On December 3, 2015, the Financial Accounting Standards Board (FASB) issued a proposal to amend the requirements in U.S. Generally Accepted Accounting Principles (U.S. GAAP) for disclosures related to fair value measurement. The proposal is part of the FASB’s disclosure framework project, which began in March 2014, to improve the effectiveness of disclosures in the notes to financial statements. The proposed changes include both additions and modifications, and in some cases, the removal of certain required disclosures. The impact of the proposed amendments will vary depending on whether an entity is a private company or a public business entity, and some changes will pertain only to not-for-profit entities and employee benefit plans.
Impact on Investment Funds
Under the proposal, private funds would no longer have to include a reconciliation of the opening balances to the closing balances of recurring Level 3 fair value measurements, or the change in unrealized gains and losses included in earnings during the reporting period for Level 3 instruments held at the end of the reporting period. However, private funds would be 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.
For funds that use the practical expedient to measure the fair value of certain investments using net asset value (NAV), the proposal will require (1) disclosure of the expected timing of liquidation of an investee’s assets and (2) the date when restrictions from redemption will lapse only if the investee has communicated the timing to the entity or announced the timing publicly such as with a private equity fund. If the timing is unknown as with a fund of funds, the entity would be required to disclose that fact.
The FASB has found that there is confusion over what is meant by the terms “sensitivity analysis” and “measurement uncertainty analysis” in the current guidance; specifically there is confusion about whether the disclosure is intended to convey changes in unobservable inputs at the reporting date or at some point in the future. The proposed changes would clarify that measurement uncertainty disclosure is intended to communicate information about the uncertainty in measurement as of the reporting date rather than sensitivity to changes in the future.
Certain Disclosure Requirements Eliminated
The proposal would eliminate the following disclosure requirements for all entities:
- The policy for the timing of transfers between levels of the fair value hierarchy (entities would still be required to have a consistent policy on the timing of such transfers, but the proposal would remove the entity’s requirement to disclose its policy)
- The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
- The valuation policies and procedures for Level 3 fair value measurements
Effective Date and Transition
The FASB will determine an effective date after it considers stakeholder feedback on the proposal. The proposals related to changes in unrealized gains and losses, range and weighted average of Level 3 significant unobservable inputs and the time period used to develop any significant unobservable inputs would be required for only the most recent period presented in the initial period of adoption. All other changes in the disclosure requirements would be applied retrospectively to all periods presented.
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