Changes to Required Disclosures for Investments Measured at Net Asset Value– June 23, 2015

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-07 (ASU 2015-07) eliminating the requirement for investments measured at net asset value to be categorized within the fair value hierarchy under generally accepted accounting standards (GAAP).  The change was enacted amid a diversity in practice in how such investments were being categorized and to align the criteria for how all investments measured at fair value are categorized.

Background

A common practice among investment companies that invest in other investment companies is to measure the fair value of such investments at net asset value as a practical expedient, as permitted by ASC Topic 820. However, FASB recognized inconsistencies regarding how reporting entities categorized such investments within the fair value hierarchy.  Such investments were required to be categorized as either Level 2 or Level 3 based on redemption characteristics, i.e. liquidity, of the investment. Generally, an investment that could be redeemed in the near term was deemed to be a Level 2 security and redemption periods extending beyond the near term were considered Level 3.  However, any entities that interpreted near term differently could, by default, categorize the same investment differently. 

Additionally, all other fair value investments categorized within the fair value hierarchy are done so based on the inputs used in valuation techniques, not liquidity, which created a fundamental disparity in the criteria used for determining how investments were being categorized within the fair value hierarchy.  FASB reiterated that the intent of the fair value hierarchy is to help financial statement users assess the subjectivity of inputs utilized to measure the fair value of a reporting entity’s investments. Accordingly, using different criteria to categorize different investments was potentially misleading to the users of financial statements. 

As a response to both issues, ASU 2015-07 eliminates the requirement to categorize investments measured at net asset value in the fair value hierarchy and also requires sufficient information be disclosed to reconcile the fair value of the remaining assets categorized within the fair value hierarchy to the statement of financial position.

Ramifications of the Change

Other ASC Topics that were potentially impacted by the change were also amended in order to minimize further ramifications. For example, Topic 230, which provides an exemption for investment companies from providing cash flow statements, was also amended. A key criterion under Topic 230 for an entity to qualify for the exemption required all of the entity’s investments to be categorized as Level 1 or Level 2 securities.  FASB amended this criteria to also include investments that are measured using the practical expedient to determine their fair value and are redeemable in the near term.

Effective Date and Transition

The effective date for ASU 2015-07 is effective for public entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The change is effective for all other entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for all entities and disclosure changes are to be applied retrospectively for all reporting periods presented.


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