FASB issues financial instruments guidance

Contents FASB      ASU on financial instruments released
     Highlights of January 6 FASB meeting
International Federation of Accountants      Standards for reporting on special purpose financial statements revised

FASB All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

ASU on financial instruments released The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, making targeted improvements to existing guidance for the recognition, measurement, presentation, and disclosure of financial instruments.

The main targeted improvements are

  • To require equity investments in unconsolidated entities (except those accounted for under the equity method of accounting) to be measured at fair value, with changes in fair value recognized in net income
  • To allow an entity to measure equity investments without readily determinable fair values at cost minus impairment, plus or minus changes resulting from observable price changes for identical or similar investments of the same issuer
  • To 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 must measure the investment at fair value and recognize any impairment loss in net income.
  • To 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 (also referred to as “own credit”) when the entity elects to measure the liability at fair value using the fair value option
  • To require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the notes to the financial statements

With respect to disclosures, the main targeted amendments include the following guidance:

  • To require public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes
  • To eliminate the requirement for entities other than public entities to disclose the fair value of financial instruments measured at amortized cost
  • To eliminate the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value of those financial instruments measured at amortized cost in the balance sheet (however, estimated fair value must still be disclosed)

Public entities should apply the new guidance for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. For all other entities the amendments are effective for fiscal years beginning after December 15, 2018 and for interim periods within fiscal years beginning after December 15, 2019; however, they may early adopt as of the public-entity effective date.

Early adoption of the “own credit” provision discussed above (for all entities), and the omission of fair value disclosures for financial instruments measured at amortized cost (for entities other than public entities), is permitted for financial statements that have not yet been issued or been made available for issuance.

For more information, read the FASB in Focus on the new guidance.

Highlights of January 6 FASB meeting The FASB met on January 6 to discuss its ongoing projects related to performance obligations and licensing within its new revenue standard, the definition of a business, and the accounting for goodwill impairment. The Board did not make decisions on its project related to the new revenue standard, but significant tentative decisions related to the other projects are identified below.

Definition of a business

The Board made a number of tentative decisions on its project to improve the definition of a business as it relates to partial sales of nonfinancial assets within the scope of ASC 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. Key tentative decisions include

  • If an asset is not derecognized because a seller still consolidates the legal entity, the seller would account for the transaction as an equity transaction. What’s more, if the seller cannot derecognize the nonfinancial asset because the derecognition conditions in ASC 610-20 have not been met, it would record a contract liability as the offset for the consideration received.
  • If a subsidiary or group of assets that is not a business is an in-substance nonfinancial asset, all assets in the group or subsidiary would be within the scope of ASC 610-20.

Accounting for goodwill impairment

The Board directed the staff to draft a proposed ASU related to goodwill impairment accounting. The Board tentatively decided not to provide additional guidance for entities that have a reporting unit with a zero or negative carrying amount; instead, they should apply the same model used for a reporting unit with a positive carrying amount.

However, the proposal would include the following additional disclosure requirements:

  • Identification of reporting units with zero or negative carrying amounts
  • The amount of goodwill attributable to each reporting unit with a zero or negative carrying amount

International Federation of Accountants Standards for reporting on special purpose financial statements revised The International Auditing and Assurance Standards Board (IAASB) of IFAC issued International Standard on Auditing (ISA) 800 (Revised), Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and ISA 805 (Revised), Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. These standards provide clarity about how the new and revised auditor reporting standards, specifically ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report, apply in the context of special purpose financial statements.

The ISAs will become effective for audits of financial statements for periods ending on or after December 15, 2016, which is the same as the effective date for the auditor reporting standards addressing general purpose financial statements.

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