The standard way to account for bonds payable is to report the face value of the bond on the
balance sheet minus any unamortized discount or plus any unamortized premium (this is a bond's "carrying value" or "book value"). But under U.S. GAAP companies can instead elect to report bonds at their fair market value.

If a company that issued bonds chooses to report the bonds at fair value, the company must record any unrealized gains or losses that occur due to changes in the fair value of the bonds. The accounting for this is a bit complicated, as you need to determine what portion of the decrease (or increase) in fair value has to do with changes in general interest rates and what portion has to do with changes in the credit risk of the debt.

If general interest rates rise and the bonds decline in value, this results in an unrealized gain9
that affects the borrower’s net income (or net loss). But if the decline in value occurs because of
a decrease in the credit risk of the debt (e.g., a decrease in the borrower’s creditworthiness) the
unrealized gain flows through other comprehensive income.

Here's a summary of how changes in fair value affect the bond issuer:

increase in general interest rates -- bond value decreases -- record unrealized gain (affects net income or net loss)

decrease in general interest rates -- bond value increases -- unrealized loss (affects net income or net loss)

increase in credit risk of the debt -- bond value decreases -- record unrealized gain (affects other comprehensive income)

decrease in credit risk of the debt -- bond value increases -- record unrealized loss (affects other comprehensive income)

0:00 Introduction
0:15 Fair value option (U.S. GAAP)
0:55 Example (change in value due to change in interest rates)
3:28 Valuation allowance for bonds payable
4:15 Change in value due to change in credit risk of the debt
5:25 Summary
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