FASB Proposes Fair Value Option

The proposed standard, says FASB, will enable companies ''to achieve a more consistent accounting for changes in the fair value of related assets a...
Stephen TaubJanuary 25, 2006

The Financial Accounting Standards Board has issued a proposal that would provide companies the option to report financial assets and liabilities at fair value.

In a press release, FASB stated that the proposed standard “seeks to reduce both complexity in accounting and volatility in earnings caused by differences in the existing accounting rules.” Under the proposal, any changes in fair value would be included in earnings.

FASB noted that the current proposal represents the first phase of a project, by addressing the fair value of certain financial assets and financial liabilities. A second phase will consider the fair-value option for certain non-financial assets and liabilities and for some financial assets and liabilities excluded from the current proposal.

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Generally accepted accounting principles, explained FASB, use different measurement attributes for different assets and liabilities, which can lead to earnings volatility. “The proposed standard helps to mitigate this type of accounting-induced volatility,” added the board, “by enabling companies to achieve a more consistent accounting for changes in the fair value of related assets and liabilities without having to apply complex hedge accounting provisions.”

On a contract-by-contract basis, the proposed standard would permit companies to measure financial assets and liabilities at fair value, according to FASB. Companies would be required to display those values separately from values measured under different attributes on the face of the balance sheet.

“The option to measure related financial instruments at fair value should simplify accounting and encourage the display of more relevant and understandable information for investors and other users of financial statements,” said FASB board member Leslie Seidman, in a statement. She also pointed out that the proposal helps achieve further convergence with the International Accounting Standards Board, which previously adopted a fair-value option for financial instruments.

The deadline for filing public comments is April 10.