Fair value option accounting
The Financial Accounting Standards Board is likely to change how companies can account for the fair value of the debt they hold. Thus, changes in fair value would be removed from the net income calculations. In addition, FASB tentatively decided that cumulative gains and losses recognized in OCI associated with changes in own credit will be recognized in net income upon the settlement of the liability.
The entire risk in excess of a base market risk, such as a risk-free fair value option accounting rate, would be considered the change in own credit or an alternative method that an entity deems as a more faithful measurement of such a risk.
While FASB noted that its fair value option accounting decision has not yet been formally proposed, it expects to formally propose the change in a new exposure draft of its financial instruments standards project by the end of the year. Once an exposure draft is issued, stakeholders will have the opportunity to comment on the proposed changes. The comments will be considered by the board during its redeliberations next year when FASB considers the comments received on the exposure draft.
Rick Martin, vice president of technical accounting at Pluris Valuation Advisors, sees this as an about-face for FASB from a standard dating back to But what it represents is the reversal of a counterintuitive rule that allows companies to actually book in their income statement tangible profits and gains whenever the value of their debt goes down.
It makes no sense that you would be fair value option accounting to book a gain on your own debt whether your own debt goes up or down. The goal was to reduce both the complexity in accounting for financial instruments and the volatility in fair value option accounting caused by measuring related assets and liabilities fair value option accounting. It also required entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.
For financial institutions that carry many of their assets at fair value, there could be a mismatch when their liabilities, which also are interest-rate sensitive, were carried at cost. Thus companies have elected to measure such liabilities at fair value by electing the fair value option under FAS FASB decided to reconsider this issue as part of its financial instruments project, which is still in progress.
So this is something that everybody joked about and thought of it as being really counterintuitive. The motive behind it was intentional and the decision to allow the fair value option for companies on debt was deliberate, but at the same time it was counterintuitive.
Martin acknowledged that FASB was just trying to be consistent. Martin believes the proposed changes will be beneficial to companies. Martin also thinks the change will fair value option accounting U.
No company would have elected the fair value option and fair value their own debt if it would have resulted in them fair value option accounting losses.
There are probably no situations where companies whose creditworthiness is improving who had to book losses will now be booking them on the balance sheet because there are probably very few companies out there that would have ever elected the fair value option in that environment in the first place.
But it can be quite simple—even as simple as depreciating a fixed asset. With the right software that manages seamless billing processes all the way through revenue recognition, businesses can ease compliance with ASC Partner Insights Sponsor Content From: Comment Start the Conversation, Login. Like what you see? Make sure you're getting it all Accounting Today is a leading provider of online business news for the accounting community, offering breaking news, in-depth features, and a host of resources and services.
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