Among the types of financial instruments discussed, the following are included:
Financial Instruments Covered in FASB ASC 825
|a.Cash and Cash Equivalents|
c.Investments—Debt and Equity Securities
d.Investments—Equity Method and Joint Ventures
j.Distinguishing Liabilities from Equity
l.Derivatives and Hedging
n.Transfers and Servicing
The fair value option is discussed in this standard in extensive detail as it relates to financial instruments, what it is, and the circumstances in which it may be used by firms. Fair value is a measurement that attempts to display what an asset or liability is worth in the open market, as opposed to those measured using the cost principle.
The standard highly encourages companies to list their financial instruments at fair value in order to increase transparency. One benefit of a company electing to pursue this path would be that they have the option to bypass certain documentation standards in their notes to the financial statements. This is significant because the documentation can become arduous to write as well as understand for the users of the financial statements.
There is actually a significant amount of flexibility given to the management of companies when electing this fair value option. For the most part and with few exceptions, management has the ability to elect to measure certain financial assets at fair value but not others at their discretion. The level of aggregation of measurement of these is another item to consider. For example, if management is required to report an entire bond issuance according to the same methodology (they cannot report half of the offering at fair value, and not the other). While this may seem common sense, it is an important restriction to note.
Financial Statement Presentation
When reporting items at fair value on the financial statements, it is important to note that FASB ASC 825 requires them to be presented separately than other items measured differently. This would also require that they are noted to be reported at fair value within the line item. One method to do this would be parenthetical disclosure stating which amounts were measured at fair value, and which were measured using another methodology.
Financial Statement Disclosures
It is important to note that the disclosures to the financial statements should include the reasons why management has elected use of the fair value option where used. This would also include why it was only partially used in some places and not others. Noting the amount of net income attributed to these changes in fair value is important as well, as well as the differences between changes in fair value vs. actual cash flows for certain items. Additionally, the information which would have been required when disclosing items in other methods than fair value should also be disclosed.
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