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Financial Instruments – Fair Value Option

Date recorded:

The IASB further discussed a draft exposure draft that would propose to limit the application of the new fair value option in IAS 39 to the following four situations, the first three of which it had previously discussed:

  • (a) The item is a financial asset or financial liability that contains one or more embedded derivatives.
  • (b) The item is a financial liability whose amount is contractually linked to the performance of assets that are measured at fair value.
  • (c) The exposure to changes in the fair value of the financial asset or financial liability is substantially offset by the exposure to the changes in the fair value of another financial asset or financial liability, including a derivative.
  • (d) The Board decided to add a fourth category to which the option may be applied as follows: 'By designation on initial recognition only, any available-for-sale financial asset other than a loan or receivable, on an asset-by asset basis'. (Note: This decision is irrevocable.)

The Board also clarified that criterion (a) applies to all financial instruments that contain an embedded derivatives. The Board acknowledged this would encompass mortgage loans since the holder generally has a prepayment option (considered an embedded that is closely related).

The Board discussed some drafting issues, including questions to ask in the exposure draft. The exposure draft will have a 90 day comment period.

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