FAS 159: The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115

By Linda Cavanaugh, CPA - FAS 159: The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115

FAS 159 permits entities to choose to measure, at fair value and on an instrument-by-instrument basis, financial instruments that are not currently reported at fair value. This Statement was effective for fiscal years beginning after November 15, 2007 and is to be applied prospectively. Early adoption was allowed if FAS 157: Fair Value Measurements was also adopted.

Election of the Fair Value Option

Per paragraph 7 of FAS 159, a recognized financial asset or liability, a firm commitment that would otherwise not be recognized at inception and that only involves financial instruments, a written loan commitment, the rights and obligations under an insurance contract or warranty that is not a financial instrument but permit the insurer to settle by paying a third party to provide goods or services, and a host financial instrument resulting from the separation of an embedded non-financial derivative instrument from a non-financial instrument are eligible to be measured at fair value.

However, an investment in a subsidiary or variable interest entity that is required to be consolidated, employers’ and plans’ obligations for pensions, stock awards and other deferred compensation plans, financial assets and liabilities recognized under leases, deposit liabilities or withdrawable on demand of depository institutions and financial liabilities that are classified in shareholder’s equity are scoped out of the fair value option and can not be measured at fair value.

An entity can chose to value any eligible items at fair value on the balance sheet with changes in fair value running through earnings. This election can be made at inception, upon entering into a firm commitment, when the financial instrument ceases to qualify for specialized accounting, when the accounting treatment for an investment in another entity changes or an event requires an eligible item to be measured at fair value but does not require subsequent re-measurement (i.e. a business combination).

The fair value election can be made on an instrument-by-instrument basis except i) if multiple advances are made to one borrower under one contract, the entire balance must be fair valued and not the individual advances; ii) if the option is applied to an equity investment, the entity’s complete interest in the equity investment must be fair valued including any debt; iii) if the option is applied to an insurance or re-insurance contract, all of the claims and obligations under the contract must be fair valued; or iv) if the option is applied to an insurance contract that has integrated or non-integrated contract features, then the entire contract including both the integrated and non-integrated features must be fair valued.

Presentation

Items valued at fair value can be presented on the balance sheet either as a separate line item or aggregately with similar items with the amount of fair value presented parenthetically (similar to accounts receivable.

Disclosures

For interim and annual balance sheets for each period presented:

1. Management’s reason for electing the fair value option

2. If using the instrument-by-instrument option:
a. a description of similar items and the reasons for the partial election
b. reconciliation between the aggregate number and the fair valued number

3. For each line item that includes an item that has been fair valued:
a. information to enable users to understand how each line item in the balance sheet relates to major categories of assets and liabilities presented in accordance with FAS 157.
b. the aggregate carrying amount of items included in each line item in the balance sheet that are not eligible for the fair value option, if any.

4. The difference between the aggregate fair value and the aggregate unpaid principal balance of:
a. loans and long-term receivables that have contractual principal amounts
b. long-term debt instruments that have contractual
principal amounts

5. For loans held as assets:
a. the aggregate fair value of loans that are 90 days or more past due
b. the aggregate fair value of loans in non-accrual status if interest income is recognized separately from other changes in fair value
c. the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in non-accrual status, or both

6. For equity investments:
a. the information required by paragraph 20 of APB OP. 18.

For interim and annual income statements for each period presented:

1. For each line item in the balance sheet:
a. the amounts of gains and losses for fair value changes included in earnings
b. where the gains and losses are reported in the income statement

2. A description of how interest and dividends are measured and where they are reported in the income statement

3. For loans and other receivables held as assets:
a. the estimated amount of gains or losses included in earnings during the period attributable to changes in instrument-specific credit risk
b. how the gains and losses were determined

4. For liabilities with fair values that have been significantly affected during the period by changes in the instrument-specific credit risk:
a. the estimated amount of gains and losses included in earnings that are attributable to changes in instrument-specific credit risk
b. qualitative information about the reasons for the changes
c. how the gains and losses were determined

In annual periods only:

1. The methods and significant assumptions used to estimate the fair value of items for which the fair value option has been elected.

If the election date is chosen because the accounting treatment for an investment in another entity changes or an event requires an eligible item to be measured at fair value but does not require subsequent re-measurement, then an entity should disclose qualitative information about the nature of the event and quantitative information by line item in the balance sheet indicating which line item in the income statement includes the effect on earnings of initially electing the fair value option for that item.

This Statement is a prelude to more items being recognized on the balance sheet at fair value. Part II is going to consider fair value for non-financial instruments.

This blog

Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

48732

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

82042

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

53908

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

97470
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
24582

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

61299

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

87148

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

28508

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

70069

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

38239
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
110231
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
30004

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

58283
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
32010
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
36649

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

109115

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

37899

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

120291

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

67470

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

43702
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
71441

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

98425

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

58988