On January 5, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, Financial Instruments, Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, affecting public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The ASU will take effect for public companies for fiscal years beginning after December 15, 2017.
Background: In May 2010, the FASB issued a comprehensive proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivatives and Hedging Activities. After considering stakeholder input, the FASB issued a revised proposed ASU, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in February 2013, which was similar to IFRS 9 in most aspects.
Again considering feedback from stakeholders, the FASB concluded that the cost and complexity introduced by the revised ASU was not justified by the benefits. The FASB decided to retain the main provisions of GAAP for financial instruments as currently set forth in the Codification and to make targeted improvements to enhance the reporting model for financial instruments, provide users of financial statements with more useful information, and consider opportunities for convergence with IFRS.
Changes: ASU 2016-01 improves current GAAP as follows:
Requiring most 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
Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes
Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities, loans, or receivables) on the balance sheet or the accompanying notes to the financial statements
Requiring a reporting organization to present separately in other comprehensive income (OCI) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (i.e., “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments
Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities
Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet
Clarifying that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the organization’s other deferred tax assets
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, the reporting organization is required to measure the investment at fair value
Entities will apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for the amendments related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption of the ASU.
Accounting pronouncements are eligible to be tested on the CPA exam in the later of (1) the first testing window beginning after the pronouncement’s earliest mandatory effective date or (2) the first testing window beginning six (6) months after the pronouncement’s issuance date; therefore, ASU 2016-01 will be testable in January 2018. Remember, there will be a simultaneous introduction of content related to the new pronouncement and removal of content related to the previous pronouncement.
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