Disclosures of Fair Value Measurements

Jeremy Veilleux, Audit Principal
January 2016

Typically, new standards issued by the Financial Accounting Standards Board (FASB) tend to increase the length of an organization’s footnote disclosures. However, even the FASB knows when to step off the gas. The FASB’s latest project is designed to improve the effectiveness of disclosure requirements on fair value measurements by enabling organizations to omit immaterial information.

The proposed Accounting Standards Update, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement seeks to improve the effectiveness of disclosures in notes to financial statements by requiring clear communication of information that is most important to financial statement users.

A key change resulting from the FASB’s proposal is the definitive statement by the FASB that an entity must provide required disclosures only if they are material. Although organizations might argue this has historically been the approach taken in their audited or reviewed financial statements, certain phrases in current FASB guidance such as “an entity shall disclose at a minimum” have made it difficult to justify omitting certain disclosures. The FASB intends to eliminate those phrases, and will reference to Topic 235, Notes to Financial Statements, which will provide guidance on the appropriate exercise of discretion.

Additionally, certain disclosures would be eliminated under the FASB’s proposal, including:

  • The amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy.
  • The policy for timing of transfers between levels.
  • The valuation policies and procedures for Level 3 fair value measurements.
  • The change in unrealized gains/losses for the period included in operations or changes in net assets on recurring Level 3 fair value measurements held at the end of the reporting period.

Finally, certain disclosures would be amended, as follows:

  • The reconciliation of opening balances to closing balances of the Level 3 fair value measurements would no longer be required, although transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 assets and liabilities will still be disclosed.
  • The disclosure of the timing of liquidation of an investee’s assets and the date when restrictions from redemption will lapse for investments reported at net asset value will be required only if the investee has communicated that timing.
  • The measurement uncertainty disclosure would be clarified to communicate information about the uncertainty in measurement as of the reporting date rather than information about sensitivity to changes in the future.

Although not substantive changes to financial reporting, these new rules may provide some relief to some organizations. Comments on this proposal are due by February 29.

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.