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Quick Reference Guide Accunting Standard Update 2016-01 "Financial Instruments

1 Quick Reference Guide Accunting Standard Update "Financial Instruments Overall: Recgnitin and Measurement f Financial Assets and Financial Liabilities"

2 Why d I need this Quick Reference Guide? As yu may knw, the Financial Accunting Standards Bard rutinely releases new accunting standards. Trying t determine hw each f these will impact yur rganizatin can be a frustrating challenge, t say the least. The release f this particular update, Accunting Standard Update , is significant because it amends generally accepted accunting principles and it culd dramatically alter the way yu d business. T help yu better understand ASU and the changes it will trigger, we've assembled this Quick Reference Guide. We hpe yu find it helpful as yu prepare fr the year ahead. As always, we're here t answer any questins yu may have. Facts abut ASU Issued in 2016 as the cmpletin f the first phase in a three-phase plan f prviding new guidance n financial instruments: Phase 1: Classificatin and measurement (ASU ) Phase 2: Impairment f financial instruments (ASU , issued in June 2016) Phase 3: Hedge accunting (expsure draft released in Sept. 2016) Gals f the three phases: 1) Cnvergence with internatinal standards. (The ASU began as a jint prject with the IASB.) 2) Reduce the cmplexity f reprting financial instruments. 3) Increase the usefulness f infrmatin prvided in financial reprting abut an entity s expsure t financial instruments. 4) Address issues raised t FASB in regard t accunting fr hedging activities. Includes eight prvisins, but the main changes t current U.S. GAAP primarily affect accunting fr equity investments, simplificatin f impairment testing, and the presentatin and disclsure requirements fr financial instruments. When des it take effect? Publicly wned entities: Fiscal years beginning after Dec. 15, 2017 (2018 calendar year reprting) Privately wned and nnprfit entities: Fiscal years beginning after Dec. 15, 2018 (2019 calendar year reprting) Which industries will be affected? Any entity that hlds r wes financial liabilities, regardless f industry.

3 Hw will it impact my day-t-day activities? ASU has been summarized int the fllwing eight prvisins: 1) Requires equity investments t be measured at fair value with changes in fair value recgnized in net incme. 2) Simplifies the impairment assessment f equity investments withut readily determinable fair values with a qualitative assessment. 3) Eliminates the requirement t disclse fair value f financial instruments measured at amrtized cst fr nn-public entities. 4) Eliminates the requirement fr public business entities t disclse methd(s) and significant assumptins used t estimate the fair value f financial instruments measured at amrtized cst n the balance sheet. 5) Requires public cmpanies t use the exit price ntin when measuring fair value f financial instruments fr disclsure purpses. 6) Requires an entity t present separately in ther cmprehensive incme the prtin f the ttal change in the fair value f a liability resulting frm a change in the instrument-specific credit risk. This applies t when an entity has elected t measure the liability at fair value in accrdance with the fair value ptin fr financial instruments. 7) Requires separate presentatin f financial assets and financial liabilities by measurement categry and frm f financial asset (that is, securities r lans and receivables) n the balance sheet r the accmpanying ntes t the financial statements. 8) Clarifies that an entity shuld evaluate the need fr a valuatin allwance n a deferred tax asset related t available-fr-sale securities in cmbinatin with the entity s ther deferred tax assets. Prvisin 1 Explanatin Requires all equity investments t be measured at fair value with changes in fair value recgnized in net incme, with the fllwing exceptins: Equity investments accunted fr under the equity methd f accunting Equity investments that result in cnslidatin f the investee Fr equity investments that d nt have readily determinable fair values: an entity may chse t measure these investments at cst minus impairment, if any, plus r minus changes resulting frm bservable price changes in rderly transactins fr the identical r a similar investment f the same issuer. This prvisin is aligned with FASB's gal f increasing the usefulness f infrmatin prvided by financial reprting abut an entity s expsure t financial instruments. Changes There will n lnger be an available-fr-sale (AFS) classificatin fr equity investments. Debt investments may still be classified as AFS.

4 Disclsure Enhancements Cmpanies are required t disclse gains/lsses bth realized and unrealized during the perid. Additinally, fr equity securities withut readily determinable fair values carried at cst minus impairment, all f the fllwing is required t be disclsed: The carrying amunt f investments The amunt f impairments and dwnward adjustments, if any, bth annual and cumulative The amunt f upward adjustments, if any bth annual and cumulative. As f the date f the mst recent statement f financial psitin, additinal infrmatin, in narrative frm, that is sufficient fr financial statement users t understand the infrmatin used by the Cmpany t reach the carrying amunts and upward/dwnward adjustments and bservable price changes. Prvisin 2 Explanatin Simplifies the impairment assessment f equity investments withut readily determinable fair values by requiring assessment fr impairment qualitatively at each reprting perid. That impairment assessment is similar t the qualitative assessment fr lng-lived assets, gdwill, and indefinite-lived intangible assets. Upn determining that impairment exists, an entity shuld calculate the fair value f that investment and recgnize as an impairment in net incme any amunt by which the carrying value exceeds the fair value f the investment. This impairment assessment reduces the cmplexity f the ther-than-temprary impairment guidance entities were required t fllw befre the issuance f this ASU, thereby reducing cst fr preparers f the financial statements. Changes At each reprting perid, an entity that hlds an equity security shall make a qualitative assessment cnsidering impairment indicatrs t evaluate whether the investment is impaired. Impairment indicatrs that an entity cnsiders include, but are nt limited t, the fllwing: A significant deteriratin in the earnings perfrmance, credit rating, asset quality, r business prspects f the investee A significant adverse change in the regulatry, ecnmic, r technlgical envirnment f the investee A significant adverse change in the general market cnditin f either the gegraphical area r the industry in which the investee perates A bna fide ffer t purchase, an ffer by the investee t sell, r a cmpleted auctin prcess fr the same r similar investment fr an amunt less than the carrying amunt f that investment Factrs that raise significant cncerns abut the investee s ability t cntinue as a ging cncern, such as negative cash flws frm peratins, wrking capital deficiencies, r nncmpliance with statutry capital requirements r debt cvenants. If an equity security withut a readily determinable fair value is impaired, an entity shall include an impairment lss in net incme equal t the difference between the fair value f the investment and its carrying amunt. If the investment is deemed t be impaired after cnducting the

5 evaluatin required by the abve paragraph, the entity shall estimate the fair value f the investment t determine the amunt f the impairment lss. An entity may elect t measure an equity security withut a readily determinable fair value (that des nt qualify fr the practical expedient t estimate fair value in accrdance with paragraph ) at its cst minus impairment, if any, plus r minus changes resulting frm bservable price changes in rderly transactins fr the identical r a similar investment f the same issuer. An electin t measure an equity security in accrdance with the abve guidance shall be made fr each investment separately. Once an entity elects t measure an equity security in accrdance with this methd, the entity shall cntinue t apply the measurement guidance until the investment des nt qualify t be measured in accrdance with this paragraph (fr example, if the investment has a readily determinable fair value r becmes eligible fr the practical expedient t estimate fair value in accrdance with paragraph ). The entity shall reassess at each reprting perid whether the equity investment withut a readily determinable fair value qualifies t be measured in accrdance with this paragraph. Other inf FASB decided t retain the ne-step test fr recgnizing impairment f equity securities withut readily determinable fair values in this update. FASB cntinues t cnsider the ne-step methd t be simpler and mre likely t result in mre decisin-useful infrmatin fr users f financial statements than the current tw-step methd. FASB als ntes that the ne-step methd permits subsequent reversals f impairment lsses in certain situatins. Prvisin 3 Explanatin Eliminate the requirement t disclse the fair value f financial instruments measured at amrtized cst fr entities that are nt public business entities. Nn-public business entities are nt required t apply the fair value f financial instruments disclsure guidance in the General Subsectin f Sectin (Financial Instruments Disclsure Sectin); that is, the fair value hierarchy, within which the fair value measurements are categrized, n lnger needs t be made in tabular frmat. Nn-public entities will still be required t disclse financial assets and financial liabilities separately, gruped by measurement categry (e.g., fair value, amrtized cst, etc.) and frm f financial asset (e.g., lans, securities, etc.). This prvisin is aligned with FASB's gal t reduce the cmplexity f reprting financial instruments. Changes Nn-public cmpanies will n lnger need t reprt the level f the fair value hierarchy within which the fair value measurements are categrized in their entirety (Level 1, 2, r 3). Nn-public entities are still required t reprt significant cncentratins related t credit risk arising frm financial instruments, including the fllwing: Infrmatin abut the (shared) activity, regin r ecnmic characteristic that identifies the cncentratin The maximum amunt f lss due t credit risk that, based n the grss fair value f the financial instrument, the entity wuld incur if parties t the financial instruments that make up the cncentratin failed t cmpletely perfrm accrding t the cntract and the cllateral r ther security.

6 Prvisins 4 and 5 Applicable nly fr public entities Prvisin 6 Explanatin This prvisin requires that changes in fair value f a liability reprted using the fair value ptin are t be recgnized in ther cmprehensive incme when the fair value change relates t changes in the instrument-specific credit risk. This wuld nt apply t instruments required t be reprted at fair value i.e., derivative instruments. Gains and lsses will transfer t current earnings as the instruments are settled befre maturity. Many felt that the changes in fair value f financial liabilities did nt significantly impact the true perfrmance f the entity, and therefre shuld nt be included in current earnings. Preparers may segregate change in fair value between instrument specific credit risk and changes in the market rates, but are nt required t d s. Preparers may use ther methds that faithfully represent prtins f fair value changes. Disclsures Required Fr all liabilities, this infrmatin abut changes in and effects f instrument-specific credit risk is required t be disclsed when an incme statement is presented: The amunt f change f the fair value f the liability that relates t instrument specific credit risk during the perid and cumulatively. Hw gains and lsses related t instrument specific credit risk were determined. When a liability is settled during the perid, the amunt f gain r lss that was recgnized in ther cmprehensive incme that is nw recgnized in net incme at settlement. Prvisin 7 Explanatin Financial assets and financial liabilities are required t be presented separately by measurement categry and frm n the balance sheet and accmpanying ntes. Measurement categry examples wuld be fair value r amrtized cst. Frm wuld be debt, lan, r security. Prvisin 8 Explanatin/Changes Clarifies that an entity shuld evaluate the need fr a valuatin allwance n a deferred tax asset related t available-fr-sale securities in cmbinatin with the entity s ther deferred tax assets. Applies nly t debt securities, as these are the nly type f securities that can be held as available fr sale.

7 The explanatin f these requirements was mved in the cdificatin frm tpic 320 t tpic 740. (76) This change was made as FASB received feedback during the cmment perid nting that sme entities were perfrming the evaluatin fr AFS securities, while ther entities were nt. FASB's is t imprve cnsistency in reprting. (10) Questins? We're here t help We've assembled a task frce charged with reviewing each standard and prviding guidance fr ur clients, s please dn't hesitate t call if yu have questins. We can als help yu prepare fr whatever transitins need t happen within yur business. When it cmes t changes f this magnitude, it's never t early t plan ahead.

ABA Staff Analysis: Interim Rule Amending Regulation Z: Summary Information Regarding Interest Rates and Payment Changes

Summary ABA Staff Analysis: Interim Rule Amending Regulatin Z: Summary Infrmatin Regarding Interest Rates and Payment Changes September 2010 The Bard published interim rule (75 FR 58469-58489) changes