Accounting Standard Update for Disclosures of Investments Measured at Net Asset Value per Share

Daniel Levesque, Audit Manager
August 2015

Accounting Standards Update (ASU) No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), was released in May of this year. This update requires specific investments that have fair value reported at net asset value per share to no longer be classified in the fair value hierarchy footnote. These specific investments currently have some unique rules when it comes to determining whether they should be classified as level 2 or level 3 investments (level 1 is not an option due to the nature of these investments). This update is an attempt to remove inconsistencies that have been applied in the past by simply excluding them from the hierarchy.

The specific investments affected by this update are those which do not have a readily determinable fair value; therefore, fair value is measured at net asset value per share, allowed through the “practical expedient” in FASB (Financial Accounting Standards Board) Accounting Standards Codification Topic 820, Fair Value Measurement. Currently, these investments are categorized as level 2 or level 3 in the fair value hierarchy footnote based on redemption dates and other factors. The current basis for determining the category for an individual investment is as follows:

  • If the investment can be redeemed at the net asset value per share at the measurement date, then it should be categorized as level 2.
  • If the investment can never be redeemed at the net asset value per share, then it should be categorized as level 3.
  • If the investment may be redeemed at the net asset value per share at some point in the future, it may be categorized as level 2 or level 3 based on the expected length of time.

The third option is what brought FASB together for another update, as they have determined it has caused “diversity in practice.” Along with some other minor changes, the new update simply removes these investments from the hierarchy to be listed separately so that one can still reconcile the footnote to the statement of financial position.

Although these investments no longer will be categorized in the fair value hierarchy footnote, certain information still must be disclosed to help users of the financial statements understand the nature and risks of these investments. In summary, the required disclosures include a breakout of these investments into classes that describe investment strategies, redemption dates/restrictions, terms and conditions of redemptions, distributions, and unfunded commitments, etc.

This update will affect all entities that utilize the net asset value per share practical expedient in measuring the fair value of investments. For public companies, the update is effective for fiscal years beginning after December 15, 2015. For all other entities, the update is effective for fiscal years beginning after December 16, 2016. The update should be applied retrospectively for all periods presented. Early application is permitted.

For more information pertaining to ASU No. 2015-07, please visit the FASB website. If you have any questions, please call your BNN service provider at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.