Updates To Disclosure Requirements For Fair Value Measurements: What You Need To Know Relevant To Registered Investment Companies

Posted by admin on Nov 6, 2018 12:18:53 PM

In August 2018, the Financial Accounting Standards Board (FASB) finalized changes to fair value measurement disclosure requirements that had been under debate for several years as part of the disclosure framework project.The FASB recognized that disclosure requirements had become unduly burdensome and costly and has made efforts to refine requirements for greater effectiveness and efficiency.FASB Disclosure Requirements

The updates for fair value measurement were included in Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement and are effective for fiscal years beginning after December 15, 2019, as well as interim periods within those fiscal years. Early adoption is permitted. In addition, early adoption of removal and modifications without additions is permitted.

The following presents each of the changes directly from the ASU along with practical considerations from BBD for registered investment companies.

What is Changing?

ASU 2018-13 - As a general consideration, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

BBD – This general consideration conforms the disclosure requirements with the general GAAP concept of materiality. In practice, this materiality consideration was likely already being taken into account by most registered investment companies.

The following disclosure requirements have been removed:

ASU 2018-13 - The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

BBD – Level 1 and 2 investments are both based on observable inputs. To most readers, transfers between these two levels is of very little consequence.

ASU 2018-13 - The policy for timing of transfers between levels

BBD – Previously, the specifics of the policy to record transfers (generally beginning of the period vs. end of the period value) were required to be disclosed. Again, to most readers, the details of the policy on transfers between levels is of very little consequence.

ASU 2018-13 - The valuation processes for Level 3 fair value measurements

BBD –  Topic 820 required the entity to describe the valuation processes used in fairly significant detail (including information such as how an entity determines its valuation policies and procedures and how an entity analyzes changes in fair value measurements from period to period). Too much drill down was originally required in the standards. There was too much information for the reader to absorb, which ends up muddying the waters.

Modifications have been made to the following disclosure requirements:

ASU 2018-13 - For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

BBD – The requirement for this information already existed in Topic 820. What has changed is that the original standard required an estimate by the reporting entity, whereas this refinement is effectively suggesting that the company not estimate but only disclose this information if it has been provided by the underlying investment either directly to the company or through public disclosure. In effect, only disclose reliable information relating to the timing of liquidation and redemptions.

ASU 2018-13 - The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date

BBD – Previously, the codification required disclosure of the “sensitivity” of unobservable inputs on Level 3 investments but is now focused on the “uncertainty” from the use of unobservable inputs as of the measurement date. Uncertainty seems more relevant to this standard as a general term. It captures sensitivity as well as other concepts relevant to the unobservable investments that are the subject of this disclosure.

The following additions were made to the disclosure requirements. 

ASU 2018-13 - The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

BBD – This additional disclosure can highlight significant impacts of Level 3 investments on current earnings, which could be of interest to the reader. For example, to the extent that there are significant unrealized gains on a particular Level 3 investment during a period, this disclosure would highlight that and alert the reader that the specific change in unrealized gains is based on unobservable inputs.

ASU 2018-13 - The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

BBD – As suggested in the ASU, most public companies already provide range and average weighted values relative to Level 3 investment valuation. The allowance of “other quantitative information” acknowledges that weighted average is not always useful or relative to an investment’s valuation and permits an issuer to provide other more useful information.

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