BC8. After the issuance of Update 2016-13, several stakeholders submitted agenda request letters asking that the Board consider providing targeted transition relief upon the adoption of the amendments in Update 2016-13. Those stakeholders requested an option to elect the fair value option in accordance with Subtopic 825-10
for certain financial instruments upon adoption of Topic 326
BC9. Several of those stakeholders represent financial statement users and preparers in the auto-financing industry, including institutions that may extend credit to borrowers with limited or impaired credit histories. They noted that certain financial statement preparers have begun (or are planning) to elect the fair value option on newly originated or purchased financial assets, although those entities historically have measured their financial assets at amortized cost basis. Those entities noted that without the targeted transition relief provided through the amendments in this Update, their election of the fair value option would have resulted in the need to maintain dual measurement methodologies by measuring previously originated or purchased financial assets at amortized cost basis in accordance with Topic 326
, while measuring newly originated or purchased financial assets at fair value through net income in accordance with Subtopic 825-10
. Furthermore, several investors noted that financial statements that have dual measurement methodologies for identical or similar financial instruments that are being managed in the same manner would not have provided financial statement users with decision-useful information because financial statement information would not have been comparable. That is, the portion of an entity’s financial instruments measured at fair value may not be comparable to other identical, or similar, financial instruments measured at amortized cost basis that are owned by the same entity.
BC10. The Board also received an agenda request letter from an industry trade group that supported the targeted transition relief. Those stakeholders noted that the targeted transition relief will provide cost savings for some financial statement preparers by allowing them to utilize their existing systems and processes for measuring financial assets at fair value.
BC11. In response to stakeholders’ requests, the Board decided to provide entities that have certain financial instruments within the scope of Subtopic 326-20
with an irrevocable option to elect the fair value option in accordance with Subtopic 825-10
for eligible instruments upon adoption of Topic 326
. The Board also concluded that an entity should apply the fair value option on an instrument-by-instrument basis and that held-to-maturity debt securities should be excluded from the scope of financial instruments eligible for the fair value option transition relief.
BC12. The Board concluded that the amendments in this Update will provide certain financial statement preparers with targeted transition relief upon adopting the amendments in Update 2016-13 while providing financial statement users with decision-useful information. The Board observed that the amendments in this Update allow some entities to elect the fair value option to achieve a single measurement methodology for similar types of financial assets. As a result, the amendments will provide increased comparability for financial statement users who may have had difficulty analyzing financial statement information that includes dual measurement methodologies for similar types of assets. The Board also concluded that the amendments will lessen the costs associated with adopting Topic 326
for some entities.
BC13. During deliberations, the Board considered whether entities should be required to apply the transition relief on an instrument-by-instrument basis or at another unit of account, such as the class of financing receivable as defined in the Master Glossary. The Board decided to provide the election on an instrument-by-instrument basis because this unit of account is more operable and understandable for entities electing the targeted transition relief. The Board noted that an instrument-by-instrument election aligns with the current requirements in Subtopic 825-10. Furthermore, an instrument-by-instrument election provides entities with flexibility to more precisely align their risk management strategies with their measurement methodologies.
BC14. The Board understands some stakeholders’ concerns about potential selection bias that would result from the fair value option being applied on an instrument-by-instrument basis. However, any potential selection bias will be limited by the transition requirements of the amendments in this Update, which require that any fair value adjustments be recorded as a cumulative-effect adjustment to opening retained earnings. Potential selection bias also will be curtailed by the irrevocable nature of the fair value option, which prohibits entities from subsequently discontinuing fair value measurement for financial instruments that had previously elected the fair value option.
BC15. The Board also understands that an election on an instrument-by-instrument basis may result in similar financial assets having different measurement methodologies, potentially resulting in noncomparability. However, existing guidance in Subtopic 825-10
currently allows for similar outcomes because entities can measure similar financial instruments using different measurement methodologies by electing to use the fair value option (at certain election dates) for certain assets and not others. The Board believes that this concern is mitigated by the disclosure objectives in Subtopic 825-10
, which require entities to disclose information to allow for comparisons when an entity selects different measurement methodologies for similar assets.