Disclosure framework — FASB makes tentative decisions about fair value disclosure

Published on: 05 Mar 2015

At its meeting yesterday, the FASB discussed disclosures related to the fair value measurement guidance in ASC 820.1

Modified or Eliminated Disclosure Requirements

Policy on Timing of Transfers Between Levels

The Board tentatively decided to remove the requirement in ASC 820-10-50-2C for an entity to disclose its policy on the timing of transfers between levels of the fair value hierarchy. Instead, the subsequent measurement section of ASC 820 will retain the requirement that entities have a consistent policy on timing of such transfers. Thus, the only change is that an entity no longer needs to disclose its timing method in the financial statements.

Valuation Processes for Level 3 Fair Value Measurements

The Board tentatively decided to remove the requirement for an entity to disclose its valuation processes for Level 3 fair value measurements under ASC 820-10-50-2(f) (and related implementation guidance under ASC 820-10-55-105)).

Editor’s Note: Removing this disclosure requirement will result in divergence between U.S. GAAP and IFRSs. The requirement was added to the FASB’s and IASB’s jointly issued standard2 on the basis of a recommendation by the IASB’s expert panel. The panel explained that the disclosure would help users understand the quality of the entity’s fair value estimates and give investors more confidence in management’s estimate. The FASB tentatively decided to remove the requirement because it would conflict with the Board’s proposed concepts statement chapter.3 The Board indicated that disclosure of internal control procedures is outside the purpose of the notes to the financial statements and is not required under other topics in U.S. GAAP.

Removing this requirement does not change management’s responsibility for internal controls over the valuation process and related auditor testing. Further, it should not affect investor confidence in the quality of the fair value estimate given the regulatory environment in the United States (e.g., SEC and PCAOB) as well as the intense scrutiny in this area. The Board also noted that investors are typically familiar with the overall valuation process.

Estimates of Timing of Future Events

The Board tentatively decided that the following disclosures currently required under ASC 820-10-50-6A(b) and ASC 820-10-50-6A(e) would apply only when they have been communicated to the reporting entity by the investee or are otherwise made publicly available (even if not specifically communicated to the investor):

  • “For each class of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity’s estimate of the period of time over which the underlying assets are expected to be liquidated by the investees.”
  • “[W]hen the restriction from redemption might lapse.”

Editor’s Note: During the meeting, it was clarified that the objective of this change is to prevent an investor from having to make its own estimate when it does not have knowledge of the timing from the investee or other public source.

In addition, the FASB’s proposed ASU Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) would remove the requirement for entities to categorize within the levels of the fair value hierarchy all investments they have measured under the net asset value practical expedient. The Emerging Issues Task Force will discuss this issue at its March 19, 2015, meeting. For more information, see Deloitte’s October 2014 issue of Accounting Roundup.

Level 3 Rollforward

The Board tentatively decided to retain the Level 3 rollforward requirement for public business entities.

For entities that are not public business entities, the Board tentatively decided to remove the Level 3 rollforward requirement and requirement to disclose the change in unrealized appreciation or deprecation related to investments held as of the balance sheet date under ASC 820-10-50-2(d); however, it would require explicit disclosures about transfers into, purchases of, and the ending balance of Level 3 investments. This tentative decision was made in light of the Board’s private-company decision-making framework (PCDMF). Entities are already required to disclose the ending balance in the fair value hierarchy table, and they could disclose transfers into and purchases of Level 3 investments in a sentence rather than in a full rollforward as required today.

Editor’s Note: The Board discussed the results of user outreach on the Level 3 rollforward and noted that some financial statement users believe that the rollforward is useful because it helps them understand management’s decisions, especially for different economic cycles. The full rollforward was generally deemed less useful for users of private-company financial statements. Transfers into and out of Level 3 were generally considered to be the most useful aspect of the rollforward.

The Board also discussed its intent regarding the fair value hierarchy classifications. Board members indicated that an investment’s higher level in the hierarchy (e.g., Level 3) should not result in an inference that the investment is worse than others, or riskier in terms of potential loss of capital, given that a Level 1 investment could be more volatile than a Level 3 investment. The levels do not indicate risk but rather the uncertainty of measurement, as described in ASC 820-10-50-2B.

Transfers Between Level 1 and Level 2

The Board tentatively decided to remove the requirement to separately disclose the amounts transferred between Level 1 and Level 2 and the corresponding reason for doing so. The FASB will ask investors what they might do differently in the absence of this information.

Sensitivity Information

The FASB will perform more research related to disclosures of sensitivity information for fair value measurements and will revisit this topic at a future meeting.

New Disclosure Requirements — Gains and Losses

The Board tentatively decided to add a requirement for public business entities to disclose fair value changes for assets and liabilities held as of the balance sheet date disaggregated by fair value hierarchy level for (1) net income before taxes and (2) comprehensive income. This is currently only required for the Level 3 amounts within net income under ASC 820-10-50-2(c) and 50-2(d).

This requirement will not apply to entities that are not public business entities in accordance with the PCDMF.

Industry-Specific Topics

On the basis of the FASB staff’s analysis, the Board tentatively decided not to move any of the disclosure requirements under ASC 820 to the financial services sections of ASC 940 through ASC 950. The staff noted that:

  • Many of the disclosure requirements in ASC 820, especially those about nonrecurring measurements (e.g., impairment), apply more directly to entities that are not in the financial services industry.
  • Entities that are not in the financial services industry have investments in financial instruments that are not part of finance companies and would not be subject to the guidance in ASC 940 through ASC 950.
  • Certain disclosures are already being used by, and are relevant to, entities that are not in the financial services industry (e.g., utilities and manufacturers).

The FASB also noted that some companies that are not in the financial services industry would be able to apply the Board’s earlier decision that entities need only provide disclosures if the disclosures are material (see Deloitte’s February 20, 2015, journal entry), thus reducing the burden of these disclosures on those companies.

Next Steps

The staff will perform additional outreach and plans to discuss transition requirements at the next meeting.


1 For titles of FASB Accounting Standards Codification (ASC or the “Codification”) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

2 Issued by the FASB as Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

3 FASB Exposure Draft, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements

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