Question

In: Accounting

An entity can apply the fair value option to an eligible item only on the date...

An entity can apply the fair value option to an eligible item only on the date when one of the following events occurs (an election date):

Specialized accounting for an item ceases to exist;

An investment becomes subject to equity method accounting (but is not consolidated) or to a VIE that is no longer consolidated; or

An event that requires the item to be measured at fair value, such as a business combination or significant modifications to debt instruments.

Please explain these three situations!

Solutions

Expert Solution

As per the GAAP the entity can apply the Fair value option to an eligible item only on the date of occuring these events (an election date):-

i) Specialized accounting for an item ceases to exist :- Measurment of eligible item at its fair value is do on instrument by instrument basis .Once you choose to follow the fair value option for an instrument, the change in reporting is irrevocable.The fair value election can be made on the date ,which can be when an item is first recognized, when there is a firm commitment, when qualification for specialized accounting treatment ceases, or there is a change in the accounting treatment for an investment in another entity.

ii) An investment becomes subject to equity method accounting :-The fair value election is generally made on an instrument-by-instrument basis and is irrevocable However, if the fair value option is applied to an investment that would otherwise be accounted for under the equity method requires that the fair value option be applied to all of the investor’s eligible interests in that investee i.e. equity and debt, including guarantees. If an investor had a pre-existing interest accounted for at fair value under the fair value option, but did not have the ability to exercise significant influence over the investee, the investor would have the option to either elect the fair value option, or apply equity method accounting.  once an investor elects to measure an equity method investment at fair value, it is required to continue to measure any equity interests (and all other eligible financial interests) in the investee at fair value, even if it no longer has the ability to exercise significant influence over the investee.

iii) An event that requires the item to be measured at fair value, such as a business combination or significant modifications to debt instruments :-Business Combinations transforms the way companies plan and execute their acquisition strategies. Investors, regulators and the stakeholders will be able to better appreciate the cost of business combinations based on the fair value of assets and liabilities and increased disclosures. The new standard applies to most business combinations, including amalgamations where the acquiree loses its existence and acquisitions where the acquiree continues its existence. More transactions are likely to fall under the definition of business combination and require business combination accounting under Ind AS 103. All business combinations will be accounted for under the purchase method (fair value), excluding business combinations involving entities or businesses under common control, which are to be accounted using the pooling of interest method. Under the acquisition method, an acquirer of a business recognizes the assets acquired and the liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition


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