FASB issued a standard Thursday that is intended to clarify the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives.
The board expects that standard to reduce diversity in practice and increase comparability of accounting for these interactions.
Stakeholders had asked FASB to clarify how guidance issued in 2016 should interact with equity method investments. Accounting Standards Update (ASU) No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, added Topic 321, Investments — Equity Securities, and made targeted changes to address certain aspects of accounting for financial instruments.
The 2016 ASU provided a company with the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment (if any), unless an observable transaction for an identical or similar security occurs (the measurement alternative).
The ASU issued Thursday explains that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments — Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.
The changes in ASU No. 2016-01 also prompted questions on whether certain forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323, or Topic 815, Derivatives and Hedging.
The ASU issued Thursday clarifies that, when determining the accounting for certain forward contracts and purchased options, a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.
The new standard is based on a consensus of the Emerging Issues Task Force.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.