Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

As part of FASB’s ongoing initiative to improve the effectiveness of the notes to the financial statements, modifications were made to the fair value measurement disclosures.  On August 28, 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820.

This article summarizes the key provisions of ASU 2018-13, including the new, eliminated, and modified disclosure requirements of ASC 820. As noted below, the applicability of the changes the ASU makes to ASC 820 can depend on whether the entity is a nonpublic entity. Unless specified below, the changes apply to all entities. 

The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU.

Summary

Removals

The following disclosure requirements were removed from Topic 820:

1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
2. The policy for timing of transfers between levels
3. The valuation processes for Level 3 fair value measurements
4. For nonpublic entities, the changes in 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.

Please note that Items 1 and 2 above should be applied retrospectively (for all years presented) while items 3 and 4 should be applied prospectively (year adopted and all years that follow).

Modifications

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 entity or announced the timing publicly.
3. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Please note that Items 1 and 2 above should be applied retrospectively (for all years presented) while item 3 should be applied prospectively (year adopted and all years that follow).

Additions (Not required for nonpublic entities)

The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:

1. 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
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) 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. 

In conclusion

This ASU advances the goals set out in the FASB’s disclosure framework project.  These significant overall changes to the fair value hierarchy disclosures improve reporting by providing management with more discretion on how best to convey information in a manner that will be more meaningful to the users of the financial statements.

When evaluating the impact of this ASU, management should consider what will enable the reader to more accurately and effectively understand the assets and liabilities measured at fair value and the impact that external factors have on those measurements.

***