January 23, 2018 — FASB Redeliberates Comments Received on Proposed Technical Corrections and Improvements to ASU 2016-01
Deloitte Accounting Journal
January 23, 2018
FASB Redeliberates Comments Received on Proposed Technical Corrections and Improvements to ASU 2016-01
At its January 18, 2018, meeting, the FASB discussed comments received from stakeholders on its proposed Accounting Standards Update (ASU)1 that clarifies certain aspects of ASU 2016-01.2 The proposed ASU was issued on September 27, 2017, and comments were due by November 13, 2017.
A summary of the ASU’s proposed amendments and the tentative decisions reached at the January 18 meeting are included in the appendix below.
Effective Date and Transition Requirements
For public business entities, the guidance in the proposed ASU would be effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, would not be required to adopt the proposed amendments until June 15, 2018. Upon adoption, the amendments should be applied retrospectively with a cumulative-effect adjustment to the effective date of ASU 2016-01. For entities that have adopted ASU 2016-01, early adoption of the new standard would be permitted upon its issuance.
For all other entities, since ASU 2016-01 is not yet effective (i.e., until fiscal years beginning after December 15, 2018), the effective date and transition requirements will be the same as the transition requirements in ASU 2016-01.
For entities that have early adopted the guidance in ASU 2016-01 related to the 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 the final ASU.
Key provisions of the proposed amendments (reproduced from the proposed ASU) and the tentative decisions reached at the January 18, 2018, meeting are summarized in the table below.
Area for Correction or Improvement
Summary of Proposed Amendments
Tentative Decisions Reached at the Meeting
Issue 1: Equity Securities Without a Readily Determinable Fair Value — Discontinuation
Once the measurement alternative in paragraph 321-10-35-23 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.
The comments received on the proposed ASU indicated that the use of the phrase “same type” could lead to inconsistent interpretation and diversity in practice. On the basis of the feedback received, the FASB tentatively concluded that the guidance should be updated to replace the phrase “same type” with “all identical or similar equity securities of the same issuer.” In addition, the guidance would be clarified to state that (1) voluntarily discontinuing the alternative measurement guidance is irrevocable, and (2) if an entity discontinues the use of the measurement alternative, all future purchases of “identical and similar equity securities of the same issuer” would be measured at fair value.
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.
The FASB tentatively decided to retain the guidance in the proposed ASU.
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.
This issue was not redeliberated.
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.
The FASB received a comment that highlighted an inconsistency between the guidance proposed in ASC 825-10-45-5 and the guidance in ASC 815-15-25-4. On the basis of the feedback received, the FASB tentatively decided to retain the guidance in the proposed ASU and amend ASC 815-15-25-4 to clarify the separate presentation of instrument-specific credit risk in other comprehensive income.
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.
This issue was not redeliberated.
Issue 6: Transition Guidance for Equity Securities Without Readily Determinable Fair Value
Stakeholders raised questions 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 [(i.e., going from cost method to the measurement alternative)].
The FASB tentatively decided to retain the guidance proposed.
In addition, the FASB deliberated comments received from respondents related to application of the transition guidance to insurance companies that apply the guidance in ASC 944-325-35-1.4 The FASB concluded that, in a manner consistent with the transition guidance related to transition from cost method to the measurement alternative (i.e., Issue 6), insurance companies should apply a “prospective” transition approach. Although the FASB did not specify a transition method to prospectively recognize amounts currently in accumulated other comprehensive income, the guidance would clarify that the method chosen should be applied to the entire population of equity securities that were previously accounted for under ASC 944-325-35-1.
FASB 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, the guidance in ASU 2016-01 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 nonpublic entities.
ASC 944-325-35-1, which was superseded by the amendments in ASU 2016-01, required insurance companies to measure equity securities without readily determinable fair value at fair value with changes in fair value recorded in other comprehensive income.