Proposed Implementation GuidanceIG1. The implementation guidance below further explains and illustrates the application of the proposed guidance. This implementation guidance does not address all possible variations. The actual facts and circumstances of particular financial instruments or transactions must be considered carefully in relation to the proposed guidance.ScopeIG2. The proposed guidance applies to financial assets and financialliabilities that are not specifically excluded from the scope by paragraph 4. For example, the scope of the proposed guidance would include the following types of financial assets and liabilities:a. Accounts receivable and payableb. Other receivables and payablesc. Originated and purchased loansd. Investments in debt securitiese. Investments in equity securities (except investments in equitysecurities that qualify for the use of the equity method of accountingas discussed in paragraph 129)f. Core and noncore depositsg. Issued debth. Hybrid financial instrumentsi. Financial derivative instrumentsj. Financial guarantees not covered by paragraph 4(d) and (o)k. Loan commitments and standby letters of credit (except loancommitments excluded from the scope by paragraph 4(j) and (k)).IG3. With respect to financial derivative instruments, the proposed guidance includes in its scope both those financial derivative assets and financial derivative liabilities that meet the definition of a derivative in Topic 815 and those financial derivative instruments that do not meet that definition because they do not have one or more characteristics of a derivative.IG4. Nonfinancial hybrid instruments are not subject to the scope of the proposed guidance. In addition, the proposed guidance is not applicable to hybrid instruments with insurance host contracts or lease host contracts because those types of financial instruments are excluded from the scope of the proposed guidance. In addition, the proposed guidance would require holders of hybrid instruments containing equity hosts to be measured at fair value with all changes in fair value recognized in net income.67IG5. In addition, hybrid financial instruments containing a liability componentand an equity component will continue to be evaluated under guidance in Topic 470, 480, or another Topic to determine whether separation of an equity component is required. If so, the scope exception in paragraph 4(b) applies to that equity component and the proposed guidance would apply to the liabilitycomponent.IG6. The proposed guidance does not present the overall revised guidanceon derivatives and hedging. Only the changes to the guidance on derivatives and hedging in Topic 815 are described. The changes affect all hedging relationships, whether the hedging instrument is a financial derivative instrument or a nonfinancial derivative instrument and whether the hedged item is (or hedged transaction involves) a financial instrument or a nonfinancial instrument.Initial MeasurementIG7. Paragraph 14 states that when an entity initially recognizes a financialasset or financial liability that meets the criteria for qualifying changes in fair value to be recognized in other comprehensive income, the entity must determine whether there is reliable evidence to indicate that the transaction price may be significantly different from the fair value of the financial instrument. Paragraph 820-10-30-3 discusses conditions that may indicate that a transaction price might not represent the fair value of an asset or liability. The proposed guidance about whether a significant difference exists focuses on the condition discussed in paragraph 820-10-30-3(c) that the financial instrument is only one element of a transaction that may involve other elements. Accordingly, if no reliable evidence indicates that there may be a significant difference between the transaction price and the fair value, the entity would use the transaction price to initially measure the financial instrument. However, if reliable evidence indicates that there may be a significant difference between the transaction price and the fair value, the entity would be required to determine if the difference is attributable to the existence of other elements in the transaction.IG8. In assessing whether reliable evidence exists that indicates that the transaction price differs significantly from the fair value of a financial instrument, such that other element(s) exist in the transaction, the factors that an entity should consider include any of the following:a. The terms of a financial instrument, such as upfront and ongoingfees, duration, collateral, and restrictive covenantsb. Prevailing rates offered to other borrowers or offered by otherlenders for similar financial instruments that are not influenced byunstated or stated rights and privilegesc. Prevailing rates of other financial instruments with the sameborrower or lender that are not influenced by unstated or statedrights and privileges68d. The price that a third-party buyer would be willing to pay to acquirea financial asset or to assume a financial liabilitye. If noncash items are exchanged, the current cash price for thesame or similar items exchanged in the transaction.IG9. An entity should consider all relevant facts and circumstances to decide whether the transaction price is significantly different from the fair value. An entity should exercise judgment to decide what is considered a significant difference.For example, if the market interest rate on a 30-year conforming loan is 5.50 percent and if an entity originates a similar loan at 4 percent with no fees or other consideration to compensate the lender for the rate differential, the transaction price of the loan may be significantly different from its fair value. Another example would be a loan commitment with fees that are significantly less than the price an entity would pay to a third party for assuming the liability, which would include credit risk and interest risk associated with the commitment.IG10. Consistent with the guidance in paragraph 820-10-30-3(c), if the transaction involves a financial instrument and other elements, each element must be separately recognized. As discussed in Section 835-30-25, the other element or elements in the transaction may represent unstated rights and privileges that should be given proper accounting recognition. One example of a transaction that may include stated or unstated rights or privileges is a loan offered at an off-market interest rate as sales incentives by a manufacturer, a financing subsidiary of a manufacturer, or a financial entity. Another example is a credit facility offered at an off-market rate in exchange for goods or services at off-market prices.IG11. In these circumstances, the financial instrument should be initially recognized at its fair value in accordance with the fair value measurement guidance in Topic 820 or Subtopic 835-30 if a present value technique is used. The other elements in the transaction that gave rise to the significant difference between the transaction price and the fair value (not attributable to transaction fees or costs or because the market in which the transaction occurs is different from the market in which the entity would sell the asset or transfer the liability) should be recognized in net income unless any of those elements qualifies as an asset or a liability under existing U.S. GAAP.IG12. The following Examples illustrate the application of the initial measurement principles.。