The FASB issued its much awaited final standard on classification and measurement in January 2016. Changes to the current GAAP model primarily affects 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.
The classification and measurement guidance is the first ASU issued under the FASB’s financial instruments project. The ASU for the new impairment guidance is expected in the first quarter of 2016. An exposure draft of the new hedging guidance is expected in the first half of 2016.
– An allowance approach would be used to recognize credit related impairment losses, which would allow an entity to recognize reversals of credit losses to the extent improvements occur.
– Removal of the requirement to consider the length of time that the fair value of an available for sale debt security has been less than its amortized cost when estimating whether a credit loss exists.
– Removal of the requirement to consider recoveries or additional declines in fair value of an available for sale debt security.
– A fair value floor will be incorporated into the credit loss fair value model for AFS debt securities. Specifically, credit losses on AFS debt securities will be limited to the difference between the security’s amortized cost basis and its fair value.
Completion of the standard is pending finalization of transition guidance and implementation examples, and deliberation on any further feedback received during the staff’s outreach. The final impairment standard is expected to be issued in the first quarter of 2016.
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