Ellin & Tucker Offices

FASB’s Changes for Classifying and Measuring Financial Instruments Significantly Affect Financial Reporting

By: Private: Carl Kampel

A rare occurrence took place recently at the Financial Accounting Standards Board–three of the seven members voted against adoption of new guidance for financial instruments. Although the specific reasons varied, the common theme was that complexity was not reduced, perhaps increased, and the amendments did not result in providing decision-useful information. The following summarizes the more significant amendments that will affect privately held entities and not for profit organizations.

The big deal is that the new guidance requires an investment in equity securities and other ownership interests in partnerships, unincorporated joint ventures and limited liability companies, which are not consolidated or accounted for under the equity method, be measured at fair value. The bigger deal is that changes in fair value will be recognized as part of net income. Business-oriented health care not for profits will also get caught up in the change as changes in fair value will be recognized as part of the performance indicator, equivalent to income from operations. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified as available for sale as other comprehensive income or outside the performance indicator. Entities will also no longer be able to use the cost method for equity investments that do not have readily determinable fair values, unless they meet the practicability exception.

The practicability exception basically allows these investments to be measured at cost, less any impairment, as long as the investment does not qualify for the practical expedient to estimate fair value. For example, investments in an entity that reports as an investment company and reports net asset value per share/unit (as do most private equity and hedge funds) would not qualify for this exception. Even under this exception, an entity would be required to adjust cost, up or down, for observable price changes in orderly transactions that the entity becomes aware of (without undue cost and effort) for identical or similar investments of the same issuer. This may become problematic in trying to determine what constitutes undue cost and effort and whether or not an investment is similar.

Regardless, entities using the practicability exception will need to make a qualitative assessment each period of whether the investment is impaired and the extent of impairment. That amount, whether considered temporary or not, will be recorded as part of net income or the performance indicator. There are some added disclosure requirements as well. These amendments are effective for privately held entities and not for profit organizations for years beginning after December 15, 2018 (effectively December 31, 2019).

On the less complex side of the changes, many privately held entities that either had more than $100 million in assets or held derivative instruments, such as interest rate swaps, were required to disclose the fair value of financial instruments, such as notes receivable, related party loans and debt securities. Many entities took the position that fair value approximated carrying value. These amendments eliminate this disclosure requirement and the justification of the aforementioned conclusion. This part of the change can be adopted immediately.



CARLbwCarl Kampel, CPA is the director in charge of professional standards at Ellin & Tucker, an advisory role that ensures all aspects of client accounting, regardless of the complexity, are conducted with the highest level of service and accuracy. His rich career spanning more than 30 years and personal contributions to financial and special reporting services standards of the audit and accounting profession have rippled internationally. He is a member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Financial Reporting Executive Committee.


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