The International Accounting Standards Board (IASB) issued an exposure draft change accounting for the value of certain liabilities resulting from changes in a firm’s credit standing under the International Financial Reporting Standards (IFRS).
Under rules in place since 2007, firms are able to elect a ‘fair value option’ for their own debt instruments. When the option is elected, debt is carried at fair value on the statement of financial position, with changes in fair value being recorded to the income statement.
This has caused counterintuitive results in company financial statements, since the deterioration of their own credit standing, and therefore the value of their debt, causes gains to be recorded in income and equity, Moody's Investors Service analysts said.
Under the proposed rules, changes that result from changes in the firm’s own credit standing will not be recorded in income but rather in a separate component of other comprehensive income, which will eliminate a source of non-economic noise in net income.
"U.S. [generally accepted accounting principles (GAAP)] also features a fair value option," Moody's analysts said. "Although the proposed change is to IFRS only, the IASB and U.S. Financial Accounting Standards Board are currently involved in a joint comprehensive project to amend accounting for financial instruments. As the boards have an overriding goal of global convergence of accounting standards, it is very possible that changes impacting the fair value option under IFRS would make their way into the financial statements of U.S. GAAP preparers as well."