Financial-Instruments Rules Challenge Health Care Entities

May 2 — Some health care organizations that have investments classified as ‘other than trading securities' might face implementation challenges when applying the Financial Accounting Standards Board's new rules on classifying and measuring financial instruments, health care practitioners told FASB.

There are clearly some challenges for some health care companies in applying the rules, including volatility in the performance indicator, discussions during FASB's April 29 meeting with the Healthcare Financial Management Association's principles and practices board indicated.

The guidance, ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement for Financial Assets and Financial Liabilities, was issued by FASB in January. It is applicable to health care not-for-profit entities for periods after Dec. 15, 2018, but earlier application is allowed for certain provisions.

The rules will require health care not-for-profits to measure many equity investments at fair value, according to an Ernst & Young summary of the key provisions. They would recognize any changes in fair value in the performance indicator—the equivalent of income from continuing operations—unless the investments qualify for an accounting exceptions.

Changes Brewing

There are also some changes brewing for those companies. Health care nonprofits will no longer be able to recognize unrealized holding gains and losses on equity securities they classify today as ‘other than trading' separately from the performance indictor, the summary states. They also will no longer be able to use the cost method of accounting for equity investments that don't have readily determinable fair values.

The rules might prove troublesome to smaller health care entities, according to the HFMA discussion. Unsophisticated health care entities, who have a lot of control over what is happening with their investments, may have classified them as ‘other than trading securities' and excluded the income as unrealized gains or losses below the performance indictor, said Kimberly McKay, a partner at BKD, LLP.

“So as you look at [rules under] 2016-01 and that equity securities now would be above the performance indicator and the recognition of that income, the debt securities, would still be below the performance indicator, I think we see some challenges along implementation for those organizations, and how they're really going to distinguish that—and operationally,” she said.

It's the Outcome, Not the Rules

The new rules were intended to be operationally easier, according to comments made from FASB members and staff accountants.

Related to the change in terms of equity securities, there's no longer trading characterization to them, a staff member said. “Just that all equity securities' changes in fair value would now go above the line—so there's no differentiation that you have to make that they are a trading security or not,” he said.

It's a point that was discussed by FASB when it deliberated the guidance, staff said. “Some board members felt that we should have kept current GAAP the way that it is, and other board members said that at the end of the day, in order to realize the value of the equity security, it has to be sold, and that convinced them that all changes in the fair value should go above the line for you and there shouldn't be a split any further going forward in GAAP,” he said.

Asked by FASB member Lawrence Smith about what the difficulty is, McKay said it comes from just looking at financial statements and the swings that can come with those unrealized gains and losses; “a lot of organizations do have that below the performance indicator.”

“When you see the huge swings in the unrealized gains or losses in the performance indicator, that is a concern that health care organizations have,” she said.

Some FASB members observed that it's not that the rules aren't operations, it's the outcome practitioners don't like.

Still, said McKay, it posses an additional challenge when a company has a portfolio that includes multiple things that are not just equity securities. “It is going to be time consuming for them to have to step back and bifurcate out their portfolio between what's above the performance indicator and what's below,” she said.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at

To contact the editor responsible for this story: Laura Tieger Salisbury in Washington at