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Fair Value Option Added for U.S.

GAAP

SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities,

introduced an important new phase of fair value accounting to U.S.

GAAP. Under SFAS 159, entities may elect the fair value option for many

assets and liabilities. Electing the fair value option means that assets or liabilities

that have previously been measured using one basis (e.g., cost) may

now be carried at fair value on a recurring basis.

Most financial assets and financial liabilities are eligible for the fair value

option under SFAS 159. Financial assets are explained further in Part II,

but generally include cash, equity (ownership) interests in other entities,

receivables, and certain other contracts. Only a handful of financial assets

and financial liabilities are not eligible for the fair value option, such as

equity interests in entities that the owner is required to consolidate, certain

assets and liabilities resulting from employee benefit plans, lease-related

assets and liabilities, and demand deposits of financial institutions.

For assets, electing fair value treatment under SFAS 159 means that assets

that were previously carried at lower of cost or fair value (i.e., nonrecurring

fair value adjustments could be made if fair value declines below carrying

value, but no adjustments would be made if fair value exceeds carrying

value) are carried at fair value on a recurring basis. What does this mean? It

means that if the fair value of an asset increases above the cost of the asset,

that gain is recognized in the financial statements and the asset is adjusted

to the higher amount. Under historical cost accounting, declines in fair value

below book value were recorded, but never gains above book value.

The fair value option established by SFAS 159 may be applied on an


instrument-by-instrument basis, with only a few exceptions (e.g., investments

otherwise accounted for by the equity method). As a result, in some

instances, a single line item on the financial statements may comprise a

combination of instruments, some of which are carried at fair value on a

recurring basis as a result of making the SFAS 159 election and others that

are carried at historical cost or another basis. Once made, SFAS 159 fair value

elections are irrevocable unless a new election date occurs.

Fair Value Defined

SFAS 157, Fair Value Measurements, defines fair value as “the price that

would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date.” The term

market participant excludes related parties.

IFRS defines fair value as “the amount for which an asset could

be exchanged between knowledgeable, willing parties in an arm’s length

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