The Fair Value Option. SFAS No. 159 With IFRS comparison at end. Why was FAS159 issued?. IFRS permits a fair-value election for financial instruments (IAS 39) FASB wants to converge with IASB This standards moves US GAAP closer to IFRS
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SFAS No. 159
With IFRS comparison at end
A very simple company that starts with one asset and one liability – to keep it simple!
Let’s assume that Bond B is accounted for as part of the trading securities investment portfolio. Therefore it is marked to market at each balance sheet date and the gain/loss is reported on the income statement. Bond A is treated in the traditional way.
First step – find the present value of the bond investment. Remember, the coupon rate on Bond B is 12%
N=19, i=11%, Pmt = $1,000 * 12% = $120, FV=$1,000Solve for PV = __________________
Interest revenue $120 – Interest expense $100 + gain $78 = $98 net income
This is our traditional accounting (book value for debt, fair value for investments classified as trading
Interest revenue $120 – Interest expense $100 = $20 net income with $78 gain on statement of comprehensive income
If the bond were classified as “available for sale” the gain would be reported in AOCI rather than on the income statement.
Interest revenue $120 – gain $78 on investment - $90 loss on liability = $8 net income
Interest revenue $120 – Interest expense $100 + gain $78 on investment + $78 gain on liability = $176 net income
Under FAS107, the fair values of financial instruments are disclosed in the financial statements
IAS 39 vs FAS 159