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Journal entry — Classification and measurement of financial instruments — FASB tentatively decides to retain unconditional fair value option

Published on: Apr 04, 2014

At its meeting today, the FASB tentatively decided to retain the existing unconditional fair value option in U.S. GAAP (ASC 8251 and ASC 815-15-25-4) rather than restrict the fair value option to certain financial instruments, as discussed in the February 2013 proposed Accounting Standards Update.2

Previously, at its February 26, 2014, meeting, the FASB had tentatively decided “to allow a fair value option for hybrid financial instruments (both assets and liabilities) only when the entity has determined that the instruments contain embedded derivative features requiring bifurcation and separate accounting.” Today’s decision means that the fair value option will be available more broadly (e.g., when a hybrid financial instrument contains an embedded feature that does not require bifurcation).

Editor’s Note: The guidance in ASC 825-10 gives entities the option of measuring most financial instruments at fair value. Entities can make this election on an instrument-by-instrument basis. Therefore, an entity can elect the fair value option for certain instruments in a group of similar instruments but not others. For example, under the current guidance, an entity can elect to measure a portion of instruments in a portfolio at fair value and measure other instruments in that same portfolio at amortized cost. However, ASC 825-10-50-28(b) provides that “[i]f the fair value option is elected for some but not all eligible items within a group of similar eligible items,” the entity must disclose the reasons for partial election. Although the disclosures about partial elections are required under current guidance, the FASB staff’s outreach revealed a concern of users that an unconditional fair value option may result in lack of comparability. The staff’s outreach to preparers, however, suggested that applying the unconditional fair value option in ASC 825 raises no significant practice issues.

At a future meeting, the Board will (1) discuss whether changes in the entity’s own credit risk should be recognized in other comprehensive income related to financial liabilities for which the fair value option has been elected and (2) revisit today’s tentative decision to retain the existing fair value option guidance in U.S. GAAP.

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

2 FASB Proposed Accounting Standards Update, Recognition and Measurement of Financial Assets and Financial Liabilities.

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