April 20, 2016
The Latest and Greatest Equity Securities Guidance
The first accounting standard update (ASU) of the year was issued the first week of January! Although the ASU modifies the recognition of financial assets and liabilities, the bulk of the changes pertain to equity securities. If your organization invests in such securities, the financial reporting and disclosure of those assets may have been made easier.
Impact to Equity Securities
Equity securities with readily determinable fair values (FV), including investments in partnerships, unincorporated joint ventures, and limited liability companies, that are not accounted for under the equity method or are not consolidated, will be recognized at FV, with changes in FV reflected in net income.
If the FV is not readily determinable, organizations may hold the equity security at cost less impairment plus or minus changes “from observable price changes in orderly transactions for the identical or similar investment of the same issuer.” To further simplify things, the impairment process for these equity securities has been revised. Gone are the days of other-than-temporary impairment. Entities will assess impairment using a process similar to that used to determine if goodwill or intangible assets are impaired; a qualitative assessment determines whether impairment is recorded.
Presentation and Disclosure Changes
All entities will present financial assets and liabilities by measurement category and form on the balance sheet or in the notes to the financial statements.
Public business entities (PBEs) that disclose the FV of financial instruments measured at amortized cost on the balance sheet will no longer have to disclose the method used to derive FV for the financial statement disclosures. PBEs must also use the exit price when measuring FV for purpose of the disclosures.
Non-PBEs will no longer include the FV of investments held at amortized cost in their financial statement disclosures.
The ASU clarifies that entities need to assess the need for a valuation allowance on its deferred tax assets (DTAs) relative to its available-for-sale securities in concert with its other DTAs.
For PBEs, the ASU is effective for annual periods beginning after December 15, 2017. The effective date for all other entities is annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Non-PBEs can early adopt this standard, but no earlier than the PBE effective date.