FEBRUARY 2007
Financial
Accounting Series
Statement of Financial Accounting Standards No. 159
The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
Summary
Why Is the FASB Issuing This Statement?
This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.
What Is the Scope of This Statement—Which Entities Does It Apply to and What Does It Affect?
This Statement applies to all entities, including not-for-profit organizations. Most of the provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. Some requirements apply differently to entities that do not report net income.
The following are eligible items for the measurement option established by this Statement:
1. Recognized financial assets and financial liabilities except:
a. An investment in a subsidiary that the entity is required to consolidate
b. An interest in a variable interest entity that the entity is required to consolidate
c. Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits, other postretirement benefits (including health care and life insurance benefits), postemployment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements, as defined in FASB Statements No. 35, Accounting and Reporting by Defined Benefit Pension Plans, No. 87, Employers’ Accounting for Pensions, No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, No. 112, Employers’ Accounting for Postemployment Benefits, No. 123 (revised December 2004), Share-Based Payment, No. 43, Accounting for Compensated Absences, No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, and No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, and APB Opinion No. 12, Omnibus Opinion—1967
d. Financial assets and financial liabilities recognized under leases as defined in FASB Statement No. 13, Accounting for Leases (This exception does not apply to a guarantee of a third-party lease obligation or a contingent obligation arising from a cancelled lease.)
e. Deposit liabilities, withdrawable on demand, of banks, savings and loan associations, credit unions, and other similar depository institutions
f. Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholder’s equity (including “temporary equity”).
An example is a convertible debt security with a noncontingent beneficial conversion feature.
2. Firm commitments that would otherwise not be recognized at inception and that involve only financial instruments
3. Nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services
4. Host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument.
How Will This Statement Change Current Accounting Practices?
The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. A not-for-profit organization shall report unrealized gains and losses in its statement of activities or similar statement.
The fair value option:
1. May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
2. Is irrevocable (unless a new election date occurs)
3. Is applied only to entire instruments and not to portions of instruments.
How Does This Statement Contribute to International Convergence?
The fair value option in this Statement is similar, but not identical, to the fair value option in IAS 39, Financial Instruments: Recognition and Measurement. The international fair value option is subject to certain qualifying criteria not included in this standard, and it applies to a slightly different set of instruments.
What Is the Effective Date of This Statement?
This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.
No entity is permitted to apply this Statement retrospectively to fiscal years preceding the effective date unless the entity chooses early adoption. The choice to
adopt early should be made after issuance of this Statement but within 120 days of the beginning of the fiscal year of adoption, provided the entity has not yet issued financial statements, including required notes to those financial statements, for any interim period of the fiscal year of adoption.
This Statement permits application to eligible items existing at the effective date (or early adoption date).
Statement of Financial Accounting Standards No. 159
The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
February 2007
Financial Accounting Standards Board of the Financial Accounting Foundation
401 MERRITT 7, PO BOX 5116, NORWALK, CONNECTICUT 06856-5116
Copyright . 2007 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.
Statement of Financial Accounting Standards No. 159
The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
February 2007
CONTENTS
Paragraph
Numbers
Objective................................................................................ 1–2
Standards of Financial Accounting and Reporting:
The Fair Value Option............................................................ 3–5
Key Terms .......................................................................... 6
Applying the Fair Value Option ................................................ 7–14
Scope of Eligible Items ....................................................... 7
Recognized Financial Assets and Liabilities That Are Not
Eligible Items ................................................................. 8
Election Dates................................................................... 9–11
Instrument-by-Instrument Application...................................... 12–14
Presentation of Items Measured at Fair Value under This Statement... 15–16
Statement of Financial Position ............................................. 15
Cash Flow Statement.......................................................... 16
Disclosures Applicable to This Statement and Statement 155............ 17–22
Required Disclosures as of Each Date for Which an Interim or
Annual Statement of Financial Position Is Presented................. 18
Required Disclosures for Each Period for Which an Interim or
Annual Income Statement Is Presented.................................. 19–20
Other Required Disclosures .................................................. 21–22
Application by Not-for-Profit Organizations ................................. 23
Effective Date ...................................................................... 24–30
Application to Eligible Items Existing at the Effective Date.......... 25–27
Available-for-Sale and Held-to-Maturity Securities ..................... 28–29
Early Adoption.................................................................. 30
Appendix A: Background Information and Basis for Conclusions ......... A1–A54
Appendix B: Illustrative Fair Value Disclosures................................ B1.B9
Appendix C: Amendments to Existing Pronouncements...................... C1–C7