FASB Issues Significant Changes to the Disclosure Requirements for Fair Value Measurement

The following four 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 of the fair value hierarchy;

3. The valuation processes for Level 3 fair value measurements; and

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.

The FASB decided not to require these disclosures because they believe that their benefits would not justify their costs. ASU 2018-13 removes certain disclosure requirements as noted above. We believe the users of the financial statements will not be negatively impacted by this streamlined approach.

The following three disclosure requirements were modified in Topic 820:

1. In lieu of a roll forward 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.

The FASB decided that nonpublic entities should be required to disclose purchases, issues and transfers into or out of Level 3 of the fair value hierarchy, as well as the reasons for those transfers, in lieu of the Level 3 roll forward because it is important for nonpublic entity financial statement users to identify when the entity has either increased its Level 3 assets and liabilities or transferred assets or liabilities into or out of Level 3, which could signal an increase or decrease in uncertainty of the fair value measurements.

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.

Since timing is useful information to users of financial statements, the FASB concluded that an entity should continue to disclose this timing when it has been communicated to the entity. If an entity knows the timing, it must be disclosed. The board noted that the entity would ask an investee about this information in the normal course of business for its own cash flow purposes. An example disclosure of this required information may be found within ASU 2018-13 (see ASC 820-10-55-107).

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

In its “Basis for Conclusions,” the FASB indicates that there was some confusion in practice and that an entity should only disclose uncertainty at the reporting date, and not sensitivity to expected future changes as this information would be deemed to be forward-looking and, accordingly, not required.

The following two disclosure requirements were added to Topic 820. 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.

The required disclosures are illustrated in the implementation example found in ASC 820-10-55-101 and provide additional insight and consistency of information to financial statement readers.

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.

The disclosures required are illustrated ASC 820-10-55-103 and provide additional insight into formation to the readers.

In addition, the amendments eliminate the words “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 both entities and their auditors when evaluating disclosure requirements.

In its’ Basis for Conclusions the FASB clearly “acknowledged that, at present, materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements” .

In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019.

An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date.

Industry practice does not require comparative financial statements for nonpublic investment partnerships. Since early adoption of the disclosure requirements in ASU 2018-13 is permitted, nonregistered investment partnerships should be able to eliminate or modify certain information in financial statements for the year ending December 31, 2018.

We would anticipate that most nonpublic funds will early adopt the provisions noted above pursuant to ASU 2018-13 for the year ending December 31, 2018. For additional information, please contact a member of your engagement team or one of the partners in the financial services and financial sponsors group.

For a deeper dive into FASB’s Fair Value Measurement (Topic 820) No. 2018-13 August 2018 Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, click here.