Question

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value. a- True b- false

Answer 1

Companies are not required to, but have the option to, value some or all of their financial assets and liabilities at fair value.

Yes the statement is True.

FASB allows companies to value those financial assets and liabilities at fair value which are eligible.

Scope of Eligible Items

All entities may elect the fair value option for the following items (eligible items):

a. A recognized financial asset and financial liability, except those listed below.

b. A firm commitment that would otherwise not be recognized at inception and that involves only financial instruments

(An example is a forward purchase contract for a loan that is not readily convertible to cash. That commitment involves only financial instruments—a loan and cash—and would not otherwise be recognized because it is not a derivative instrument.)

c. A written loan commitment

d. The rights and obligations under an insurance contract that is not a financial instrument (because it requires or permits the insurer to provide goods or services rather than a cash settlement) but whose terms permit the insurer to settle by paying a third party to provide those goods or services

e. The rights and obligations under a warranty that is not a financial instrument (because it requires or permits the warrantor to provide goods or services rather than a cash settlement) but whose terms permit the warrantor to settle by paying a third party to provide those goods or services

f. A host financial instrument resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument. (An example of such a nonfinancial hybrid instrument is an instrument in which the value of the bifurcated embedded derivative is payable in cash, services, or merchandise but the debt host is payable only in cash.)

No entity may elect the fair value option for the following financial assets and financial liabilities:

a. An investment in a subsidiary that the entity is required to consolidate.

b. An interest in a variable interest entity that the entity is required to consolidate.

c. Employers’ and plans’ obligations (or assets representing net overfunded positions) for pension benefits, other postretirement benefits (including health care and life insurance benefits), postemployment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements, as defined in FASB Statements.

d. Financial assets and financial liabilities recognized under leases as defined in FASB Statement(This exception does not apply to a guarantee of a third party lease obligation or a contingent obligation arising from a cancelled lease.)

e. Deposit liabilities, withdrawable on demand, of banks, savings and loan associations, credit unions, and other similar depository institutions.

f. Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholder’s equity (including “temporary equity”). An example is a convertible debt security with a non contingent beneficial conversion feature.