I just returned from a week-long business trip to the Cayman Islands (I know, tough life). I was teaching annual Update courses to professionals responsible for auditing investment management, insurance, and enterprise entities. And I learned something. The FASB has a fan base! The participants were praising the FASB for the changes to fair value disclosures as a result of the issuance of ASU 2018-13 Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. And I missed it!
This was a difficult year to develop a 1-day update course covering the latest developments in both U.S. GAAP and IFRS. Why? There are too many new rules! Think about it. Revenue from Contracts from Customers (ASC 606 / IFRS 15), Leases (ASC 842 / IFRS 16), and Financial Instruments (ASC 326 / IFRS 9), just to name a few of the headliners. Looking for things to cut, a new standard dealing with disclosures was an easy target. However, what I failed to appreciate was that clients were struggling to comply with existing requirements related to disclosure of fair value measurements, especially private investment funds.
Why the new rule?
ASU 2018-13 was issued as part of the FASB’s disclosure framework project. The objective and primary focus of this project is to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity’s financial statements. This project resulted in a new FASB Concept Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to Financial Statements. This guidance states that in requiring information in the notes to the financial statements, the Board should:
- Require information that is relevant to existing and potential users of the financial statements;
- Apply the cost constraint; that is, the benefits of providing the information should justify the costs of providing and consuming it;
- Consider potential unintended adverse consequences of requiring certain information in the notes; and
- Realize that including some types of future-oriented information in the notes may have negative effects on the cash flow prospects of the reporting entity.
The first on the chopping block were disclosures related to fair value measurements, which were numerous. Many entities, especially nonfinancial entities, found the disclosures costly to prepare and stated that their users are not interested in such disclosures.
The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements found within ASC Topic 820 Fair Value Measurements (ASC 820). Specifically:
The following disclosure requirements were removed from ASC 820:
- The amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy.
- The policy for timing of transfers between levels.
- The valuation processes for Level 3 fair value measurements.
- For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.
The following disclosure requirements were modified in ASC 820:
- In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfer into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
- For investments in certain entities that calculate net asset value, an entity is required to disclose the timing and liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
- The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
The following disclosure requirements were added to ASC 820 (although they are not required for nonpublic entities):
- The changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period.
- The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
When is the effective date and can entities early adopt?
ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. However, early adoption is permitted and, based on the feedback from my participants, I think clients are likely to do just that!
What’s on the horizon?
In addition to ASU 2018-13, the FASB also issued ASU 2018-14 that improves the disclosures related to defined benefit plans. According to FASB Chairman, Russel Golden, “The new standards improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost-beneficial, clarifying disclosures’ specific requirements, and adding relevant disclosure requirements.
Be on the lookout for upcoming rules that will simplify the disclosures related to income taxes and inventory.
I made a promise to myself on that trip (immortalized on my Twitter page). And no it wasn’t to include every single standard in the training, despite missing the boat on ASU 2018-13. I told you there was too much material! It was, however, to take time out to enjoy more sunsets, like the one above I captured while on the trip. Enjoy!
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