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On January 16, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-01 Clarifying the Interactions between Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The ASU is based on a consensus of the FASB Emerging Issues Task Force.
Among other changes, ASU No. 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, introduced a measurement alternative to measure equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) without readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. Stakeholders asked the FASB to clarify how this guidance should interact with equity method investments accounted for in accordance with Topic 323.
Additionally, stakeholders also raised questions about the application of the guidance for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. Differing views exist currently about whether those forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323 or Topic 815.
As a result, this ASU was issued to make improvements related to the following two topics:
Accounting for certain equity securities when the equity method of accounting is applied or discontinued
The ASU clarifies that, immediately before applying or upon discontinuing the equity method of accounting, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative.
Scope considerations for forward contracts and purchased options on certain securities
The ASU clarifies that when determining the accounting for certain forward contracts and purchase options, an entity should not consider whether the underlying securities would be accounted for under the equity method or at fair value upon the settlement of the forward contract or exercise of the purchased option.
The amendments are effective and should be applied prospectively, with early adoption permitted, as follows:
To access the full script of ASU No. 2016-01, click here.
To access the full script of ASU No. 2020-01, click here.
For more information on the financial reporting library, contact a local MNP Assurance Professional, or Jody MacKenzie, Director, Assurance Professional Standards.
This communication contains a general overview of the topic and is current as of January 16, 2020. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person’s use of or reliance upon this material. © MNP LLP 2020. All rights reserved.
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