While the effective date has arrived for nonpublic entities to implement Accounting Standards Update (ASU) 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, FASB only recently finalized a set of technical corrections in ASU 2019-04 that addresses four issues—scope, held-to-maturity (HTM) disclosures, measurement alternative and remeasurement of equity securities. These technical corrections are not expected to have a significant effect on current accounting practice or create significant administrative cost for most entities. For a comprehensive review of ASU 2016-01 requirements, see BKD’s article Ready for New Classification & Measurement Rules for Financial Instruments?
ASU 2019-04 specifically excludes health and welfare plans accounted for under Accounting Standards Codification (ASC) 965, Plan Accounting—Health and Welfare Benefit Plans, from the scope of Subtopics 320-10, Investments—Debt Securities and 321-10, Investments—Equity Securities.
HTM Debt Securities Fair Value Disclosures
As originally issued, the language in ASU 2016-01 seemed to require all entities to disclose the fair value of HTM debt securities measured at amortized cost basis. ASU 2019-04 updates the language to make it clear that this disclosure only applies to PBEs.
ASU 2016-01 created a new practical expedient for nonmarketable equity securities. If elected, entities record those securities at cost adjusted for impairment and increases or decreases in observable prices (for orderly transactions for a similar investment of the same issuer). These codification improvements address subsequent measurement. An entity is required to remeasure an equity security without readily determinable fair value (RDFV) at fair value when an orderly transaction is identified in accordance with ASC 820, Fair Value Measurement. The measurement alternative is considered a nonrecurring fair value measurement and is subject to ASC 820’s disclosure requirements.
Remeasurement of Equity Securities as Historical Exchange Rate
ASU 2019-04 clarifies that only foreign-denominated equity securities without an RDFV accounted for under the measurement alternative must be remeasured at historical exchange rates (rate as of the acquisition date or most recent date on which the equity security was adjusted to fair value).
Transition & Effective Dates
For all entities, the amendments will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities should apply the guidance retrospectively by means of a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which all amendments in ASU 2016-01 were adopted. Prospective application is required for the amendments related to equity securities without RDFV for which an entity elects the measurement alternative.
Early adoption is permitted in any interim period as long as an entity has adopted all amendments in ASU 2016-01.
For additional information, contact your BKD trusted advisor or visit our website.