Making Your Fair Value Disclosures More Useful

Changes are coming to the fair value measurement framework. The FASB recently issued Accounting Standards Update 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which is designed to make fair value disclosures align with the recently issued concept statement for notes to the financial statements. The revisions contained in ASU 2018-13 consider the information relevant for financial statement users and cost constraints. Included in this update is clarification that the concept of materiality should be applied when determining what information should be disclosed.

ASU 2018-13 eliminates and modifies some disclosures, which may prompt entities to early adopt the changes for their upcoming third quarter and year-end financial reporting.

Reducing Disclosure Costs

The FASB identified certain disclosures that could be eliminated, thus reducing costs of preparing the financial statement disclosures while also streamlining them for the financial statement users. The following four required disclosures are removed upon adoption of ASU 2018-13:

  • The amount of transfers, of assets and liabilities measured on a reoccurring basis, between Level 1 and Level 2 of the fair value hierarchy,
  • The policy followed by an entity to determine when a transfer between Level 1 and Level 2 of the fair value hierarchy has occurred,
  • The processes used to measure reoccurring and nonrecurring valuations of assets and liabilities categorized as Level 3 of the fair value hierarchy. Disclosures such as the following would no longer be necessary:
    • The group that decides on an entity's valuation policies and procedures, to whom they report, and the procedures they follow;
    • Frequency and method of calibrating and testing pricing models;
    • Process for analyzing period-to-period change to fair value measurements;
    • How third party information was determined to be developed in accordance with US GAAP; and
    • Methods used in developing and substantiating unobservable inputs used in the fair value measurement

Nonpublic entities also have the disclosure of changes in unrealized gains and losses from Level 3 fair value measurements included in earnings eliminated.

The following disclosures were modified and are expected to reduce the cost of preparing disclosures and increase their effectiveness:

  • Disclosure of the timing of a liquidation of an investee's assets and when redemption restrictions might lapse is only required for an investment in certain entities that calculate net assets value when the timing of the events has been communicated to the entity or made public, and
  • For recurring Level 3 fair value measurements a nonpublic entity may disclose transfers into and out of Level 3 of the fair value hierarchy, the reason for the transfer, and purchases and issuances of Level 3 fair value assets and liabilities instead of a roll-forward of Level 3 fair value measurements.

The FASB also reworded the required disclosures over "sensitivity" of recurring Level 3 fair value measurements to significant unobservable inputs to be a disclosure over the "uncertainty" of those unobservable inputs if they could have reasonably been different at the reporting date.

Disclosure Enhancements for Public Business Entities

Upon adoption of ASU 2018-13, a public business entity will be required to make additional disclosures to provide financial statement users with information about:

  • Changes in unrealized gains and losses that are included in other comprehensive income for recurring Level 3 fair value measurements for assets and liabilities that remain held at the end of the reporting period, and
  • Quantitative information about significant unobservable inputs used in Level 3 measurements. This information should include the range that was used in developing the fair value measures, and the weighted average of those inputs, unless a more reasonable and rationale method would be appropriate in place of the weighted average.

Adoption and Effective Date

ASU 2018-13 is effective for fiscal years, including interim periods within, beginning after Dec. 15, 2019 (December 31, 2020 calendar year-end). The changes to the disclosure requirements are to be applied retrospectively, except for disclosures about changes in unrealized gains and losses, range and weighted average of unobservable inputs, and uncertainty disclosures, which should be applied prospectively.

The provisions of the Update are available for early adoption at any time, and any of the eliminated or modified disclosures may be adopted early, while delaying adoption of the additional disclosures until the required date.

For More Information

The FASB continues to work on additional updates to U.S. GAAP related to the new disclosure framework and changes to disclosures around income taxes, inventory, and other areas are expected soon. For more information, please contact Mark Winiarski of MHM's Professional Standards Group. Mark can be reached at mwiniarski@cbiz.com.

Published on September 04, 2018