No. US2015-11
June 29, 2015
What’s inside:
Background ..................... 1
Key provisions ................. 1
Implications .....................2
Other provisions and
related amendments ....2
What’s next ......................3
Investments using NAV practical expedient
removed from fair value hierarchy
At a glance
New FASB guidance allows reporting entities to exclude investments measured at net
asset value (NAV) per share under the existing practical expedient in ASC 820 from the
fair value hierarchy. In addition, when the NAV practical expedient is not applied to
eligible investments, certain other disclosures are no longer required. The new
guidance is effective in 2016 for calendar year-end public business entities. Early
adoption is permitted.
Background
.1 ASC 820, Fair Value Measurement, requires reporting entities to categorize
investments measured at fair value in one of three levels in the fair value hierarchy. This
categorization is based on the observability of the inputs used in valuing the investment.
ASC 820 also allows the use of NAV as a practical expedient for fair value for certain
investments, to the extent that NAV is calculated consistent with the guidance in ASC
946, Financial Services−Investment Companies.
.2 ASC 820 contains guidance for leveling investments measured at NAV as a practical
expedient. When the investment is redeemable at the measurement date, it would
generally be categorized as Level 2, but if redemptions are not permitted, it would be
categorized as Level 3. The appropriate category is unclear for investments that are
redeemable at NAV at various intervals (e.g., quarterly, semi-annually or annually). This
has resulted in inconsistent categorization in the fair value hierarchy. For example, some
reporting entities have classified investments that offer redemptions quarterly or more
frequently in Level 2 and investments that offer redemptions less frequently than
quarterly in Level 3. Other reporting entities use semi-annual or annual redemptions as
the dividing line for determining where to include such investments in the fair value
hierarchy.
Key provisions
.3 On May 1, 2015, the FASB issued 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). Under the new guidance,
investments measured at net asset value (“NAV”), as a practical expedient for fair value,
are excluded from the fair value hierarchy. Removing investments measured using the
practical expedient from the fair value hierarchy is intended to eliminate the diversity in
practice that currently exists with respect to the categorization of these investments. The
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In depth
1
only criterion for categorizing investments in the fair value hierarchy will be the
observability of the inputs.
Implications
.4 Because a reporting entity’s investments measured at NAV as a practical expedient
for fair value will no longer be categorized in the fair value hierarchy, the total of the fair
value hierarchy disclosure will not agree to the total investments at fair value on the
balance sheet. Therefore, the new guidance requires reporting entities to reconcile the
fair value hierarchy disclosure to the balance sheet by disclosing the amount of
investments measured using the practical expedient.
PwC observation:
Because investments measured at NAV as a practical expedient will no longer be
included in the fair value hierarchy, reporting entities will no longer be required to
include these investments in the associated disclosures, including the rollforward of
Level 3 investments.
.5 Although removed from the fair value hierarchy, the new guidance still requires
reporting entities that elect the practical expedient to make certain disclosures about the
nature and risks of the investments. However, the disclosures are no longer required for
investments that are eligible to be measured using the practical expedient, but for which
the practical expedient was not elected.
PwC observation:
For some investments, NAV is fair value, not a practical expedient for fair value. It is
important for a reporting entity to determine whether it is using NAV as a practical
expedient or whether NAV is, in fact, the fair value of the investment. This new
guidance only applies to investments measured at NAV as a practical expedient. For
example, the fair value of an investment in a mutual fund where the mutual fund’s
NAV per share is determined and published and the basis for current transactions is
fair value. In contrast, if NAV is communicated to the investor, but is not publicly
available, NAV is being used as a practical expedient for fair value. Only the latter
may be excluded from the fair value hierarchy. In the former scenario, a reporting
entity would continue to include the investment in the mutual fund in the fair value
hierarchy and make all required fair value disclosures.
Other provisions and related amendments
.6 As a result of the changes made to ASC 820 by the new guidance, the FASB amended
two other areas of GAAP.
.7 ASC 230, Statement of Cash Flows, currently provides an exemption for investment
companies and similar entities from preparing a statement of cash flows. One of the
criteria for the exemption requires that “substantially all” of the investments held during
the period be categorized as Level 1 or Level 2 within the fair value hierarchy. Without
the amendment to ASC 230, reporting entities with significant investments measured at
NAV as a practical expedient would not have met the criteria and would have been
required to present a statement of cash flows. The new guidance amends ASC 230 to
include investments measured using the practical expedient in the “substantially all” test
if they are redeemable in the near term at all times.
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In depth
2
PwC observation:
Although “near term” is not defined, we generally expect reporting entities to use the
same interpretation previously applied when assessing whether investments
measured at NAV as a practical expedient were considered Level 2 or Level 3.
.8 The FASB also amended ASC 715, Compensation—Retirement Benefits, to clarify
that a plan sponsor’s pension assets are eligible to be measured at NAV as a practical
expedient and that those investments are not required to be categorized in the fair value
hierarchy.
What’s next
.9 The new guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015 for public business entities. For all other
entities, the guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2016. Early adoption is permitted, including for
financial statement periods that have not yet been issued.
.10 Reporting entities must apply the new guidance retrospectively to all periods
presented. Additionally, a reporting entity should disclose the nature of and reason for
the change in accounting.
Questions?
Authored by:
PwC clients who have questions about this
In depth should contact their engagement
partner. Engagement teams who have
questions should contact the Financial
Instruments team in the National
Professional Services Group (1-973-2367803).
Christopher R. May
Partner
Phone: 1-973-236-5729
Email: christopher.r.may@us.pwc.com
Robert Sidoti
Senior Manager
Phone: 1-973-236-7952
Email: robert.sidoti@us.pwc.com
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