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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...)
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