Examining the Recognition and Measurement of Financial Assets and Financial Liabilities under ASU 2016-01

Added Volatility or Improved Information Value?

McGregor Scott, , DPS, CPA, CMA, CFA

In BriefAccounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, became effective for financial statements beginning after December 15, 2017. One of its key provisions was a change in the treatment of equity securities classified as available for sale. Under prior guidance, the change in unrealized gains and losses for available for sale equity securities was recognized in equity as a part of other comprehensive income. Under ASU 2016-01, the change in unrealized gains and losses on all equity securities is recognized in income. For companies that have large portfolios of equity securities that were classified as available for sale, this change may significantly affect earnings. In the insurance industry, for example, companies with large portfolios of equity securities classified as available for sale securities showed dramatic increases in both earnings volatility and earnings surprises for 2018 and 2019, the first two years of implementation.