Accounting for Financial Instruments 


The Financial Accounting Standards Board has embarked upon an ambitious project related to financial instruments. So far, two of the three Financial Instrument standards have been issued. Below you will find some background information on Recognition and Measurement, Credit Losses and Hedging. You may also be interested in visiting the the Financial Instruments landing page for additional content including an overview video and news articles. In the near future, helpful resources will be posted to that webpage. 

Credit Losses
On June 16, 2016, FASB issued Accounting Standards Update (ASU) No. 2016-13— Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The release of this new standard marks the end of accounting for credit losses using the incurred loss model. 

The new standard will: 
  • Apply to most debt instruments, trade receivables, lease receivables, reinsurance receivables, financial guarantee contracts and loan commitments.
  • Financial instruments measured at fair value, some equity instruments and available for sale debt securities will still be excluded.
  • Entities would recognize as an allowance the estimate of contractual cash flows not expected to be collected.
  • Entities would consider all available relevant information in making the estimate, including historical charge-offs and other past events, current conditions, and reasonable and supportable forecasts and their implications for expected credit losses.
  • Entities would revert to an unadjusted historical credit loss experience for the period beyond which it can make its reasonable and supportable projections.

Transition and Next Steps
 
Public business entities that meet the definition of an SEC filer are required to apply the guidance for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Public business entities that do not meet the definition of an SEC filer are required to apply the guidance for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Non-public, not for profit and employee benefit plan entities are required to apply the guidance for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Early application of the guidance is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 


Recognition and Measurement 
On January 5, 2016, the FASB issued Accounting Standards Update (ASU) 2016-01—Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

The new standard: 
  • Requires public business entities to sue the exit price notion when measuring the fair value of financial instruments for disclosure purposes,
  • Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets (securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 
  • Requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability result in from a change in the instrument-specific credit risk (entities “own credit”) when the organization has elected to use the fair value option to measure its financial instruments,
  • Eliminates the requirement to disclose the fair value of financial instruments measured at amortized costs for organizations that or not public business entities, and
  • Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

Hedging
FASB’s final phase of the overall financial instrument project is to address the current model for hedge accounting. This project addresses issues related to hedge accounting for financial instruments and non-financial items. 

The objective of this project is to 
  • Make targeted improvements to the hedge accounting model based on the feedback received from preparers, auditors, users and other stakeholders.
  • Consider opportunities to align hedge accounting guidance in GAAP with IFRS 9, Financial Instruments.
The FASB staff is developing a draft proposed Accounting Standards Update based on the tentative decisions reached by the Board. This draft is expected to be released in third quarter 2016.



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