Magazine article The CPA Journal

Financial Instruments Where Are We?

Magazine article The CPA Journal

Financial Instruments Where Are We?

Article excerpt

The fourth panel of the 15th Annual Financial Reporting Conference assessed the status of recognition and impairment of financial instruments in light of FASB's new standard, Accounting Standards Update (ASU) 2016-01, as well as upcoming standards on credit losses and derivatives and hedging.

The Project

Norman Strauss first called on Robert Uhl, who noted that the overall financial instrument project liad changed in scope over file years: "At first the thought was, fair value would be the best measurement for all financial assets. As FASB did their outreach, they heard some dissension." Eventually, he said, FASB settled on more modest modifications to the classification and measurement standards.

Mark LaMonte then detañed the changes to equity investments, which are significant. 'Historically," LaMonte said, "equity securities could be treated as avaüable for sale, with the gains and losses being recorded in other comprehensive income [OCX]. The new standard requires that equity investments be marked through the P&L [profit-and-loss statement]." This change has file potential to create volatility for companies with many equity investments, such as insurance companies. LaMonte noted that international standards still allow OCI treatment in certain cases, which could cause difficulties for some issuers. LaMonte noted, "It's in the eye of the beholder whether or not it's a good idea. Certainly from a user perspective, volatility can drive us a little nuts. But for firms that are in the business of holding investments, like an insurer, volatility is real, so this it will better portray their true operating results."

Cosper then detailed the process for measuring equity investments for which fair value cannot be readily determined, which will be done at cost less impairment, adjusted for subsequent observable price changes for identical or similar investments. "Those changes will be reported in current earnings," she explained. She added that, while elective, the measurement should be applied consistently from period to period.

Cosper also discussed the simplified impairment test. "It's a simplified, single-step test," she said, "where you look at a qualitative assessment, and the guidance includes some impairment indicators. When it does exist, the impairment's based on the fair value less the carrying value." The streamlined test will, FASB hopes, be simpler for issuers to apply. Cosper clarified that the rule applies to both public and nonpublic companies.

Strauss returned to Uhl to discuss the new fair value option for recording debt. Uhl noted that the traditional method leads to a paradoxical result where, as a company's credit goes down, it records a gain. To remedy this, he said, "FASB has decided that when you're fair valuing your debt, you would take that piece that's due to your own credit and put that into OCI." Companies have a great deal of latitude in determining the amount due to their own credit, he added, but those methods must be disclosed. He also emphasized that this standard only applies to debt that companies elect to recognize under the fair value option.

LaMonte added that the new option "is a positive change" that eliminates a nonGAAP measure and "the need for investors to make adjustments." He also commented on the general trend towards disclosure relief: "Some of the information that is going away is information that we use, so there is a bit of a negati ve."

Strauss then turned to Kirk Silva to discuss whether there was convergence between FASB and the International Accounting Standards Board (IASB) on this topic. "At one point, both FASB and the IASB were proposing the same model." While this approach seemed simple, Silva remarked that "there was a realization that we were just swapping one model for another and getting the same conclusions. So from the perspective of a preparer, we were quite satisfied that FASB listened to feedback and instead went in the direction of targeted changes. …

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