In January 2016, the Financial Accounting Standards Board issued the first of the three projects related to financial instruments. This final standard relates to the recognition and measurement of financial instruments with clarification of certain aspects of presentation and disclosure. The following bullets are statements from the Accounting Standard Update.
- 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. 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.
- Simplify 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, an entity is required to measure the investment at fair value.
- 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 assumption(s) 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 disclosure purposes.
- 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.
- Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, 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.
For institutions considered public (including certain non-SEC registrants as defined by ASU 2013-12), the amendments in this Update are effective for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. For entities not considered public, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. All entities that are not public entities may adopt the amendments for fiscal years beginning after Dec. 15, 2017, with some additional options for early application such as the ability to elect to not disclose the information about fair value of financial instruments. Entities not considered public may elect to eliminate this disclosure for any financial statements which have not yet been issued.
Beyond the changes in disclosures, the impact on public and nonpublic institutions (beginning in 2018 and 2019, respectively) depends on the amount and type of equity securities held by an institution. As equity securities were already required to be measured at fair value, balances will only be affected if an institution elects to measure these securities at cost, less impairment, plus or minus observable price changes. The recognition of unrealized gains and losses will only be affected if an institution previously classified its equity securities as available-for-sale, as the unrealized gains and losses previously recorded through other comprehensive income will now be recognized through net income.
Of the two remaining financial instrument projects (hedging and credit impairment), the credit impairment standard scheduled for release in the first quarter of 2016 is expected to have a larger impact on the financial statements of community institutions. As final standards are issued for these projects, your Plante Moran advisors will be here to help institutions understand and implement the changes.