September 28, 2017 — FASB Issues Proposed Technical Corrections and Improvements to ASU 2016-01
Deloitte Accounting Journal
September 28, 2017
FASB Issues Proposed Technical Corrections and Improvements to ASU 2016-01
On September 27, 2017, the FASB issued a proposed Accounting Standards Update (ASU)1 that clarifies certain aspects of ASU 2016-01.2 Comments on the proposed ASU are due by November 13, 2017. All of the amendments were issued in response to feedback received from stakeholders.
A summary of the proposed amendments is included in the appendix below.
Effective Date and Transition Requirements
For entities that have early adopted the guidance in ASU 2016-01 related to presentation of changes in instrument-specific credit risk for financial liabilities for which a fair value option has been elected, the amendments in the proposed ASU that are relevant to fair value option liabilities would be effective upon issuance of a final ASU. For the remaining proposed amendments, the effective date and transition requirements would be the same as the effective date and transition requirements in ASU 2016-01.
Key provisions of the proposed amendments are summarized in the table below, which is reproduced from the proposed ASU.
Area for Correction or Improvement
Summary of Proposed Amendments
Issue 1: Equity Securities without a Readily Determinable Fair Value — Discontinuation
Once the measurement alternative in paragraph 321-10-35-2 is elected, an entity must continue to apply the alternative until the investment has a readily determinable fair value or becomes eligible for the net asset value practical expedient. Stakeholders raised questions about additional situations that may allow for the measurement alternative in paragraph 321-10-35-2 to be discontinued by an entity.
The proposed amendment would clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an election that would apply to that security and all other securities of the same type.
Issue 2: Equity Securities without a Readily Determinable Fair Value — Adjustments
When an observable transaction occurs for a similar security, paragraph 321-10-55-9 states that adjustments made should reflect the current fair value of the security. Stakeholders raised questions about whether adjustments should be made to reflect the fair value as of the observable transaction date or the current reporting date.
The proposed amendment would clarify that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.
Issue 3: Forward Contracts and Purchased Options
Forward contracts and purchased options on equity securities for which the measurement alternative is expected to be applied are accounted for on a look-through basis in accordance with paragraph 815-10-35-6. Stakeholders raised questions about whether a change in observable price or impairment of the underlying equity investment would result in remeasuring the entire value of the forward contract or purchased option.
The proposed amendment would clarify that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.
Issue 4: Presentation Requirements for Certain Fair Value Option Liabilities
Stakeholders raised questions about whether certain hybrid financial liabilities for which the fair value option has been elected would be within the scope of the presentation requirement in paragraph 825-10-45-5.
The proposed amendment would clarify that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging — Embedded Derivatives, or 825-10.
Issue 5: Fair Value Option Liabilities Denominated in Foreign Currency
Paragraph 825-10-45-5 requires an entity to present separately the portion of the total change in the fair value of a liability attributable to a change in the instrument-specific credit risk within other comprehensive income. Stakeholders raised questions about how an entity should apply Topic 830, Foreign Currency Matters, when determining the amount of fair value changes that are attributable to instrument-specific credit risk for a foreign-currency-denominated liability for which the fair value option is elected.
The proposed amendments would clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument-specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.
Issue 6: Transition Guidance for Equity Securities without Readily Determinable Fair Value
Stakeholders raised a question about whether a prospective transition approach is required for all equity securities without a readily determinable fair value, including those for which the measurement alternative is not applied upon transition.
The proposed amendment would clarify that the prospective transition approach for equity securities without a readily determinable fair value in Update 2016-01 is meant only for instances in which the measurement alternative is applied.
Technical Corrections and Improvements to Recently Issued Standards: I. Accounting Standards Update No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
For public business entities (PBEs), the guidance in ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim reporting periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities with respect to only the following changes made to ASC 825: (1) for financial liabilities measured under the fair value option, fair value changes resulting from change in instrument-specific credit risk would be presented in other comprehensive income and (2) the fair value disclosure requirements in ASC 825 for financial instruments not recognized at fair value would be eliminated for non-PBEs.