Accounting for Financial Instruments — FASB and IASB Tentatively Decide on Fair Value Options

Published on: 14 Jun 2012

At their joint meeting yesterday, the FASB and IASB confirmed that investments in debt instruments will be measured at FV-OCI1 only if they (1) pass the contractual cash flow characteristics test2 and (2) are managed within the relevant business model. In addition:

  • The FASB tentatively agreed to provide limited fair value options that are similar to those in its tentative model for the classification and measurement of financial instruments.
  • The IASB tentatively decided to provide a fair value option for debt instruments measured at FV-OCI.

FASB’s Fair Value Options

The FASB tentatively decided to permit an entity to elect at initial recognition to measure a group of financial assets and financial liabilities at FV-NI if the entity both (1) manages the net exposure related to those financial assets and financial liabilities on a fair value basis and (2) provides information on that basis to the reporting entity’s management.

The FASB also tentatively decided to allow entities to designate, at initial recognition, a hybrid financial liability at FV-NI, unless:3

a.     The embedded derivative or derivatives do not significantly modify the cash flows that otherwise would be required by the contract; or

b.     It is clear with little or no analysis when a similar hybrid instrument is first considered that separation of the embedded derivative or derivatives is prohibited.

Because the FASB and IASB jointly decided at their April meeting not to permit the bifurcation of financial assets, this option is limited to financial liabilities.

IASB’s Fair Value Option

Under IFRS 9, an entity may irrevocably designate an investment in debt instruments otherwise qualifying for amortized cost as measured at FV-NI at initial recognition if such designation eliminates or significantly reduces an accounting mismatch. Yesterday, the IASB tentatively decided to permit the same fair value option for debt instruments otherwise measured at FV-OCI.

Editor’s Note: IFRS 9 also permits entities to measure investments in equity securities that are within the scope of IFRS 9, and that are not held for trading at FV-OCI, by making an irrevocable election to do so at initial recognition. See IFRS 9:5.7.5.



[1] At its joint meeting with the FASB on May 21, 2012, the IASB tentatively decided to introduce fair value through other comprehensive income (FV-OCI) as a measurement category for eligible debt instruments.

[2] At their February 28, 2012, joint meeting, the FASB and IASB tentatively agreed that, in a manner consistent with IFRS 9, Financial Instruments, a financial asset could be eligible for a measurement category other than fair value with changes in fair value recognized in net income (FV-NI) if, at initial recognition, the “contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.”

[3] FASB’s June 13, 2012, Summary of Board Decisions.

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