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Journal Entry — Classification and Measurement of Financial Instruments — FASB Expands Practicability Exception and Retains Certain Specialized Guidance for Not-for-Profit Entities

Published on: Jan 10, 2013

At its meeting yesterday, the FASB tentatively decided to expand the scope of a practicability exception from fair value accounting and related impairment guidance included in its tentative model for the classification and measurement of financial instruments. Under this exception, an entity would be permitted to measure investments in equity securities that do not have a readily determinable fair value at cost; subsequent adjustments would be made for impairment and observable changes in the price of identical or similar equity securities of the same issuer. The FASB expanded the scope of the exception and related impairment guidance to include investments in (1) an entity’s ownership interests without a readily determinable fair value (e.g., partnership interests) that are not subject to the ASC 8201 fair value practical expedient related to net asset value per share2 in addition to (2) equity securities without a readily determinable fair value.

Further, the FASB tentatively decided to retain the specialized industry guidance in ASC 958-325-35 that permits not-for-profit entities other than health care entities to account for certain investments at FV-NI or to use an alternative measurement method (i.e., the cost method or the equity method of accounting if applicable3). The FASB also tentatively decided to limit this “portfolio-wide option” to investments in nonfinancial assets and ownership interests in an entity that qualify for the equity method of accounting. Not-for-profit entities would therefore be permitted to account for (1) investments in ownership interests in an entity that qualify for the equity method of accounting at FV-NI and (2) nonfinancial assets at either FV-NI or an alternative measure in accordance with applicable guidance.

For investments in ownership interests accounted for under the equity method, not-for-profit entities would be required to apply the FASB’s tentative model for the impairment of such investments4 instead of the impairment guidance in ASC 958-325-35. This specialized industry impairment guidance would be deleted from the FASB Accounting Standards Codification.

We expect the FASB to issue its proposed ASU on the classification and measurement of financial instruments by the end of this month or in early February.

For more information about the FASB’s previous tentative decisions on the classification and measurement of financial instruments, see Deloitte’s September 24, 2012, Heads Up.


[1] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

[2] Under ASC 820, an entity may elect to measure certain investments at net asset value per share (or its equivalent) as a practical expedient for measuring fair value. For more information, see ASC 820-10-15-4 and ASC 820-10-35-59 through 35-62.

[3] A not-for-profit entity uses the equity method to account for investments in ownership interests of an entity when such investments provide the entity with significant influence over the investee under ASC 323 or — for investments in for-profit real estate partnerships, limited partnerships, or similar entities — when the investment represents more than a minor interest under ASC 958-810.

[4] This guidance would require an entity to qualitatively assess whether an investment is more likely than not impaired and then to measure the investment at fair value and record an impairment loss if its fair value is less than its carrying value.

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