Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Liabilities, introduces new guidance that impacts accounting for equity investments, including equity investments without a readily determinable fair value. Under ASU 2016-01, equity investments are required to be measured at fair value on the balance sheet with changes in fair value recognized in net income. However, an entity may elect to value equity investments without a readily determinable fair value at its cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, with any changes recognized through net income. If electing this alternative, an entity would be expected to make efforts to identify relevant observable transactions that are known or can reasonably be known, but the entity is not required to spend undue cost and effort to identify such transactions.
Practically speaking, the new standard will require a financial institution to adjust its reported value of certain equity investments that have historically been reported at cost on the balance sheet, such as stock in Bankers’ Bank, based on observable price changes from orderly stock transactions. For example, if an entity had purchased 50 shares of Bankers’ Bank stock in a previous period at $500 per share, the entity would have an asset recorded of $25,000, assuming no impairment had been recorded. In the current year, the entity observes that a peer institution sold a similar issue of Bankers’ Bank stock in an orderly transaction for $2,000 per share. Under ASU 2016-01, the entity would need to adjust the value of its Bankers’ Bank stock based on the observed, orderly transaction. As a result, the entity would increase the value of its Bankers’ Bank stock asset to $100,000 and recognize a $75,000 gain through the income statement. The entity would be expected to make reasonable efforts to identify additional observable transactions in future periods.
ASU 2016-01 is effective for public business entities for years beginning after December 15, 2017, and for non-public business entities beginning December 15, 2018.
The guidance in this standard specific to equity securities without readily determinable fair values should be applied prospectively as of the date of adoption. This means any adjustments to the value of investments in equity securities without readily determinable fair values would run through net income on the date of adoption.
The guidance from this standard will not impact the valuation of Federal Home Loan Bank or Federal Reserve Bank stock.
Please note, ASU 2016-01 is a wide-reaching standard that also impacts accounting for other equity securities, among other things. Please reach out to your Wipfli relationship executive if you have additional questions.