Question

The "fair value option" in accounting for long-term liabilities

a) what is the fair value option to report liabilities?

b) Do you think that the fair value option is a more relevant approach to valuing liabilities than amortized costs? Why or why not?

Answer 1

a) Although the companies are not required to, however they have the option to value all or some company's liabilities at fair value. When the fair value option is elected by company elected, a decrease (or increase) in fair value from one balance sheet to the next would be reported as a gain (or loss) as other comprehensive income to the extent it’s connectivity to the credit risk. Otherwise would be reported in company's net income. When the liability is created it would be a one-time election for each liability.

b) At initial recognition when an entity irrevocably designates a financial liability that otherwise would need to be measured at fair value or amortised cost through other comprehensive income would be measured at fair value through profit or loss. In these circumstances the fair value option would significantly reduce or eliminate a recognition or measurement inconsistency (usually referred to as an ‘accounting mismatch’) or otherwise leads to more relevant approach in information than amortized costs