New FASB Guidance for Financial Instruments

The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01” or the “Update”) and the amendments contained in the update affect all entities that hold financial assets or owe financial liabilities. The amendments are intended to make improvements to accounting principles generally accepted in the United States of America (“US GAAP”) by simplifying the reporting of and enhancing the disclosures relating to financial instruments, and contain revisions to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.

General Revisions include:

• The requirement for equity securities currently classified as “available for sale” to be measured at fair value rather than historical cost, with the changes in fair value recorded through earnings rather than as a component of other comprehensive income or loss. Therefore, equity securities with readily determinable fair values will no longer be separated into trading or available-for-sale categories. The classifications will remain for debt securities, and the revisions do not apply to equity investments accounted for under the equity method of accounting, or those that result in consolidation of the investee.
• An option for an entity to record equity securities without readily determinable fair values, that do not qualify for the net asset value (NAV) practical expedient per ASC 820-10-35-59, at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The entity must make an election for each investment separately in order to utilize this option. At each reporting period, the entity must reassess (along with impairment) whether the investment continues to qualify for this option. The option is not available to a) reporting entities that are investment companies, b) broker-dealers, or c) post-retirement benefit plans.
• Simplification of the assessment of impairment for equity securities without readily determinable fair values for which the election above is made. For these eligible equity securities, once impairment has been determined to exist (by considering indicators from new guidance in ASC 321-10-35-3), the entity will recognize an impairment loss to net income for the amount that the security’s carrying amount exceeds its fair value. Impairment must be assessed at each reporting period. The revision to the assessment method is similar to that of goodwill and long-lived assets, removing the complexity of the other-than-temporary impairment guidance required prior to the Update.

Financial Statement Presentation Revisions include:

• A requirement to recognize changes in the fair value of instrument-specific credit risk for financial liabilities as part of other comprehensive income, rather than earnings, when the entity has elected to measure the financial liability at fair value in accordance with the fair value option. This change is intended to remove the effect that a deterioration in credit worthiness has on net income, since the change in fair value will be reflected in OCI instead of earnings. The amount of the change will be reclassified to earnings upon extinguishment of the liability.
• A requirement to separately present financial assets and liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
• Clarification that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to the available-for-sale securities in combination with the entity’s other deferred tax assets. This is intended to reduce diversity in the current practice by some entities of separate consideration of deferred tax assets related to available-for-sale securities.



Disclosure Requirement Revisions

• Public business entities:
1. Are no longer required to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet.
2. Are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This change is to be applied prospectively, eliminates the entry price method, and results in increased comparability of financial instruments between entities. If information is no longer comparable as a result of the update, this fact will be required to be disclosed.
• Entities that are not public business entities are no longer required to disclose the fair value of financial instruments measured at amortized cost.



Effective Date

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans (within the scope of ASC 960 through ASC 965), the amendments are effective for fiscal years beginning after December 15, 2018. Early application is permitted for public business entity financial statements which have not yet been issued or available for issuance; otherwise, early adoption is not permitted.

Application

An entity should apply the amendments by means of a cumulative-effect adjustment to opening retained earnings as of the beginning of the fiscal year in which this guidance is adopted or becomes effective. 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 update.