Question

Which of the following statements is not true of fair value option?

a. Receivables are recorded at fair value in the financial statements.
b. Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.
c. The Financial Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost.
d. An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue.

Answer 1

Option (b) is not true of the fair value option. Unrealized holding gains and losses from fair value adjustments are reported in the income statement, not as a part of comprehensive income.

Step-by-step explanation:

The fair value option allows companies to record financial assets and liabilities at their fair value. The correct statements associated with the fair value option are that receivables are recorded at fair value in the financial statements (a), the Financial Accounting Standards Board (FASB) believes fair value measurements provide more relevant and understandable information than historical cost (c), and an unrealized holding gain or loss is indeed the net change in the fair value of a receivable from one period to another, which would include interest revenue contrary to what the option (d) suggests.

However, the statement (b) about unrealized holding gains and losses being reported as a component of comprehensive income is not accurate. Under the fair value option, unrealized holding gains and losses are actually reported in the income statement, affecting net income.