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27.01.2011: FASB Reverses Course on Fair Value

The Financial Accounting Standards Board has taken a step back on previous plans to require companies to report all of their financial instruments at fair value.

FASB tentatively decided Tuesday to permit accounting for “plain vanilla” financial instruments at amortized cost, a reversal of a proposal from last year under which most types of financial instruments, including bank loans, would have to be reported at fair value. This would be closer to the approach adopted by the International Accounting Standards Board, which has adopted a “mixed measurement” model under which some assets would be reported at fair value and others at amortized cost.

The “plain vanilla” assets that would be eligible for cost accounting would be “those instruments where the entity has a relationship with the borrower and the purpose is to be repaid with the collection of interest and fees,” said FASB chairman Leslie Seidman during a webcast Tuesday. “We wouldn’t expect securities that are traded in an active market to qualify for this, where the purpose is to hold the asset for a period of time (and sell it).”

Other assets under the tentative FASB proposal would still be reported at fair value, including assets held for sale or trading.

FASB plans to hold additional board meetings to decide on the final standards, which are being worked out with the IASB as part of the two boards’ convergence efforts.

Source: WebCPA

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