What is the FASB Fair Value Option?
The Financial Accounting Standards Board issued a standard that provides companies with an option to report selected financial assets and liabilities at fair value, effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007.
The goal of Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, is to reduce complexity in accounting for financial instruments and reduce the volatility in earnings caused by differing measurement of related assets and liabilities.
The standard is designed to help mitigate volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with complex hedge accounting rules. The standard also sets presentation and disclosure requirements that are designed to facilitate comparisons between companies that choose different measurement attributes for similar asset and liability types.
Investors and others who utilize financial statements will be able to more easily understand the effect of the company's choice to use fair value on its earnings due to the standard’s requirement to provide additional related information. Companies are also required to display the fair value of the chosen assets and liabilities on the face of the balance sheet. Disclosure requirements that are detailed in other accounting standards, such as FASB Statements No. 157 and No.107, are not affected by the new standard.
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