A new Financial Accounting Standards Board disclosure requirement makes several material changes to U.S. GAAP. New requirements for determining the fair value disclosure of financial institutions’ loan portfolios are among the revisions.

(ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, went into effect for financial statements beginning after Dec. 15. The guidance has already impacted public business entities at the beginning of this year. For all other institutions, it is effective for annual periods beginning in 2019 and interim periods beginning in 2020

The amendments require public business entities that have to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement. This change to GAAP eliminates the entry price method previously used by some institutions for disclosure purposes for some financial assets. Previously, GAAP permitted institutions an option to measure fair value in two different ways.

FASB concluded that an entity is not required to revise its prior period disclosures of fair value for those financial instruments that may have been calculated using the entry price notion, which was an acceptable method under previous GAAP.

The new requirement also acknowledges that if an entity used an entry price notion to measure fair value in a prior period, then the disclosure of fair value in the periods after adoption of this new requirement may not be comparable with the new disclosures because those disclosures measure fair value using the exit price notion. In those cases, it was concluded that the entity should clarify in the notes to financial statements that the prior-period fair values disclosed are not determined in a manner consistent with the current-period fair values disclosed because of a change in the methodology.

FASB sought to reduce the complexity and costs for public business institutions that are required to disclose information about fair values of instruments measured at amortized cost. An entity is required to disclose only the level of the fair value hierarchy within which the fair value information falls.

Neekis Hammond

Neekis Hammond

Neekis Hammond, managing director with Sageworks, provides financial institutions with advisory services and thought leadership, and consults with product development on compliance and accuracy.