Proposed update to Fair Value Measurements and Disclosures (Topic 820)

With an increasing number of recommendations to FASB to improve the GAAP disclosure requirements related to Fair Value Measurements, the Board has issued an exposure draft with suggestions for improving the disclosures about fair value measurements. Accounting Standards Update of Topic 820 was issued by the Board for public comment and is expected to be effective for interim and annual periods ending after December 15, 2009. Here are the proposed updates:

Level of disaggregation: The existing U.S. GAAP on fair value measurement and disclosures require an entity to provide disclosures about fair value measurements for each major category of assets and liabilities. The major categories have been interpreted to mean a line item in the statement of financial position. FASB has suggested that disclosures about the fair value measurements would be more useful if the entities provided them for each class of assets and liabilities within the line items in the statement of financial position. The reporting entity shall determine the appropriate classes for disclosures on the basis of the nature and risks of the assets and liabilities and their classification within the fair value hierarchy. For example disclosures relating to derivative instruments may be presented separately by type of contract such as interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts and other contracts. The classification of the assets and liabilities in the fair value hierarchy shall also affect the level of disaggregation because of the different degrees of uncertainty and subjectivity involved in Level 1, Level 2 and Level 3 measurements. The number of classes may need to be greater for fair value using significant unobservable inputs to achieve the disclosure objectives because Level 3 measurements have a greater degree of uncertainty and subjectivity.
Disclosures about inputs used for recurring and nonrecurring fair value measurements: The current accounting standards require an entity to describe the techniques used for recurring and non recurring fair value measurements. FASB believes that a more explicit discussion of the valuation techniques and inputs for fair value measurements may be required. Examples of relevant disclosures include: the type of valuation technique used such as market approach, income approach, or the cost approach; quantitative inputs relating to prepayment rates, rates of estimated credit losses, interest rates or discount rates and volatilities; the nature and type of collateral or other credit enhancements. For example, for residential- asset- backed securities, a reporting entity may be required to disclose whether it is subprime or home equity lines of credit, the year of issuance, geographical concentration and information about the credit ratings of the securities. The reporting entity may also be required to disclose how broker quotes, pricing services, net asset values and relevant market data were considered in determining fair value.
Effect of reasonably possible alternative level 3 inputs (sensitivity disclosures): For fair value measurements using significant unobservable inputs (Level 3), if changing one or more of the significant unobservable inputs to reasonably possible alternative inputs would increase or decrease the fair value significantly, the reporting entity shall state the fact and disclose the total effect of the change. The reporting entity shall describe how the total effects of the change to reasonably possible alternative inputs are calculated. The reporting entity shall also disclose quantitative information about the significant inputs used and reasonably possible alternative inputs for each class of fair value measurement. For example, for residential mortgage-back securities, the reporting entity's quantitative disclosures may include inputs used and reasonably possible alternative inputs related to yield/discount rate, probability of default, loss severity and prepayment rate.
Transfers between levels 1, 2 and 3: The reporting entity would be required to disclose amounts of significant transfers between level 1 and level 2 of the fair value hierarchy and reasons for the transfers. Significant transfers into each level shall be disclosed separately from transfers out of each level. For this purpose significance shall be judged with respect to the earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, with respect to total equity.

Proposed update to Fair Value Measurements and Disclosures (Topic 820)

What would you like to do?