Effective Interest... On What Basis?

In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The new statement requires a market-based valuation method for equity securities and certain investments in debt securities on the statement of financial position while simultaneously maintaining a historical cost-based measurement system on the income statement. This lack of symmetry creates a theoretical problem when measuring interest income following the required revaluation of a debt security. This article examines the measurement approach required by the new statement and two alternative approaches and offers a theoretically correct solution to this problem.