Editor’s Note: The Board directed the staff to further research whether defining the term as an “equity investment” rather than as an "equity security” would affect the accounting for partnership interests. In addition, the Board noted that the current definition of equity security in U.S. GAAP excludes (1) forward contracts to acquire or sell equity securities and (2) whether the accounting for such contracts should be aligned with the proposed accounting for equity securities/investments. As a result, at a future meeting, the Board will decide how an entity should account for a forward contract on equity securities whose fair value is not readily determinable and that do not meet the definition of a derivative under ASC 815.² 

Under current U.S. GAAP, forward contracts that meet the definition of a derivative must be accounted for as derivatives under ASC 815 unless they qualify for a scope exception (e.g., the one for own-equity contracts). ASC 815-10-25-17 indicates that forward contracts to acquire securities (debt or equity) covered by ASC 320 that have all of the characteristics in ASC 815-10-15-141³ should, at inception, be designated as held to maturity, available for sale, or trading.

Editor’s Note: The Board discussed the FV-OCI classification for equity securities in the context of (1) strategic investments held by entities, (2) equity securities held by insurers, and (3) exchange-traded funds whose underlying investments are in debt securities. Although the Board discussed stakeholders’ feedback on these three topics, the Board only directed the staff to further research whether specific criteria could be established to define a strategic investment that could qualify for the FV-OCI classification.

Editor’s Note: The February 2013 proposed ASU provides a practicability exception to fair value measurement for equity investments without readily determinable fair values. This practicability exception would permit entities to measure equity investments without readily determinable fair values at cost less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical investment or a similar investment of the same issuer. Under the proposed guidance, for an equity investment that qualifies for and is measured by using the practicability exception, when information about price changes is observable, the entity would be required to adjust the carrying value of the equity investment upward or downward.

Editor’s Note: In an effort to simplify the impairment model for equity securities and equity method investments, the February 2013 proposed ASU contains a one-step method under which an entity would consider “impairment indicators to determine if it is more likely than not that the fair value of the investment is less than its carrying amount.” Under this model, an entity that determines that the equity security is impaired would recognize an impairment loss equal to the difference between the security’s fair value and carrying amount. In contrast, ASC 320-10-35-30 requires entities to perform a two-step assessment to determine whether an equity security is impaired. That is, under ASC 320-10-35-30, an entity must determine whether impairment is temporary or other than temporary; under the proposed guidance, this assessment would not be required.

Some board members expressed concern that for equity investments in publicly traded entities that are accounted for under the equity method, the proposed one-step model may require an immediate impairment recognition since the fair value of such investments would be readily observable and impairment losses would not be reversible if the stock price later improved. These board members pointed out that an entity that uses the practicability exception to account for such investments would be permitted to adjust the carrying value of the investment both upward and downward on the basis of observable changes in fair value.