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Updated Fair Value Measurement Disclosure Requirements Impact Year-End Audits for Public Companies; Private Entities in 2017


12/23/2016
 
Synopsis
 
Last May, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value (NAV) per Share (or Its Equivalent). The new guidance was issued to ensure that all investments categorized in the fair value hierarchy are classified using a consistent approach. It was also intended to remove discrepancies in practice related to classification of investments valued at NAV per share with different future redemption dates. This update has implications for 2016 year-end audits for public entities and will also impact private entities in 2017. 
 
Issue 
 
Prior to the adoption of ASU 2015-07, reporting entities using the NAV per share practical expedient to value investments were required to categorize these investments within the fair value hierarchy table based on their redemption characteristics. ASU 2015-07 removes this requirement. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption of this amendment is acceptable.
 
Entities are required to categorize items measured at fair value in three different levels in the fair value hierarchy. These are based on the observability of the inputs used in valuing the investments. For reporting entities with investments that periodically report NAV per share, there is a practical expedient that allows the entity to measure the fair value of the investment using the investment’s NAV per share. Current guidance requires these investments be categorized as either Level 2 or Level 3 in the fair value hierarchy disclosures based on when the investment can be redeemed. ASU 2015-07 removes the requirement to consider the redemption characteristic of the investment, requiring they be excluded from fair value hierarchy and instead be included in a separate line or table to facilitate reconciliation back to the balance sheet.
 
The new disclosure requirement is limited to only those investments the reporting entity has measured using the NAV practical expedient. However, information necessary to help the readers of the financial statement understand the nature and risks of the investments measured at NAV must still be disclosed.
 
What Does CohnReznick Think?
 
This pronouncement will simplify the presentation within the fair value hierarchy for those entities which utilize NAV per share as a practical expedient to value its investments.  This will also allow for consistency across entities that value their investments in this manner.
 
Contact
 
For more information, please contact Jay Levy, Partner and Financial Services Industry Practice Leader, at 646-254-7412 or jay.levy@cohnreznick.com; Jeff Moskowitz, Partner, at 646-448-5461 or jeffrey.moskowitz@cohnreznick.com; or Bill Pidgeon, Partner, at 973-403-7998 or william.pidgeon@cohnreznick.com. To learn more about CohnReznick’s Financial Services Industry Practice, visit our webpage. 
 
Example
 
Note: The following an example on how the information can be presented within the footnotes. 
 
Table 1 represents presentation prior to the adoption of the new ASU 2015-07 update. We assume that the Absolute return – market neutral and Multi-strategy investments are valued using the NAV practical expedient.
 
 
Table 2 presents the investments (Absolute return – market neutral and Multi-strategy) investments valued at NAV practical expedient as a single line item.
 

 

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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