FASB Tentatively Provides Fair Value Options in Accounting for Financial Instruments

Published on: 09 Sep 2011

The FASB tentatively decided this week to provide conditional fair value options for (1) groups (or portfolios) of financial assets and financial liabilities and (2) hybrid financial assets.

Groups of Financial Assets and Financial Liabilities

The Board tentatively decided by a slim margin of 4 to 3 to give entities the option at initial recognition of classifying and measuring a group of financial assets and financial liabilities at FV-NI1 “if the entity (1) manages the net exposure relating to those financial assets and financial liabilities (which may be derivative instruments) and (2) provides information on that basis to the reporting entity’s management.”2

Hybrid Financial Assets

At its June 8, 2011, meeting, the Board tentatively decided to permit an entity to elect (at initial recognition) to measure a hybrid financial liability at FV-NI in its entirety once the entity has determined that an embedded derivative exists that otherwise would require bifurcation. Similarly, the Board tentatively decided in a unanimous decision during this week’s meeting to permit an entity, “at initial recognition to apply a conditional fair value option to avoid bifurcation and separate accounting of an embedded derivative. An entity would be permitted to measure a hybrid financial asset at fair value in its entirety after the entity has determined that an embedded derivative feature exists that otherwise would require bifurcation and separate accounting.”3


[1] FV-NI refers to a classification and measurement category for financial assets and liabilities currently being explored in the FASB’s accounting for financial instruments project. An instrument classified as FV-NI as a result of the application of the “cash flow characteristics” and “business strategy" criteria or through an optional election would be measured at fair value with changes in fair value recorded through net income.

[2] FASB’s September 7, 2011, Action Alert.

[3] FASB’s September 7, 2011, Action Alert.

Accounting Journal Entries Image

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.