 Hello and welcome to this session. This is Professor Farhad and this session will get a look at the fair value option, a topic that's covered in intermediate accounting as well as the CPA FAR exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lecture and constantly growing. For example, this topic goes under my intermediate accounting, but I do have many other courses beside intermediate accounting. If you like my lectures, please click on the like button, share the lectures, put them in playlist. If they're benefiting you, it means they might benefit other people, so share the wealth. Also, please connect with me on Instagram. On my website, you'll have additional resources such as PowerPoint slides, true, false, multiple choice, practice questions. If you're studying for your CPA exam, 2,000 plus CPA questions and dozens, if not hundreds of exercises which are considered quasi CPA simulation, check out my website. So let's talk about the fair value option. Let's emphasize the word option. Now, in this session, I will not talk about the fair value hierarchy because that's a different topic. If you want to learn about the fair value hierarchy, just look in the description below of this video and I have the link where I discuss the fair value hierarchy level 1, level 2, level 3. All what I'm going to be discussing here is the fair value option. It's what? It's giving the options to the companies to report certain things, financial instruments at fair value. What does it mean when we talk about fair value? It means we might have unrealized gain and unrealized losses. Because every time you report something at fair value, so that's what I want you to get in the habit of thinking. Every time you hear the word fair value, what you should be thinking about is unrealized gain slash loss. If you have an asset or a liability, this asset or liability could go up in value. You have an unrealized gain because you haven't sold yet or it could go down in value. You might have an unrealized loss. So this is what comes with fair value accounting unrealized gain and unrealized losses. So when the company have this option, here's what they have to do. They have to apply this option on an instrument by instrument basis. What does that mean? It means when they make an investment, when they buy a bond, when they buy a stock, then they will have to determine whether they want to apply, whether they want to use fair value on an instrument by instrument basis. What does that mean? It means they make two different investments. They buy stocks in company A, stocks in company B. They might choose to use the fair value for company A and not for company B, instrument by instrument basis. It's generally available at the time of the purchase or when we incur the liability, either or. It's at the time, at the initiation of the transaction. So this is when you have to determine whether you want to use the fair value option or not use it. Company must measure the instrument at fair value until the company no longer has ownership. What does that mean? It means once you use the fair value, once you choose that method, you have to use that method until you sell, until you dispose of the asset or the liability for that matter. So it's something that's going to be with you. It means constantly you're going to have to write it up, up, write it down, up, up, down. It doesn't matter. Keep on following that, the fair value of that investment. The best way to illustrate this is to work an example or two. Just kind of show you what is the fair value option, okay? How the company purchases bond in Fiedler's company during 2020 and it classifies as available for sale. So notice it's available for sale. At December 31st, the cost of this security is 100,000. That's how much they paid. It's fair value at December 31st, 2020 is 125. What does that mean? It means they have a gain of 25,000 on this specific instrument and that specific bond. If Hardy chooses a fair value option to account for Fiedler company, it makes the following entry. So what entry would they make? Well, they have to write the investment up. They have that investment and they will write it up 25,000. Now this is different than the fair value available for sale treatment because if you remember before using the fair value treatment, I'm sorry, available for sale treatment, this would have been fair value adjustment. So this account would have been fair value adjustment. We are not using the fair value adjustment. We are going to the instrument itself to the debt investments and increasing the debt investment by 25,000. Now we would still report the gain in income, unrealized holding gain or loss. So if this was part of a portfolio that's available for sale, the debit would have been fair value adjustment, which is something if you're not aware of, go to my accounting for investment in equity securities, but this is the difference. So here we are touching the instrument itself, which is the debt investment, rather than adjusting the whole portfolio because we selected that instrument specifically and that instrument happens to be a bond in Fiedler company. Let's take a look at another example. The Durham company holds 28% stake interest in SAPIN. 28% is what? As we learn, this is the equity method. Now we can use the equity method. Durham purchased the investment for 930,000. At December 31st, the fair value of the investment is 900,000. Now generally speaking, if you're using the equity method, we ignore the fair value because the equity method says that we need to adjust our investment proportionally to income and losses and dividend. Well, if we elect to report the investment using the fair value, now we're changing our method. We're saying we bought this investment, although we have a significant influence, but we want to report it at fair value. How do we report it at fair value? We have a loss. We're going to debit unrealized holding gain or loss, which is a loss that goes to income, 30,000, and we're going to credit the investment itself 30,000. So we go ahead and we reduce the investment itself. We don't reduce fair value adjustment. We don't reduce some other portfolio valuation account. We reduce the investment itself. So this is how we utilize the fair value adjustment in accounting. Now, on the next topic, we're going to look at impairment of value, and that's going to be an interesting topic as well. As always, I would like to invite you again to visit my website if you are serious about studying for your CPA exam. Make this investment. This investment is worth 20 to 30 years. You're going to study for your CPA once. You're studying for your accounting once. Propel your career. Good luck and study hard. Accounting is worth it.