FASB clarifies guidance in ASU 2016-01
FINANCIAL REPORTING INSIGHTS |
The Financial Accounting Standards Board recently issued Accounting Standards Update (ASU) 2018-03, Technical Corrections and Improvements to Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to clarify certain guidance in ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, including the following:
- An entity measuring an equity security using the measurement alternative in Accounting Standards Codification (ASC) paragraph 321-10-35-2 may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer.
- When an observable transaction occurs for a similar security of the same issuer as one measured using the measurement alternative, ASC 321-10-55-9 states that adjustments made should reflect the current fair value of the security. ASU 2018-03 clarifies that the adjustments made in accordance with ASC 321-10-55-9 are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.
- Remeasuring the entire value of forward contracts and purchased options for which the measurement alternative is applied is required when observable transactions occur on the underlying equity securities.
- When the fair value option is elected for a financial liability, the guidance in ASC 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under ASC 815-15, Derivatives and Hedging — Embedded Derivatives, or 825-10, Financial Instruments — Overall.
- For a foreign-currency-denominated financial liability for which the fair value option is elected, the amount of change in fair value that relates to the instrument-specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.
- The prospective transition approach for equity securities without a readily determinable fair value in ASU 2016-01 is meant only for instances in which the measurement alternative is applied.
The narrow-scope amendments in ASU 2018-03 are not expected to have a significant effect on current accounting practice. For public business entities, ASU 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt ASU 2018-03 until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt ASU 2018-03 before adopting ASU 2016-01. For all other entities, the effective date for ASU 2018-03 is the same as the effective date in ASU 2016-01.
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For those entities that are not public business entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019.