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Journal Entry — FASB Further Narrows Fair Value Option

Published on: Mar 11, 2013

At its March 6, 2013, meeting, the FASB tentatively decided to eliminate the fair value option (FVO) for multiple types of items that are within the scope of ASC 8251 but outside the scope of its proposed Accounting Standards Update (ASU) Recognition and Measurement of Financial Assets and Financial Liabilities (the “R&M proposal”). Such items would include (1) guarantees and other contingencies, (2) rights and obligations under insurance contracts, (3) warranties, (4) written loan commitments, and (5) firm commitments.

Guarantees and Other Contingencies

The FASB tentatively decided to eliminate the guidance in ASC 825 that permits entities to elect the FVO for guarantees and other contingencies accounted for in accordance with ASC 460 and ASC 450, respectively, provided that they meet the definition of a financial instrument. Further, the Board indicated that the effective date and transition for this proposed amendment would be consistent with that for the R&M proposal.

Rights and Obligations Under Insurance Contracts

The Board also tentatively decided to eliminate the FVO in ASC 825-10-15-4(d) for rights and obligations under an insurance contract. The effective date and transition for this guidance would be consistent with that for the forthcoming insurance contracts proposal.

Warranties

In addition, the Board tentatively decided to eliminate the FVO in ASC 825-10-15-4(e) for rights and obligations under a warranty; rights under a warranty would be accounted for in accordance with the proposed ASU Revenue From Contracts With Customers, whereas obligations under a warranty would be accounted for as insurance contracts. The effective date and transition for these provisions would be consistent with these proposals.

Written Loan Commitments

The Board tentatively removed the FVO for written loan commitments in ASC 825-10-15-4(c). This decision would have the same effective date and transition as the R&M proposal.

Firm Commitments

Lastly, the Board tentatively decided to remove the FVO in ASC 825-10-15-4(b) for firm commitments that would otherwise not be recognized at inception and that involve only financial instruments. During the deliberations, the Board also clarified a prior decision to retain and modify the existing model in ASC 815-10 for forwards and option contracts related to purchasing securities. In particular, the Board noted that the scope of this model should extend to physically settled forward and purchased option contracts (with no intrinsic value at inception) related to purchasing or selling loans that do not meet the definition of a derivative in ASC 815. These decisions would have the same effective date and transition provisions as the R&M proposal.

Next Steps

The FASB plans to issue these tentative decisions as part of an exposure draft that contains the consequential amendments to ASC 825 that resulted from the R&M proposal.

 


[1] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

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