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FASB Proposes Amendments to Financial Instruments and Leases

Last week, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU”), Technical Corrections and Improvements to Recently Issued Standards: I. Accounting Standards Update No. 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and II. Accounting Standards Update No. 2016-02, Leases (Topic 842).

The proposed changes address the following areas:

  • Equity Securities without a Readily Determinable Fair Value—Discontinuation. The proposed amendment allows a company measuring an equity security using the measurement alternative to change to a fair value method in agreement with Topic 820, Fair Value Measurement.
  • Equity Securities without a Readily Determinable Fair Value—Adjustments. The proposed amendment allows changes made under the measurement alternative to reflect the security’s fair value as of the date that the observable transaction for a similar security transpired.
  • Forward Contracts and Purchased Options. The proposed amendment provides that re-measuring the whole value of forward contracts and purchased options is necessary when observable transactions arise on the underlying equity securities.
  • Presentation Requirements for Certain Fair Value Option Liabilities. The proposed amendment clarifies that when the fair value option is chosen for a financial liability, the guidance under paragraph 825-10-45-5 should be applied, irrespective of whether the fair value option was elected under Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10.
  • Fair Value Option Liabilities Denominated in a Foreign Currency. The proposed amendments clarify that for financial liabilities wherein the fair value option is elected, the total of change in fair value relating to the instrument-specific credit risk must first be calculated in the currency of denomination when disclosed independently from the total fair value change of the financial liability. Both components of the fair value change of the liability must also be re-measured into the functional currency of the reporting entity using end-of-period spot rates.
  • Transition Guidance for Equity Securities without a Readily Determinable Fair Value. The proposed amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value under ASU No. 2016-01 is only for cases when the measurement alternative is used.

Comments on the proposal are due Monday, November 13.

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