Financial Instruments Projects

The Financial Accounting Standards Board (FASB) is close to wrapping up its last major financial instruments project. The standards on classification and measurement and credit impairment will have the greatest effect on financial institutions with investment portfolios. The forthcoming changes to hedge accounting could expand its usage for all entities, especially those that manage currency exchange rate fluctuations or use commodity components in their production process.

Accounting Standards Update (ASU) 2016-01 makes targeted but significant changes related to classification and measurement of investments in equity securities and presentation of fair value changes in certain financial liabilities.

The credit impairment standard creates a single impairment model—current expected credit loss (CECL)—for most financial assets, replacing the multiple models available under current U.S. generally accepted accounting principles. The new model requires an impairment allowance to be recognized at inception, representing the entity’s assessment of lifetime expected credit losses.

The final hedging standard will make it easier to apply hedge accounting to risk management strategies where it’s too challenging or costly to apply today.

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