Accounting for equity investments with readily determinable fair values

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) are generally measured at fair value through earnings. There will no longer an available-for-sale classification (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values.

The accounting model in ASU 2016-01 applies to all types of equity investments, including equity instruments that meet the definition of a security (as provided under US GAAP) and those that would not be considered securities (e.g., limited partnership interests). Equity investments included in the scope of the guidance may include investments in the equity of investment companies that hold nothing but debt securities, as ASU 2016-01 does not permit an investor to “look through” the investment to determine the appropriate recognition and measurement model.

Accounting for equity investments without readily determinable fair values

Under the guidance in ASU 2016-01, these investments can no longer be accounted for using the cost method. However, reporting entities (other than those following “specialized” accounting models, such as investment companies and broker-dealers) will be able to elect to record equity investments without readily determinable fair values at cost, less impairment, adjusted (to fair value) for subsequent observable price changes if certain criteria are met. Reporting entities that elect this measurement alternative will report changes in the carrying value of the equity investments in earnings.

If the measurement alternative is elected, the equity investment will be remeasured to fair value whenever there is an impairment or there are observable price changes in orderly transactions for the identical or similar investment of the same issuer.

Impairment of equity investments without readily determinable fair values – measurement alternative

A reporting entity is required to perform a qualitative assessment each reporting period to identify impairment. When a qualitative assessment indicates that an impairment exists, the reporting entity will need to estimate the fair value of the investment and recognize an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment in net income.

Although the FASB did allow a measurement alternative for equity investments without readily determinable fair values, they removed the concept of temporary impairment.