Financial instruments and hedging

Financial instruments are pervasive across all reporting entities and even more so in the financial services sector.

The FASB is revisiting the accounting for financial instruments. The FASB issued two of its three financial instruments standards: recognition and measurement and allowance for credit losses. An ED on hedging, the third part of the original accounting for financial instruments project, was released in September, 2016.



Allowance for loan and lease losses – FASB issues final impairment standard

On June 16, the FASB issued new impairment guidance for financial instruments that will impact all reporting entities.


Read the latest developments on accounting for financial instruments

Recognition and measurement

  • The FASB issued new guidance, ASU 2016-01, Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities that affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.
  • The guidance requires entities to measure equity investments that are not accounted for under the equity method and do not result in consolidation at fair value. Changes in fair value are recognized in income unless the investments qualify for the practicability exception.
  • The guidance is effective in Q1 2018 for calendar year-end public business entities and in 2019 for calendar year-end nonpublic entities. Certain provisions can be early adopted.
  • In general, the guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the first period in which the guidance becomes effective.

Allowance for credit losses (Impairment of financial assets)

  • In June 2016, the FASB issued new guidance for the accounting for credit losses on financial assets within its scope (CECL), ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
  • For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use the new current expected credit loss approach that will generally result in earlier recognition of allowances for losses.
  • For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what is done today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities.
  • The guidance is effective as follows:

- Q1 2020 for calendar year-end public business entities that are SEC filers

- Q1 2021 for calendar year-end public business entities that are not SEC filers

- 2021 for calendar year-end nonpublic entities

Early application of the guidance will be permitted in 2019 for calendar year-end entities.

  • Given its scope, which includes trade and lease receivables, the new guidance will impact financial services and non-financial services entities

Derivatives and hedging

  • The FASB is currently redeliberating its exposure draft that will amend ASC 815, Derivatives and Hedging. The changes are intended to allow more hedging strategies to qualify for hedge accounting and simplify the related administration and reporting.
  • The proposals will significantly affect what qualifies for hedge accounting, how hedge effectiveness assessments are documented, how hedge effectiveness is assessed and hedge ineffectiveness is measured, and how the hedging results are presented and disclosed in the financial statements.
  • Additional disclosures, including the effect of hedging on individual income statement line items and quantitative hedging goals, would be required.
  • The final guidance is expected to be issued in the third quarter of 2017. While the effective date has not yet been decided, early adoption is expected to be permitted.
  • The proposed changes would impact both financial and nonfinancial hedges. 

Video perspectives

Is a discounted cash flow required for available for sale securities under the new financial instruments credit loss standard? Hear PwC’s Edward Lee describe this important question raised by many practitioners during application of the new standard and share his perspectives. He also addresses situations when a company has multiple positions in the same security, but classifies some as held to maturity and some as available for sale.


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Available for sale debt securities and the new credit loss model

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