Accounting for Financial Instruments

By Lauren Williams and Davey Steele 

Organizations holding equity investments in their portfolio should review the FASB’s revised financial instrument accounting guidance (Accounting Standards Updates 2016-01 and 2018-03). Although the revised guidance impacts several financial instruments, the most significant revisions are to equity investments (except those accounted for under the equity method and consolidated subsidiaries).

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The comprehensive update covers recognition, measurement, presentation and disclosure of financial instruments in the financial statements.  The revisions expected to have the greatest impact on insurance companies and related organizations include:
Equity securities are held at fair value with adjustments flowing through net income.
Equity investments without a readily determinable fair value:
o May be measured at cost minus impairment, if any, plus or minus subsequent adjustments for observable price changes in orderly transactions for the identical or similar investment of the same issuer.
o Follow a single step impairment model consisting of a qualitative impairment assessment and determining the fair value.
The valuation allowance on deferred tax assets (DTA’s) related to available-for-sale securities should be evaluated in combination with the company’s other DTA’s.
Non-public organizations are no longer required to disclose the fair value of debt securities held at cost or amortized cost.

Organizations with significant equity investments in their portfolios may see increased earnings volatility resulting from unrealized gains and losses flowing through the income statement rather than other comprehensive income. However, insurance companies will benefit from the elimination of certain fair value disclosures. Further, organizations holding equity securities without readily determinable fair values may also benefit from the simplified impairment process.

The update is effective for non-public companies for fiscal years beginning after 12.15.18.  Early adoption is permitted.  A cumulative effect adjustment should be recorded as of the beginning of the fiscal year of adoption and the new guidance applied prospectively.

About the Authors
Lauren Williams, CPA (LWilliams@JohnsonLambert.com) is a Principal with Johnson Lambert LLP; Davey Steele, CPA (DSteele@JohnsonLambert.com) is a Senior Manager with Johnson Lambert LLP.