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Publication date: 23 Oct 2019   

us Fair value guide 5.2

Under US GAAP, the key standards that have a FVO include the following:

  • ASC 815-15, Derivatives and Hedging—Embedded Derivatives, which provides a FVO for certain hybrid financial instruments that contain an embedded derivative that would otherwise require separation
  • ASC 860-50, Transfers and Servicing—Servicing Assets and Liabilities, which permits a reporting entity to choose between the amortization method and the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities
  • ASC 825-10, Financial Instruments—Overall, which provides a measurement basis election for most financial instruments (i.e., a choice to use either historical cost or fair value), including equity method investments, allowing reporting entities to mitigate potential mismatches that arise under the current mixed measurement attribute model

In accordance with the requirements of the guidance, once the FVO election for a specific instrument is made, it is irrevocable for that instrument. Because the FVO is not a requirement, its election may result in reduced comparability of financial reporting, both among similar reporting entities and within a single entity, because similar assets or liabilities could be reported under different measurement attributes (i.e., some at historical cost and some at fair value). However, the disclosure provisions in the referenced topics are intended to mitigate this by requiring: (1) identification of instruments for which the option is elected and (2) extensive information about the effects on the financial statements.

Under IFRS, the key standards that provide a FVO include the following.

  • IAS 28, Investments in Associates and Joint Ventures, which permits a venture capital organization, mutual fund, unit trust, and similar entities, including investment-linked insurance funds, to measure investments in associates and joint ventures at fair value through profit or loss in accordance with IFRS 9
  • IAS 16, Property, Plant and Equipment, which permits a reporting entity to choose either the cost model or the revaluation model as its accounting policy after initial recognition
  • IAS 38, Intangible Assets, which permits a reporting entity to choose either the cost model or the revaluation model as its accounting policy after initial recognition when an active market exists for an intangible asset
  • IFRS 9, Financial Instruments, permits the FVO in limited circumstances for a financial liability on initial recognition, with changes in fair value recognized in profit or loss if certain criteria are met. However, with respect to the FVO for a financial asset, under IFRS 9, an entity can only designate a financial asset at fair value when it eliminates or reduces an accounting mismatch. In addition, an entity may apply the fair value option irrevocably to contracts to buy or sell non-financial items that qualify for the “own use” exception on initial recognition if it eliminates or reduces an accounting mismatch (as described in FV 5.5.7). Finally, there is also a FVO to designate a credit exposure at fair value through profit and loss (as described in FV 5.5.10). This fair value option is different from the irrevocable option for “own use” contracts, since this can be elected at initial recognition, subsequently, or even while the hedged credit exposure is unrecognized (for example, in the case of a loan commitment).
  • IAS 40, Investment Property, which permits an entity to choose as its accounting policy either the fair value model or the cost model
  • IFRS 3, Business Combinations, which provides the acquirer with the option to measure a noncontrolling interest (NCI) in an acquiree at either fair value or the present ownership instruments’ proportionate share in the recognized amounts of the acquiree’s net identifiable assets

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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