Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The objective of this update is to enhance the reporting model for financial instruments to provide more decision-useful information to financial statement users and to help converge Generally Accepted Accounting Principles (GAAP) with international standards. The ASU will affect all entities (including nonprofit entities) that hold financial assets or owe financial liabilities.
Main Provisions of the Update
Key Considerations for Health Care Organizations
Provision 1 will likely have the most significant impact on certain health care organizations. Current guidance allows unrealized gains and losses on equity securities classified as “available-for-sale” (investor-owned entities) or “other-than-trading” (nonprofit entities) to be excluded from the performance indicator (net income or revenues in excess of expenses). The amendments in this ASU will require unrealized gains and losses to run through the performance indicator. This change would also eliminate the requirement to disclose the aggregate fair value and unrealized losses of equity securities in an unrealized loss position at year-end. This ASU does not change the classification and recording of income for debt securities. In addition, all nonprofit entities will now be exempt from disclosing the fair value of financial instruments not measured at fair value.
For public entities, the ASU is effective for fiscal years beginning after December 15, 2017. The ASU is effective for all other entities for fiscal years beginning after December 15, 2018. Organizations will be required to adopt this standard through means of a cumulative-effect adjustment to their balance sheets as of the beginning of the period of adoption. As such and, depending on the size of each organization’s investment portfolio, adoption of the standard may have a significant impact on the performance indicator in the year of adoption. Organizations should begin preparing for implementation of this ASU and educate financial statement users on its potential impact. The ASU generally does not allow for early adoption of a majority of the provisions noted above; however, it does allow for early adoption of the provision that exempts private entities and nonprofit entities from the disclosure requirements related to the fair value of financial instruments.