Home » Operations » Best Practices & Benchmarking in Operations

FASB Update 2016-01: the update that has got corporate execs worried

This is an update to FASB standards that primarily affects companies that hold financial assets or owe financial liabilities. It will apply from 15 December 2017 but corporates have concerns over the changes in how they will have to account for equity investments in other companies.

At the start of 2016, the Financial Accounting Standards Board (FASB) issued its accounting standards updated #2016-01 for the accounting of financial instruments (in an update subtitled: Recognition and Measurement of Financial Assets and Financial Liabilities), which outlines some changes to accounting under US GAAP (generally accepted accounting principles). The update primarily affects companies that hold financial assets or owe financial liabilities and will apply for public business entities for accounting periods beginning after 15 December 2017.

Some key points about FASB Update 2016-01

The project began before the global financial crisis of 2008 as a joint initiative with the International Accounting Standards Board (IASB). Its objective is to improve and to achieve convergence of their respective standards on the accounting for financial instruments.

  • The main objective of the update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.
  • The update affects all entities that hold financial assets or owe financial liabilities.
  • It requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
  • It simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
  • It eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities

For a complete list of the key provisions of the update, see this data sheet from PwC or the FASB's own website.

An article in the New York TimesA Little-Known Accounting Change Could Have a Big Impact – notes that this accounting standards update will have a major impact on business and “has corporate executives up in arms — and scrambling to comply”. It says that one of the main changes brought about by the new standards will be the way companies have to account for their equity investments in other companies, specifically for those stakes smaller than 20 per cent.

The article, written by William D. Cohan, says: “But Update 2016-01 could significantly affect — and distort — the way companies like Alphabet, Intel, IBM and Salesforce.com, which make a lot of small investments in other companies, report their earnings. It could also curtail such investments from being made in the first place, because some businesses say the costs of complying with the rule are too high.”


CTMfile take: This accounting update has gone largely under the radar – does it affect you and has your company taken steps to comply by 15 December?


This item appears in the following sections:
Operations
Best Practices & Benchmarking in Operations
Control & Compliance in Operations

Also see

Comments

No comment yet, why not be the first?

Add a comment