Fair Value Disclosures Made Easier: ASC 820
Fair Value Disclosures Made Easier: ASC 820
The Financial Accounting Standards Board (FASB) has simplified certain disclosure requirements related to measuring the fair value of a plan’s assets and liabilities starting in December 2019. As our world’s upheaval starts to settle, you may consider taking the time to streamline some of the work required to keep your qualified retirement plan compliant with this accounting standard.
In August 2018, FASB issued final guidance Accounting Standards Update (ASU) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This update was part of FASB’s larger disclosure effort to simplify the process of valuing assets and liabilities. The guidance became effective for all organizations for fiscal years beginning after December 15, 2019. Organizations also were allowed to adopt these standards earlier than this date.
Understanding FASB’s three levels of liquidity
Accounting Standards Codification 820 (ASC 820) specifies three levels of liquidity for assets and liabilities, and each level has different fair value disclosure requirements. As a reminder, liquidity refers to the degree to which a financial instrument can quickly and easily be bought or sold at a price that reflects its intrinsic value.
Level 1 assets and liabilities are highly liquid, such as money-market funds or stocks publicly traded on the New York Stock Exchange, Nasdaq or other exchange. Level 2 assets and liabilities are not as easily valued, but can be measured using other data or market prices, such as interest rate swaps. Level 3 assets and liabilities are highly illiquid, such as foreign stock and certain derivatives.
Prior to ASC 820, many reporting organizations felt required fair value disclosures were cumbersome, expensive to organize and not very useful. ASC 820 sought to ease reporting requirements for organizations by removing, adjusting and adding reporting requirements for fair value measurements across all three levels of assets and liabilities.
Disclosure requirements that were removed:
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Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.
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Policy for timing of transfers between levels.
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Valuation processes for Level 3 fair value measurements.
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For non-public 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.
Disclosure requirements that were adjusted:
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In lieu of a roll forward for Level 3 fair value measurements, a non-public entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy, as well as purchases and issues of Level 3 assets and liabilities.
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For investments in certain entities that calculate net asset value, an entity is required to disclose the timing and liquidation of an investee’s assets as well as the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
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Amendments clarify that the “measurement uncertainty disclosure” is to communicate information about the uncertainty in measurement as of the reporting date.
Disclosure requirements that were added:
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Entities must disclose 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.
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Entities must disclose 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 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.
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