Accounting For Financial Instruments

ASU 2016-01
Accounting for Financial Instruments: Recognition & Measurement

Recognition Measurement

Main Provisions

The amendments in ASU 2016-01:

• Require 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 (thereby eliminating the presentation of changes in the fair value of an equity investment in other comprehensive 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.
• Require equity investments without readily determinable fair values to undergo a qualitative assessment to identify impairment. When the qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. This impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets.
• Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities.
• Eliminate 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.
• Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosxure purposes. This change eliminates the entry price method previously used by some entities for disclosure purposes for some financial assets. Previously, U.S. GAAP permitted entities an option to measure fair value in two different ways.
• Require 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 (this is referred to as the “own credit” provision.)
• Require separate presentation of 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.
• Clarify 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.

Effective Date and Transition

The amendments in ASU 2016-01 are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit (NFP) organizations and employee benefit plans, the amendments are effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. All organizations that are not public companies may adopt the amendments in ASU 2016-01 earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.

Early adoption of the amendments in ASU 2016-01 is not permitted, except for early application of the “own credit” provision and the provision that exempts private companies and NFP organizations from the requirement to apply the fair value of financial instruments disclosure guidance.

An organization should apply the amendments 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 of the standard.