FASB issues technical corrections and improvements to ASU 2016-01
On February 28, 2018, the FASB issued Accounting Standards Update (ASU) 2018-03,1 which clarifies certain aspects of ASU 2016-01.2
The amendments in the new ASU are summarized in the appendix below.
Effective Date and Transition Requirements
For public business entities, the amendments in ASU 2018-03 are 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, are not required to adopt the amendments until the interim period beginning after June 15, 2018. Public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in ASU 2016-01.
For all other entities, the effective date will be the same as the effective date in ASU 2016-01.
Early adoption of ASU 2018-03 is permitted for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, if they have adopted ASU 2016-01.
Appendix
Key provisions of the amendments (reproduced from ASU 2018-03) are summarized in the table below.
| Area for Correction or Improvement | Summary of Amendments |
|---|---|
| Issue 1: Equity Securities Without a Readily Determinable Fair Value — Discontinuation | |
| Once an entity elects the measurement alternative in paragraph 321-10-35-2, the 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 an entity to discontinue the measurement alternative in paragraph 321-10-35-2. | The amendment clarifies 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 irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. |
| 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 amendment clarifies 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 amendment clarifies 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 amendment clarifies 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, Financial Instruments — Overall. |
| Issue 5: Fair Value Option Liabilities Denominated in a 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 amendments 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 a 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 amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services — Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. |
____________________
1 FASB Accounting Standards Update No. 2018-03, Technical Corrections and Improvements to Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
2 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.
