FASB Issues Guidance to Exclude Investments in Certain Entities that Calculate Net Asset Value Per Share from the Fair Value Hierarchy
The FASB issued an ASU eliminating the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. As such, certain fair value “levelling” disclosures are no longer required, although information must be disclosed so that users can reconcile amounts reported in the fair value hierarchy to the balance sheet. The new standard takes effect in 2016 for public companies and is available here
ASC Topic 8201
provides a practical expedient permitting a reporting entity to measure the fair value of certain investments using the net asset value (NAV) per share (or its equivalent) of the investment (the “NAV practical expedient”). These often include investments in investment companies that do not have a readily determinable fair value (e.g. investment in a hedge fund or private equity fund). Prior to the ASU, investments that were measured at fair value using the NAV practical expedient were categorized within the fair value hierarchy based on liquidity, i.e., the ability and the length of time before which the reporting entity could redeem its investment at NAV.
If a reporting entity could not redeem its investment with the investee at NAV at the reporting entity’s balance sheet date but the investment was redeemable with the investee in the “near term”, then the reporting entity would take into account the length of time until the investment became redeemable in determining whether the fair value measurement of the investment was categorized within Level 2 or Level 3 of the fair value hierarchy. Some entities assessed the “near term” differently. As such, similar investments were categorized inconsistently in the fair value hierarchy (i.e., Level 2 vs. Level 3). The ASU eliminates this diversity.
simplifies Topic 820 by removing the requirement to categorize, within the fair value hierarchy, all investments measured using the NAV practical expedient. Although classification within the fair value hierarchy is no longer required, an entity must disclose the amount of investments measured using the NAV practical expedient in order to permit reconciliation of the fair value of investments in the hierarchy to the corresponding line items in the balance sheet. The implementation guidance presents an example of this reconciliation.
Investments measured using the NAV practical expedient continue to be: (i) exempt from the detailed disclosures related to the fair value hierarchy required by paragraph 820-10-50-2, and (ii) subject to the qualitative and quantitative disclosures described in paragraph 820-10-50-6A.
The ASU, however, reduces disclosures that were required for investments that are eligible for the use of, but for which the reporting entity opts not to use, the NAV practical expedient. These investments are no longer subject to the disclosures described in paragraph 820-10-50-6A. Since the fair value for these investments is determined using observable and/or unobservable inputs, the fair value measurements for these investments continue to be subject to the fair value disclosures required by paragraph 820-10-50-2, which includes “levelling” disclosures.
Other Matters: In connection with the changes above, the ASU made an additional change to preserve an exception for investment companies related to the statement of cash flows. Prior to the amendments, an investment company was not required to present a cash flow statement if, among other conditions, substantially all of its investments were carried at fair value and classified within Level 1 or Level 2 in the fair value hierarchy. Since investments that are measured at fair value using the NAV practical expedient will no longer be included in the fair value hierarchy, Topic 230 was amended to expand the exemption from providing a cash flow statement. That is, the cash flow statement is not required for an investment company if, among other conditions, substantially all of its investments are carried at fair value and classified within Level 1 or Level 2 of the fair value hierarchy, or are measured using the NAV practical expedient and are redeemable in the near term at all times.
Effective Date and Transition
The amendments are effective retrospectively for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments are effective retrospectively for all other entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted.
For questions related to matters discussed above, please contact Adam Brown
or Dale Thompson
1 Fair Value Measurement
2 Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)