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In addition to the standards that require assets and liabilities to be reported at fair value, GAAP provides reporting entities with a fair value option (FVO) to measure certain financial instruments and other items on the balance sheet at fair value.
The key standards that have a FVO, as discussed in FV 5, include:
  • 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 of 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 mode
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 those 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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