ACCOUNTING & AUDITING ARTICLE-
SFAS 159 – The Fair Value Option for Financial Assets and Financial Liabilities (as amended)

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The purpose of SFAS 159 (effective for fiscal years beginning after November 15, 2007) is to expand the use of fair value measurements for financial instruments that are not otherwise required to be stated at fair value. It does not change any previous standards that require the use of fair value. The use of fair value is optional and applies to non-for-profits as well as for-profit entities. An entity’s decision to apply fair value under this statement is made at certain defined election dates on an item-by-item basis. Therefore, an entity could have several identical assets and liabilities of which some are measured at fair value and the remaining at some other value. However, once the choice is made to apply fair value under this statement, it is irrevocable. Lastly, the gains and losses from changes in fair value resulting from applying this statement are recognized in income.

Eligible items for fair value treatment under this statement include all recognized financial assets or liabilities except investments in consolidated subsidiaries, interests in consolidated variable interest entities, assets or obligations relating to employee benefits, financial assets or liabilities relating to leases, demand deposit liabilities and financial instruments where all or a part are classified as a component of equity by the issuer. The election to treat the assets or liabilities can occur on certain dates which include the date on which an eligible item is first recognized, the date the entity first enters a firm commitment, the date financial assets which had always been measured at fair value no longer quality for that treatment, the date the percentage ownership changes in an investee and the date on which an event requires an asset or liability to be measured at fair value once but not at each balance sheet date.

SFAS 159 also allows securities under SFAS 115 that are classified as available-for-sale and held-to-maturity to be included in the fair value election. Under SFAS 115, the unrealized gains and losses on available-for-sale are currently included in other comprehensive income. If an entity elects to treat available-for-sale securities under SFAS 159, then the unrealized gains and losses would be included in income and the securities would be subsequently classified as trading.

While the disclosure requirements of SFAS 159 are quite extensive, they do not replace the disclosure requirements of other pronouncements. They are intended to facilitate comparisons between entities, as well as between assets and liabilities of a single entity that are measured differently. They also serve to explain why management elected or partially elected fair value measurements and how the election impacts earnings.

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