Article written by:
Kristin Romaker, CPA
Manager, Assurance & Business Advisory Services

While we all have been distracted discussing the implementation of the new accounting standards for leases and revenue recognition, there is another Accounting Standards Update (ASU) sneaking in that is effective for fiscal years beginning after December 15, 2018. The update impacts private companies including not-for-profits and employee benefit plans that hold financial assets or owe financial liabilities.

ASU 2016-01 Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities was passed to provide users with more information on recognition, measurement, presentation and disclosures. FASB Chairman Russell Golden said in a statement, “It [the standard] improves the accounting model to better meet the requirements of today’s complex economic environment.”

One key change of the standard requires changes of fair market value (FMV) of equity investments (except investments recorded under the equity method, those that result in consolidation of the investee and certain other investments) to be presented as other income/loss on the income statement versus presented in the statement of other comprehensive income (OCI). Due to the volatility of the stock market, the change could have an unexpected impact on financial statements including earnings per share.

Another item to note is that the update provides a new measurement alternative for private companies when evaluating the carrying value of equity investments without readily determinable fair values. This amendment impacts the estimated fair value using the net asset value (NAV) per share of the investment. Many employee benefit plans have assets carried at NAV and further analysis would be required upon the adoption of the ASU.

One provision in the update that simplifies reporting for private companies is the change that no longer requires financial instruments measured at amortized cost to have a corresponding fair value disclosure. The disclosure requirements of the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost can be omitted from private companies’ footnotes under the new update.

While the FASB chairman feels the update modifies the current practice to meet the requirements of today’s complex economic environment, it also presents new challenges in measuring certain investments. Private companies and employee benefit plan trustees should feel free to reach out to a GBQ associate for further guidance and consultation on this new update.

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Tags: Audit/GAAP