Asset Management Intelligence - August 2015 - FASB Issues Updated Disclosure Guidance for Investments in Entities That Use NAV per Share as a Practical Expedient

Background

Under the FASB Accounting Standards Codification Topic 820, Fair Value Measurements, an entity is permitted, as a practical expedient, to measure fair value of certain investment at Net Asset Value (“NAV”). Under existing guidance, investments which are valued using NAV as a practical expedient are categorized within the fair value hierarchy based on whether the investment is redeemable at NAV on the measurement date (Level 1), never redeemable at NAV (Level 3), or redeemable at NAV at a future date. For investments that are redeemable at NAV at a future date, current guidance requires entities to take into account the length of time until those investments become redeemable to determine whether to categorize those investments in Level 2 or Level 3. To the extent future redemption dates are not in the “near term,” those investments are categorized in Level 3.  The FASB noted that there is diversity in practice as to how entities defined near term. To resolve this diversity, the FASB issued ASU 2015-07 Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (the “ASU”).

Key Changes

The ASU removes the requirement to categorize within the fair value hierarchy investments for which fair value is measured using NAV as a practical expedient. By removing the requirement to categorize within the fair value hierarchy, the FASB eliminated the diversity in practice among entities of the categorization of investments with future redemption dates. This change also has the added benefit that all investments that are categorized in the fair value hierarchy are done so on a consistent basis, as using the NAV as a practical expedient does not consider the observability of the inputs. Investments that calculate the NAV per share but for which entities do not use the practical expedient will continue to be required to be categorized in the fair value hierarchy.

Although the ASU does not require the classification of investments measured using NAV within in the fair value hierarchy, sufficient information must be presented in order to permit the reconciliation of the fair value of assets that are categorized within the fair value hierarchy to the amounts presented on the statement of financial condition. 

The ASU also will require entities to continue to disclose information that helps users understand the nature and risks of investments measured using NAV as a practical expedient. The required disclosures include:

• The fair value of the investment by class,
• A description of the terms and conditions which an investor may redeem the investment (such as lock-up periods and notice requirements), and
• Information on significant restrictions on the ability to sell the investment

The ASU removes the requirement of the above disclosures for investments that calculate NAV per share but for which entities do not use the NAV as a practical expedient.

Transition

The ASU is effective for public entities for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. For all other entities, the effective date is for all fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. As the ASU is required to be adopted retrospectively, the categorizations of level within the fair value measurement should be removed for all periods presented in the financial statements.

Asset Management Intelligence - August 2015

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