Financial instruments: Recognition and measurement

KPMG addresses frequently asked questions on ASC 321 and changes to ASC 825. This latest edition includes new and updated interpretations on a variety of topics including ASU 2019-04 and 2020-01.

Applicability

ASU 2016-01, ASU 2018-03, ASU 2019-04, ASU 2020-01

• Companies that hold equity investments
• Companies that have elected the fair value option for financial liabilities

Relevant dates

Early adoption allowed?

Key impacts

ASU 2016-01 created ASC 321 and amended ASC 825. Key impacts of ASU 2016-01 included changes to the:

• accounting for equity investments;
• accounting for financial liabilities measured at fair value under the fair value option;
• measurement of a valuation allowance for deferred tax assets related to available-for-sale debt securities; and
• presentation of cash flows for equity securities.                            

This July 2020 edition of the publication discusses how the amendments in ASU 2019-04 and ASU 2020-01 affect the recognition and measurement of certain financial instruments for all entities.
 

Key impacts of ASU 2019-04 and ASU 2020-01 are summarized below:

ASU 2019-04

• If an entity applies the measurement alternative and a transaction price for a similar or identical security is observed, the equity security is measured at fair value under ASC 820.

ASU 2020-01

• If an entity  is applying the measurement alternative for an equity investment under ASC 321 and must transition to the equity method because of an observable transaction, it remeasures its investment at fair value immediately before transition.
• Similarly, if an entity is applying the equity method and must transition to ASC 321 because of an observable transaction, it remeasures its investment at fair value immediately after transition.
• If an entity holds certain nonderivative forward contracts or purchased call options to acquire equity securities, such instruments are generally measured using the principles of ASC 321 before settlement or exercise. This includes instruments where on eventual settlement or exercise, the resulting investments will be accounted for under ASC 323 or the fair value option under ASC 825 (if those securities otherwise would have been accounted for under ASC 323).

Report contents

• Equity securities
• Financial liabilities for which the fair value option is elected
• Establishing a valuation allowance for deferred tax assets
• Effective dates and transition
• Cash flow presentation