Handbook | November 2021

 

Insight

Financial instruments: Recognition and measurement

Latest edition: Our in-depth guide to the recognition and measurement of financial instruments.

Mark Northan

Mark Northan

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-6927

Danielle Imperiale

Danielle Imperiale

Executive Director, Dept. of Professional Practice, KPMG US

+1 212-954-3866

KPMG addresses frequently asked questions on ASC 321 and changes to ASC 825. 

Applicability

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

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

Relevant dates

  • ASU 2016-01 and ASU 2019-04 are effective in both annual and interim periods for all entities.
Effective date Public entities All other entities

Annual periods – Fiscal years beginning after       

Dec 15, 2020

Dec 15, 2021

Interim periods – In fiscal years beginning after 

Dec 15, 2020

Dec 15, 2021

Early adoption allowed?

ASU 2020-01: All entities are permitted to early adopt the amendments, including in an interim period for: 

  • public business entities for periods for which financial statements have not yet been issued; and
  • all other entities for periods for which financial statements have not yet been made available for issuance.

 

Narrow amendments have driven meaningful change

What began as an ambitious project to overhaul the classification and measurement requirements for financial instruments evolved into a narrower scope project. While the accounting changes were ultimately limited to specific areas, that doesn’t overshadow the significant changes within those areas.

Perhaps the biggest change is the measurement alternative for equity securities without a readily determinable fair value, which introduced a new concept into US GAAP – cost adjusted to fair value when there are observable transactions – with greater volatility in earnings. To date, the measurement alternative has been the biggest source of interpretive questions, which is reflected in the number of Q&As that we have dedicated to it. It has also been the area where changes to processes and controls have been the most significant relative to other changes in the standard.

Our purpose in this updated publication is to explain the changes from legacy US GAAP and help you gain an in-depth understanding of these requirements by answering the questions that we are encountering in practice.

Key impacts of ASU 2016-01

  • 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
  • Presentation of cash flows for equity securities.

Key impacts of 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

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