In short
The fair value option lets a company elect to measure eligible financial assets and liabilities at fair value, with changes in fair value reported in earnings, instead of using the measurement the guidance would otherwise require.
Key takeaways
- The election is made instrument by instrument, usually when the item is first recognized, and is irrevocable.
- For liabilities, the part of a fair value change caused by the company's own credit risk goes to other comprehensive income.
- It can reduce volatility when related assets and liabilities would otherwise be measured differently.
Where it's tested
FAR: Investments (Debt & Equity Securities) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
An investor owns 30% of an investee and applies the equity method. The investee reports net income of $200,000 and pays dividends of $50,000. What is the net increase in the investment account?