Financial Instruments—Clarifying the Interactions
between Topic 321, Topic 323, and Topic 815 (EITF 19-A)

Accounting Standards Update 2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force)

 

Overview


On January 16, 2020, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that clarifies the interactions between Topic 321, Topic 323, and Topic 815.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments—Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments. One of those improvements provided an entity with the ability to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any. Paragraph 321-10-35-2, as amended, states that if an entity identifies observable price changes in orderly transactions for the identical or a similar investment of the same issuer, it should measure the equity security at fair value as of the date that the observable transaction occurred (hereinafter referred to as the measurement alternative).
 
Stakeholders raised questions about the interactions between the measurement alternative in Topic 321 and the equity method of accounting in Topic 323, Investments—Equity Method and Joint Ventures. Stakeholders noted that diverse views have emerged about the application of the measurement alternative and the equity method of accounting since the adoption of Update 2016-01. Furthermore, those stakeholders noted that they expect the frequency of these circumstances to increase as more entities adopt the amendments in Update 2016-01 and apply the measurement alternative guidance.
 
Stakeholders also raised questions about the interactions between Topic 321, Topic 323, and Topic 815, Derivatives and Hedging, related to the application of the guidance for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting. Stakeholders noted that diverse views have emerged about whether those forward contracts and purchased options should be accounted for in accordance with Topic 321, Topic 323, or Topic 815.
 
The amendments in Update 2020-01 affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting.
 
The amendments in Update 2020-01 clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options under Topic 815, as described in the table below.

Area for Improvement Summary of Amendments
Issue 1: Accounting for Certain Equity Securities upon the Application or Discontinuation of the Equity Method of Accounting
Stakeholders asked whether an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321.
The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purpose of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.
Issue 2: Scope Considerations for Forward Contracts and Purchased Options on Certain Securities
Stakeholders asked whether certain forward contracts and purchased options to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting in accordance with Topic 323 should be accounted for under Topic 321 or under another Topic. These forward contracts and purchased options do not meet the criteria for derivative accounting under Topic 815 and do not represent in-substance common stock within the scope of Topic 323.
The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.
 

How Do the Amendments Improve Current Generally Accepted Accounting Principles (GAAP)?


The amendments in Update 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815 for certain forward contracts and purchased options, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions.
 

Effective Dates and Transition


For public business entities, the amendments in Update 2020-01 are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance.
 
The amendments in Update 2020-01 should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date.
 

Additional Information

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