In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The new guidance requires entities to measure equity investments that do not result in consolidation or are under the equity method to be reported at fair value. Changes in fair value are to be recognized in net income. The ASU indicates the change is to be recorded as a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As such, any balance reported in an unrealized gain/loss account at year end would be transferred to the undivided earnings account as of the beginning of the year the change is adopted.
So What Does This Mean?
From a financial statement standpoint, any balance in unrealized gain/loss accounts will be consolidated into the undivided earnings account. Going forward, any changes to the fair value will be run through the income statement. For Call Report purposes, this brings up two questions. First, do I need to do anything special to report the cumulative-effect adjustment? Second, where are changes to fair value reported going forward? Per correspondence with the Region 1 office of the NCUA, the answer to the first question is there is no additional reporting necessary on the Call Report to show the cumulative-effect adjustment. The answer to the second question isn’t as obvious. On the Call Report, the Statement of Income and Expense page includes a separate line for gain/loss on investments. However, this section specifically excludes trading securities. As a result, any changes in fair value of these investments would be reported as gains/losses on line 4 (Trading profits and losses) on the Statement of Income and Expenses.
