Page 8 - FINAL CFA I SLIDES JUNE 2019 DAY 9
P. 8
Session Unit 8:
31. Non-Current (Long-Term) Liabilities
Fair Value Reporting Option, p. 277:
Examples show if market rate changes, we expect fair (market or present) or economic value of
the bond (liability in our books) to change…
Under IFRS and US GAAP,
• Firms have irrevocable option to report debt
at Fair (market) value;
tanties
•
Gains (decreases in liability and losses
(increases in bond liability) reported in
income statement!
Impact of rate changes on D/A and D/E?
Increase in bond price = increase in liability = loss taken to income statement per IFRS and GAAP
Equity decreases and hence D/A and D/E increases. Reverse is true!
CFA implication?
Market value more appropriate than BV for analytical purposes –why?
Economic substance more critical than book value substance for a CFA: when rates rise (as market
values drop), a firm could repurchase the bond at its now-lower market value. So why bother about BVs?
