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Fair value disclosure changes: What does your investment fund need to adopt?

November 15, 2019 Article 3 min read
Authors:
Joe Vloedman Michelle Donehoo
It’s critical to stay current with fair value disclosure requirements and how they may affect your investment funds — especially when considering end-of-year financial statements. Here’s a recap of the disclosure changes.
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As investment companies draft their 2019 financial statements, many may need a refresher on the updated disclosure requirements of ASU 2018-13, which was issued as part of the FASB’s project to improve effectiveness of disclosures.

Issued in August 2018, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement removes, modifies, and adds fair value disclosure requirements, but the additions are only applicable to public business entities (PBEs¹). The following is a summary of the disclosure changes:

Removals
ApplicabilityDisclosure description Perspective
All entities
Policy for timing of transfers between levels of the fair value hierarchyAn accounting policy should still be in place for the timing of transfers between levels (i.e. transfer at the date of change or at period-end), but disclosure of the policy is no longer required.
Valuation processes for Level 3 fair value measurementsValuation processes previously disclosed included how an entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period. Many entities continue to present some description of valuation policies, but this can be described in less detail or eliminated if desired.
Non-PBEsChanges in unrealized gain/loss for period included in earnings for recurring Level 3 fair value measurements held at period-endDisclosure was previously a requirement for all entities, and is now only applicable to PBEs.
PBEsAmount of and reasons for transfers between Level 1 and Level 2Transfers between Level 1 and Level 2 were previously only required for PBEs, but are no longer required for any entity. Note: Transfers in and out of Level 3 are still required to be disclosed for all entities.

         

 

Modifications
ApplicabilityDisclosure description Perspective
All entities
For investments at net asset value, disclose expected timing of liquidation and/or redemption restriction lapsing only if the investee has communicated to the entity or announced publicly; if timing is unknown, that fact should be disclosedCommon in a fund of funds, absent communication from the investee, management previously would estimate their expectation of timing for the investee to liquidate assets and distribute proceeds, or timing for redemption restrictions to lapse and disclose. A new threshold for this disclosure is being established.
Non-PBEsIn lieu of a Level 3 rollforward, disclose transfers in and out of Level 3 and purchases and issues of Level 3 assets and liabilitiesMany entities continue to present a rollforward, but this can be condensed if desired. Also note, tabular presentation isn’t mandatory for the remaining disclosure requirements.
PBEsThe ‘measurement uncertainty’ disclosure for recurring Level 3 financial instruments is meant to communicate uncertainty in measurement as of the reporting dateThis clarifies that the objective is to disclose unobservable inputs which reasonably could have been different at the reporting date — not inputs which may change in the future; there is also no requirement to disclose information about sensitivity to future changes in inputs. Note this measurement uncertainty disclosure was previously, and still remains, applicable to PBEs only.

           

 

Additions
ApplicabilityDisclosure description Perspective
PBEs
Change in unrealized gain/loss for the period included in other comprehensive income for recurring Level 3 fair value measurements held at period-endThis is only applicable to entities with other comprehensive income, so it will not impact investment companies following ASC 946.
Range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurementsAll entities will still disclose quantitative information about significant unobservable inputs, but only PBEs must disclose the range and weighted average of significant unobservable inputs.

          

For each of the removals, entities have the option to retain the disclosure even though it’s no longer required.

The update also makes some minor wording changes, such as removal of “At a minimum … ” from certain disclosure requirements. Discretion should be applied in determining the extent of fair value disclosures, and materiality should be considered in evaluating disclosure requirements.

The update is effective for all entities for fiscal years beginning after Dec. 15, 2019, and interim periods within those years. Early adoption of the update is allowed, including early adoption of some or all the removals without early adoption of the additions, so many entities adopted removals in their 2018 financial statements.

If you have any questions, please reach out today.

¹ The Accounting Standards Codification Master Glossary defines PBEs as meeting any one of five criteria. The definition includes entities required by the U.S. Securities and Exchange Commission to file or furnish financial statements and entities required by the Securities Exchange Act of 1934 to file financial statements with another regulatory agency, among others.

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