Lesson: Instrument-Specific Credit Risk

In this lesson, Nick Palazzolo, CPA, breaks down the concept of instrument-specific credit risk, particularly in the context of financial liabilities when the fair value option is elected. He clarifies what happens when the fair value of a liability changes due to the creditworthiness of the bond issuer, causing the value to drop. Nick explains that such changes are recorded in other comprehensive income (OCI), but this provision doesn't tie to financial liabilities that must be measured at fair value with changes recognized in the current earnings, such as derivatives. He ensures to point out the relative importance of this topic in the grander scheme of financial reporting.