Disclosure Framework Fair Value Measurement … Framework—Fair Value Measurement March 4, 2015...
Transcript of Disclosure Framework Fair Value Measurement … Framework—Fair Value Measurement March 4, 2015...
Board Meeting Handout
________________________
The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be
addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended
to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after
extensive due process and deliberations.
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Disclosure Framework—Fair Value Measurement
March 4, 2015
PURPOSE OF THIS MEETING
1. The March 4, 2015, Board meeting is a decision-making meeting on fair value
measurement disclosures and related transition. The Board initially discussed this
topic at the September 3, 2014, Board meeting.
BACKGROUND INFORMATION
2. During 2014, the staff conducted a field study on preparers’ use of discretion in
applying disclosure requirements. On April 4, 2014, the Board reviewed the field
study results and asked the staff to (a) analyze a few disclosure sections, including
fair value measurement, and (b) suggest changes in the existing requirements on the
basis of the 2014 proposed FASB Concepts Statement, Conceptual Framework for
Financial Reporting—Chapter 8: Notes to Financial Statements.
3. The staff assessed the indicated disclosures for fair value measurements on the basis
of the concepts and decision questions in the proposed Concepts Statement.
TOPIC 1: DISCLOSURES TO CONSIDER MODIFYING
4. The staff has identified six disclosures that are not consistent with the proposed
Concepts Statement:
(a) Policy for timing of transfers between levels (Subissue 1)
(b) Valuation processes for Level 3 fair value measurements (Subissue 2)
(c) Estimates of timing of future events (Subissue 3)
(d) Level 3 rollforward (Subissue 4)
(e) Transfers between Level 1 and Level 2 (Subissue 5)
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(f) Sensitivity information (Subissue 6).
Subissue 1—Policy for Timing of Transfers between Levels
5. Paragraph 820-10-50-2C requires a reporting entity to disclose and follow a
consistent policy for the timing of transfers between levels of the fair value
hierarchy (for example, event date, beginning or end of period). Because the
requirement to follow a policy consistently is not a disclosure, the Board’s
discussion will not address this requirement, except as it relates to the section it is
located within the FASB Accounting Standards Codification®.
Question for the Board
1. Should a reporting entity be required to disclose its policy for timing of
transfers between levels of the fair value hierarchy?
Subissue 2—Valuation Processes for Level 3 Fair Value Measurements
6. Paragraph 820-10-50-2(f) requires a reporting entity to disclose its valuation
processes for Level 3 fair value measurements. The implementation guidance
contained in paragraph 820-10-55-105 lists the following as information that a
reporting entity might disclose to comply with paragraph 820-10-50-2(f):
(a) 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
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).
(b) The frequency and methods for calibration, back testing, and
other testing procedures of pricing models.
(c) The process for analyzing changes in fair value measurements
from period to period.
(d) 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 this Topic.
(e) The methods used to develop and substantiate the unobservable
inputs used in a fair value measurement.
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Question for the Board
2. Should a reporting entity be required to disclose its valuation processes
for Level 3 fair value measurements?
Subissue 3—Estimates of Timing of Future Events
7. For entities with investments in entities that report net asset value, the following
disclosures are required, among others:
(a) Paragraph 820-10-50-6A(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 investee’s assets are expected to be liquidated by the investees.
(b) Paragraph 820-10-50-6A(e). 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.
Questions for the Board
3. Should a reporting entity be required to disclose the estimated timing of
liquidation of an investee’s assets and the date when the restrictions from
redemption might lapse?
3(a). If not, should a reporting entity be required to disclose the timing if it
has been communicated to the reporting entity by the investee?
Subissue 4—Level 3 Rollforward
8. Paragraph 820-10-50-2(c) requires a reporting entity with recurring Level 3 fair
value measurements to present a reconciliation of the opening balances to the
closing balances, disclosing separately:
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(a) Total gains or losses for the period recognized in earnings or comprehensive
income, and the line item(s) in which those gains or losses are recognized
(b) Purchases, sales, issues, and settlements (each disclosed separately)
(c) Amounts of any transfers into or out of Level 3.
9. The staff has identified the following alternatives for the Board’s consideration:
(a) Alternative A: Remove the Level 3 rollforward requirement but retain the
requirement to disclose the amounts and reasons for any transfers into or out
of Level 3.
(b) Alternative B: Retain the Level 3 rollforward requirement and add a Level 2
rollforward requirement.
(c) Alternative C: Retain the Level 3 rollforward requirement and do not add
any further requirements.
Questions for the Board
4. Does the Board prefer Alternative A, B, or C?
4(a). If the Board selects Alternative B, should the decision apply to private
companies based on the Private Company Decision-Making Framework: A
Guide for Evaluating Financial Accounting and Reporting for Private
Companies
4(b). If the Board selects Alternative C, should the decision apply to private
companies based on the Private Company Decision-Making Framework
guide?
Subissue 5—Transfers between Level 1 and Level 2
10. Paragraph 820-10-50-2(bb) requires public reporting entities (but not private
entities) to disclose the following:
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 those transfers, and the reporting
entity’s policy for determining when transfers between levels are
deemed to have occurred….
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Question for the Board
5. Should a reporting entity be required to separately disclose the amounts
of and reasons for transfers between Level 1 and Level 2?
Subissue 6—Sensitivity Information
11. Paragraph 820-10-50-2(g) requires public reporting entities (but not private entities)
to disclose the following information about recurring Level 3 fair value
measurements:
(a) A narrative description of the sensitivity of the measurement to changes in
unobservable inputs that would change the measurement significantly
(b) A description of any interrelationships of those inputs with other inputs and
how they might magnify or mitigate each other’s effects, including, at a
minimum, the unobservable inputs disclosed when complying with
paragraph 820-10-50-2(bbb).
12. Paragraph 93(h)(i) of IFRS 13, Fair Value Measurement, has the same requirement
as is included in paragraph 820-10-50-2(g), but goes one step further than generally
accepted accounting principles (GAAP) and also requires the following for
recurring fair value measurements categorized within Level 3 of the fair value
hierarchy in paragraph 93(h)(ii):
…for financial assets and financial liabilities, if
changing one or more of the unobservable inputs to reflect
reasonably possible alternative assumptions would change fair
value significantly, an entity shall state that fact and disclose the
effect of those changes. The entity shall disclose how the effect
of a change to reflect a reasonably possible alternative
assumption was calculated. For that purpose, significance shall
be judged with respect to profit or loss, and total assets or total
liabilities, or, when changes in fair value are recognized in other
comprehensive income, total equity.
13. The staff has identified the following alternatives for the Board’s consideration:
(a) Alternative A: Remove the disclosure required by paragraph 820-10-50-2(g).
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(b) Alternative B: Retain the disclosure required by paragraph 820-10-50-2(g)
and require disclosure of the quantitative information as described in
paragraph 93(h)(ii) of IFRS 13.
(c) Alternative C: Modify the disclosure required by paragraph 820-10-50-2(g)
so that it is limited to circumstances in which the changes and
interrelationships would not be apparent to a reasonably informed user.
Question for the Board
6. Does the Board prefer Alternative A, B, or C?
TOPIC 2: DISCLOSURE TO CONSIDER ADDING
14. The staff identified one disclosure that is consistent with the proposed Concepts
Statement, but is not part of the existing requirements:
(a) Gains and losses (Subissue 7).
Subissue 7—Gains and Losses
15. Paragraphs 820-10-50-2(c)(1) and 820-10-50-2(d) require the following disclosures
for recurring Level 3 fair value measurements:
820-10-50-2(c)...reconciliation from the opening balances to the
closing balances, disclosing separately changes during the period
attributable to the following:
1. Total gains or losses for the period recognized in
earnings (or changes in net assets), and the line item(s)
in the statement of income (or activities) in which those
gains or losses are recognized.
820-10-50-2(d)…the amount of the total gains or losses for the period in
(c)(1) 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 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.
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Questions for the Board
7. Should a reporting entity be required to disclose fair value changes by
statement of comprehensive income line item related to assets and
liabilities held at the end of the reporting period disaggregated by the levels
within the fair value hierarchy?
7(a). If the Board were to add the requirement for entities to disclose fair
value changes by statement of comprehensive income line item related to
assets and liabilities held at the end of the reporting period disaggregated
by the levels within the fair value hierarchy, should the decision apply to
private companies based on the Private Company Decision-Making
Framework guide?
TOPIC 3: INDUSTRY-SPECIFIC TOPICS
16. The staff analyzed whether any of the requirements in Topic 820, Fair Value
Measurement, should be moved into the Financial Services Topics (Topics 940
through 950) within the Codification.
17. The staff analyzed whether certain fair value measurement disclosures should be
moved into the Financial Services Topics by considering the following questions:
(a) Are the disclosures broadly relevant?
(b) Are materiality assessments likely to be costly?
Question for the Board
9. Should any of the Topic 820 disclosures be moved into the Financial
Services Section of the Codification?
TOPIC 4: TRANSITION AND PERMISSION TO BALLOT
18. The staff analyzed transition into four subissues based on the nature of the potential
decisions that the Board will make on the previous issues, namely:
(a) Disclosure objective and discretion (February 18, 2015, Board meeting)
(Subissue 1)
(b) Qualitative disclosures (Subissue 2)
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(c) Quantitative disclosures, removal (Subissue 3)
(d) Quantitative disclosures, additions (Subissue 4).
Questions for the Board
8. Does the Board think that the guidance should be applied on a
retrospective basis or prospective basis?
8(a). Does the Board grant the staff permission to draft new guidance in an
Exposure Draft of a proposed Accounting Standards Update for vote by
written ballot?
8(b). If yes, what comment period does the Board select for this proposed
Update?
Board Meeting Handout
________________________
The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be
addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to
reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive
due process and deliberations.
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Financial Statements of Not-for-Profit Entities
March 4, 2015
PURPOSE OF THIS MEETING
1. The purpose of this meeting is to discuss Board members’ views about the expected
benefits, costs, and complexities associated with the proposed Accounting
Standards Update (ASU) Not-for-Profit Entities (Topic 958) and Health Care
Entities (Topic 954)—Presentation of Financial Statements of Not-for-Profit
Entities (proposed Update). The staff will also ask the Board for permission to
proceed with preparing a proposed Update for vote by written ballot.
BENEFITS, COSTS, AND COMPLEXITIES
2. At the October 8, 2014 Board meeting the staff provided alternatives to the Board
to lessen cost and complexity concerns voiced by Not-for-Profit Advisory
Committee (NAC) members and others. At that meeting, the Board revised its
previous decisions on capital-like transactions and presentation of governing board
designations, appropriations, and similar transfers in order to lessen some of those
concerns raised. In particular, the Board tentatively decided to do the following:
(a) No longer propose to require an NFP to report subsequent transfers back into
operations over time to reflect use of capital-like items for operations
(b) Require that resources restricted for the acquisition of capital-like items be
released from restrictions within operations and subsequently transferred out of
operations
(c) Prescribe the presentation and disclosure of governing board designations,
appropriations, and transfers, including requiring that: (1) all transfers be
reported in a separate, discrete section; (2) a subtotal be reported for the net
amount of operating revenues, expenses, gains and losses before such transfers;
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(3) at a minimum, the aggregation of transfers out of operating activities be
reported separate from the aggregation of transfers into operating activities on
the face of the statement of activities; and (4) unless all transfers are displayed
on the face, a note to disclose the details of the aggregated transfers with a
qualitative description of their purpose, amounts, and types.
3. At that same October 2014 meeting, the staff was instructed to begin drafting the
proposed Update for external review, after which the Board would have the
opportunity also to consider comments received from external reviewers before
making their overall assessment of the expected benefits, costs, and complexities
related to the proposed Update. With the exception of the issue raised by some
external reviewers about better aligning the operating notion between the statement
of activities and statement of cash flows, external reviewers raised no incremental
concerns about the operationality or usefulness of the proposed amendments beyond
those already provided to and discussed by the Board. Therefore, the staff believes
Board members can utilize the benefits, costs, and complexities discussion already
provided by the staff as a basis for their discussion of the overall benefits, costs, and
complexities.
4. At the February 25, 2015 Board meeting, the Board discussed and reached tentative
decisions for (a) sweep issues identified during drafting and external review and (b)
proposed transition and effective date and comment period length. Those tentative
decisions are included as Appendix I. The Board also discussed some of the
expected benefits and perceived costs of implementing the proposed Update and
asked the staff to discuss the recent decisions reached with the NAC at its March 3,
2015 meeting.
5. At the March 4, 2015 Board meeting, the staff will also provide the Board with a
verbal summary of the discussion that took place at the previous day’s NAC meeting
and will ask the Board to complete its discussion of the overall benefits, costs, and
complexities of the proposed Update.
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Questions for the Board
1. Subject to what is learned through comment letters and other stakeholder
outreach, do the expected benefits of the proposed Update justify the
perceived costs?
2. Should the staff proceed to drafting a proposed Update for a vote by
written ballot?
NEXT STEPS
6. If the Board grants permission to the staff to proceed to the balloting stage, the staff
will incorporate in the preballot draft both the external review feedback and the
sweep issues identified and discussed by the Board at the February 25, 2015
meeting. The staff plans on issuing the preballot draft within the next 7-10 days and
the Exposure Draft by mid-April 2015.
7. The staff also recommends that the Exposure Draft include, if the Board approves,
an announcement of a plan to hold two roundtables to gather further insight from
stakeholders shortly after the close of the comment period. The Board tentatively
decided that the comment period will be through July 31, 2015.
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APPENDIX I: FEBRUARY 25, 2015 TENTATIVE BOARD DECISIONS
The Board discussed various issues identified during the drafting of a proposed Accounting
Standards Update (ASU). The Board also discussed the proposed transition and effective
date and comment period length. Finally, the Board discussed a staff analysis of the
expected benefits and perceived costs of the proposed changes.
Alignment of Operating Definitions in the Statements of Activities and Cash Flows
The Board decided to maintain tentative definitions for operations in the statements of
activities and cash flows but decided to seek input in the forthcoming Exposure Draft on
whether and how those definitions might be further aligned.
Presentation and Disclosure of Investment Return
The Board decided not to require disclosure of unrelated business income taxes or excise
taxes that are netted against investment return and to eliminate the disclosure of the
following:
1. Components of investment return as both a separate disclosure and part of the
endowment rollforward
2. The total performance of other investment portfolios that is currently required for
institutions of higher education.
Accounting Write-Offs and Equity Transfers
The Board decided that the following items should be reported separately from revenues,
expenses, gains, and losses and presented within the operating activity section of the
statement of activities and before the section of governing board transfers:
1. The immediate write-off of goodwill upon acquisition of an entity (required of not-
for-profit entities (NFPs) predominantly supported by contributions and investment
income), unless the acquired entity is for a purpose or purposes that are not directed
at carrying out the purpose for the acquirer’s existence
2. Accessions and deaccessions of noncapitalized collection items acquired with
resources that are without donor restrictions
3. Equity transfers, unless they are not for current period use in carrying out the
purpose for the reporting entity’s existence.
The Board also decided that NFPs should classify as operating cash flows their (1) cash
outflows for purchases of collection items, (2) cash inflows on the sale of collection items,
and (3) cash inflows for contributions received that are restricted for the acquisition of
collection items.
Governing Board Designations
The Board decided to clarify that presentation of governing board designations,
appropriations, or similar transfers on the statement of activities would include decisions
made by the governing board’s designees.
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Proposed Transition and Effective Date and Comment Period Length
The Board decided to require retroactive application of the proposed changes. In the initial
year of application of the proposed changes, the annual financial statements would disclose
the nature of any reclassifications or restatements and their effects, if any, on the change in
the net asset classes for each year or period presented. Application to interim financial
statements would not be required in the initial year of application.
The Board also decided not to propose a specific effective date and will instead ask
respondents to provide information that would help the Board in determining an
appropriate date (or dates) during redeliberation.
The Board also decided that, based on an expectation that the forthcoming Exposure Draft
would be issued by mid-April, the comment period would end on July 31, 2015.
Potential Benefits, Costs, and Complexities of the Proposed Amendments
The Board discussed an analysis of the expected benefits and perceived costs of
implementing the proposed changes. The Board will continue that discussion after its
March 3, 2015 meeting with the Not-for-Profit Advisory Committee (NAC).
Next Steps
The Board directed the staff to discuss the summary of decisions reached at this meeting
with the NAC during its March 3, 2015 meeting. The Board will consider this feedback at
the March 4, 2015 Board meeting and decide whether the overall expected benefits of the
proposed amendments justify the perceived costs, and, if so, will direct the staff to proceed
with drafting a proposed ASU.