The FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” last Thursday. The “option” aspect is that firms will now have a choice of whether or not to apply fair value accounting to some financial instruments that have always been accounted for at historical values.
Subscribers to The Analyst’s Accounting Observer: the exposure draft of this standard was covered in Volume 15, No. 5 “FASB’s Fair Value Frenzy.”
Companies that take the fair value option might find that hedging becomes easier than under Statement 133, with no need for “effectiveness testing,” which seems to have been a hurdle in some restatements seen over the past year and a half. If firms are as good at hedging as they claim to be, the earnings volatility that results from having two offsetting instruments recorded at fair value should be relatively subdued. It might be a good chance for firms to control their financial exposures and reduce their compliance paperwork at the same time.
Only apparent downside at this time: comparability will suffer for investors. Remember - it’s an option, not a mandate. And companies will also likely apply it only where fair value reporting will give them a better-looking balance sheet. So it’s not without its drawbacks.