The G100 believes that whether credit risk is taken into the measurement will depend on the nature of the financial instrument and the basis upon which it is measured. For example, credit risk will be one of the factors reflected in the measurement of a financial instrument recognized at fair value and as such credit risk is included in the measurement on initial recognition. Where an instrument is measured on a cost basis and recovery/settlement of cost is expected, credit risk will not be included in the measurement. However, credit risk would have been a factor influencing the terms and conditions (contractual interest rate) relating to the instruments.
 

The term ‘current measurements’ implies the use of fair values. As indicated above, credit risk is one of the factors influencing the measurement in a fair value model.
 

A difficulty in these cases is how to determine the extent to which changes in credit risk have affected market interest rates. While estimates based on the spread between risk free rates and the transaction rate, credit default swap rates and analysis by credit agencies there are likely to be concerns about the degree of subjectivity and arbitrariness involved and its effect on the reliability of the information. There may also be difficulties in separating the credit risk relating to a particular instrument from that relating to the entity as a whole.
 

The G100 would support the so-termed frozen spread approach on the grounds that it is consistent with the definition of fair value and is consistent with the practice of entities seeking to achieve certainty of funding costs by locking in the initial position to have protection from interest rate charges.

As indicated above, where an instrument is measured at fair value the credit risk relating to the instrument will be impacted in its valuation and seeking to remove its effect would be futile.