12.4 Presentation
12.4.1 Statement of Comprehensive Income
12.4.1.1 General
ASC 825-10
Statement of Comprehensive Income
45-4 A
business entity shall report unrealized gains and losses
on items for which the fair value option has been
elected in earnings (or another performance indicator if
the business entity does not report earnings) at each
subsequent reporting date.
ASC 825-10-45-4 states that the changes in fair value of an item for which the
FVO is elected should be recognized in net income (or another performance
indicator if an entity does not report net income). However, see
Section 12.4.1.2 for discussion of the recognition of a
component of the change in fair value of a financial liability in OCI.
12.4.1.1.1 Presentation of Interest on Interest-Bearing Financial Instruments Accounted for at Fair Value Through Earnings
12.4.1.1.1.1 General
Under U.S. GAAP, an entity is not required to separately present, in its
income statement, interest income or interest expense for
interest-bearing financial assets or financial liabilities accounted for
at fair value through earnings, unless (1) the entity must do so in
accordance with regulatory guidance or (2) it is industry practice to do
so.7 However, the entity may elect, as an accounting policy, to present
interest income or interest expense separately from other changes in the
fair value of financial instruments measured at fair value through
earnings. This election would apply to interest-bearing financial
instruments that are measured at fair value through earnings under the
FVO in ASC 825 or ASC 815, as well as interest-bearing financial
instruments that are measured at fair value under other relevant GAAP
(e.g., trading debt securities under ASC 320).
The following U.S. GAAP guidance indicates that separate presentation of
interest is a policy election:
- ASC 825-10-50-28(e)(2), which requires disclosure of the aggregate fair value of loans in nonaccrual status held as assets, and for which the FVO has been elected, if the “entity’s policy is to recognize interest income separately from other changes in fair value.”
- ASC 325-40-15-7, which notes that “it is practice for certain industries (such as banks and investment companies) to report interest income as a separate item in their income statements, even though the investments are accounted for at fair value.”
If an entity’s elected accounting policy related to
separate recognition of interest income or interest expense is
considered significant, the entity should disclose that policy in
accordance with ASC 235-10-50-1. Section
12.4.1.1.1.2 contains guidance on how to measure interest
income or interest expense when it is separately presented in the income
statement for an interest-bearing financial instrument recognized at
fair value through earnings.
12.4.1.1.1.2 Measurement
If an entity elects, as an accounting policy, to separately present
interest income or interest expense on an interest-bearing financial
instrument accounted for at fair value through earnings, the entity
should, with one exception, include amortization or accretion of any
premium or discount on the instrument as part of the separately reported
interest income or interest expense.8 If the fair value initially recognized for an interest-bearing
financial instrument (e.g., debt) differs from the principal amount due
at maturity (“par”), this difference is a premium or discount that
should be amortized or accreted. An entity should recognize the
amortization or accretion in interest income or interest expense if it
is separately presented. Under ASC 320-10-35-4 and ASC 325-40-35-2, the
method used to measure interest income or interest expense on an
interest-bearing financial instrument (including any amortization or
accretion of a premium or discount) should be the same regardless of the
measurement attribute (e.g., amortized cost) used to measure the
financial instrument. Thus, the premium or discount should be amortized
by using the interest method that would have applied to the
interest-bearing financial asset or financial liability if it had not
been recognized at fair value through earnings.
The guidance above does not apply to the following:
- The portion of the difference between fair value and par at inception attributable to embedded features that are not indexed to interest rates or the issuer’s own credit (e.g., an in-the-money option that permits the holder to convert the debt instrument into a fixed number of the issuer’s equity shares). Entities should exclude such features from the discount or premium to be accreted or amortized.
- Any transaction costs and fees, such as debt issuance costs, origination costs, and origination fees (i.e., up-front costs and fees) are not part of the initial measurement of a financial instrument that is recognized at fair value and therefore are not included in any premium or discount of the financial instrument in accordance with ASC 825-10-25-3. That is, the interest method is used only for applicable discounts and premiums since up-front costs and fees are recognized in earnings as they are incurred or received (see Section 12.3.1.2 for discussion of the initial recognition of up-front costs and Section 12.4.1.1.2 for discussion of the income statement presentation of fees received and costs incurred that are associated with the origination of loans receivable).
Example 12-10
Measurement of Interest Income on Acquired
Loans With Deteriorated Credit Quality That Are
Recognized at Fair Value Through Earnings
Entity G acquires a portfolio of loans from a
third party at a significant discount (at a
transaction price equal to fair value) and has
elected to account for the loans at fair value
through earnings under the FVO in ASC 825. In
accordance with G’s previously elected accounting
policy, G separately presents interest income on
these loans in its income statement.
If G had not elected to account for the loans
under the FVO, a portion of the loans would have
been accounted for under ASC 310-30 (which
addresses the accounting for acquired loans with
deteriorated credit quality) and the remaining
portion would have been accounted for under ASC
310-20.
On the basis of these facts, G should measure
interest income on the loans by applying ASC
310-30 to the portion of the portfolio that would
have otherwise been accounted for under that
guidance and applying ASC 310-20 to measure
interest income on the remaining portion of the
loan portfolio. In addition, G should not
capitalize any transaction fees or costs related
to the acquisition since the loans are recognized
at fair value through earnings. Instead, G should
apply the effective-yield guidance in ASC 310-30
and ASC 310-20 on the basis of a net investment in
the loan portfolio equal to the initial fair value
(in this case, the transaction price is fair value
on initial recognition). Entity G will need to
allocate the transaction price to the portions of
the portfolio accounted for under ASC 310-30 and
ASC 310-20 so that it can appropriately apply the
applicable interest recognition guidance to each
component.
Note that in this example, it is assumed that in
the absence of electing the FVO, G would have
applied ASC 310-30. If, instead, G had adopted ASU
2016-13, it would have applied the guidance
relevant to purchased credit-deteriorated
financial assets.
Example 12-11
Measurement of Interest Income on HFS Mortgage
Loans That Are Recognized at Fair Value Through
Earnings
Entity H is a financial institution that
originates and purchases conforming mortgage loans
that are held temporarily until they are sold or
securitized. Entity H has elected to account for
the mortgage loans at fair value through earnings
under the FVO in ASC 825. In accordance with its
previously elected accounting policy, H separately
presents interest income on these HFS mortgage
loans in its income statement. In this example, it
is assumed that the collectibility of principal
and interest on H’s HFS mortgage loans is not in
question.
On the basis of these facts, H would measure
interest income on the HFS mortgage loans by using
the loan’s stated (coupon) rate without amortizing
any original issue (purchase) discounts. Such
measurement is consistent with how H would measure
interest income if it had recognized the loans at
the lower of cost or market in accordance with ASC
948-310.
12.4.1.1.2 Presentation of Fees Received and Costs Incurred That Are Associated With the Origination of Loan Receivables HFS
A bank, savings institution, or similar financial institution (a “banking
institution”) often originates a loan receivable as a principal, intending
to sell the originated loan. (This practice is particularly common in
mortgage banking operations.) In these lending arrangements, when banking
institutions do not elect the FVO under ASC 825, they classify the
originated loans initially and subsequently as HFS and measure them at the
lower of cost or fair value. In accordance with ASC 310-20, when banking
institutions do not elect the FVO, they capitalize certain fees charged and
costs incurred that are associated with origination into the carrying amount
of the loans (referred to hereafter as “loan origination fees and costs”).
As a result of such capitalization, the loan origination fees and costs
enter into the calculation of the gain or loss upon the sale of the loans.
In accordance with generally accepted accounting practices for banking
institutions (and in a manner consistent with the reporting requirements of
the SEC and banking regulators), the net gain or loss on the sale of loans
is classified within a single line item as a component of noninterest income
(e.g., “gain on sale of loans, net”).9
A banking institution may, however, elect to account for its HFS originated
loans at fair value through earnings in accordance with the FVO in ASC 825.
Under ASC 820 and ASC 825, up-front fees charged and costs incurred are
excluded from the measurement of the fair value of financial assets and
liabilities and, therefore, are recognized in earnings as charged or
incurred.10 There is no specific U.S. GAAP guidance on how loan origination fees
and costs should be classified in the income statement when the FVO is
elected for the related loans. Nevertheless, in accordance with generally
accepted accounting practices for banking institutions that account for HFS
loans at the lower of cost or fair value, the loan origination fees and
costs, which are recognized immediately in earnings as charged or incurred,
should not be classified within interest income or interest expense.
However, there is diversity in practice related to the classification within
noninterest income and noninterest expense of loan origination fees and
costs related to HFS loans for which the FVO in ASC 825 has been
elected.
Given the lack of specific guidance on this topic, either of the following
two alternatives is considered acceptable as an accounting policy that
should be consistently applied and disclosed if considered significant in
accordance with ASC 235-10-50-1:
- Alternative A: Net-basis classification within noninterest income — Proponents of this view believe that the income statement classification of loan origination fees and costs should not be affected by whether the banking institution has elected to account for the related HFS loans at fair value through earnings under ASC 825. Rather, such loan origination fees and costs should be classified, and should have an income statement caption, as if the amounts had been capitalized and deferred under ASC 310-20 (i.e., on a net basis within a single line item that is a component of noninterest income). Proponents of this view note that a similar view applies to the classification of interest income and interest expense on loans for which the FVO in ASC 825 has been elected. This approach permits consistent classification regardless of whether the FVO in ASC 825 has been elected, thereby promoting comparability.
- Alternative B: Gross-basis classification within noninterest income and noninterest expense — Proponents of this view believe that, in the absence of specific guidance that permits net presentation, the loan origination fees and costs related to HFS loans accounted for at fair value through earnings under the FVO in ASC 825 should be classified on a gross basis. The fees associated with loan origination would be classified as a component of noninterest income, and the costs would be classified as a component of noninterest expense. This view is consistent with the outcome that would result from the application of principal-agent considerations.
Note that the above alternatives apply only when all of the following
conditions are met:
- The banking institution prepares an income statement that includes separate totals for interest income, interest expense, noninterest income, and noninterest expense.11
- The loans are originated for sale (i.e., the loans are HFS loans).
- If the FVO had not been elected, the fees charged and costs incurred would have been capitalized into the carrying amount of the loans in accordance with ASC 310-20.
- The banking institution is acting as a principal in the origination of the loans.12
12.4.1.2 Financial Liabilities for Which FVO Is Elected
12.4.1.2.1 Overall Guidance
ASC 825-10
Financial Liabilities for Which Fair Value
Option Is Elected
45-5 If an
entity has designated a financial liability under
the fair value option in accordance with this
Subtopic or Subtopic 815-15 on embedded derivatives,
the entity shall measure the financial liability at
fair value with qualifying changes in fair value
recognized in net income. The entity shall present
separately in other comprehensive income the portion
of the total change in the fair value of the
liability that results from a change in the
instrument-specific credit risk. The entity may
consider the portion of the total change in fair
value that excludes the amount resulting from a
change in a base market risk, such as a risk-free
rate or a benchmark interest rate, to be the result
of a change in instrument-specific credit risk.
Alternatively, an entity may use another method that
it considers to faithfully represent the portion of
the total change in fair value resulting from a
change in instrument-specific credit risk. The
entity shall apply the method consistently to each
financial liability from period to period.
45-5A When
changes in instrument-specific credit risk are
presented separately from other changes in fair
value of a liability denominated in a currency other
than an entity’s functional currency, the component
of the change in fair value of the liability
resulting from changes in instrument-specific credit
risk shall first be measured in the liability’s
currency of denomination, and then the cumulative
amount shall be adjusted to reflect the current
exchange rate in accordance with paragraph
830-20-35-2. The remeasurement of the component of
the change in fair value of the liability resulting
from the cumulative changes in instrument-specific
credit risk shall be presented in accumulated other
comprehensive income.
45-6 Upon
derecognition of a financial liability designated
under the fair value option in accordance with this
Subtopic, an entity shall include in net income the
cumulative amount of the gain or loss on the
financial liability that resulted from changes in
instrument-specific credit risk.
45-7 The
guidance in paragraph 825-10-45-5 does not apply to
financial liabilities of a consolidated
collateralized financing entity measured using the
measurement alternative in paragraphs 810-10-30-10
through 30-15 and 810-10-35-6 through 35-8.
ASC 815-15
45-2 If an entity has
designated a financial liability under the fair
value election in accordance with paragraphs
815-15-25-4 through 25-6, the entity shall apply the
guidance in paragraph 825-10-45-5 on the
presentation of changes in the liability’s fair
value that result from changes in
instrument-specific credit risk.
ASC 830-20
Financial Liabilities for Which the Fair Value
Option Is Elected
35-7A
Paragraph 825-10-45-5A requires that for a financial
liability for which the fair value option is
elected, the change in the liability’s fair value
resulting from changes in instrument-specific credit
risk shall be presented separately in other
comprehensive income from other changes in the
liability’s fair value presented in current
earnings. The component of the change in fair value
of the liability resulting from changes in
instrument-specific credit risk shall first be
measured in the liability’s currency of
denomination, and then the cumulative amount shall
be adjusted to reflect the current exchange rate in
accordance with paragraph 830-20-35-2. The
remeasurement of the component of the change in fair
value of the liability resulting from the cumulative
changes in instrument-specific credit risk shall be
presented in accumulated other comprehensive
income.
ASC 470-50
Extinguishments of Debt
40-1 As
indicated in paragraph 470-50-15-4, the general
guidance for the extinguishment of liabilities is
contained in Subtopic 405-20 and defines
transactions that the debtor shall recognize as an
extinguishment of a liability.
40-2 A
difference between the reacquisition price of debt
and the net carrying amount of the extinguished debt
shall be recognized currently in income of the
period of extinguishment as losses or gains and
identified as a separate item. Gains and losses
shall not be amortized to future periods. If upon
extinguishment of debt the parties also exchange
unstated (or stated) rights or privileges, the
portion of the consideration exchanged allocable to
such unstated (or stated) rights or privileges shall
be given appropriate accounting recognition.
Moreover, extinguishment transactions between
related entities may be in essence capital
transactions.
40-2A In an
early extinguishment of debt for which the fair
value option has been elected in accordance with
Subtopic 815-15 on embedded derivatives or Subtopic
825-10 on financial instruments, the net carrying
amount of the extinguished debt shall be equal to
its fair value at the reacquisition date. In
accordance with paragraph 825-10-45-6, upon
extinguishment an entity shall include in net income
the cumulative amount of the gain or loss previously
recorded in other comprehensive income for the
extinguished debt that resulted from changes in
instrument-specific credit risk.
ASC 825-10-45-5 requires an entity that has elected to measure a financial
liability at fair value in accordance with the FVO to separately present in
OCI the portion of the total change in fair value of the liability that is
attributable to the change in instrument-specific credit risk, but only if
the financial liability contains an instrument-specific credit risk
component (see Section 12.4.1.2.2 for discussion of the
scope of this special presentation guidance). An entity must determine the
portion of the total change in fair value of the financial liability that is
attributable to the instrument-specific credit risk so that it can bifurcate
the amounts to properly record the amounts in net income and OCI (see
Section 12.4.1.2.3 for discussion of how to
determine the amount to be recognized in OCI). Upon derecognition of the
financial liability, any amounts accumulated in OCI are recognized in net
income (see Section 12.4.1.2.4 for discussion of the
accounting upon derecognition).
12.4.1.2.2 Scope of Special Presentation Guidance
12.4.1.2.2.1 Nonrecourse Financial Liabilities
The guidance in ASC 825-10-45-5 and 45-5A that requires separate
presentation in OCI of the portion of the change in fair value of a
financial liability that is attributable to instrument-specific credit
risk does not apply to liabilities that do not contain
instrument-specific credit risk. A liability that is nonrecourse to the
issuer (i.e., the debtor or the borrower) does not contain
instrument-specific credit risk. Therefore, changes in fair value
associated with a nonrecourse financial liability designated under the
FVO should be recognized entirely in earnings. This view was discussed
with the FASB staff, which agreed with the conclusion reached.
It is important for an entity to differentiate between
instrument-specific credit risk and asset-specific performance risk when
assessing a financial liability whose amounts are payable only upon
receipt of cash flows from specified assets (e.g., securitization
structures). This distinction is important because, in some
circumstances, a financial liability may have little or no
instrument-specific credit risk and substantially all the changes in the
fair value of the liability may be attributable to asset-specific
performance risk. We believe that, in such cases, when the issuer or
borrower does not have any obligation to make a payment if the assets to
which the obligation is contractually linked fail to perform, changes in
the fair value of the liability would be recognized in earnings. For
example, an entity that issues a note whose cash flows are contractually
linked to an underlying pool of assets (e.g., loans, corporate bonds)
would have no obligation to make payments unless amounts are received on
the underlying pool of assets. In such circumstances, all changes in
fair value would be recognized in earnings.
Depending on how the obligation is structured, there may still be some
instrument-specific credit risk when there is also asset-specific
performance risk. For example, if amounts received on the underlying
pool of assets are not immediately payable to the lender (i.e., there is
a timing difference between the receipt of cash flows from the assets
and the payment on the obligation), the issuer or borrower will owe
amounts to the lender even when the assets have performed. Depending on
whether the issuer or borrower is able to use the cash received on the
assets for purposes other than to pay its obligation under the financial
liability, there may be some residual instrument-specific credit risk,
which may sometimes be minimal.
12.4.1.2.2.1.1 Financial Liabilities of CFEs
ASC 825-10-45-7 states that the guidance in ASC 825-10-45-5 on
separately presenting in OCI the portion of the change in fair value
of a financial liability that is attributable to instrument-specific
credit risk does not apply to “financial liabilities of a
consolidated [CFE] measured using the measurement alternative in
paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8.”
While ASC 825-10-45-7 does not specifically address how the
financial liabilities of a CFE are accounted for when the
measurement alternative in ASC 810-10-30-10 through 30-15 and ASC
810-10-35-6 through 35-8 is not applied (i.e., when the financial
liabilities are measured at fair value in accordance with ASC 820),
the guidance in ASC 825-10-45-5 on separately presenting in OCI the
portion of the change in fair value of a financial liability that is
attributable to instrument-specific credit risk would also generally
not apply in such situations. This conclusion is based on the
description of a CFE in the ASC master glossary as an entity that
issues “beneficial interests [that] have contractual recourse only
to the related assets of the collateralized financing entity and are
classified as financial liabilities.” Thus, the only
instrument-specific credit risk that could exist in the financial
liabilities of a CFE would be the timing difference between the
receipt of cash flows from the assets and the payment on the
obligations for the beneficial interests, as discussed in
Section 12.4.1.2.2.1. However, it would be
unlikely that even this instrument-specific credit risk component
would exist in CFEs.
12.4.1.2.2.2 Hybrid Financial Liabilities
As clarified in ASU 2018-03, ASC 825-10-45-5 and ASC 815-15-45-2 indicate
that the requirement to separately present in OCI the portion of the
change in fair value of a financial liability that is attributable to
instrument-specific credit risk should also be applied to hybrid
financial liabilities for which the FVO has been elected under ASC
815-15-25-4 through 25-6. Furthermore, on the basis of discussions with
the FASB staff, this guidance also applies before adoption of ASU
2018-03.
We believe that the scope of the requirement to separately present in OCI
the portion of the change in fair value of a financial liability that is
attributable to instrument-specific credit risk also encompasses hybrid
nonfinancial liabilities to which fair value accounting is applied under
ASC 815-15-30-1(b) and ASC 815-15-35-2. However, no portion of the
change in fair value of such nonfinancial hybrid instruments would be
recognized in OCI if the instrument does not contain any
instrument-specific credit risk.
12.4.1.2.3 Measuring Instrument-Specific Credit Risk
The change in fair value attributable to instrument-specific credit risk of a
financial asset or financial liability represents the component of the
change in fair value of the financial instrument attributable to changes in
the specific credit risk of that instrument (e.g., changes in “credit
spread” associated with the instrument).13 As noted in ASC 825-10-45-5, one acceptable method of isolating the
change attributable to instrument-specific credit risk is to calculate the
hypothetical change in fair value of the instrument during the period that
is attributable to changes in the risk-free or benchmark rate and to
calculate the difference between that amount and the total change in fair
value.14
Alternatively, an entity may use another method that it considers to
faithfully represent the portion of the total change in fair value resulting
from a change in instrument-specific credit risk. However, the entity must
apply that method consistently to each financial instrument from period to
period. Although the guidance in ASC 825-10-45-5 applies specifically to
financial liabilities, we believe that it is applicable by analogy to loans
and other receivables held as assets.
See the example below for an illustration of the calculation
of instrument-specific credit risk on the basis of a calculation of the
hypothetical change in fair value of the instrument during the period that
is attributable to changes in the risk-free or benchmark rate and a
comparison of that change to the total change in fair value of the
instrument. As discussed above, an entity is not required to use this method
to calculate the change in fair value attributable to instrument-specific
credit risk.
Example 12-12
Measurement of Instrument-Specific Credit Risk
On January 1, 20X8, Entity I issues an
uncollateralized five-year bond with a par value and
fair value of $500 million and an interest rate of 8
percent and elects to record the bond at fair value
in accordance with the FVO in ASC 825.
Assume the following:
- Interest is paid annually; the bond has a bullet maturity.
- Three-month LIBOR, a benchmark rate, is 5 percent on January 1, 20X8. As of March 31, 20X8, three-month LIBOR has increased to 5.5 percent. (Although LIBOR is used in this example, the entity could also have selected the U.S. Treasury rate as a benchmark rate.)
- The change in three-month LIBOR is the only relevant change in general market conditions.
- The fair value of the bond as of March 31, 20X8, is $495 million, which indicates an 8.3 percent market rate of interest on the bond.
- Entity I computes the change in fair value that is attributable to instrument-specific credit risk by calculating the portion of the total change in fair value of the instrument during the period that is not attributable to changes in general market conditions.
- For simplicity, it is assumed that (1) there is a flat yield curve, (2) all changes in interest rates result from a parallel shift in the yield curve, and (3) the changes in three-month LIBOR are the only relevant changes in general market conditions. An entity should base its calculations on actual market conditions.
Upon issuance of the bond, the market rate of
interest on it is 8 percent. The components of the
market rate include (1) the benchmark rate
(three-month LIBOR) of 5 percent and (2) 3 percent,
which represents the bond’s credit risk or “credit
spread.” At the end of the period, three-month LIBOR
increases to 5.5 percent and there are no other
changes in general market conditions that would
affect the valuation of the bond.
To determine the change in fair value of the bond
attributable to instrument-specific credit risk, I
calculates the present value of the remaining
contractual cash flows by using an 8.5 percent rate
consisting of the benchmark interest rate at the end
of the period (5.5 percent) and the initial spread
from the benchmark rate upon issuance of the bond (3
percent). The resulting present value of the
remaining cash flows discounted at 8.5 percent is
$492 million.
The fair value of the bond as of
December 31, 20X8, is $495 million. Thus, the
portion of the change in fair value of the bond
attributable to instrument-specific credit risk
during the period is $3 million. In other words, the
fair value of the bond decreased by $8 million
because of a change in general market conditions
(the increase in LIBOR) and increased by $3 million
because of the narrowing of the credit spread on the
bond. Accordingly, in accordance with ASC
825-10-45-5, in preparing its financial statements
and recognizing the bond at fair value, I would
reduce the carrying amount of the bond by $5 million
and would recognize a loss in earnings of $8 million
and a gain in OCI of $3 million. Note that I is also
required to determine instrument-specific credit
risk for disclosure purposes.
In the absence of other changes in general market
conditions, the change in fair value that is
attributable to instrument-specific credit risk in
the next period would be based on a comparison of
the fair value of the bond at the end of the period
with the present value of future cash flows
discounted at three-month LIBOR at the end of the
period, added to an instrument-specific credit
spread of 2.8 percent (8.3% – 5.5%). The 8.3 percent
represents the implicit market yield on the bond at
the end of the previous period (i.e., the effective
yield of the bond, which is based on discounting the
remaining cash flows and a fair value of $495
million at the beginning of the period). To
determine the credit spread at the end of the
previous period, I subtracts the 5.5 percent (the
benchmark rate at the end of the previous
period).
12.4.1.2.3.1 Foreign-Denominated Financial Liabilities
ASC 825-10-45-5A and ASC 830-20-35-7A provide guidance on the measurement
of the instrument-specific credit risk component of a
foreign-denominated financial liability. In accordance with that
guidance, entities are required to apply the following two-step
measurement approach:
- Measure the instrument-specific credit risk component of the change in fair value of the liability in the liability’s currency of denomination.
- Adjust the cumulative amount of changes in instrument-specific credit risk in the currency of denomination of the liability to the entity’s functional currency by using the exchange rate as of the measurement date (i.e., the balance sheet date).
12.4.1.2.4 Extinguishments of Financial Liabilities Measured at Fair Value
If a financial liability is repaid at its maturity, there
will generally not be any remaining component in AOCI related to the
cumulative changes in fair value of the financial liability attributable to
instrument-specific credit risk. However, if a financial liability
recognized at fair value is extinguished before its stated maturity, there
will often be a component in AOCI related to the cumulative changes in fair
value of the financial liability attributable to instrument-specific credit
risk. ASC 470-50-40-2A states that in an early extinguishment of debt for
which the FVO has been elected in accordance with ASC 825 or ASC 815-15, an
entity should include in net income the cumulative amount of any gain or
loss previously recognized in OCI for the extinguished debt that resulted
from changes in instrument-specific credit risk.
12.4.2 Statement of Financial Position
12.4.2.1 General
ASC 825-10
Statement of Financial Position
45-1A An
entity shall separately present financial assets and
financial liabilities by measurement category and form
of financial asset (that is, securities or loans and
receivables) in the statement of financial position or
the accompanying notes to the financial statements.
45-1B
Entities shall report assets and liabilities that
are measured at fair value pursuant to the fair value
option in this Subtopic in a manner that separates those
reported fair values from the carrying amounts of
similar assets and liabilities measured using another
measurement attribute.
45-2 To
accomplish that, an entity shall either:
- Present the aggregate of fair value and non-fair-value amounts in the same line item in the statement of financial position and parenthetically disclose the amount measured at fair value included in the aggregate amount
- Present two separate line items to display the fair value and non-fair-value carrying amounts.
ASC 815-15
45-1 In each
statement of financial position presented, an entity
shall report hybrid financial instruments measured at
fair value under the election and under the
practicability exception in paragraph 815-15-30-1 in a
manner that separates those reported fair values from
the carrying amounts of assets and liabilities
subsequently measured using another measurement
attribute on the face of the statement of financial
position. To accomplish that separate reporting, an
entity may do either of the following:
- Display separate line items for the fair value and non-fair-value carrying amounts
- Present the aggregate of the fair value and non-fair-value amounts and parenthetically disclose the amount of fair value included in the aggregate amount.
ASC 825-10-45-1A requires entities to separately present financial assets and
financial liabilities by measurement category (e.g., fair value, amortized cost)
and form of financial asset (i.e., securities or loans). Such information may be
presented either on the face of the statement of financial position or in the
notes to the financial statements. Furthermore, an entity that has measured
assets or liabilities at fair value under ASC 825 or ASC 815-15 (including those
measured at fair value because the entity is unable to reliably identify and
measure an embedded derivative that would otherwise need to be bifurcated) must
present those assets and liabilities in the statement of financial position in a
manner that separates them from the carrying amounts of similar assets and
liabilities that are measured by using an attribute other than fair value. ASC
825 and ASC 815-15 identify two ways to accomplish such presentation.
12.4.2.2 Accrued Interest
In the absence of regulations that require separate presentation of accrued
interest, the fair value amount presented in the statement of financial position
for an interest-bearing financial asset or financial liability accounted for at
fair value through earnings should include any interest earned or incurred but
not paid (accrued interest). It would, however, be acceptable for an entity to
parenthetically disclose the amount of the fair value measurement that
represents accrued interest in the financial statement line item for which the
interest-bearing financial asset or financial liability accounted for under the
FVO is presented.
If there are regulations that require presentation of accrued interest separately
from the related interest-bearing financial asset or financial liability for
which the FVO has been elected, an entity must do one of the following to comply
with the disclosure requirements in ASC 825:
- Present the aggregate amount of accrued interest, which represents part of the fair value of the asset or liability, in a separate line item in the statement of financial position.
- Parenthetically disclose the amount of the fair value measurement that represents accrued interest in the financial statement line item for which the interest-bearing financial asset or financial liability is presented.
See Section 12.4.1.1.1.2 for discussion of how to measure
interest income or interest expense when interest is separately presented in the
income statement for an interest-bearing financial asset or financial liability
that is recognized at fair value through earnings.
12.4.2.3 Netting Under ASC 210-20
The netting of financial assets and financial liabilities under
ASC 210-20 is a presentation issue and is not affected by the measurement base
of such assets and liabilities. See the example below for an illustration.
Example 12-13
Offsetting Repurchase Agreements and Reverse
Repurchase Agreements
Entity J has outstanding repurchase agreements (“repos”)
and reverse repurchase agreements (“reverse repos”) with
the same counterparty. The repos and reverse repos meet
the conditions for offsetting in ASC 210-20-45-11 and
45-12. Entity J can net the repos and reverse repos in
the statement of financial position even if it elects to
account for them at fair value under the FVO. Since the
repos and reverse repos are carried at fair value, the
offsetting is based on the fair value carrying amounts
and not on the contractual or par amounts.
Further, assume that J has repos and reverse repos with
the same counterparty but that only some of the repos
and reverse repos are measured at fair value under the
FVO. It would be acceptable to apply ASC 825 to measure
the repos and reverse repos by using different
measurement attributes, provided that J discloses the
reasons for electing the FVO for certain contracts and
not others. Under these circumstances, and provided that
the criteria for offsetting contracts under ASC 210-20
are met, J could net the fair values for contracts for
which the FVO was elected with the amortized cost of
contracts for which the FVO was not elected.
12.4.3 Statement of Cash Flows
ASC 825-10
Statement of Cash Flows
45-3 Entities
shall classify cash receipts and cash payments related to
items measured at fair value according to their nature and
purpose as required by Topic 230.
An entity’s election of the FVO for financial assets and liabilities does not affect the cash flow statement classification of receipts and payments associated with such financial assets or financial liabilities. In developing Statement 159, the FASB contemplated requiring that cash receipts and cash payments
related to financial assets and financial liabilities for which the FVO has been
elected be classified as operating activities; however, the Board ultimately
rejected this approach. Paragraph A42 of the Basis for Conclusions of FASB Statement
159 states, in part:
The Board concluded that the cash receipts
and cash payments related to trading securities as well as to financial assets
and financial liabilities for which the fair value option has been elected
should be classified pursuant to Statement 95 (as amended) based on the nature
and purpose for which the related financial assets and financial liabilities
were acquired or incurred.
See Deloitte’s Roadmap Cash Flows for further discussion of
the classification of cash flows in the statement of cash flows.
Footnotes
7
Industry or regulatory guidance may require that certain entities
separately present interest from other changes in fair value for
certain interest-bearing financial instruments. For example,
bank holding companies, brokers and dealers in securities, and
investment companies generally present interest separately from
other changes in fair value in their income statements.
8
ASC 948-310-35-2 establishes interest recognition guidance for
HFS mortgage loans. That guidance precludes an entity from
amortizing purchase discounts. See further discussion in
Example 12-11.
9
Banking institutions may use a different title for this line item
(e.g., amounts related to mortgage loans may be presented as a line
item titled “mortgage banking income”).
10
ASC 310-20 requires entities to defer loan origination fees and
direct loan origination costs (see ASC 310-20-25-2). However, ASC
310-20-15-3 explicitly states that ASC 310-20 does not apply to
“[n]onrefundable fees and costs associated with originating or
acquiring loans that are carried at fair value if the changes in
fair value are included in earnings of a business entity or change
in net assets of a not-for-profit entity.”
11
SEC Regulation S-X, Article 9, requires bank
holding companies that are SEC registrants to present
separate totals for interest income, interest expense, other
income, and other expenses. The U.S. banking regulators’
call report instructions similarly require that regulated
banking institutions present separate totals for interest
income, interest expense, noninterest income, and
noninterest expense.
12
If the banking institution is merely acting as an agent in
the origination of a loan, it would generally be required to
report fees and costs associated with the origination of a
loan on a net basis.
13
The guidance in this section is also relevant to loans and
receivables that have been recognized at fair value by using the FVO
in ASC 825 or ASC 815-15 because, as discussed in Section
12.5.2, ASC 825 requires disclosure of “[t]he
estimated amount of gains and losses [for the period] that are
attributable to changes in the instrument-specific credit risk” when
these financial assets are recognized at fair value by using the
FVO.
14
This method of computing the component of the total change in fair
value that is attributable to instrument-specific credit risk is
illustrated in paragraphs B5.7.18 and IE1–IE5 of IFRS 9.