Recognition and Measurement of Financial Assets and Financial Liabilities

Posted by Christian Wynns on February 22nd, 2016

In January 2016, FASB issued update 2016-01 “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”.

Purpose:

To improve financial reporting by providing the end user more relevant information about an entity’s equity investments while also reducing the number of items recognized in other comprehensive income.

Superseded provision:

The amendments in this update supersede the previous guidance which required that equity securities with readily determinable fair values were to be classified in different accounts (trading or available-for-sale) and measured at fair value, while requiring other equity investments to be measured at fair value with fair value fluctuations recognized through net income. The amendments also supersede certain disclosure requirements, such as, the methods and significant assumptions used to estimate the fair value.

Note: Investments accounted for under the equity method of accounting are not included within the scope of this update. Investments resulting in the consolidation of the investee are also excluded from this provision.

Amended provision:

Equity investments that do not have a readily determinable fair value can be re-measured at fair value upon the occurrence of an observable price change or upon indication of impairment. The impairment assessment of equity investments that do not have a readily determinable fair value will be required to be assessed at each reporting period, qualitatively, with any such impairments being recorded to net income. The amendments require enhanced disclosure about such investments, including separate presentation of financial assets and financial liabilities by measurement category and form on the balance sheet or in the related notes, and separate presentation of the certain items in other comprehensive income.

In addition, the amendment clarifies that deferred tax assets related to available-for-sale securities should be evaluated for impairment in combination with other deferred tax assets of the entity.

Note: The amendments exempt entities that are not public business entities from disclosing fair value information for financial instruments measured at amortized cost.

Who does this update affect?

The Update will affect all entities that hold financial assets or financial liabilities.

Effective dates:

Public business entities – Fiscal years beginning after December 15, 2017. Early implementation is not permitted.

All other entities including not-for-profit organizations and employee benefit plans – Fiscal years beginning after December 15, 2018, with the option to implement the amendments for fiscal years beginning after December 15, 2017. Earlier implementation is not permitted.