Download The Fair Value Option

SFAS No. 159
With IFRS comparison at end
A very simple company
that starts with one asset
and one liability – to keep
it simple!
Assets
Bond B
Liabilities & Owners Equity
$1,000 Bond A
$1,000
OE
$0
Let’s assume that Bond B is accounted for as part of the
trading securities investment portfolio. Therefore it is marked
to market at each balance sheet date and the gain/loss is
reported on the income statement. Bond A is treated in the
traditional way.
First step – find the present value of the bond
investment. Remember, the coupon rate on Bond B is
12%
N=19, i=11%, Pmt = $1,000 * 12% = $120,
FV=$1,000
$1,078
Solve for PV = __________________
Assets
Cash
Bond B
Liabilities & Owners Equity
20 Bond A
$1,000
$1,078 OE
$98
Interest revenue $120 – Interest expense $100 + gain $78 = $98
net income
This is our traditional accounting (book
value for debt, fair value for
investments classified as trading
Assets
Cash
Bond B
Liabilities & Owners Equity
$ 20 Bond A
$1,000
1,078 RE
20
AOCI
78
$1,098
$1,098
Interest revenue $120 – Interest expense $100 = $20 net income
with $78 gain on statement of comprehensive income
If the bond were classified as “available for
sale” the gain would be reported in AOCI
rather than on the income statement.
$1,090
Assets
Cash
Bond B
Liabilities & Owners Equity
$ 20 Bond A
$1,090
1,078 OE
8
$1,098
$1,098
Interest revenue $120 – gain $78 on investment - $90
loss on liability = $8 net income
$922
Assets
Cash
Bond B
Liabilities & Owners Equity
$
20 Bond A
$ 922
1,078 OE
176
$1,098
$1,098
Interest revenue $120 – Interest expense $100 + gain
$78 on investment + $78 gain on liability = $176 net
income
Under FAS107, the fair values of financial
instruments are disclosed in the financial
statements
IAS 39 vs FAS 159
versus
 Must meet criteria so that
financial reporting is
improved by fair value
measurement
 Instrument by instrument
decision
 Applies only to items within
scope of FAS159
 Precludes similar items as
listed in FAS159 (leases,
pensions, etc.)
 Determination is made at
initial recognition and cannot
be changed
 Determination is made at
initial recognition and cannot
be changed