Thursday, December 28, 2017

US Accounting Standard ASU 2016-01 - Financial Instruments

Normally my blog posts are about FCCS or HFM tips, features, etc. but this one is about an accounting standard now effective in the USA. But since FCCS and HFM are consolidation products, knowing and understanding the accounting involved is a necessary component of successfully working with the products. Plus this change will have a minor impact on FCCS/HFM usage.

Over the last few years there has been a shift in the accounting community away from historical cost and toward fair value accounting. In that vein, ASU 2016-01 was issued in January 2016 by the FASB. For publicly traded companies it is now effective (technically, effective for fiscal years beginning after December 15, 2017). The changes to GAAP, briefly, affect:

  • accounting for equity investments
  • accounting for financial liabilities under the fair value option
  • presentation and disclosure requirements for financial instruments
  • guidance related to the valuation allowance assessment when recognizing deferred tax assets from available-for-sale debt securities
IFRS 9 is the equivalent within the IFRS standard. I'm not going to go into everything in the ASU - the big accounting firms covered this well when the ASU was released - but I do want to focus on a couple things.

Equity investments need to be valued at fair value, with any change being recorded through earnings on the income statement. This requirement excludes investments that are accounted for by the equity method or those that are consolidated into the owner. So this change does not impact consolidated entities. The grouping of entity investments as trading or available-for-sale goes away as well as recognizing unrealized holding gains/losses for these entities.

A journal entry will be needed to adjust the value of the asset with the offset to the income statement. Companies will probably book this entry in the general ledger but could also book it in FCCS/HFM. The amount of the entry will also need to be used in the preparation of an indirect method cash flow statement as an adjustment to net income, as this is a non-cash item. For companies holding trial balance data for these entities inside their FCCS/HFM application the entities are typically outside of the main company hierarchies and no adjustments there will be needed.

Another change revolves around presentation of financial assets and financial liabilities. These should be presented by measurement category (like fair value) and form (securities, loans, receivables) in either the statement of financial position or in the accompanying notes. If presenting in the statement, then within FCCS/HFM account hierarchy changes and most likely new accounts will be required.



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