Author: Andrew K. Sledd, CPA, CFE, Business Assurance & Advisory Services Senior Manager | Financial Services Industry Team
In May of 2015, the Financial Accounting Standards Board (“FASB”) released an Accounting Standards Update (“ASU”) regarding investments held at net asset value per share (“NAV”). Current fair value measurement guidance allows companies, as a practical expedient, to measure investments using NAV. It is common place for companies that invest in investment companies to value their holdings using NAV. ASU 2015-07 states that investments that are valued using NAV as a practical expedient estimate to fair value no longer have to be classified within the fair value hierarchy. The impacts of this release are substantial and the effects will significantly decrease or eliminate the financial statement disclosures required by the current FASB guidance relating to the fair value measurements.
In issuing ASU 2015-07 the FASB sought to eliminate the diversity in practice of how assets measured using NAV as a practical expedient were categorized within the fair value hierarchy. The Task Force charged with reviewing the current fair value hierarchy observed significant variation in practice of categorizing investments held at NAV in either Level 2 or Level 3 and that using NAV as a practical expedient was one of the only fair value measurements that used different criteria for classification within the hierarchy. ASU 2015-07 will eliminate the majority of the fair value disclosures for any investments that a company holds at NAV as a practical expedient. In cases where only some investments are valued using NAV as practical expedient, it is recommended to provide a reconciliation from the fair value hierarchy disclosure to the balance of the investments on the statement of financial position. It is important to note that while some investments produce a NAV the company may choose to not use the NAV as the practical expedient. In this case, the investment would still be required for inclusion in the fair value hierarchy.
ASU 2015-07 does not completely eliminate disclosures regarding the investments held at NAV. Financial statement preparers will still be required to disclose information regarding the nature and risk of the investments held at NAV. The disclosures required allowing the user to understand the nature and risk of the investment include: information related to significant investment strategies, unfunded commitments and redemption and transferability restrictions.
The new guidance is effective for public entities for fiscal years beginning after December 15, 2015 and for private entities for fiscal years beginning after December 15, 2016, however, early adoption is permitted. For more information including illustrative examples, see the entire pronouncement from the FASB (ASU 2015-07 Amendments to ASC 820 Fair Value Measurements).
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