The Financial Accounting Standards Board is looking for views on a proposed clarification in accounting standards meant to address different practices that are developing in accounting for certain securities.
The Accounting Standards Codification, which is the rulebook for all Generally Accepted Accounting Principles (GAAP), has relatively new rules for how to recognize and measure financial instruments. Those rules were issued in 2016 in Accounting Standards Update No. 2016-01, giving companies some new directives to measure and recognize certain instruments at fair value, which is a more complex process when some investments or securities are difficult to measure due to a lack of readily apparent market activity that can serve as a reference point.
In a different topic area of the Codification, companies have separate rules to follow in recognizing investments, including rules for how to recognize investments in joint ventures. FASB’s Emerging Issues Task Force dug deep into the rule book to sort out some questions about how those rules interact with one another, especially where companies apply the equity method of accounting.
The proposed update to accounting standards, recommended by the EITF, clarifies the guidance to indicate where a company should consider observable transactions as they either apply or discontinue use of the equity method of accounting in accordance with the rules. The proposal also addresses questions about the interplay of those rules with yet a third area of GAAP, that on derivatives and hedging, which also got a recent makeover in 2017 when FASB issued ASU 2017-12. The rules on derivatives and hedging also reference the use of the equity method of accounting when measuring certain forward contracts and purchased options.
The EITF is often tasked with sorting out some of the narrower or trickier questions that emerge from practitioners. The board has issued its recommendation for public comment through Aug. 29, after which the EITF will redeliberate and recommend an effective date for the amendments.
“The proposed amendments would reduce diversity in practice and increase comparability of the accounting for these transactions,” FASB said in a statement.