It’s Just an Oil Change After All: FASB Issues Final Standard for Recognition and Measurement of Financial Instruments

The original proposal for the Accounting Standards Update (ASU) on the recognition and measurement of financial instruments would have required banks and other financial institutions to make a complete overhaul of their process for determining the classification of securities and loans. The final standard, however, turned out to be closer to an oil change.

Originally referred to as the “classification and measurement standard,” ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” was issued by the FASB on Jan. 5, 2016.

This article explains the changes the FASB made during the five years of work on the project – changes primarily affecting equity investments, deferred-tax assets on available-for-sale securities, and disclosures.

Financial institutions will welcome two of the final standard’s developments, both of which can be adopted early:

  • For liabilities elected to be carried at fair value, the change in fair value resulting from instrument-specific credit risk is presented in other comprehensive income instead of earnings.
  • Entities that are not public business entities (as defined by the FASB) to remove the disclosures of fair value for financial instruments. Exit pricing will be required.