New Accounting Guidance May Incorporate Volatility into Your Financial Performance

May 2019 | Article

The VIX, or Chicago Board Options Exchange (CBOE) Volatility Index, is a representation of the stock market’s near-term volatility. It is often referred to as the “Fear Index” or “Fear Gauge.” From the beginning of 2018, the VIX has traded between a range of $8.92 to $50.30. In fact, on February 8, 2018, the VIX increased from $17.31 to $37.32, or 115%.

Apart from being a good investment if you bought and sold it timely, what does this have to do with you? Many healthcare organizations record the change in value of its investments below what is referred to as the performance indicator (i.e. “Revenues in Excess of Expenses” or net income). The main intent was to remove market volatility from the primary measure of financial performance. When the market is volatile, a large portfolio of investments can experience sweeping changes, both positive and negative.

In January of 2016, FASB issued Accounting Standards Update (ASU) 2016-01, Financial Instruments, which, among other provisions, requires the change in fair value of equity investments be recognized within the performance indicator. This ASU is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. An entity should apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.

It has been some time since the issuance of this guidance, so it may have fallen off the radar for some. Healthcare organizations with a large investment portfolio may experience significant impacts. It is important to not only understand the potential impacts of this change, but to also communicate those expectations with the users of that financial information, as periods of market volatility will appear to distort financial performance without appropriate understanding.

If you’re looking for more information on potential impacts to your organization, or if you’d like to learn more about other changes within this ASU, please contact your Eide Bailly representative.

Reminder: Effective with ASU 2013-12, the definition of a public business entity excludes not-for-profits, including those with conduit debt. When changes are considered relevant to these entities, FASB now specifically identifies them in the implementation guidance.

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