FASB's Fair Value Disclosure Requirements: Full Adoption of ASU 2018-13 and Subsequent Updates Under Topic 820

ASU 2018-13 reduces certain recurring Level 3 fair value disclosure requirements for nonpublic entities, including many private investment companies.

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This update is part of the FASB’s larger disclosure framework project, intended to improve the effectiveness of financial statement footnote disclosure. ASU 2018-13 modifies the required fair value disclosures, with several significant changes affecting recurring Level 3 measurements. The ASU impacts non-public and public entities differently; a summary of changes to disclosure requirements, categorized by non-public and public entities, is presented below.

Key takeaways:

• Nonpublic entities, including many private funds, have a reduced recurring Level 3 disclosure burden. The ASU removes the Level 3 valuation-process disclosure and the transfer-timing policy disclosure and, for nonpublic entities, removes the disclosure of changes in unrealized gains and losses included in earnings for recurring Level 3 measurements held at period-end. The Level 3 roll forward is replaced with more limited purchases, issues, and transfer disclosures.
• Public entities gain a new quantitative requirement: explicit disclosure of the range and weighted average of significant unobservable Level 3 inputs and how the weighted average was calculated, while losing the Level 1/Level 2 transfer disclosure, the transfer-timing policy disclosure, and the Level 3 valuation-process disclosure.
• The ASU removes “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote appropriate discretion and clarify that materiality is an appropriate consideration when evaluating Topic 820 disclosures.
• The amendments are effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Most changes apply retrospectively, but the disclosures related to changes in unrealized gains or losses included in OCI, the range and weighted average of significant unobservable inputs, and narrative measurement uncertainty apply prospectively.

Nonpublic Entities: Hedge Funds and Private Equity

Disclosure Removals

• Valuation process for Level 3 measurements. Specifically, the ASU deletes ASC 820-10-55-105, which required a description of the group responsible for valuation policies and procedures, its methods of calibration and back testing, its process for analyzing changes in fair value measurements, its process for analyzing third-party information used in valuation, and its methods used to develop and substantiate unobservable inputs.
• Policy regarding the timing of transfers between levels in the fair value hierarchy. ASU 2018-13 eliminates the requirement to disclose this policy.
• Changes in unrealized gains and losses included in earnings for recurring Level 3 fair value measurements held at the end of the period. Previously, this disclosure was often presented as a supplement to the Level 3 roll forward table.

Disclosure Modifications

• Instead of the Level 3 roll forward reconciliation, nonpublic entities are required to disclose transfers into and out of Level 3 and purchases and issues of Level 3 assets and liabilities. Purchases, issues, transfers in, and transfers out must be disclosed separately, and the reasons for transfers into or out of Level 3 must also be disclosed.
• For investments valued using the practical expedient (unadjusted NAV), disclosure of the timing of liquidation events and redemption restriction lapses is required only if the investee has communicated that timing to the reporting entity or announced it publicly. If the timing is unknown, the entity must disclose that fact; for redemption restrictions, the entity must also disclose how long the restriction has been in effect.
• The ASU also removes “at a minimum” from the phrase “an entity shall disclose at a minimum” to promote appropriate discretion and clarify that materiality is an appropriate consideration when evaluating Topic 820 disclosures. Nonpublic entities remain required to disclose quantitative information about significant unobservable inputs used in Level 3 fair value measurements. Still, they are exempt from the specific requirement to disclose the range and weighted average of those inputs and how the weighted average was calculated.

Public Entities: 1940 Act Mutual Funds, BDCs, and Broker-Dealers

Disclosure Additions

• Explicit requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and how the weighted average was calculated. Other quantitative information, such as the median or arithmetic average, may be disclosed instead of the weighted average if it is determined to be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
• Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period.

Disclosure Removals

• Amounts of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.
• Policy regarding the timing of transfers between levels in the fair value hierarchy.
• Valuation process for Level 3 measurements.

Disclosure Modifications

• NAV practical expedient: disclosure of liquidation timing and redemption restriction lapse timing is required only if the investee has communicated that timing to the reporting entity or announced it publicly. If timing is unknown, disclose that fact; for redemption restrictions, also disclose how long the restriction has been in effect.
• Deletion of “at a minimum” promotes appropriate discretion and clarifies that materiality is an appropriate consideration when evaluating fair value measurement disclosures.
• Measurement uncertainty disclosure clarified: as-of-reporting-date, not future sensitivity. The measurement uncertainty disclosure is intended to communicate information about uncertainty in the measurement as of the reporting date rather than sensitivity to future changes in fair value. Nonpublic entities are exempt from this disclosure unless another Topic requires it.

Effective Date and Transition

ASU 2018-13 is effective for all reporting entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods.

A prospective method of adoption is required for additional or modified disclosures related to

1. Changes in unrealized gains or losses included in OCI
2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements
3. The narrative description of measurement uncertainty as of the reporting date. All other disclosure changes resulting from the ASU should be applied retrospectively.

For further discussion on how EisnerAmper can help your fund meet FASB’s disclosure requirements, please use the form to contact our team.