Volume 26, No. 8

In the “PC era” (that’s PC as in “pre-convergence”) the accounting standards for financial instruments were quite similar for both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Once convergence efforts began in earnest in 2007, the standard setters sought to reach common standards in three major financial instrument areas: their classification and measurement, the measurement of impairment, and accounting for hedge activities.

Convergence has come and gone, and it didn’t result in the intended goal of three common standards on financial instruments. The FASB has completed its standard on classification and measurement of financial instruments, and it becomes effective for calendar year companies at the start of 2018. (The impairment standard will be effective for calendar year public companies beginning in 2020, and the hedging standard is incomplete as of now.) The FASB decided to make targeted improvements in the classification and measurement of financial instruments, rather than start over with a totally new accounting model. One such targeted improvement deals with investments in equities: they’re now required to be reported at fair value, whether publicly traded or not, and the changes in fair value will pass through net income.

That change may freak out some players: after all, it will require more effort to produce than simply leaving it at a cost basis for all time – and at the same time, it makes much more sense than leaving it reported at an irrelevant cost basis for all time. The standard leaves companies plenty of leeway in presenting the fair value information when readily determinable values don’t exist – it doesn’t have to be an exercise in agony. In this report, we look for the companies where this new measurement might be required, and find that it might not be that widespread - and not necessarily fear-inspiring.

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