Simplification? An Examination of Readily Determinable Fair Value

The Financial Accounting Standards Board (FASB)'s revised definition of readily determinable fair value (RDFV) may have in fact made the net asset value practical expedient more difficult to apply. In 2015, the FASB issued accounting updates addressing investments that calculate net asset value (NAV) per share, which, among other amendments, amended the definition of RDFV. Feedback received from financial statement preparers and users indicate that the intended clarification may have resulted in additional confusion rather than clarity regarding when a financial instrument is considered to have a RDFV. As a result, employee benefit plan advisors, financial statement preparers, and investors in entities with the impacted financial instruments may want to take a closer look at the issue, which could have an effect on their accounting for alternative investments.

The Issue with the Changes to the NAV Practical Expedient and RDFV

Changes to NAV in Accounting Standards Update 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) clarifies that investments reported using the net asset value (NAV) practical expedient should be excluded from the fair value hierarchy classification table in the financial statement disclosures.

Technical corrections included in ASU 2015-10 amend the definition of RDFV to include:

The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

Alternative investments are not listed on national exchanges or over-the-counter markets, nor do they have quoted market prices available from sources such as financial publications, the exchanges, or the National Association of Securities Dealers Automated Quotations System (NASDAQ). These investment vehicles generally have greater flexibility in investment strategies than registered investment companies (i.e., mutual funds). The following are examples of types of alternative investments commonly found:

• Common/collective trusts (CCTs)
• Pooled separate accounts (PSAs)
• Stable value investments (CCT or PSA that invests in a GIC or synthetic GIC)
• Private equity funds
• Hedge funds
• Real estate funds
• Funds of funds

Open-ended mutual fund investments are generally considered to have a RDFV defined as the closing value that is published and is the basis for transactions at that amount on a daily basis.

Prior to the revised definition in ASU 2015-10, alternative investments have not been considered to have a RDFV that meets the definition above by many reporting entities, although there has been diversity in practice. Therefore, in many instances, such alternative investments have been reported using the NAV as a practical expedient, and prior to ASU 2015-07, were classified as a level 2 or in some cases, as a level 3 measurement in the fair value measurement hierarchy. If a RDFV exists, Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures requires the use of the observable inputs to determine fair value, therefore, the NAV practical expedient guidance would not be applicable. After the amendments in ASU 2015-07 became effective, reporting entities no longer included such alternative investments in the fair value hierarchy disclosures as they were considered to be reporting using the NAV as a practical expedient.

Many preparers and users were concerned that the revised definition in ASU 2015-10 would result in a requirement to include certain alternative investments previously thought to be reporting using the NAV practical expedient, back into the fair value hierarchy classification disclosures since the reported amount was considered to be fair value using a RDFV. Questions also arose regarding the definition of "published" as the definition is not provided in U.S. GAAP. While many entities elected to early adopt ASU 2015-07, some entities did not adopt the amendments, awaiting the FASB to clarify its intent.

AICPA and FASB Resolution

As a result of the diversity in practice, during its March 2017 meeting, the FASB stated the RDFV definition change in ASU 2015-10 was intended to assist in the determination of whether to measure certain investments (primarily certain limited partnerships and venture capital entities) at cost or fair value for entities that are not required to report all investments held at fair value. In addition, the FASB stated it could not identify a pervasive measurement issue on the basis of outreach conducted with stakeholders. Therefore, the FASB voted to:

• Keep the definition of RDFV as amended in ASU 2015-10 with no further revision
• Draft an amended illustrative example for the Defined Contribution Plan financial statements included in the codification as part of the technical corrections and improvements project

The FASB stated its belief that financial statement users would not be misled regardless of which disclosures are used. Reporting entities are encouraged to provide disclosures consistent with conclusions previously reached on impacted investments.

Current Events for Employee Benefit Plans

On Oct. 3, 2017, the FASB issued an exposure draft for Proposed FASB ASU Codification Improvements, which includes an amendment to Subtopic 962-325, Plan Accounting. The amendment to Subtopic 962-325 in this proposed ASU would remove the stable value common collective trust fund from the illustrative example in paragraph 962-325-55-17 to avoid the interpretation that such an investment should always be measured using the NAV practical expedient. Rather, a plan would need to evaluate whether a RDFV exists. Transitional guidance would make this amendment effective for annual periods beginning after Dec. 15, 2018, and shall be applied prospectively. Early adoption is permitted.

In addition, the AICPA recently issued a technical Q&A (TQA Section 2220.28) to address RDFV and its interaction with NAV fair value practical expedient.

What's Next?

While practice and interpretations are still evolving, reporting entities should consider including certain types of alternative investments that could be considered to have a RDFV in the financial statement disclosures as required by ASC Topic 820. These alternative investments include those with an ending NAV that is published for wide distribution and for which there is an established market with current transactions conducted at that published NAV. Final resolution is uncertain because some argue that although the alternative investment's price per share is quoted on a private market that is not active, the price per share is based on the value of the underlying investments, which are traded on an active market and should be included in the fair value hierarchy table. Others argue that the alternative investment is measured using the NAV practical expedient and should be excluded from the fair value hierarchy table.

Ultimately, reporting entities will need to assess whether an equity security has a RDFV (as amended by ASU 2015-10), based on the facts and circumstances and apply their accounting policies on a consistent basis.

For comments, questions or concerns about this topic, please contact Hal Hunt or Mike Loritz of MHM's Professional Standards Group. Hal can be reached at hhunt@cbiz.com or 816.945.5610. Mike can be reached at mloritz@cbiz.com or 816.945.5611.