Changes to Fair Value Disclosure requirements - What You Need to Know

The FASB’s new guidance in ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, impacts the fair value disclosures of both public and private companies.

ASU 2018-13 amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures.
 
The following disclosure requirements were removed from Topic 820:

1.       Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.

2.       Policy for timing of transfers between levels of the fair value hierarchy.

3.       Valuation process for Level 3 fair value measurements.

4.       For nonpublic entities, changes in the unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

The following disclosure requirements were modified in Topic 820:

1.       In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.

2.       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 reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity shall disclose that fact.

3.       The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a narrative description of the uncertainty of the fair value measurement from the use of significant unobservable inputs, if those inputs reasonably could have been different at the reporting date, is required.

The following disclosure requirements were added to Topic 820. Nonpublic entities are not required to make these additional disclosures:

1.       For recurring fair value measurements categorized within Level 3 of the fair value hierarchy held at the end of the reporting period, the changes in unrealized gains and losses for the period included in other comprehensive income.

2.       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) instead 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.

What Nonpublic entities need to know?

In addition to benefiting from the same reduced and modified disclosure requirements applicable to public companies, nonpublic entities including Not-for-Profit entities (as defined in ASC 820-10-20) benefit from the following two amendments. There were no additions to ASC 820’s disclosure requirements for nonpublic companies.

Removals:

v  Changes in unrealized gains and losses included in income for recurring Level 3 investments:

Existing disclosure requirement: Changes in unrealized gains and losses for the period included in income for recurring Level 3 fair value measurements held at the end of the reporting period

For public companies, the FASB added the requirement to disclose the changes in unrealized gains and losses in Other Comprehensive Income. For nonpublic companies, the FASB chose not to add that disclosure and to remove the existing disclosure of the changes in unrealized gains and losses included in income.

Modifications:

v  Level 3 rollforward:

Existing disclosure requirement: For recurring Level 3 fair value measurements, a reconciliation of the beginning and ending balances.

Amended disclosure requirement: Instead of a full rrollforward of Level 3 instruments (which continues to be required for public companies), nonpublic companies are required to disclose:

ü  Purchases and issuances (each disclosed separately)

ü  Transfers into or out of Level 3 and the reasons for those transfers

Like public companies, a nonpublic company must consistently follow its policy for determining when transfers are deemed to have occurred and disclose transfers into Level 3 separate from transfers out of Level 3.

Effective Date and Transition Requirements

The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
 
Early adoption is permitted upon issuance of the ASU. An entity is permitted to early adopt all disclosure requirements in the ASU or early adopt only the removed and modified disclosure requirements, while delaying adoption of the additional disclosures until their effective date.
 
Upon adoption, the amendments should be applied retrospectively to all periods presented, except the amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.