ASU 2016-01 shook up financial reporting at the beginning of the year, as companies scrambled to determine compliance with the new requirements for reporting equity investments.
The rise of corporate venture capital over recent years largely flew under the accounting radar until this update took effect, creating significant volatility for many corporate investors in their reported earnings as they were required to recognize the gains and losses from investments previously held at cost.
Now that the initial shock has worn off, CFOs may be able to rest a little easier, but they shouldn’t forget about the requirements under ASU 2016-01 entirely.
Even if the company elected the measurement alternative that allows for the investment to be reported at cost, don’t forget about the requirement for impairment testing that goes along with it. Some companies may choose to perform the initial Step Zero analysis internally before engaging a valuation firm to navigate the rest of the process, while others turn over the entire process to a valuation professional.
“An entity may elect to measure an equity security without a readily determinable fair value [and that does not qualify for the practical expedient]…at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.”
ASU 2016-01 Paragraph 321-10-35-2
Originally appeared in Mercer Capital’s Financial Reporting Update: Goodwill Impairment