-67- historical transaction-based valuation or (2) the item had a ready market in the form of an organized exchange so that the cost of obtaining objective and verifiable pricing information was minimal, as was the uncertainty about whether the reporting entity could find a buyer. 4. Change in Accounting Treatment Until recently, accounting for non-exchange-traded financial assets had typically been on the basis of amortized cost. For a traditional fixed-rate loan, for example, the amortized cost value of the loan would be (1) the original amount lent, net of any repayments, plus (2) accrued interest at the contractually specified rate. With the exception of actual default, amortized cost valuation was not sensitive to changing market conditions such as changes in interest rates or changes in the asset’s credit risk. Financial innovation during the 1980s and 1990s created a need for better information than reported by the traditional transaction-based system. With encouragement from the Securities and Exchange Commission (SEC), the FASB began in the early 1990s to consider greater use of market values in accounting for financial instruments.28 One concern with the transaction-based 28 Before 1990, financial accounting standards mentioned swaps only in the context of hedging. Statement of Financial Accounting Standards (SFAS) No. 52 mentions currency swaps used as hedges to reduce risk from currency fluctuations and discusses (continued...)Page: Previous 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 Next
Last modified: May 25, 2011