Financial instruments

The FASB issued two of its three financial instruments standards in the first half of the year: recognition and measurement in January 2016 and allowance for credit losses in June 2016. The FASB is expected to issue an exposure draft on hedging, the third piece of the original accounting for financial instruments project, in Q3 of 2016.

Recognition and measurement

Changes to the current GAAP model primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities, is largely unchanged.

Impairment

The guidance has a broad scope and requires that the CECL model generally apply to all financial assets measured at amortized cost and certain off-balance sheet exposures. The CECL model requires the recognition of an allowance, at the inception or acquisition of a financial asset, for the full amount of expected credit losses over the life of the financial asset. For available-for-sale debt securities measured at fair value with qualifying changes in fair value recognized in other comprehensive income, the ASU has a separate impairment model that is similar to the current guidance.

Given the scale of the change, some companies may require substantial time and effort to implement the new Standard. In addition, some companies may find that their systems and credit impairment models need to change. Companies may need to begin to collect and maintain additional data from internal and external sources for a period of time before adoption to have historical data to support expected loss calculations.


Listen to our podcast for an overview of derivatives and hedging: the fundamentals

Need a refresher on derivatives and hedge accounting? Listen in to get grounded in the fundamentals.

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