Fair Value Accounting for Financial Securities at Alphabet

Fair Value Accounting for Financial Securities at Alphabet

By
Anne Beyer, Jaclyn Foroughi
2018|Case No.A233| Length 24 pgs.

Beginning in fiscal year 2018, a new and relatively unnoticed accounting rule took effect that had the potential for a major impact on the reported earnings of companies holding financial assets or owing financial liabilities. Dubbed the Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, or Accounting Standards Update 2016-01 (ASU 2016-01), the updated rule sought to increase financial reporting transparency and relevancy by changing how companies accounted for equity. Specifically, the update required recognition of changes in fair value in net income and affected the presentation and disclosure requirements for financial instruments.

Entities across a broad range of industries were significantly impacted—specifically, companies holding minority passive stakes in other entities that had to be valued quarterly, whether that value had increased or decreased. This inherent volatility then flowed through a company’s income statement, causing fluctuations in earnings per share, and calling into question the relevance of reported net income.

This case describes the updated standards for equity investments under FASB’s ASU 2016-01 and IASB’s IFRS 9 and their impact on Alphabet Inc. By providing viewpoints from preparers, investors, and standard setters, the case allows students to appreciate the trade-offs of the different accounting methods for asset valuation.

Learning Objective

Students are introduced to the concept of fair value accounting and the two methods of recognizing unrealized gains and losses. Specifically, students are presented with an opportunity to compare and contrast (i) the cost method, (ii) the fair value method with unrealized gains and losses recognized in Net income, and (iii) the fair value method with unrealized gains and losses recognized in Other comprehensive income.

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