8/14/2019 FASB Finalizes ASU on Improving Disclosures About Fair Value Measurements

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Heads Up

The FASBs Early Valentine

FASB Finalizes ASU on ImprovingDisclosures About Fair ValueMeasurementsby Ana Zelic, Beth Ann Reese, and Magnus Orrell, Deloitte & Touche LLP

BackgroundOn January 21, 2010, the FASB issued Accounting Standards Update (ASU) 2010-06.1

The ASU amends ASC 8202(formerly Statement 1573) to add new requirements fordisclosures about transfers into and out of Levels 1 and 2 and separate disclosures about

purchases, sales, issuances, and settlements relating to Level 3 measurements. It alsoclarifies existing fair value disclosures about the level of disaggregation and about inputs

and valuation techniques used to measure fair value. The above disclosures are similar tothose in the exposure draft (ED) of the proposed ASU.4

Unlike the ED, the ASU does not require entities to provide sensitivity disclosures.5TheFASB will consider whether to require sensitivity disclosures jointly with the IASB as part

of a new convergence project on fair value measurement and disclosures. The FASB

made this decision in view of comments received during the exposure period about theoperationality and costs of such disclosures and its October 2009 decision to convergewith the IASB on fair value measurement and disclosure.

The ASU also amends guidance on employers disclosures about postretirement benefitplan assets under ASC 715 to require that disclosures be provided by classes of assets

instead of by major categories of assets.

With one exception, the ASU is effective for the first reporting period (including interimperiods) beginning afterDecember 15, 2009 (see Effective Date and Transitionsectionbelow).

An overview of the ASUs disclosure requirements is provided below. In addition, the

appendix of this Heads Upcontains a table comparing the existing fair value disclosure

requirements of ASC 820 with the ASUs new or amended disclosure requirements.

In This Issue:

Background

Disclosure Requirements

Effective Date and Transition

Appendix

Unlike the ED, theASU does notrequire entities toprovide sensitivitydisclosures.

January 22, 2010

Volume 17, Issue 6

1 FASB Accounting Standards Update No. 2010-06, Improving Disclosures About Fair Value Measurements.2 For titles of FASB Accounting Standards Codification (ASC) references, see DeloittesTitles of Topics and Subtopics in the

FASB Accounting Standards Cod ification.3 FASB Statement No. 157, Fair Value Measurements.4 Exposure draft of a proposed Accounting Standards Update, Improving Disclosures About Fair Value Measurements.5 Under the ED, for Level 3 fair value measurements, if changing one or more of the significant unobservable inputs to

reasonably possible alternative inputs would have changed the fair value significantly, entities would have stated that fact and

disclosed the total effect of those changes. In addition, entities would have needed to describe how the effect of a change to

a reasonably possible alternative input was calculated. The ED also proposed that an entity disclose, for each class of Level 3

measurements, quantitative information about the significant inputs used and reasonably possible alternative inputs.

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Disclosure Requirements

Level of Disaggregation

ASC 820s existing guidance requires entities to provide fair value measurementdisclosures by major category of assets and liabilities. The term major category has

often been interpreted to be a line item in the statement of financial position. The ASUamends ASC 820 to require entities to provide fair value measurement disclosures foreach class of assets and liabilities. Providing the disclosures by class may be more useful

since a class is often a subset of assets or liabilities within a line item in the statement

of financial position. When providing disclosures for equity and debt securities, entitiesshould determine class on the basis of the nature and risks of the securities, in amanner consistent with ASC 320-10-50-1B and, if applicable, ASC 942-320-50-2. Under

ASC 320-10-50-1B, in determining the nature and risks of the securities, entities shouldconsider activity or business sector, vintage, geographic concentration, credit quality, and

economic characteristics. ASC 942-320-50-2 requires financial institutions to disclose allof the following major security types (although additional types also may be necessary):

a. Equity securities, segregated by any one of the following:

1. Industry type

2. Entity size

3. Investment objective;

b. Debt securities issued by the U.S. Treasury and other U.S. government corporations andagencies;

c. Debt securities issued by states of the United States and political subdivisions of thestates;

d. Debt securities issued by foreign governments;

e. Corporate debt securities;

f. Residential mortgage-backed securities;

ff. Commercial mortgage-backed securities;

fff. Collateralized debt obligations;

g. Other debt obligations.

For all other assets and liabilities, entities should use judgment to determine theappropriate classes of assets and liabilities for which they should provide disclosuresabout fair value measurements.

The ASU requires an entity, in determining the appropriate classes of assets and liabilities,

to consider the nature and risks of the assets and liabilities as well as their placement inthe fair value hierarchy (i.e., Level 1, 2, or 3). For example, a greater number of classes

may be necessary for fair value measurements with significant unobservable inputs (i.e.,Level 3 measurements) because of the increased uncertainty and subjectivity involved inthese measurements.

In determining the appropriate level of disaggregation, an entity should also consider

what is required for specific assets and liabilities under other U.S. GAAP (e.g., thedisclosure level required for derivative instruments under ASC 815).

Transfers Into and Out of Levels 1, 2, and 3

For assets and liabilities that are measured at fair value on a recurring basis in periods

after initial recognition (e.g., trading securities), the ASU requires an entity to disclosethe amounts of significant transfers between Levels 1 and 2, and transfers into and

out of Level 3, of the fair value hierarchy and the reasons for those transfers. An entitymust disclose and discuss significant transfers intoeach level separately from transfersout ofeach level. For this purpose, significance is judged with respect to earnings andtotal assets or total liabilities or, when changes in fair value are recognized in othercomprehensive income, with respect to total equity. In addition, an entity should disclose

and consistently follow its policy for determining when transfers between levels are

The ASU requiresan entity, in

determining theappropriate classes ofassets and liabilities,to consider thenature and risks ofthe assets andliabilities as well astheir placement inthe fair valuehierarchy (i.e., Level1, 2, or 3).

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recognized (e.g., as of the (1) actual date of the event or change in circumstances that

caused the transfer, (2) beginning of the reporting period, or (3) end of the reportingperiod). The policy for transfers into Levels 1, 2, and 3 should be the same as that fortransfers out of Levels 1, 2, and 3.

Editors Note:Note that before the ASU, ASC 820 did not require an entity todisclose separately the amounts of significant transfers into and out of Levels 1 and 2

and to describe the reasons for the transfers. For Level 3 transfers, ASC 820 did notrequire disclosures about the entitys policy for determining when transfers into and

out of Level 3 are recognized and did not address whether that policy should be thesame for transfers into and out of Level 3. ASC 820 also did not require disclosuresabout the reasons for the transfers into and out of Level 3.

Reconciliation on a Gross Basis

The ASU amends the reconciliation of the beginning and ending balances of Level

3 recurring fair value measurements. In periods after initial recognition, an entitypresents information about purchases, sales, issuances, and settlements for significant

unobservable inputs (Level 3) on a gross basis rather than as a net number as currentlyrequired. Financial statement users have indicated that gross presentation is more useful.

Disclosures About Inputs and Valuation Techniques

The ASU clarifies that a description of the valuation technique(s) (e.g., market approach,

income approach, or cost approach) and inputs used to measure fair value is required forboth recurring and nonrecurring fair value measurements. In addition, such disclosures

are required for fair value measurements classified as either Level 2 or Level 3. If thevaluation technique has changed, entities should disclose that change and the reason for

the change.

Effective Date and TransitionThe guidance in the ASU is effective for the first reporting period (including interim

periods) beginning afterDecember 15, 2009, except for the requirement to providethe Level 3 activity of purchases, sales, issuances, and settlements on a gross basis,

which will be effective for fiscal years beginning afterDecember 15, 2010, and forinterim periods within those fiscal years. In the period of initial adoption, entities will not

be required to provide the amended disclosures for any previous periods presented forcomparative purposes. However, those disclosures are required for periods ending afterinitial adoption. Early adoption is permitted.

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Appendix

Recurring Fair Value Measurements

Topic Existing Disclosures Under ASC 820 ASUs New or Amended Disclosures

Level of disaggregation Provide disclosures by each major category ofassets and liabilities

Provide disclosures by each class of assets and liabilities

Transfers into and out of Levels 1, 2,

and 3

Transfers into and out of Level 3 Significant transfers between Levels 1 and 2 and the reasons for

those transfers; transfers into and out of Level 3 and the reasonsfor those transfers. The policy for determining when transfersbetween levels are recognized should be applied consistently,and the policy for transfers into Levels 1, 2, and 3 should be thesame as that for transfers out of Levels 1, 2, and 3.

Level 3 reconciliation No separate disclosure of total gains and lossesrecognized in other comprehensive income

Purchases, sales, issuances, and settlements (net)

Transfers into and out of Level 3

Total gains and losses recognized in other comprehensiveincome

Purchases, sales, issuances, and settlements (each typedisclosed separately)

Transfers into and out of Level 3 (separately whensignificant) and the reasons for the transfers

Valuation techniques and inputs The inputs and valuation technique(s) used tomeasure fair value and a discussion of changes invaluation techniques and related inputs, if any, duringthe period

For Levels 2 and 3, a description of valuation techniques andinputs used to determine fair values of each class of assets orliabilities; if the valuation technique has changed, that changeand the reason for the change should be disclosed

Nonrecurring Measurements

Topic Existing Disclosures Under ASC 820 ASUs New or Amended Disclosures

Level of disaggregation Provide disclosures by each major category ofassets and liabilities

Provide disclosures by each class of assets and liabilities

Valuation techniques and inputs The inputs and valuation technique(s) used tomeasure fair value and a discussion of changes invaluation techniques and related inputs, if any, duringthe period

For Levels 2 and 3, a description of valuation techniques andinputs used to determine fair values of each class of assets orliabilities; if the valuation technique has changed, that changeand the reason for the change should be disclosed.

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