Accounting Standards Update 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07) was issued in May 2015 with an effective date for public entities for fiscal years beginning after December 15, 2015, and, for all other entities, for fiscal years beginning after December 15, 2016. Because this ASU allows for simplified fair value disclosures and calls for retrospective reporting, meaning that all periods presented in the financial statements will conform to the presentation, your organization may want to consider early adoption.
If your entity holds investments, like many nonprofit organizations, you should be familiar with the fair value measurements footnote disclosure. Depending on the types of investments your organization has and their placement within the fair value hierarchy, this footnote can be quite lengthy. With ASU 2015-07, you do not have to categorize certain types of investments that measure fair value using net asset value (NAV) — which includes those that are traded on the open markets, such as mutual funds or real estate investment funds (REITS), as well as other investments that do not have readily determined fair values, such as hedge funds and private equity funds. Instead, entities are required to disclose the total amount of investments measured using NAV, to allow financial statement users to easily reconcile the investments included in the fair value hierarchy to the statement of financial position.
Prior to this update, investments where fair value is measured at NAV (or its equivalent) were categorized within the fair value hierarchy based on liquidity, or whether the investment is redeemable with the investee at its NAV on the measurement date, at a future date or never redeemable. Classification within the fair value hierarchy was dependent on the length of time estimated for investments to become redeemable at a future date. Determining that length of time proved to be complicated and inconsistent in practice; ASU 2015-07 solves this problem.
ASU 2015-07 also removes certain disclosures relating to roll forward of investment activity for investments measured at NAV that were previously categorized as a Level 3 in the fair value hierarchy. However, entities are encouraged to continue to include such disclosures to aid users in understanding the nature, characteristics and risks of the reporting entities investments. All other disclosures related to the fair value hierarchy remain the same.
Implementing ASU 2015-07 is relatively easy! It starts with simply identifying all investments measured at fair value using NAV. Once they are identified, remove them from categorization as Level 1, Level 2 or Level 3 within the fair value hierarchy footnote.
You may ask how this is an improvement to the accounting standard.By removingthe investments measured atNAVfrom the fair value hierarchy, itallows fora more consistent approachin reportinginvestments, simplifies the fair value disclosures, and may save you time come your year end audit going forward. Electing to early adopt this ASU allows your organization to see these benefits sooner.
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Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.