The Financial Accounting Standards Board issued Tuesday a long-awaited accounting standards update for the recognition and measurement of financial instruments that it has been developing for over a decade with the International Accounting Standards Board.
The standard affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. FASB also plans to issue this year a separate standard on the impairment of financial instruments that will differ markedly from the IASB’s. The IASB issued its own financial instruments standard, IFRS 9, in 2014. The "recognition and measurement" standard was formerly referred to as "classification and measurement" but was changed to better reflect what FASB was trying to address.
“The new standard is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments,” said FASB Chairman Russell G. Golden in a statement. “It improves the accounting model to better meet the requirements of today’s complex economic environment.”
The new guidance makes targeted improvements to existing GAAP by:
• requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
• requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;
• requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;
• eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;
• eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and
• requiring a reporting organization 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 organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
The accounting standards update on recognition and measurement will take effect for public companies for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. For private companies, not-for-profit organizations, and employee benefit plans, the standard becomes effective for fiscal years beginning after Dec. 15, 2018, and for interim periods within fiscal years beginning after Dec. 15, 2019.
The update allows for early adoption of the “own credit” provision referred to above. In addition, it permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost.
Although FASB and the IASB worked jointly to improve the accounting for financial instruments and to achieve convergence on a single recognition and measurement model, FASB said it decided to make only targeted improvements to GAAP and retain the current framework for accounting for financial instruments in GAAP. FASB said it made that decision after evaluating the potential costs and benefits of pursuing the changes that would result from complete convergence with IFRS 9, Financial Instruments.
Even though differences will exist between the guidance in GAAP and the guidance in IFRS related to the accounting for financial instruments, FASB said the amendments achieve convergence with IFRS in a number of areas. For example, FASB now requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability that results from a change in the instrument specific credit risk for financial liabilities that the entity has elected to measure at fair value in accordance with the fair value option is the same as the guidance in IFRS 9 for those liabilities. However, the guidance on the type of liabilities that can be measured at fair value is different between GAAP and IFRS.
In addition, the guidance in IFRS does not allow amounts recorded in other comprehensive income to be recycled to net income upon derecognition of the liability, whereas GAAP requires those amounts to be recycled to net income.
FASB's amended update now requires most equity investments to be measured at fair value, which generally is consistent with the results of applying the guidance in IFRS 9. However, IFRS 9 allows an entity to make an irrevocable election at initial recognition to present subsequent changes in fair value in other comprehensive income (without recycling) for particular investments in equity instruments that otherwise are measured at fair value through profit or loss. In addition, the amendment in FASB's update clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets is the same as the tentative decision that the IASB has reached on this issue when considering amendments to International Accounting Standard 12, Income Taxes.