asu-2016-01-financial-instruments

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-01: Financial Instruments on January 5, 2016.

Why Is the FASB Issuing This Accounting Standards Update?

According to the FASB Website:

Before the global financial crisis that began in 2008, both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) began a joint project to improve and to achieve convergence of their respective standards on the accounting for financial instruments. The global economic crisis further highlighted the need for improvement in the accounting models for financial instruments in today’s complex economic environment. As a result, the main objective in developing this Update is enhancing the reporting model for financial instruments

What Are the Provisions for the ASU 2016-01 Update?

ASU 2016-01 provides revised accounting guidance related to the accounting for and reporting of financial instruments.  Some of the main provisions include revising the current accounting for marketable equity securities such that:

  • Only marketable debt securities will be classified as trading, available for sale, or held to maturity and accounted for under the current provisions.
  • With the exception of equity investments qualifying for the equity method of accounting and circumstances under which the investor has a controlling financial interest in the investee and is required to prepare consolidated financial statements, all investments in equity securities are to be reported at fair value with unrealized gains and losses reported in the income statement.

For equity investments that do not have readily determinable market values, the entity may choose to report the investment at cost minus impairments, if any.  The carrying value will be increased or decreased to reflect observable price changes in orderly transactions for identical or similar investments of the same issuer.

Some of the other provisions include:

  • Simplifying the impairment assessment of an equity investment without a readily determinable market price by introducing a qualitative approach.
  • Eliminating certain disclosures related to fair value.

When Is the Pronouncement Effective and Eligible for Testing on the CPA Exam?

The pronouncement is effective for public companies for periods beginning after December 15, 2017 and one year later for nonpublic entities.  This pronouncement is expected to be eligible for testing on the CPA Exam by Q1 2018. However, since this is a significant change and the AICPA has previously delayed inclusion on the exam for significant changes, it is possible that the AICPA may hold off on including it in the exam until a later date.