Measuring Fair Value: New ASU Offers Clarity

Stakeholders seeking clarity were behind the latest Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB).  In response to questions raised, the FASB released ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  This ASU was issued to clarify and improve guidance contained in ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10, and is not expected to significantly change financial reporting practices.  Currently, an equity security without a readily determinable fair value that also does not qualify for the practical expedient to measure fair value, may be accounted for based on cost, plus any impairments and observable price changes.  This process is known as the cost method.  Under the amended guidance, an entity that uses the cost method has the option to make an irrevocable election to change its measurement approach to a fair value method allowable under Topic 820, Fair Value Measurement.  As a result, all future purchases of identical or similar investments by the same issuer must be measured using an allowable fair value method.  This ASU also clarifies the accounting for equity securities measured under the cost alternative.  Specifically, the amended guidance states that value should be measured based on the fair value as of the date an observable transaction takes place—not the financial reporting date.

The update also addresses treatment of forward contracts and purchased options accounted for under the cost method.  Now, when an observable price change occurs to an underlying equity security associated with a forward contract or purchased option, the entire value of that contract or option must be remeasured.  Further clarification is provided for the presentation of certain fair value option liabilities, stating 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 Subtopic 825-10, Financial Instruments-Overall.

The ASU also addresses fair value option liabilities denominated in a foreign currency.  According to the new update, for financial liabilities where the fair value option has been elected, the amount of change in fair value, in relation to the instrument-specific credit risk, should first be measured in the currency of denomination when it is presented separately from the total change in fair value of the financial liability.  Both components of the change in the fair value of the liability should then be remeasured into the functional currency of the reporting entity using end-of-period spot rates.  Lastly, the amendment simplifies the transition guidance for equity securities without a readily determinable fair value; entities will use a prospective transition approach only for securities they elect to measure using the measurement alternative.

In summary, the issued amendment addresses multiple items brought to FASB’s attention by stakeholders.  The update is intended to provide clarification of previously issued guidance and how to apply that guidance’s fair value option.  To give entities time to continue with their current adoption plans for the previously issued update 2016-01, FASB has quickly moved to issue this amendment.  For private companies, not-for-profit organizations, and employee benefit plans, the amendments have the same effective date and transition requirements as ASU 2016-01.  Early adoption is permitted if the entity has adopted ASU 2016-01.

If you would like more information about this ASU, or would like to request a speaker for your organization or event, contact one of our PYA executives below at (800) 270-9629.

 


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Matt Neilson

Matt Neilson

Director of Financial Reporting

Related Posts
A recent Accounting Standards Update (ASU) addresses land easements and their accounting under the new lease standards.  In January 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-01 Leases:...
Read More

Land Easements—Guidance for Implementing New Lease Accounting Standards

Many Americans have a 401(k) retirement savings plan as a benefit of employment with their employers.  They contribute a percentage of their compensation to their 401(k) each pay period with...
Read More

Taking Distributions from Your 401(k): What You Need to Know

Are you feeling unease about the impending Tuesday, April 17 tax filing deadline? Fear not –the Internal Revenue Service (IRS) permits a taxpayer to file an extension to allow time...
Read More

The Tax Deadline Looms: Need More Time?

Businesses are increasingly reliant on technology to achieve organizational objectives. However, with the convenience and efficiency of technology come intensifying risks of data loss and theft. High-profile data breaches top...
Read More

Cybersecurity Framework “SOCs” It to Cyber Threats

The ink on the Tax Cuts and Jobs Act (TCJA), which swept in a tidal wave of changes to federal tax rules, had been dry for only seven weeks before...
Read More

New Budget Agreement Brings Additional Tax Changes

The Financial Accounting Standards Board (FASB) has set forth amended guidance aimed at simplifying and reclassifying certain features of financial instruments. Accounting Standards Update (ASU) No. 2017-11 – Earnings Per...
Read More

The Update on Down Round—FASB Reclassifies Earnings Per Share

The new Tax Cuts and Jobs Act is bringing sweeping reform to the United States tax code. While recent tax reform has drawn considerable media attention to domestic corporate tax...
Read More

The Bottom Line: How Will Recent Tax Reform Impact You?

Most Americans are now aware that new tax reform legislation, titled the 2017 Tax Cuts and Jobs Act, was signed into law late last year. There has been significant news...
Read More

Excess Employee Compensation Under the New Tax Reform Law: Will Your Tax-Exempt Organization Be Affected?

PYA is pleased to announce the promotions of Michael Ramey, Matt Stuart, and Jeff Pate to the level of Equity Principal. PYA has announced the promotion of Senior Manager Michael...
Read More

PYA Announces Three New Equity Principals

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop