The Finer Points of Fair Value

FASB 159 opens up options.

December 2007
by Thomas Ratcliffe/Journal of Accountancy

The first quarter of 2008 is likely to usher in the first significant wave of financial statements from companies that have adopted FASB’s new fair value option for financial assets and liabilities.

FASB released Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities, in February. The new standard allows companies to measure certain financial assets and liabilities at “market” or fair value rather than at their historic or original cost. The option does not require companies to comply with relatively complex hedge accounting requirements spelled out in FASB Statement no. 133, Accounting for Derivative Instruments and Hedging Activities.

The fair value option should allow companies to focus more on electing and complying with the fair value option guidance, rather than on designating and documenting transactions to comply with the Statement no. 133 hedge accounting guidance. The option is effective at the start of the first fiscal year beginning after Nov. 15, 2007. (At press time, FASB was considering a delay, in whole or in part, in the effective date of Statement nos. 157, Fair Value Measurements, and 159.)

This article will explain Statement no. 159’s substantive provisions and provide reporting entities and practitioners some practical guidance for deciding how to report certain assets and liabilities in financial statements. The article also contains some red flags for auditors associated with companies that have elected to use the fair value option.

Read the full article here.