Wednesday, August 14, 2013

[aaykarbhavan] FAIR VALUE DISCLOSURES-FASB -AICPA-BOOK EXCERPT






Fair Value Disclosures
7.79     FASB ASC 820-10-50 discusses the disclosures required for assets and liabilities measured at fair value. "Pending Content" in FASB ASC 820-10-50-1 explains that for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the statement of financial position after initial recognition, the reporting entity is required to disclose certain information that enables users of its financial statements to assess the valuation techniques and inputs used to develop those measurements. For recurring fair value measurements using significant unobservable inputs (level 3), the reporting entity is required to disclose certain information to help users assess the effect of the measurements on earnings (or changes in net assets) for the period. 
7.80     Professional judgment may need to be applied as reporting entities implement and address the broad disclosure objectives summarized in paragraph 7.79. "Pending Content" in FASB ASC 820-10-50-1A lists several items that are required to be considered when addressing disclosure objectives in paragraph 7.80:
  • The level of detail necessary to satisfy the disclosure requirements
  • How much emphasis to place on each of the various requirements
  • How much aggregation or disaggregation to undertake
  • Whether users of financial statements need additional information to evaluate the quantitative information disclosed.
            "Pending Content" in FASB ASC 820-10-55-104 builds on this guidance, adding that a reporting entity might disclose some or all of the following:
  • The nature of the item being measured at fair value, including the characteristics of the item being measured that are taken into account in the determination of relevant inputs.
  • How third-party information such as broker quotes, pricing services, net asset values, and relevant market data was taken into account when measuring fair value.
7.81     "Pending Content" in FASB ASC 820-10-50-2 requires a reporting entity to disclose, at a minimum, the following information for each class of assets and liabilities measured at fair value in the statement of financial position after initial recognition:
a.   For recurring and nonrecurring fair value measurements, the fair value measurement at the end of the reporting period, and for nonrecurring fair value measurements, the reasons for the measurement. Recurring fair value measurements of assets or liabilities are those that other FASB ASC topics require or permit in the statement of financial position at the end of each reporting period. Nonrecurring fair value measurements of assets or liabilities are those that other FASB ASC topics require or permit in the statement of financial position in particular circumstances (for example, when a reporting entity measures a long-lived asset or disposal group classified as held for sale at fair value less costs to sell in accordance with FASB ASC Topic 360, Property, Plant and Equipment, because the asset's fair value less costs to sell is lower than its carrying value).
b.   For recurring and nonrecurring fair value measurements, the level within the fair value hierarchy in which the fair value measurements are categorized in their entirety (level 1, 2, or 3). 
c.   For assets and liabilities held at the end of the reporting period that are measured at fair value on a recurring basis, the amounts of any transfers between level 1 and level 2 of the fair value hierarchy, the reasons for the transfers, and the reporting entity's policy for determining when transfers between levels are deemed to have occurred. Transfers into each level should be disclosed separately from transfers out of each level. "Pending Content" in FASB ASC 820-10-50-2C explains that a reporting entity should disclose and consistently follow its policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred. The policy about the timing of recognizing transfers should be the same for transfers into the levels as that for transfers out of the levels. Examples of policies for determining the timing of transfers include the following: the date of the event or change in circumstances that caused the transfer, the beginning of the reporting period, and the end of the reporting period.   
d.   For recurring and nonrecurring fair value measurements categorized within level 2 and level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in valuation technique (for example, changing from a market approach to an income approach or the use of an additional valuation technique), the reporting entity should disclose that change and the reason(s) for making it. 
e.   For fair value measurements categorized within level 3 of the fair value hierarchy, a reporting entity should provide quantitative information about the significant unobservable inputs used in the fair value measurement. A reporting entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the reporting entity when measuring fair value (for example, when a reporting entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure, a reporting entity cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the reporting entity.
f.    For recurring fair value measurements categorized within level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances, disclosing separately changes during the period attributable to any of the following: 
i.    Total gains or losses for the period recognized in earnings (or changes in net assets), and the line items(s) in the statement of income (or activities) in which those gains or losses are recognized.
ii.   Total gains or losses recognized in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognized.
iii.  Purchases, sales, issuances, and settlements (each of those types of changes disclosed separately).
iv.  The amounts of any transfers into or out of level 3 of the fair value hierarchy, the reasons for those transfers, and the reporting entity's policy for determining when transfers between levels are deemed to have occurred. Transfers into level 3 should be disclosed and discussed separately from transfers out of level 3.
g.   For recurring fair value measurements categorized within level 3 of the fair value hierarchy, the amount of the total gains or losses for the period in f(i) included in earnings (or changes in net assets) that is attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the end of the reporting period, and the line item(s) in the statement of income (or activities) in which those unrealized gains or losses are recognized.
h.   For recurring and nonrecurring fair value measurements categorized within level 3 of the fair value hierarchy, a description of the valuation processes used by the reporting entity (including, for example, how an entity decides its valuation policies and procedures and analyzes changes in fair value measurements from period to period). 
i.    For recurring fair value measurements categorized within level 3 of the fair value hierarchy, a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if a change in those inputs to a different amount might result in a significantly higher or lower fair value measurement. If there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement, a reporting entity should also provide a description of those interrelationships and how they magnify or mitigate the effect of changes in the unobservable inputs of the fair value measurement. To comply with that disclosure requirement, the narrative description of the sensitivity to changes in unobservable inputs should include, at a minimum, the unobservable inputs disclosed when complying with (d and e). 
j.    For recurring and nonrecurring fair value measurements, if the highest and best use of a nonfinancial asset differs from its current use, a reporting entity should disclose that fact and why the nonfinancial asset is being used in a manner that differs from its highest and best use.
Paragraph 7.194 provides an illustrative example of the disclosures required by "Pending Content" in FASB ASC 820-10-50-2.
7.82     "Pending Content" in FASB ASC 820-10-50-2F states that a nonpublic entity is not required to disclose the information required by paragraphs 7.82(c), 7.82(i), and 7.90 unless required by another FASB ASC Topic. A nonpublic entitity is defined by the FASB ASC glossary as an entity that does not meet any of the following conditions:
  • Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.
  • It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).
  • It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.
  • It is required to file or furnish financial statements with the SEC.
  • It is controlled by an entity covered by criteria (a) through (d).
            "Pending Content" in FASB ASC 820-10-50-2E includes the phrase "unless required by another FASB ASC Topic." This phrase requires nonregistered investment companies to consider whether other applicable FASB ASC Topics (for example, FASB ASC 825, Financial Instruments, which is discussed in further detail in paragraph 7.94) require any of the disclosures referenced in "Pending Content" in FASB ASC 820-10-50-2F. 
7.83     When implementing the quantitative information disclosure requirement in paragraph 7.81(e), investment companies may consider the following:
  • Disaggregation. Determining the appropriate level of disaggregation may require professional judgment. FASB ASC 820 does not specify what level of disaggregation is required for quantitative disclosures, but the illustrative disclosure example in FASB ASC 820-10-55-103 indicates that at least each class of asset or liability may be listed. However, some reporting entities may find that further disaggregation is necessary, in order to provide financial statement users with the ability to evaluate and sufficiently understand the quantitative information (see considerations listed in paragraph 7.80). When determining whether further disaggregation is necessary, an entity may consider the results of their fair value hierarchy classification analysis, and the inputs evaluated during such analysis. The same inputs that were identified as relevant during the fair value hierarchy classification analysis may also be considered significant enough to warrant disclosure in the quantitative disclosure about significant unobservable inputs. Further, when multiple types of fair value measurement techniques are used to value individual assets (or liabilities) or groups of assets (or liabilities) within an individual class of assets (or liabilities), disaggregation below the asset class level may be necessary in order to sufficiently address objectives in paragraph 7.80. If a wide range of quantitative data occurs at a certain disaggregation level, it may be an indicator that the level of disaggregation is not appropriate. Generally, the disaggregation level depends on the nature and risks of the investment.  
  • Quantitative information types. Professional judgment may be required when determining what quantitative information is relevant and should be disclosed. Reporting entities may consider the overall objectives of paragraphs 7.79-.80 when applying such judgment in this area, including determining what type of information is most meaningful to the users of the financial statements. FASB ASC 820 does not specify what type of quantitative information is required to be disclosed. However, the illustrative disclosure example in FASB ASC 820-10-55-103 indicates that the high and low end range values and the weighted average of the range may be disclosed. fn (37)   
The following comments provided in paragraph BC 86 of FASB Accounting Standards Update (ASU) No. 2011-04, Fair Value (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, may also be helpful in understanding the objective of the quantitative information disclosure: 
The Boards concluded that the information required by the disclosure will facilitate comparisons of the inputs used over time, providing users with information about changes in management's views about particular unobservable inputs and about changes in the market for the assets and liabilities within a particular class. In addition, that disclosure might facilitate comparison between reporting entities with similar assets and liabilities categorized within Level 3 of the fair value hierarchy.
The Boards noted that the objective of the disclosure is not to enable users of the financial statements to replicate the reporting entity's pricing models but to provide enough information for users to assess whether the reporting entity's views about individual inputs differed from their own and, if so, to decide how to incorporate the reporting entity's fair value measurement in their decisions.
  • Exceptions to the disclosure requirement in paragraph 7.81(e).
    • As discussed in paragraph 7.81(e), the reporting entity does not have to disclose quantitative information if inputs are not developed by the entity when measuring fair value. However, the same paragraph states that a company cannot ignore quantitative information that is significant and is reasonably available to the entity. Investment companies may consider whether they have obtained and evaluated the third party's price (or inputs to the price) during due diligence required by FASB ASC 820-10-35-54K, which allows reporting entities to use quoted prices from third parties to determine fair value measurements, but requires reporting entities to perform due diligence to ensure those prices were developed in accordance with FASB ASC 820. When performing such due diligence, an investment company may consider the following procedures: gain an understanding of the techniques and models used by the third party, compare valuations received to market information and information received from other vendors, if available, and perform back testing. Also, FASB Staff Position No. 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (codified in FASB ASC 820-10-35) provides guidance on how vendor prices and broker quotes need to be considered in assessing observable and unobservable inputs for the fair value measurement.
    • The reporting entity does not have to disclose quantitative information if the net asset value is used as a practical expedient to determine fair value of the investment (see paragraph 7.88 for discussion of disclosure requirements for investments in companies that calculate net asset value per share, regardless of whether the practical expedient has been applied). Paragraph BC89 of FASB ASU No. 2011-04 supports this by stating "…disclosures about the fair value of those assets and liabilities that are subject to the practical expedient and categorized within level 3 of the fair value hierarchy would not be meaningful for such instruments because the determination of the level in the hierarchy is made on the basis of the reporting entity's ability to redeem its investment, rather than on the basis of whether the inputs used in the measurement are observable or unobservable. However, when an adjustment to the practical expedient value is necessary, the adjustment may need to be considered for the level 3 input table disclosure."
  • Presentation of disclosed quantitative information. FASB ASC 820-10-50-8 requires quantitative information to be disclosed in a tabular format.
7.84     When implementing the disclosure requirement related to valuation processes in paragraph 7.81(h), Investment Companies may consider disclosing items listed in "Pending Content" in FASB ASC 820-10-55-105:
    • For the group within the reporting entity that decides the reporting entity's valuation policies and procedures: 1) its description, 2) to whom that group reports, and 3) the internal reporting procedures in place (for example, whether and, if so, how pricing, risk management, or audit committees discuss and assess the fair value measurements).
    • The frequency and methods for calibration, back testing, and other testing procedures of pricing models.
    • The process for analyzing changes in fair value measurements from period to period.
    • How the reporting entity determined that third-party information, such as broker quotes or pricing services, used in the fair value measurement was developed in accordance with FASB ASC 820.
    • The methods used to develop and substantiate the unobservable inputs used in a fair value measurement.
7.85     When implementing the narrative description of sensitivity disclosure requirement in paragraph 7.81(i), investment companies may consider paragraph BC 96 of FASB ASU No. 2011-04, which explains that "the Boards expect that the narrative description will focus on the unobservable inputs for which quantitative information is disclosed because those are the unobservable inputs that the entity has determined are most significant to the fair value measurement." Further, investment companies may consider the example provided in "Pending Content" in FASB ASC 820-10-55-106:
The significant unobservable inputs used in the fair value measurement of the reporting entity's residential mortgage-backed securities are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. 
7.86     "Pending Content" in FASB ASC 820-10-50-2B explains that a reporting entity should determine appropriate classes of assets and liabilities on the basis of: the nature, characteristics, and risks of the asset or liability; and the level of the fair value hierarchy within which the fair value measurement is categorized. Further, the number of classes may need to be greater for fair value measurements within level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position.
7.87     "Pending Content" in FASB ASC 820-10-50-3 states that, for derivative assets and liabilities, the reporting entity should present both the fair value disclosures discussed in paragraph 7.81(a)-(c) on a gross basis (which is consistent with the requirements in FASB ASC 815-10-50-4B[a]) and the reconciliation disclosures discussed in paragraph 7.81(f)-(g) on either a gross or net basis.
7.88     "Pending Content" in FASB ASC 820-10-50-6A states that for investments in certain entities that calculate net asset value per share (investments that are within the scope of "Pending Content" in paragraphs 4–5 of FASB ASC 820-10-15) and measured at fair value on a recurring or nonrecurring basis during the period, a reporting entity shall disclose information that help users of financial statements to understand the nature and risks of the investments and whether the investments are probable of being sold at amounts different from net asset value per share (or its equivalent). 
These disclosures are required, regardless of whether the practical expedient (see paragraphs 2.77 - .87) has been applied. These disclosures, to the extent applicable, are required for each class of investment. The required disclosures, at a minimum, are as follows:
a.   The fair value measurement (as determined by applying paragraphs 59–62 of FASB ASC 820-10-35) of the investments in the class at the reporting date and a description of the significant investment strategies of the investee(s) in the class.
b.   For each class of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity's estimate of the period of time over which the underlying assets are expected to be liquidated by the investees.
c.   The amount of the reporting entity's unfunded commitments related to investments in the class.
d.   A general description of the terms and conditions upon which the investor may redeem investments in the class (for example, quarterly redemption with 60 days' notice).
e.   The circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise redeemable investments that are restricted from redemption as of the reporting entity's measurement date, the reporting entity should disclose its estimate of when the restriction from redemption might lapse. If an estimate cannot be made, the reporting entity should disclose that fact and how long the restriction has been in effect.
f.    Any other significant restriction on the ability to sell investments in the class at the measurement date.
g.   If a reporting entity determines that it is probable that it will sell an investment or investments for an amount different from net asset value per share (or its equivalent), as described in FASB ASC 820-10-35-62, the reporting entity should disclose the total fair value of all investments that meet the criteria in FASB ASC 820-10-35-62 and any remaining actions required to complete the sale.
h.   If a group of investments would otherwise meet the criteria in FASB ASC 820-10-35-62, but the individual investments to be sold have not been identified (for example, if a reporting entity decides to sell 20 percent of its investments in private equity funds, but the individual investments to be sold have not been identified), so the investments continue to qualify for the practical expedient in "Pending Content" in FASB ASC 820-10-35-59, the reporting entity should disclose its plans to sell and any remaining actions required to complete the sale(s).
Paragraph 7.203, from "Pending Content" in FASB ASC 820-10-55-107, provides an example of the disclosures required by "Pending Content" in FASB ASC 820-10-50-6A.
7.89     "Pending Content" in FASB ASC 820-10-50-2E provides disclosure requirements for those classes of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. Specifically, for those classes of assets and liabilities, a reporting entity should disclose the information required by paragraph 7.81(b), (d), and (h). No other disclosures in FASB ASC 820-10-50 (summarized in paragraphs 7.79-.88) are required for those classes of assets and liabilities. FASB ASC 825-10-55-3 and 55-4 list examples of financial instruments that a financial entity and nonfinancial entity, respectively, would include in their disclosures about the fair value of financial instruments, including:
    • Cash and short-term investments
    • Investment securities and trading account assets
    • Long-term investments
    • Loan receivables
    • Deposit liabilities
    • Long-term debt
    • Commitments to extend credit
    • Standby letters of credit
    • Written financial guarantees
            Other examples may include, but would not be limited to the following: tender option bonds, reverse repurchase agreements, treasury rolls, lines of credit, securities lending, and variable-rate demand preferred shares.



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