Alert: FASB Accounting Standards Update No. 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities

On January 5, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU seeks to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.

In July 2014, the International Accounting Standards Board (IASB) issued the final version of International Financial Reporting Standard (IFRS) 9 Financial Instruments in response to a joint project with FASB. Despite the objective of convergence on a single recognition and measurement model for financial instruments, FASB decided to make targeted improvements to US Generally Accepted Accounting Principles (US GAAP) and to consider opportunities for convergence with IFRS, rather than complete convergence with IFRS 9. FASB concluded, following a cost/benefit analysis, that there are limited changes to the overall accounting outcomes in the classification and measurement model between US GAAP and IFRS 9.

The main changes to US GAAP are as follows:

  • An entity must measure equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income. If fair values are not readily determinable, equity investments may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
  • An entity must prepare a qualitative assessment when identifying impairment for equity investments without readily determinable fair values. When a qualitative assessment indicates that impairment exists, an entity must measure the investment at fair value.
  • Public business entities must use the exit price method (consistent with Topic 820 Fair Value Measurement) when measuring the fair value of financial instruments for disclosure purposes. The option to use the entry price method has been eliminated.
  • An entity must present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the entity’s own credit-worthiness when the entity has elected to measure the liability at fair value in accordance with the fair value option.
  • An entity must separately present financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
  • For financial instruments measured at amortized cost, non-public business entities and public business entities are no longer required to disclose their fair value and method(s) and significant assumptions used to estimate their fair value, respectively.
  • Clarification that the assessment of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities be made in combination with the entity’s other deferred tax assets.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods therein. For all other entities (including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting) the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2019. All entities that are not public business entities may early adopt the amendments as of the fiscal years beginning after December 15, 2017, including interim periods therein.

Early application of the following amendments is permitted for a fiscal year or interim period for which the entity’s financial statements have not yet been issued (public business entities) or made available for issuance (all other entities) as of the beginning of the fiscal year of adoption:

  1. An entity must present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the entity’s own credit-worthiness if the entity has elected to measure the liability at fair value in accordance with the fair value option.
  2. For financial instruments measured at amortized cost, non-public business entities are not required to disclose their fair value.

Except for the early application guidance discussed above, early adoption of the amendments is not permitted.

The amendments, with one exception, should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption.

To access the full script of ASU No. 2016-01, click here.

This communication contains a general overview of the topic and is current as of January 5, 2016. 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 n 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 2016. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.