Changes in the GAAP Treatment of Equity Securities
Effective for fiscal years beginning after 12/15/18, FASB ASU 2016-01 will apply for equity investments, except investments in equities accounted under the Equity Method. This ASU effectively eliminates the previous categories of trading, available-for-sale, and cost methods for accounting for investments. Under current GAAP, changes in fair market value (unrealized gains and losses) for trading securities were already accounted for under net income. Changes in fair market value for available-for-sale securities were previously accounted for under other comprehensive income (OCI).
ASU 2016-01 now measures all changes in fair market value in equity securities through net income. Therefore, for the 2019 calendar year, entities who hold available-for-sale securities will record the change in fair market value in current year net income. A cumulative-effect adjustment will be recorded to the beginning balance of retained earnings as of 1/1/2019 to account for the previously reported balance of Other Comprehensive Income. Cost method investments are eligible for a measurement alternative, to be valued at cost less impairment.
This change continues the trend of further aligning US GAAP with IFRS. If you have any questions, please do not hesitate to contact us.
Jay Brooks, CPA