On 11 May 2010, the IASB published ED/2010/4 Fair Value Option for Financial Liabilities (‘the ED’) setting out their proposals on the presentation of gains and losses on liabilities designated under the fair value option.

These proposals are part of the IASB’s plan to improve and simplify the accounting for financial instruments. If finalised, entities that have designated financial liabilities at fair value through profit or loss (FVTPL) under the fair value option will no longer present in profit or loss a gain from a deterioration in own credit risk or loss from an improvement in own credit risk.

Instead, gains and losses arising from changes in an entity’s own credit risk will be presented in other comprehensive income (OCI). The Board is responding to the criticisms voiced by many constituents that recognising the effects of changes in an entity’s own credit risk in profit or loss does not provide useful information and is counter-intuitive as an entity will recognise gains that it has limited ability to realise at times when its performance is worsening.

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