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ASC 825-10 does not include guidance on geography for items measured at fair value under the FVO, nor does it address how to present dividend income, interest income, or interest expense. However, for instruments within the scope of ASC 320-10, even if measured at fair value under the FVO, there is a prescribed method of calculating interest income that must be applied to those instruments. For all other instruments carried at fair value under the FVO for which GAAP does not prescribe a particular method of interest recognition, we believe a reporting entity may apply one (or some variation) of the following models for reporting interest income and expense, and should disclose its policy for recognition.
  • Present the entire change in fair value of the FVO item, including the component related to accrued interest, in a single line item in the income statement.
  • Some industries, such as investment companies, are required to show investment income separately, and therefore, can only apply this approach to a certain extent. For others, presenting investment income separately is common industry practice. When determining the amount to separately report as investment income from instruments for which the FVO is elected, if existing US GAAP prescribes a method of calculating interest income for identical instruments not carried at fair value, we believe the same model should be applied to instruments carried at fair value.
  • Separate the interest income or expense from the full change in fair value of the FVO item and present that amount in interest income/expense. Present the remainder of the change in fair value in a separate line item in the income statement. Allocation of the change in fair value to interest income/expense should use an appropriate and acceptable method under GAAP.
  • Examples of instances when interest income or expense is permitted to be broken out separate from other changes in fair value are: (1) derivatives that have been designated in qualifying hedging relationships, (2) certain investments in debt and equity securities, (3) certain originated or acquired loans (as referenced in ASC 825-10-50-28(e)(2)), and ASC 825-10-50-28(e)(4) certain debt.
  • Each presentation reflects the same net change in fair value, but the impact on individual line items in the income statement may differ significantly. When there is no method prescribed by other GAAP, we encourage reporting entities to use the single line presentation because the total change in fair value is a more meaningful number.
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