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Business and Policy Areas
Business and Policy Areas

FASB Issues Proposal on Fair Value Option

February 3, 2006

The Financial Accounting Standards Board (FASB) issued an Exposure Draft, "The Fair Value Option for Financial Assets and Liabilities." The proposed statement would create a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities on a contract-by-contract basis. Under the option, any changes in fair value would be included in earnings.

Currently GAAP uses different measurement attributes for different assets and liabilities, which can lead to earnings volatility. The proposed standard helps mitigate earnings volatility caused by differences in accounting rules. In addition, the standard will

  • achieve an offset accounting effect for the changes in the fair values of related financial assets and financial liabilities without having to apply complex hedge accounting provisions;
  • achieve further convergence with the International Accounting Standards Board, a long-term FASB undertaking; and 
  • expand the use of fair value measurement, which is considered to be more relevant than cost to financial statement users.

For example, this statement will impact 1) investments being accounted for under the equity method, and 2) investments in equity securities that do not have readily determinable fair values, as described in paragraph 3 of FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

Adoption of this proposed statement would be required as of the beginning of an entity’s first fiscal year that begins after December 15, 2006, with earlier adoption permitted as of the beginning of an entity’s earlier fiscal year that begins after issuance of the final statement.

NACUBO plans to comment on the draft and would like to hear from members who may be affected by the proposed statement.  Interested institutions are also encouraged to comment directly to FASB. The deadline for submitting comments is April 10.

NACUBO contact:  Sue Menditto, director, accounting policy


The NACUBO contact is Sue Menditto, director, accounting policy, 202.861.2542.