Fair Value Option (FVO)

Question 1

What is the purpose of Fair Value Option?

Answer 1

The FVO allows entities to measure most recognized financial assets and liabilities at Fair Value.

• Unrealized gains and losses are reported in EARNINGS(Income statement) at each subsequent reporting date.

Question 2

How are financial instruments elected for FV?

Answer 2

The decision whether to elect the FVO is made IRREVOCABLY at an election date (unless a new election date occurs).

With certain exceptions, the decision is made Instrument by Instrument and only for an Entire Instrument.

Question 3

How is FVO applied to multiple instruments in a single transaction?

Answer 3

The FVO generally need NOT be applied to ALL instruments in a single transaction.

-But an instrument that constitutes one legal contract is indivisible for FVO purposes.

Question 4

The election for the FVO may be made only on the date of?

Answer 4

1) Initial recognition of an eligible item
2) Making an eligible firm commitment
3) A change in accounting for an investment in another entity b/c it becomes subject to the equity method
4) Deconsolidation of a subsidiary or a variable interest entity (w/ retentino of an interest)
5) An event requiring measurement of an eligible item at F.V on that date but NOT subsequently (exclude LCM impairment)

Question 5

What are some examples of events that require either Remeasurement at FV or initial recognition (or both) of eligible items

Answer 5

1) Business Combination
2) Consolidation or deconsolidation, or
3) Significant modification of debt

Question 6

How are items with Fair Values reported on the Balance sheet?

Answer 6

Assets and Liabilities measured using FVO are reported by separating their reported FV from the carrying amounts of similar items

Question 7

How are items with Fair Values reported on the Income Statement?

Answer 7

Unrealized gains and losses on items measured using the FVO are recognized in EARNINGS at each subsequent reporting date.
- Upfront costs and fees related to those items are recognized as incurred

Question 8

How are items with Fair Values reported on the Cash Flow Statement?

Answer 8

Classified according to their nature and purpose.