New Guidance on Financial Instruments Finalized

Jeff Skaggs, Audit Principal
January 2016

On January 5, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”

This ASU contains certain provisions that will have a meaningful impact on how banks recognize, measure and disclose their activities related to financial instruments. The most significant provision requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value to be recognized in net income. This is a significant change from the current available-for-sale rules, which provide for recognizing the change in fair value through other comprehensive income. The adoption of this provision is to be recognized as a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption.

The second notable change eliminates the requirement for nonpublic business entities to disclose fair value for financial instruments that are measured at amortized cost, which generally includes items such as cash and due from banks, loans, deposits, and debt. This provision should provide some notable relief for those that calculate the related estimated fair values and prepare the financial statement disclosures.

ASU 2016-01 is effective for years beginning after December 15, 2017 for public business entities, including interim periods within those fiscal years, and years beginning after December 15, 2018 for all other entities, including interim periods within fiscal years beginning after December 15, 2019. Certain provisions can be adopted early with the most appealing provision being the elimination of the fair value disclosures for nonpublic business entities. This can be adopted for any financial statements that have not yet been made available for issuance.

If you would like to discuss further, please contact Jeff Skaggs or your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.