For various reasons, loans, receivables, and investments may be reported at fair value with changes in fair value reported in earnings. This treatment may be required as a result of the accounting guidance for the instrument (e.g., debt securities held for trading purposes) or mandated by industry-specific guidance (e.g., broker-dealers and investment companies). In other cases, instruments may be reported at fair value with changes in fair value reported in current earnings because the reporting entity has elected the fair value option for the instrument.
Some of the interest income guidance specifically scopes out instruments reported at fair value with changes in fair value reported in current earnings and some specifically includes such instruments. As a result, reporting entities that carry instruments at fair value with changes in fair value reported in current earnings should consider whether industry-specific and/or instrument-specific guidance addresses their specific fact pattern.

6.9.1 Considerations relating to the fair value option

For instruments measured under the fair value option (FVO), ASC 825-10 indicates that it does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense but that the reporting entity's policy in these areas should be disclosed. Accordingly, ASC 825-10 allows for discretion in how to report interest income and expense for items under the FVO.
We believe reporting entities may apply one of the following models for reporting interest income related to financial assets accounted for at fair value with changes in fair value recorded in earnings when there is not specific guidance:
  • 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.
  • Separate the interest income from the full change in fair value of the FVO item and present that amount in interest income. The remainder of the change in fair value should be presented in a separate line item in the income statement.

If existing US GAAP prescribes a method of calculating interest income for identical instruments not carried at fair value, we generally believe the same model should be applied to instruments carried at fair value. The allocation of the change in fair value to interest income/expense should be based on an appropriate and acceptable method under US GAAP. Reporting entities should select a policy for income statement presentation that is appropriate for their individual facts and circumstances, disclose the policy in the notes to financial statements, and follow it consistently.
ASC 825 generally requires immediate recognition of upfront costs and fees related to items that are reported at fair value through current earnings. For example, if the FVO is elected for a loan receivable, the reporting entity should not defer loan origination fees or costs related to that loan. Immediate recognition of income and expense items that would be deferred absent election of the FVO might significantly change both the recognition pattern and the presentation of income or expense in the income statement. For example, loan origination fees and costs associated with originated loans that are not measured using the FVO are capitalized as a net basis adjustment and either amortized to interest income or recognized as part of the gain/loss on the sale of the loan. When an originated loan is measured using the FVO, the costs and fees are recognized in current earnings in the applicable expense or revenue accounts (e.g., salaries, legal fees, fee revenue).
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