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5.2 The fair value option: relevant guidance
Publication date: 31 Mar 2022
us Fair value guide
Under US GAAP, the key standards that have a FVO include the following:
- ASC 815-15, Derivatives and Hedging—Embedded Derivatives, which provides a FVO for certain hybrid financial instruments that contain an embedded derivative that would otherwise require separation
- ASC 860-50, Transfers and Servicing—Servicing Assets and Liabilities, which permits a reporting entity to choose between the amortization method and the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities
- ASC 825-10, Financial Instruments—Overall, which provides a measurement basis election for most financial instruments (i.e., a choice to use either historical cost or fair value), including equity method investments, allowing reporting entities to mitigate potential mismatches that arise under the current mixed measurement attribute model
In accordance with the requirements of the guidance, once the FVO election for a specific instrument is made, it is irrevocable for that instrument. Because the FVO is not a requirement, its election may result in reduced comparability of financial reporting, both among similar reporting entities and within a single entity, because similar assets or liabilities could be reported under different measurement attributes (i.e., some at historical cost and some at fair value). However, the disclosure provisions in the referenced topics are intended to mitigate this by requiring: (1) identification of instruments for which the option is elected and (2) extensive information about the effects on the financial statements.
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