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FASB Issues Standards for Recognition and Measurement of Financial Assets and Liabilities

AAFCPAs wants to alert you to this change from the Financial Accounting Standards Board (FASB).  In their effort to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments, on January 5, 2016 the FASB issued a new Accounting Standards Update (ASU) No. 2016-01, Financial Instruments, Overall (Subtopic 825-10): Recognition And Measurement Of Financial Assets And Financial Liabilities.

The standard affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

The new guidance makes targeted improvements to existing generally accepted accounting principles (GAAP).  The following are those improvements which AAFCPAs believes are most applicable to private companies and nonprofit organizations:

  • Requiring equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values 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.
  • Simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.
  • Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities.
  • Requiring an entity to 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 instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
  • Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
  • Clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

What are the Effective Dates?

The amendments contained in this guidance are effective for private companies, nonprofit organizations and employee benefit plans for fiscal years beginning AFTER December 15, 2018.  These same entities can elect to adopt earlier, as of the fiscal years beginning AFTER December 15, 2017.

Our Advice

This guidance amends portions of Topic 825, Financial Instruments, and is applicable to those entities referred to above that elect the fair value option for the measurement of qualifying financial instruments, which is generally most commercial entities and nonprofits.  If the fair value option was not elected, this ASU does not apply.  While this ASU is admittedly esoteric in nature, we encourage our clients to review this standard with your AAFCPA partner, and review the financial statement presentation and accounting implications to your company or organization.  Those custodians of employee benefit plans, 401k, 403b, etc., will incorporate this ASU into their accounting in the year the guidance becomes effective.  In addition, custodians should discuss early adoption of this ASU with your AAFCPA partner.

If you have any additional questions about how the new ASU will impact you, please contact your AAFCPA partner, or Jeffrey Mead, CPA, CGMA, Partner at 774.512.4143, jmead@nullaafcpa.com.

About the Author

Jeff Mead, Audit Partner
Jeffrey is a Partner and leader of AAFCPAs’ Commercial Practice, providing proactive audit/assurance, tax, and advisory solutions for closely-held and privately-owned businesses. His diverse commercial client base includes: professional service firms, technology companies, publishers, and manufacturers/distributors. Jeffrey strives to use the audit process as a fulcrum to leverage opportunities and to provide high-value, creative services to his clients. He has significant experience advising clients on economic and tax implications for key transactions, as well as new or complex applications of accounting pronouncements. He is a member of AAFCPAs’ Revenue Recognition and Lease Accounting Task Forces, providing technical accounting advice regarding understanding new standards, assessing the impact, and guidance on implementation and transition. He has extensive expertise advising employee benefit plan fiduciaries, including those offering 401(k), 403(b), defined benefit plans, and profit-sharing plans.

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