February 2013
Certified Public Accountants
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maalert
FASB Exempts Private Companies from
a Fair Value Measurement Disclosure
The Financial Accounting Standards Board
(FASB) issued guidance in February clarifying
the applicability to nonpublic entities of a certain
disclosure requirement regarding the fair value
of assets and liabilities. The guidance, found in
Accounting Standards Update (ASU) 2013-03,
Financial Instruments (Topic 825): Clarifying the
Scope and Applicability of a Particular Disclosure
to Nonpublic Entities, takes effect immediately. It
directly affects private companies that have total
assets of $100 million or more—or one or more
derivative instruments—and the preparation of
their 2012 financial statements.
The Disclosure at Issue
In May 2011, in conjunction with the
International Accounting Standards Board, the
FASB issued new standards for public and private
companies on fair value measurement and
disclosures. The standards were part of an effort
to achieve common fair value measurement and
disclosure requirements in US generally accepted
accounting principles (GAAP) and international
financial reporting standards (IFRS).
Among other things, the standards—found
in ASU 2011-04, Fair Value Measurement
(Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure
Requirements in US GAAP and IFRSs—describe
many of the requirements in GAAP for measuring
fair value and disclosing information about fair
value measurements.
In particular, the guidance in the ASU amended
Accounting Standards Codification (ASC) Topic
825-10-50-10(d), which addresses the disclosure
of the fair value of financial instruments in an
entity’s balance sheet, to require the disclosure
of the level of the “fair value hierarchy” within
which the fair value measurements for an
instrument are categorized.
The fair value hierarchy identifies three levels of
assets and liabilities, with the level of required
disclosures essentially increasing as the
associated valuations become less reliable:
• Level 1 assets and liabilities are valued according
to a quoted price in an active market, generally
without any adjustments.
• Level 2 assets and liabilities are valued based
on “observable inputs” other than quoted active
market prices, including quoted prices for similar
assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities
in inactive markets, and interest rates and yield
curves.
• Level 3 assets and liabilities are valued based on
“unobservable inputs,” such as a company’s own
estimates and pricing models.
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Because Level 3 assets and liabilities can’t easily
be sold in active markets, they’re difficult to
value. So their fair values are less reliable than
those of Level 1 assets and liabilities and could
undermine the reliability of financial statements.
These risky and illiquid assets and liabilities,
therefore, are subject to the most expansive
disclosure requirements.
The FASB’s Intent Versus Reality
In developing the amendments in ASU 2011-04,
the FASB concluded that some of the disclosures
shouldn’t be required of nonpublic entities
because of the characteristics of the users of their
financial statements. It considered, for example,
the ability of those users to access information
about the financial positions of nonpublic
entities and the relevance to those users of the
information that would be disclosed.
At a public meeting before the release of
ASU 2011-04, the FASB expressed its explicit
intent that the guidance in the ASU exempt all
nonpublic entities from the disclosure required
in ASC Topic 825-10-50-10(d). In December
2012, however, several stakeholders raised
concerns about the amendments. They pointed
out that the cross-referencing between ASC
Topics 820 and 825 was potentially confusing
because the nonpublic entity exemptions seemed
to conflict with one another and with the FASB’s
intent.
For example, ASC Topic 820-10-50-2F exempts
nonpublic entities from the requirement to
disclose the level of the fair value hierarchy for
items not reported at fair value in the balance
sheet unless required by another topic. Topic 825
requires such disclosure from nonpublic entities
with assets greater than $100 million or that
have derivative instruments. The amendments,
therefore, suggested that nonpublic entities
that have total assets of $100 million or more or
that have one or more derivative instruments
wouldn’t qualify for the intended exemption.
The FASB’s Response
The guidance in ASU 2013-03 makes clear that
the requirement to disclose the level of the fair
value hierarchy within which the fair value
measurements are categorized doesn’t apply
to nonpublic entities for financial assets and
liabilities that aren’t measured at fair value in the
balance sheet but for which fair value is disclosed
in the footnotes.
For example, if a private company’s own debt is
measured at amortized cost in its balance sheet,
the fair value of that liability must be disclosed in
the footnotes to the financial statements. Under
the guidance in ASU 2013-03, the company need
not disclose the level of the fair value hierarchy
for that footnoted measurement.
The FASB didn’t, however, take action to tackle
additional concerns raised by stakeholders
about the overlap and potential redundancy
between Topics 820 and 825, noting that it would
require a comprehensive review that would need
“considerably more time and effort.”
Retained Disclosure Requirements
The amendments in ASU 2013-03 don’t
change any of the other fair value disclosure
requirements in Topics 820 or 825, including the
expanded fair value measurement disclosures
required by the amendments in ASU 2011-04.
Under those amendments, for Level 3 items,
a company must disclose both its valuation
processes and the sensitivity of the measurement
to changes in unobservable inputs and any
interrelationships between those unobservable
inputs. Nonpublic companies are exempt from
the latter requirement. For all items, companies
must disclose their use of a nonfinancial asset
that differs from its highest and best use if the
asset is measured at fair value in the company’s
balance sheet or its fair value is disclosed on the
basis of highest and best use.
Effective Date
The amendments in ASU 2011-04 took effect for
nonpublic entities for annual periods beginning
after December 15, 2011 (calendar year 2012),
meaning many nonpublic entities are in the
process of adopting them. In light of that the
FASB decided to make the amendments in ASU
2013-03 effective immediately.
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We’re Here to Help
Moss Adams LLP continuously monitors the
regulatory landscape and will keep you informed
of any changes or further amendments to fair
value measurement requirements or other ASUs.
In the meantime, if you have questions about
whether the amendments affect you or how to
comply with fair value reporting requirements,
contact your Moss Adams professional.
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