The FASB wasted no time rolling out its first Accounting Standards Update (ASU) of 2016. The ASU focuses on the recognition of financial assets and liabilities with the intent of simplifying and reducing the cost of preparing financial statements and eliminating diversity in practice. Some of the highlights follow.
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Equity investments with readily determinable fair values (FV) will be recognized at FV, with changes in FV flowing through net income. This essentially eliminates the accounting distinction for equity securities classified as available-for-sale. However, this requirement does not apply to investments accounted for using the equity method, those that result in consolidation of the investee and a few other limited exceptions.
The FV of equity investments without readily determinable FVs may now be estimated using cost, less impairment(s) plus or minus changes resulting from observable price changes in identical or substantially similar investments of the same issuer. Impairing such equity securities has also been simplified by replacing the other-than-temporary consideration with a process similar to that used when assessing goodwill or intangible assets for impairment. A loss is recognized when a qualitative assessment indicates that impairment exists.
Public business entities (PBEs) are no longer required to disclose the methods and significant assumptions used to estimate the FV of financial instruments measured at amortized cost. Also, when measuring the FV of financial instruments for disclosure purposes, PBEs must use the exit price.
Non PBEs are no longer required to disclose the FV of financial instruments measured at amortized cost.
Financial Statement Presentation
All entities must separately disclose financial assets and liabilities by measurement category and form (i.e. securities, loans and receivables) on the balance sheet or in the accompanying notes to the financial statements.
Deferred Tax Assets
Entities should evaluate the need for a valuation allowance on deferred tax assets (DTA) stemming from available-for-sale securities in conjunction with its other DTA’s, not in isolation.
PBE’s – Effective for fiscal years, and interim periods therein, beginning after 12.15.17. Early adoption is permitted on a limited basis.
Non PBE’s – Effective for fiscal years beginning after 12.15.18 and interim periods within fiscal years beginning after 12.15.19. Early adoption is permitted, but not earlier than the PBE effective dates.
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