Question

Accounting standards update, ASU 2016-01, is effective for publicly traded companies with a fiscal year beginning after December 31, 2017. The accounting update now requires companies to classify its equity investments at fair value, except those accounted for using the Equity Method. In other words, equity investments are no longer classified as available-for-sale securities. Based on your knowledge of the accounting for equity investments, what is the financial reporting implications for a company that typically makes equity investments classified as available-for-sale? What impact might this reporting requirement have?

Answer 1

The earlier accounting requirement which allowed classification of equity investments as ävailable for sale permitted the available for sale equity investments to be carried at fair values, only if fair values were readily determinable. The fair value adjustments were required to be adjusted in the statement of Other Comprehensive Income and not the income statement.

If the fair values were not readily determinable, then these equity instruments could be carried at cost.

However, the new standard mandatorily requires all equity instruments (except subsidiaries, associates and JVs) to be carried at fair value. Further, on an instrument to instrument basis, the entity has the choice to charge the fair value difference to profit and loss account or carry them in other comprehensive income (the latter option, subject to conditions). Therefore, the financial reporting implication would be that equity instruments which earlier could be carried at cost, or conveniently fair valued through other comprehensive income, now mandatorily need to be fair value. The fair value differences will be charged to profit and loss account, unless the entity satisfies certain conditions, i.e. not held for trading and few other, in which case, the fair value differences can be parked in Other Comprehensve Income

Please comment for any further clarifications