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Journal entry — FASB directs staff to draft proposed ASU on one-time election of fair value option on certain instruments within the scope of ASC 326-20

Published on: Nov 15, 2018

At its meeting on November 14, 2018, the FASB voted to amend ASU 2016-131 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that were previously recorded at amortized cost that are within the scope of ASC 326-202 if the instruments are eligible for the fair value option under ASC 825-10.3 The entity would make this election on an instrument-by-instrument basis. The FASB directed its staff to draft the proposed ASU.

Since ASU 2016-13 was issued, the FASB has received agenda requests to provide transition relief by allowing entities to elect the fair value option on certain financial instruments. Stakeholders noted that among other things, an entity may elect the fair value option under ASC 825-10 to newly originated or purchased assets after adopting ASU 2016-13. As a result, an entity would measure some assets at fair value while continuing to measure others at amortized cost. Stakeholders believe that this inconsistency would be eliminated if an entity were provided with a one-time election to measure existing assets at fair value upon adopting ASU 2016-13.

The Board also voted to prohibit an entity from discontinuing the use of the fair value option when adopting ASU 2016-13, but will request feedback from entities about why such an option could be favorable.

For first-time adopters of ASU 2016-13, the fair value option election would take place on adoption, and entities would apply a modified retrospective approach, in which the cumulative effect of the election would be recorded in beginning retained earnings in the period of adoption. For entities that have already adopted ASU 2016-13, the proposed ASU will include questions for respondents on the length of time those entities would require to determine whether to take the election and make the election contemplated in the proposed ASU.

The proposed ASU will have a 30-day comment period. For further information, see the tentative Board decisions on this topic, when available, on the FASB’s Web site.

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1 FASB Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments.

2 FASB Accounting Standards Codification (ASC) Subtopic 326-20, Financial Instruments — Credit Losses: Measured at Amortized Cost.

3 FASB Accounting Standards Codification Subtopic 825-10, Financial Instruments: Overall.

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