ASC 825-10: Explaining Fair Value Disclosure Transactions & Journal Entries

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) Topic 825-10, "Financial Instruments - Overall," provides guidance on the fair value disclosure requirements for financial instruments. These disclosure requirements aim to provide investors and other stakeholders with transparent and relevant information about the fair value of a company's financial instruments. This article will explain the concept of fair value disclosure transactions under ASC 825-10 and provide examples of journal entries that illustrate the proper accounting treatment for these transactions.

 

Fair Value Disclosure Transaction

A fair value disclosure transaction involves the disclosure of the fair value of a company's financial instruments in its financial statements. Financial instruments include assets and liabilities such as cash, investments, receivables, payables, and debt instruments. Under ASC 825-10, companies are required to disclose the fair value of these instruments, along with their carrying amounts, in the notes to the financial statements. Additionally, companies must also disclose the methods and significant assumptions used to estimate fair value and any changes in those methods or assumptions.

 

Journal Entries for Fair Value Disclosure Transaction

While fair value disclosures generally do not involve journal entries, it is essential to understand how to record financial instruments and any adjustments to their fair value, which would subsequently be disclosed in the financial statements. Let's look at a hypothetical example.

 

Example:

Company G holds an investment in Company H's bonds, which are classified as available-for-sale securities. The bonds have a carrying amount of $500,000 and a fair value of $520,000 at the end of the reporting period.

 

Journal Entry 1: Record the investment in bonds

Company G would record the initial investment in bonds as follows:

 

Debit: Investment in Bonds $500,000

Credit: Cash $500,000

 

The debit to investment in bonds represents the cost of the investment, while the credit to cash represents the cash outflow for the purchase.

 

Journal Entry 2: Record the unrealized gain on available-for-sale securities

As the fair value of the bonds has increased, Company G would need to recognize an unrealized gain on its available-for-sale securities:

 

Debit: Fair Value Adjustment - Bonds $20,000

Credit: Unrealized Gain on Available-for-Sale Securities $20,000 (reported in other comprehensive income)

 

This entry records the unrealized gain on the available-for-sale securities, which would be reported as a component of other comprehensive income in the equity section of the balance sheet.

 

Fair Value Disclosure

In the notes to the financial statements, Company G would disclose the carrying amount and fair value of its financial instruments, including the investment in bonds:

 

 

The company would also disclose the methods and significant assumptions used to estimate the fair value of its financial instruments and any changes in those methods or assumptions.


ASC 825-10 provides guidance on the fair value disclosure requirements for financial instruments, enhancing the transparency and comparability of financial information for investors and other stakeholders. By understanding and complying with these disclosure requirements, companies can ensure that their financial statements accurately represent the fair value of their financial instruments and provide useful information for decision-making. It is essential for accountants and financial professionals to understand and apply the principles of ASC 825-10 when dealing with fair value disclosure transactions in order to maintain compliance with accounting standards and provide accurate financial information to stakeholders.