Effective January 1st 2018 public companies are required to implement ASU 2016-01 which changes the method of accounting for equity investments. Non-public companies can early adopt or are required to adopt January 1st 2019. The resulting update requires equity investments to be measured at fair value with changes in fair value recognized in net income. Additionally, this removes the previous requirement to categorize equity securities into Trading or Available-for-sale and creates a single requirement to treat all equity securities the same way. Any equity investments that are accounted for under the equity method or result in consolidation are not included in the scope of this update.
This amendment should be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
Additional amendments in this update:
- Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
- Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities.
- Eliminate 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.
- Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
- Require an entity 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 when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
- Require 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.
- Clarify 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.
For more information on how this might affect your company, contact Andrew Wan today.