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  • 3 Min Read
  • January 18, 2016

FASB Finalizes New Classification and Measurement Standard For Financial Instruments

Written by:
Sam Hobbs, CPA

The Financial Accounting Standards Board (FASB) issued an accounting standards update on January 5: ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.

These changes stem from a joint project between the IASB and the FASB, which began in 2010. That project’s objective was to provide financial statement users with more valuable information about an entity’s investments in financial instruments, while reducing complexity. These changes could have a significant impact on insurers.

Impacts of the FASB Update

This new classification and measurement standard will require that equity investments be measured at fair value, with changes in fair value recognized through net income. There will be exceptions for equity investments that are accounted for under the equity method, or those that result in consolidation of the investee.

Essentially, this update will eliminate the available-for-sale classification for equity securities with readily determinable fair values. This could have a significant impact on insurers who hold a large volume of equity investments. This change should be applied by means of a cumulative-effect adjustment to the balance sheet.

Simplifying the Regulatory Process

By requiring a qualitative assessment, the new standard will simplify the impairment process for equity securities without readily determinable fair values. If the qualitative assessment shows that the investment is impaired, then an impairment loss will be recognized in income as the difference between the carrying value and the fair value. The current two-step approach under the other-than-temporary impairment guidance will no longer be required. In addition, this guidance eliminates the requirement to disclose the methods and assumptions used to estimate the fair value for investments measured at amortized cost.

A few new disclosure requirements were also introduced. For example, entities will be required to use the exit price when measuring the fair value of investments and financial assets, and liabilities will need to be presented separately in the notes or on the balance sheet and grouped by measurement category and form of financial asset.

Timeline

For public companies, this update will be effective for fiscal years beginning after December 15, 2017. This timeline is intended to give companies time to prepare for the changes. Overall, the final changes have a more narrow impact than what was originally proposed in 2010, and what was ultimately released by the IASB in July of 2014. Additional updates related to hedging, impairment, and financial disclosures are in process and will require more changes once finalized.

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