FASB Amends Guidance on Classification and Measurement of Financial Instruments (January 12, 2016)
Heads Up | Volume 23, Issue 1
January 12, 2016
FASB Amends Guidance on Classification and Measurement of Financial Instruments
by Jamie Davis and Shahid Shah, Deloitte & Touche LLP
On January 5, 2016, the FASB issued ASU 2016-01,1 which amends the guidance in U.S. GAAP
on the classification and measurement of financial instruments. Although the ASU retains many
current requirements, it significantly revises an entity’s accounting related to (1) the classification and
measurement of investments in equity securities and (2) the presentation of certain fair value changes
for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements
associated with the fair value of financial instruments.
This Heads Up provides a comprehensive summary of the FASB’s changes to its classification and
measurement model for financial instruments. In addition, the appendix to this Heads Up compares the
classification and measurement models under current U.S. GAAP, the ASU, and IFRS 9 (2014).2
Editor’s Note: Although the FASB and IASB had been working to converge their respective
classification and measurement models (see the FASB’s February 2013 exposure draft), after
performing stakeholder outreach and a cost-benefit analysis, the FASB ultimately decided to make
only limited changes to existing U.S. GAAP. Consequently, the ASU’s amendments do not achieve
convergence with IFRSs. The IASB’s final guidance on this topic was issued in July 2014 in the
form of amendments to IFRS 9 (see Deloitte’s August 8, 2014, Heads Up for more information
about the amendments to IFRS 9 (2014)).
Summary of Changes to U.S. GAAP on Classification and Measurement
Key changes as a result of the ASU are discussed below.
Classification and Measurement of Equity Investments
The ASU requires entities to carry all investments in equity securities, including other ownership interests
such as partnerships, unincorporated joint ventures, and limited liability companies, at fair value through
net income (FVTNI). This requirement does not apply to investments that qualify for the equity method of accounting or to those that result in consolidation of the investee or for which the entity has elected
the practicability exception to fair value measurement (as discussed below).
Editor’s Note: Under current U.S. GAAP, marketable equity securities other than (1) equity
method investments (those for which the investor has significant influence over the investee)
or (2) those that result in consolidation of the investee are classified as either held for trading
or available for sale (AFS). For AFS equity securities, any amounts in accumulated other
comprehensive income (OCI) are recycled to net income upon sale or an other-than-temporary
impairment. Investments in nonmarketable equity securities other than equity method
investments or those that result in consolidation of the investee are measured at cost (less
impairment) unless the fair value option has been elected. Because equity securities would no
longer be accounted for as AFS securities or by using the cost method, entities that hold such
equity investments could see significant volatility in earnings. For instance, this new requirement
would significantly affect certain types of mutual funds (e.g., bond funds and fixed-income funds)
that are currently accounted for as AFS securities. According to ASC 320-10-55-9,3 a mutual
fund is considered an equity security even if it invests only in U.S. government debt securities.
Consequently, investments in bond funds and fixed-income mutual funds are considered equity
securities and must be accounted for at FVTNI under the ASU.
For investments in equity securities without a readily determinable fair value that do not qualify for
the net asset value (NAV) practical expedient in ASC 820-10-35-59, an entity is permitted to elect a
practicability exception to fair value measurement, under which the investment will be measured at
cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or
similar investment of the same issuer. The ASU clarifies that when identifying observable price changes,
an entity should consider relevant transactions “that are known or can reasonably be known“ and
that an entity is not required to spend undue cost and effort to identify such transactions. The ASU
also indicates that an entity should consider a security’s rights and obligations, such as voting rights,
distribution rights and preferences, and conversion features, when evaluating whether the security
issued by the same issuer is similar to the equity security held by the entity.
The practicability exception is not available to (1) reporting entities that are investment companies,
(2) broker-dealers in securities, or (3) postretirement benefit plans.
Editor’s Note: Entities that elect the practicability exception would still need to assess the equity
investment for impairment (see discussion below).
Furthermore, investments in Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock
issued to member financial institutions are not subject to this guidance. Instead, FHLB and FRB
stock would continue to be accounted for at cost less impairment under ASC 942-325-35-3. The
ASU’s impairment guidance on equity investments for which fair value is not readily determinable
also does not apply to FHLB or FRB stock.
Impairment Assessment of Equity Investments Without Readily Determinable
Fair Values That Are Measured by Using the Practicability Exception
In an effort to simplify the impairment model for equity securities for which an entity has elected
the practicability exception, the FASB eliminated the requirement in U.S. GAAP to assess whether
an impairment of such an investment is other than temporary. Under the new guidance, as of each
reporting period, an entity will qualitatively consider the following indicators (from ASC 321-10-35-3,
which was added by the ASU) to determine whether the investment is impaired:
A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects
of the investee
A significant adverse change in the regulatory, economic, or technological environment of the investee
A significant adverse change in the general market condition of either the geographical area or the
industry in which the investee operates
A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the
same or similar investment for an amount less than the carrying amount of that investment
Factors that raise significant concerns about the investee’s ability to continue as a going concern, such
as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory
capital requirements or debt covenants.
If it determines that the equity security is impaired on the basis of the qualitative assessment, the entity
will recognize an impairment loss equal to the amount by which the security’s carrying amount exceeds
its fair value. By contrast, the current guidance in ASC 320-10-35-30 requires an entity to perform a
two-step assessment under which it first determines whether an equity security is impaired and then
evaluates whether any impairment is other than temporary.
Presentation of Fair Value Changes Attributable to Instrument-Specific Credit
Risk for Fair Value Option Liabilities
The ASU establishes an incremental recognition and disclosure requirement related to the presentation
of fair value changes of financial liabilities for which the fair value option has been elected. Under this
guidance, an entity would be required to separately present in OCI the portion of the total fair value
change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in
earnings. For derivative liabilities, however, any changes in fair value attributable to instrument-specific
credit risk would continue to be presented in net income, which is consistent with current U.S. GAAP.
This new requirement to separately present in OCI the portion of the total fair value change attributable
to instrument-specific credit risk does not apply to financial liabilities of consolidated collateralized
financing entities that are measured in accordance with ASC 810-10-30-10 through 30-15 and
ASC 810-10-35-6 through 35-8.
An entity would measure the portion of the change in fair value attributable to instrument-specific
credit risk as the excess of total change in fair value over the change in fair value that results from a
change in a base market risk, such as a risk-free interest rate or a benchmark interest rate. Alternatively,
an entity would be permitted to use another method that it considers to more faithfully represent the
portion of the total change in fair value resulting from a change in instrument-specific credit risk. In
either case, the entity would disclose the method it used to determine the gains and losses attributable
to instrument-specific credit risk and would be required to apply the method consistently from period to
Any accumulated gains or losses reflected in OCI as a result of this provision would be recognized
through earnings once the financial liability is derecognized.
Editor’s Note: During the financial crisis of 2008, many stakeholders expressed concerns about
the counterintuitive impact on earnings of recording changes in the fair value of financial liabilities
when such changes are related to an entity’s own debt for which the fair value option had been
Under U.S. GAAP today, for financial liabilities measured at fair value, an entity would recognize
a gain in earnings when there is an increase in instrument-specific credit risk or a loss when
there is a decrease in instrument-specific credit risk. The new guidance aims to eliminate this
counterintuitive result by requiring entities to present in OCI changes in fair value that result from
changes in an entity’s own credit risk.
As discussed in more detail below in the Effective Date and Early Adoption section, entities are
permitted to early adopt this provision of the ASU for financial statements that have not yet been
Valuation Allowance on a Deferred Tax Asset Related to an AFS Debt Security
The new guidance eliminates the diversity in practice related to the evaluation of the need for a
valuation allowance for deferred tax assets (DTAs) related to debt securities that are classified as AFS.
Under current U.S. GAAP, entities may perform this evaluation either separately from their other DTAs
or in combination with them. The new guidance clarifies that an entity should “evaluate the need for a
valuation allowance on a [DTA] related to [AFS] securities in combination with the entity’s other [DTAs].“
Editor’s Note: When a financial instrument is measured at fair value, the tax basis of that
instrument is not usually affected. This causes a temporary difference between the tax basis and
financial reporting basis of an investment, thereby creating a DTA or DTL pursuant to ASC 740.
Historically, some entities have evaluated the need for a valuation allowance on DTAs associated
with AFS debt securities separately from other DTAs. The revised guidance clarifies that such
separate evaluation is not permitted.
Summarized below are some of the ASU’s notable changes related to disclosures.
Amendments to Disclosures in ASC 825
For financial instruments not recognized at fair value in the statement of financial position, the ASU
Entities that do not meet the definition of a public business entity (PBE) are no longer required
to provide the disclosures4 in ASC 825-10-50 about fair value.
PBEs are no longer required to disclose the information in ASC 825-10-50-10(b) and (c)
related to (1) the methods and significant assumptions they used to estimate fair value or (2) a
description of the changes in the methods and significant assumptions they used to estimate
However, the ASU retains the current requirements in U.S. GAAP for PBEs to provide fair value
information about (1) financial instruments not recognized at fair value in the statement of financial
position either in the body of the financial statement or in accompanying notes and (2) the level of the
fair value measurement hierarchy in which financial instruments are classified (i.e., Level 1, Level 2, or
Editor’s Note: The option permitting entities to omit ASC 825-10-50 fair value disclosures if it is
not “practicable to estimate fair value“ has been eliminated.
The ASU also clarifies U.S. GAAP by eliminating the guidance in ASC 825 that had been interpreted
to permit an “entry“ price notion for estimating the fair value of loans for disclosure purposes. The
amendments instead require a PBE to disclose the fair value, in accordance with the “exit“ price
notion in ASC 820, of financial assets and financial liabilities measured at amortized cost, except
for (1) receivables and payables due within one year or less; (2) equity investments for which the
practicability exception is applied; and (3) deposit liabilities with no defined or contractual maturities.
Editor’s Note: Practitioners may have interpreted the current illustrative guidance in
ASC 825-10-55-3 to allow entities to disclose the fair value of loans on the basis of an “entry“
price notion. The ASU’s requirement to disclose fair value on the basis of an “exit“ price notion
may represent a major shift for some entities that have continued to disclose the fair value of
loans on the basis of entry price. The new guidance was intended to achieve greater consistency
and comparability related to fair value measurements for financial statement users.
The ASU also requires all entities to disclose either on the balance sheet or in the notes to the financial
statements all financial assets and financial liabilities grouped by (1) measurement category (i.e.,
amortized cost or fair value — net income or OCI) and (2) form of financial asset (i.e., securities and
Equity Investments Without Readily Determinable Fair Values
The new guidance requires entities that have elected the practicability exception to fair value
measurement (discussed above) to disclose (1) the carrying amount of investments without readily
determinable fair values, (2) the amount of the adjustment (either upward or downward) made to the
carrying amount due to observable price changes, (3) any impairment charge during the reporting
period, and (4) additional information to help users understand the information the entity considered in
determining the quantitative information disclosed in items (1) through (3).
Effective Date and Early Adoption
For PBEs, the new standard is effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2017. For all other entities, including not-for-profit entities and employee
benefit plans within the scope of ASC 960 through ASC 965 on plan accounting, the effective date is
in line with the recommendation of the private-company decision-making framework — that is, the
guidance is effective for fiscal years beginning one year after the effective date for PBEs (i.e., December
15, 2018) and interim reporting periods within fiscal years beginning two years after the PBE effective
date (i.e., December 15, 2019).
Early adoption is permitted for all entities whose financial statements have not yet been issued or have
not been made available for issuance with respect to the following changes made to ASC 825:
For financial liabilities measured under the fair value option, fair value changes resulting from a
change in instrument-specific credit risk would be presented separately in other comprehensive
The fair value disclosure requirements for financial instruments not recognized at fair value
would be eliminated for non-PBEs.
Early adoption of other provisions is not permitted for PBEs. Non-PBEs are permitted to early adopt the
new standard when it becomes effective for PBEs (i.e., fiscal years beginning after December 15, 2017,
including interim periods therein).
To adopt the amendments, entities will be required to make a cumulative-effect adjustment to
beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective,
with the exception of the following:
Guidance (including disclosure requirements) on equity securities without readily determinable
fair values will be applied prospectively to all equity investments that exist as of the date of
Guidance consistent with ASC 820 on using the exit price notion to measure the fair value of
financial instruments for disclosure purposes will be applied prospectively. If information is no
longer comparable as a result of adopting the guidance, entities will be required to disclose
Appendix — Comparison of Classification and Measurement Models
The table below compares the classification and measurement models under current U.S. GAAP, the ASU, and IFRS 9 (2014).
Current U.S. GAAP
IFRS 9 (2014)
for financial assets other
than equity investments
Under ASC 320, three categories are used
to classify and measure investments in
Held to maturity (amortized cost).
Under ASC 310, two categories are used
to classify and measure loans:
Held for investment (amortized cost).
Held for sale (lower of cost or fair value).
Three categories are used:
Fair value through other comprehensive income
Fair value through profit or loss (FVTPL).
for equity investments
Under ASC 320, marketable equity
securities other than equity method
investments (those for which the investor
has significant influence over the investee)
or those that result in consolidation of the
investee are classified as either held for
trading (FVTNI) or AFS (FVTOCI).
For AFS equity securities, any amounts
in accumulated OCI are recycled to net
income upon sale or when the security
becomes other than temporarily impaired.
Investments in nonmarketable equity
securities other than equity method
investments are measured at cost (less
impairment) unless the fair value option
has been elected.
Under ASC 321, entities will carry
all investments in equity securities
that do not qualify for equity
method accounting or result in
consolidation of the investee at
FVTNI. For equity investments that
do not have a readily determinable
fair value, entities are permitted
to elect a practicability exception
and measure the investment at
cost less impairment plus or minus
observable price changes (in orderly
The exception would not be
available to investment companies,
broker-dealers, defined benefit
plans, and investors in equity
investments that apply the
NAV practical expedient under
Equity investments other than equity method
investments or those that result in consolidation
of the investee are accounted for at FVTPL
with an option to irrevocably designate equity
investments that are not held for trading at
FVTOCI at initial recognition. For FVTOCI equity
investments, any amounts in accumulated OCI
are not transferred to profit or loss, even if
the investment is sold or impaired. In limited
circumstances, “cost may be an appropriate
estimate of fair value.“
for financial liabilities
Nonderivative financial liabilities (primarily
an entity’s own debt) are accounted for at
amortized cost unless the fair value option
is elected. Derivative financial liabilities
and short-sale obligations are measured
at fair value.
No changes, except for the
presentation of certain fair value
changes for fair value option
liabilities (see below).
Financial liabilities are carried at amortized cost,
except for derivative and trading liabilities and
those designated under the fair value option
Method for classifying
For securities, the classification depends
on whether the entity holds the security
for trading or has the intent and ability to
hold it to maturity.
For loans, the classification depends on
whether the entity intends to hold the
loan to maturity or for the foreseeable
The classification is based on both the
entity’s business model for managing the
financial assets and the contractual cash flow
characteristics of the financial asset.
Criteria for carrying
financial assets at
The following financial assets are carried
at amortized cost:
Debt securities that the entity has the
positive intent and ability to hold to
Loans that the entity has the intent and
ability to hold to maturity or for the
Financial assets are carried at amortized cost if
they satisfy both of the following criteria:
They meet the cash flow characteristics criterion
(i.e., solely payments of principal and interest).
They are held in a business model whose
objective is to hold assets for the collection of
Criteria for measuring
financial assets other
than equity investments
The following financial
assets other than equity investments are
measured at FVTOCI:
Investments in debt securities that are
not classified as either trading or held to
Loans not classified as held for trading if
the investor is contractually at risk of not
recovering substantially all of its initially
Financial assets other than equity investments
are measured at FVTOCI if they satisfy both of
the following criteria:
They meet the cash flow characteristics criterion.
They are held in a business model in which
assets are managed both to collect contractual
cash flows and for sale.
Criteria for measuring
financial assets other
than equity investments
at FVTNI (or FVTPL)
The following financial
assets other than equity investments are
measured at FVTNI:
Debt securities bought and held principally
Loans bought and held principally for
trading if the investor is contractually at
risk of not recovering substantially all of its
initially recorded investment.
Financial assets elected under the fair
value option (see below).
The following financial assets other than equity
investments are measured at FVTPL:
Financial assets that fail to qualify for either
amortized cost or FVTOCI.
Financial assets designated under the fair value
option (see below).
Criteria for measuring
financial assets at the
lower of cost or fair
Loans held for sale.
currency gains and
losses on financial assets
accounted for at FVTOCI
For AFS debt securities, unrealized foreign
currency gains and losses are deferred
in OCI in a manner similar to how other
unrealized gains and losses are deferred.
Unrealized foreign currency gains and losses on
nonequity investments accounted for at FVTOCI
are recognized in profit or loss.
Hybrid financial assets
Embedded derivatives in hybrid financial
assets are bifurcated and accounted
for separately at FVTNI when certain
conditions are met.
Measured and classified in their entirety in
accordance with their contractual cash flow
characteristics and the business model under
which they are managed. Bifurcation of
embedded derivatives in hybrid financial assets
Fair value option —
For financial instruments within the scope
of the guidance, qualifying conditions
need not be met before the fair value
option may be elected.
The fair value option may be elected only if
qualifying conditions are met.
For a financial asset, the option may be elected
if exercising it would eliminate or significantly
reduce an accounting mismatch.
For a financial liability, the option may be
elected if either of the following applies:
Exercising the option would eliminate or
significantly reduce an accounting mismatch.
A “group of financial liabilities or [a group
of] financial assets and financial liabilities is
managed and its performance is evaluated
on a fair value basis, in accordance with a
documented risk management or investment
strategy, and information about the group is
provided internally on that basis to the entity’s
key management personnel.“
In addition, the fair value option may be elected
for a hybrid financial liability unless either of the
The embedded derivative or derivatives do
not “significantly modify the cash flows that
otherwise would be required by the contract.“
“[I]t is clear with little or no analysis when a
similar hybrid instrument is first considered that
separation of the embedded derivative(s) is
Presentation of fair value
changes attributable to
risk for financial liabilities
designated under the fair
There are no similar requirements under
current U.S. GAAP.
The portion of the total fair value
change caused by a change in
instrument-specific credit risk is
recognized in OCI. Any accumulated
amount remaining in OCI is
reclassified to earnings when the
liability is extinguished.
The portion of the total fair value change
caused by a change in the liability’s credit risk is
recognized in OCI unless such treatment would
create or enlarge an accounting mismatch in
profit or loss. This amount is not subsequently
transferred to profit or loss.
financial assets other
than equity investments
Reclassification is permitted in certain
circumstances. Transfers from the heldto-
maturity category and transfers into or
out of the trading category are expected
to be rare.
Reclassification is required if the business model
changes and would be recorded as of the first
day of the period after the period in which the
business model changes.
Before ASU 2016-01’s amendments, ASC 825-10-50-10 states that “a reporting entity shall disclose all of the following:
Either in the body of the financial statements or in the accompanying notes, the fair value of financial instruments for which it is practicable
to estimate that value
The method(s) and significant assumptions used to estimate the fair value of financial instruments consistent with the requirements of
paragraph 820-10-50-2(bbb) except that a reporting entity is not required to provide the quantitative disclosures . . . by that paragraph
A description of the changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments, if any,
during the period
The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3).“