January 12, 2016
FASB Finalizes Financial Instruments – Classification and Measurement Standard
On Jan. 5, the Financial Accounting Standards Board (FASB or Board) issued a final standard (the Final Standard) on the classification and measurement of financial instruments. While the FASB maintained existing U.S. GAAP for recognition and measurement of most financial assets (including loans and debt securities), the Board introduced a new requirement for the measurement of equity securities, including common and preferred stock. The Final Standard requires that all equity securities (with the exception of those accounted for under the equity method or those that result in the consolidation of the investee) with readily determinable fair values be measured at fair value on the balance sheet, with changes in value recognized in net income. The FASB’s decision will be of particular interest to Equity REITs that own equity securities and would represent a major change from current U.S. GAAP. Currently, companies are permitted to classify investments in equity securities as either trading or available-for-sale. Equity securities classified as trading are measured at fair value on the balance sheet, with changes in value recognized in net income; while equity securities classified as available-for-sale are measured at fair value on the balance sheet with changes in value recognized in other comprehensive income.
NAREIT submitted a letter on the proposed accounting standards update (the Proposal) on May 15, 2013. Consistent with NAREIT’s recommendations, the FASB:
continued to pursue a mixed attribute model for the classification and measurement of financial assets and financial liabilities;
retained existing embedded derivatives guidance for financial assets; and,
eliminated the proposed requirement to assess cash flows based solely on principal and interest in order to classify financial instruments at amortized cost.
The Final Standard is effective for public business entities for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years. For all other entities, the Final Standard is effective for fiscal years beginning after Dec. 15, 2018, and interim periods in fiscal years beginning after Dec. 15, 2019.
For more information contact George Yungmann, Senior Vice President Financial Standards at email@example.com or Christopher Drula, Vice President Financial Standards at firstname.lastname@example.org.