Are Your Investments Reported Correctly?

By Thomas R. Wilson, CPA | February 12, 2019

The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), ASU No. 2016-1 – Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities.  The objective of this ASU is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.

The amendments in this ASU segregates the accounting for debt and equity securities by modifying FASB ASC 320, Debt and Equity Securities, to only include guidance related to debt securities and by creating FASB ASC 321, Equity Securities, to provide guidance for equity securities.  Some of the targeted improvements are as follows:

Investments – Equity Securities (FASB ASC 321)

Under previous standards, Management had to determine whether marketable equity securities were either “trading securities” or “available-for-sale securities.” Both classifications required measurement at fair value, with created differences in how the unrealized gain or loss was presented in the financial statements. Unrealized gains and losses from trading securities were included in net income, whereas unrealized gains and losses from available-for-sale securities were included in other comprehensive income.

ASU No. 2016-01 eliminates the distinction between trading and available-for-sale securities, all equity investments (with exceptions) will now be measured at fair value with the unrealized gain or loss recognized in net income.

The exception is equity investments that meet the following criteria:

  • Equity investments accounted for under the equity method, and
  • Equity investments that result in the consolidation of the investee

In addition, it simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

Investments – Debt Securities (FASB ASC 320)

Unlike the changes to equity securities, investments in debt securities will continue to be classified into the three categories:

  • Trading securities
  • Available-for-sale securities
  • Held-to-maturity securities

The initial measurement and subsequent measurement for debt securities will remain unchanged.  It also eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities.

Under both ASC 320 and ASC 321, the following should be noted:

  1. Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
  2. Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

As noted above, this ASU eliminates the distinction between trading and available for sale securities.  All equity investments (with the exceptions noted above) will now be measured at fair value with the unrealized gains/losses recognized through net income, instead of through Other Comprehensive Income.

As a result, any calculation (EBITDA, Composite Score, etc.) involving net income, will be impacted depending on market fluctuations of the equity investments and the resulting gain or loss recognized through net income.

This ASU is effective for non-public for financial statements issued for annual periods beginning after December 15, 2018 (calendar year 2019), with public entities required to implement this ASU one year earlier.

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