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By Rafael Guijarro, CPA, CITP, CISA – Audit Manager, Financial Institutions Group

Effective January 1, 2019, Accounting Standards Update 2016-01, Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities changed the classification and accounting options for equity securities. Credit unions are no longer able to account for these investments as available-for-sale or trading securities, instead the update creates a new investment classification just for equity securities, where fair value will be recorded in income (identical to the accounting of a trading security).

Making the Transition

There are two methodologies for accounting for these equity security changes:

1.  If you were accounting for these investments as trading, no adjustments are necessary. Only the classification will change from trading securities to equity securities.

2.  If you were accounting for equity securities as available-for-sale, a cumulative-effect adjustment is necessary. The accumulated other comprehensive income (AOCI) related to equity investments needs to be reclassified as undivided earnings. There is no income statement effect.

To help you better understand, Doeren Mayhew has outlined a quick example below:

December 31, 2018

Equity security

Par-$1,000,000

Unrealized gain – $100,000

Entry- January 1, 2019

Debit – AOCI – $100,000

Credit – Undivided earnings – $100,000

Wondering how to account for the changes in fair value going forward? The changes in fair value for equity securities should be recorded through the income statement.

Need Assistance?

If your financial institution is to ready begin the implementation process, rely on one of Doeren Mayhew’s qualified credit union CPAs as a resource to your accounting group. Please contact our Financial Institutions Group today and we will be glad to help.