What the January 2016 FASB ASU Means for Banks

“The new standard is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. It improves the accounting model to better meet the requirements of today’s complex economic environment.”

FASB Chairman Russell G. Golden / January 5, 2016

On January 5, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update (ASU) – the Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. According to FASB, the update is intended to improve the reporting model for financial instruments, giving users of the financial statements with more practical information. The ASU mandates a number of items that affect banks, with implementation set for 2017 for public companies and 2018 comprehensively.  

 Changes Imposed by the FASB Accounting Standards Update

 While all of the following changes are relevant and must be addressed by the deadline, the first three in particular warrant special attention for private and public banks.

• This ASU requires equity investments be measured at fair value with changes flowing through earnings, impacting:
  • Increased volatility in earnings
  • Includes mutual funds that invest in U.S. government debt securities
  • No longer cost method investees
  • Practical exception for equity securities that a fair value can’t be easily determined
  • Federal Home Loan Bank and Federal Reserve Bank stock are not subject to this guidance

• For financial institutions that aren’t considered public business entities, this ASU eliminates disclosures under ASC 825-10-50 regarding the fair value of financial instruments (i.e. loans, deposits and debt). This is the equivalent of the last five (5) pages of your audited financial statements.

• For financial institutions that are considered public business entities, this ASU eliminates the requirement to disclose the information in ASC 825-10-50-10(b) and (c) related to the methods and significant assumptions used to estimate fair value or a description of the changes in the methods and assumptions. 

For the majority of banks in the country, the changes listed above could have a significant impact on your accounting and financial reporting function, your investment decisions, and ultimately your shareholders. There are a few other ASU topics that may be lower in priority to your bank, but still warrant mention. If you need additional information around any of the following points, please do not hesitate to contact the HORNE Banking team.

• Requirement of public business entities to utilize the “exit” price notion. Some public banks were misinterpreting the FASB’s original intent when utilizing the “entry” price notion.

• Separate presentation in Other Comprehensive Income (OCI) for the portion of the total fair value change attributable to instrument-specific credit risk for liabilities measured at fair value as opposed to reflecting the whole amount in earnings.

• Clarification that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

The FASB updates have a host of implications for privately held and public companies. We recommend that you stay connected and subscribe to the HORNE Banking blog because we will continue to proactively monitor, report and explain regulatory updates that impact your organization. 

Join the conversation and receive updates of new posts