FASB issues new financial instruments recognition and measurement standard

By Ken Tysiac

FASB issued a new standard Tuesday designed to improve the recognition and measurement of financial instruments through targeted changes to existing GAAP.

Public and private companies, not-for-profits, and employee benefit plans that hold financial assets or owe financial liabilities are affected by the standard.

The new guidance is contained in Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard:

  • Requires equity investments (except those that are accounted for under the equity method of accounting or result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
  • Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
  • Requires 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.
  • Eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities.
  • Eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
  • Requires a reporting organization 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 (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

“The new standard is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments,” FASB Chairman Russell Golden said in a statement. “It improves the accounting model to better meet the requirements of today’s complex economic environment.”

FASB also is continuing to work on a standard on the impairment of financial instruments. Originally, the financial instruments project was a convergence effort with the International Accounting Standards Board (IASB), but the boards came to different conclusions on some issues and the IASB issued IFRS 9, Financial Instruments, in July 2014.

The recognition and measurement standard will take effect for public companies for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. The standard takes effect for private companies, not-for-profits, and employee benefit plans for fiscal years beginning after Dec. 15, 2018, and for interim periods within fiscal years beginning after Dec. 15, 2019.

Early adoption is permitted for:

  • The own credit provision.
  • The provision that exempts private companies from having to disclose fair value information about financial instruments measured at amortized cost.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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