Fair Value and Derivatives
Measurement and Disclosure
Jim Laures
Deloitte & Touche LLP
March 2, 2010
Agenda
1.FASB Accounting Standards Codification (“ASC”) Topic 815, Derivative and
Hedging (formerly, Statement of Financial Accounting Standards (“SFAS”) No.
161, Disclosures about Derivatives and Hedging Activities--an amendment of
FASB Statement No. 133) (ASC 815)
2.FASB ASC Topic 820, Fair Value Measurements and Disclosures (formerly
SFAS No. 157, Fair Value Measurements) (ASC 820)
a.
FASB Accounting Standards Update (“ASU”) 2009-12, Fair Value Measurements and Disclosures
(Topic 820)—Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent) (ASU 2009-12)
b.
FASB ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving
Disclosures About Fair Value Measurements (ASU 2010-06)
c.
FASB Staff Position No. FAS 157-4, Determining Fair Value when the Volume and Level of
Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that
are Not Orderly (FSP FAS 157-4)
3. Other
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ASC 815
When and Why Issued
• Issued March 2008
• Expands existing disclosure requirements to improve transparency of financial
reporting and provide users of financial statements with an enhanced
understanding of:
‒ How and why derivatives are used
‒ How derivatives and related hedged items are accounted for under SFAS No. 133
‒ How derivative instruments affect an entity’s financial position and results of operations
• Effective for periods beginning after November 15, 2008 (2009 for calendar year
entities)
• Comparative disclosures required only for periods subsequent to initial adoption
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ASC 815
Qualitative Disclosures
• Purpose and objectives for using derivatives, strategies for achieving objectives
• Distinguish between instruments used for risk management (hedging) and those
used for other purposes (trading)
• Further disaggregate current required disclosures by the “primary underlying risk
exposure”
‒ interest rate
‒ credit
‒ foreign exchange rate
‒ equity
• Describe volume of derivatives activity by type of instrument
‒ Notional amounts
‒ Number of contracts
‒ Etc.
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ASC 815
Quantitative Disclosures – Statement of Assets and Liabilities
• No change in current presentation of derivatives on Statement of Assets and
Liabilities
• No change in disclosure of each derivative by type within the Schedule of
Investments or in Footnotes
• However, new tabular disclosure of derivatives required
‒ Summarize by primary risk exposure
‒ Identify location (by line item) in Statement of Assets and Liabilities
‒ Period end fair value--gross basis
• Even when derivatives are subject to master netting arrangements and qualify for net presentation
• Cash collateral payables and receivables associated with derivatives should not be added to/netted
against the fair value amounts
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ASC 815
Statement of Operations – Realized & Unrealized Gain (Loss)
• No change to existing presentation within Statement of Operations
• However, new tabular disclosure of derivatives’ realized and change in
unrealized gains/losses required
‒ Summarize by primary risk exposure
‒ Identify location (by line item) in Statement of Operations
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ASC 815
Example Illustration – Statement of Assets and Liabilities – Assets
Fair Values of Derivatives in the Assets section of Statement of Assets and
Liabilities (remains unchanged)
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ASC 815
Example Illustration – Statement of Assets and Liabilities – Liabilities
Fair Values of Derivatives in the Liabilities section of Statement of Assets and
Liabilities (remains unchanged)
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ASC 815
Example Tabular Disclosure Footnote (Statement of Assets and
Liabilities) – for Derivatives not accounted for as hedging
instruments
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ASC 815
Example Illustration – Statement of Operations
Excerpt of Realized Gain (Loss) and Change in Net Unrealized appreciation
(depreciation) section (remains unchanged)
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ASC 815
Example Tabular Disclosure Footnote (Statement of Operations) –
Derivatives not accounted for as hedging instruments [Note:
Separate tabular disclosure for realized and for unrealized is not required; realized
and unrealized can be combined into one tabular disclosure.]
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ASC 815
Other Key Requirements
• Adds credit risk disclosure requirements
‒ Disclose existence and nature of credit-risk-related contingent features that require,
upon occurrence of a credit event (e.g., credit rating downgrade), settlement of
derivative or posting of collateral
• Clarifies that derivatives are subject to “concentration of credit risk disclosures”
required by FASB ASC Topic 825, Financial Instruments (formerly SFAS No.
107, Disclosure About Fair Value of Financial Instruments)
• Cross-referencing from derivatives footnote to other footnotes required when
disclosure information is presented elsewhere in financial statements
Resource
• Managed Funds Association Discussion Paper on FAS 161 Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (Feb 2010) [member’s only]
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ASU 2009-12
When and Why Issued
• Issued September 30, 2009
• Creates a “practical expedient” for measuring the fair value of investments in
certain entities (“Investee”) that calculate net asset value per share (NAV)
• Prior to issuance, there was diversity in practice in how investors estimated fair
value of investments in funds that calculate NAV
‒ NAV is determinative of fair value, without further adjustment as of the reporting date
‒ NAV adjusted to account for impact of the attributes of the investment--e.g., restrictions
on redemption (e.g., lockups and gates), unfunded commitments, and intangible benefits
• Effective for interim and annual periods ending after December 15, 2009 (2009
for calendar year entities)
• Early application is permitted; however, if applied, an entity may defer adoption
of the disclosure provisions
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ASU 2009-12
Scope
• Applies to an investment in an Investee:
‒ That has attributes of an investment company (as defined in FASB ASC Topic 946,
Financial Services – Investment Companies), or
‒ For which it is industry practice to issue financial statements using guidance consistent
with the measurement principles of FASB ASC Topic 946
• Does not apply to an investment with a readily determinable fair value
• Examples:
Potentially In
Certain investments in:
•
•
•
•
•
Hedge funds
Private equity funds
Venture capital funds
Real estate funds
Foreign hedge funds
Potentially Out
Certain investments in:
•
•
•
•
Operating entities
Mutual funds
Closed-end funds transacted on an
exchange
Closed-end funds transacted in an overthe-counter market
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ASU 2009-12
What it Does
• Permits reporting entity to use of NAV per share (or its equivalent) to measure
fair value for alternative investments (e.g., hedge funds, private equity funds,
etc.)
• If NAV is not calculated as of reporting entity’s measurement date, requires
reporting entity to adjust NAV for significant market events that may have
occurred since the Investee calculated NAV
• Investment-by-investment election
• Requires either Level 2 or Level 3 classification by the reporting entity
determined by ability to redeem
‒ Level 2: ability to redeem at NAV at measurement date
‒ Level 3: will never have the ability to redeem at NAV at measurement date
‒ Level 2 or 3: if can’t redeem at NAV at measurement date (but may be able to redeem at
a later date), evaluate “length of time until investment will become redeemable”
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ASU 2009-12
What it Does (continued)
• Prohibits use of NAV as a practical expedient if it is probable the reporting entity
will sell the investment (or portion thereof) at a price other than NAV. To be
considered probable:
‒ Management with authority to approve the action commits to a plan to sell
‒ Active program to locate a buyer or other actions to complete the plan to sell has been
initiated
‒ Investment is available for immediate sale subject only to terms and conditions that are
usual and customary for such sales
‒ Actions required to complete the plan indicate that it is unlikely that plan will be
significantly changed or withdrawn
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ASU 2009-12
Disclosure by major category of investments
• Fair value of investments and description of significant investment strategies of
the Investee(s)
• Estimate of period over which an Investee may liquidate underlying investments
(This disclosure applies only to investments (a) that cannot be redeemed and (b)
when the reporting entity receives distributions via liquidation of the underlying
investments by the Investee)
• Amount of reporting entity’s unfunded commitments related to investments in the
major categories
• General description of terms and conditions upon which the reporting entity may
redeem the investments --e.g., quarterly redemption with 60 days’ notice, etc.
• Circumstances in which an otherwise redeemable investment might not be
redeemable—e.g., because of lockups or gates, etc.
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ASU 2009-12
Disclosures by major category of investments (continued)
• For investments that are redeemable but restricted from redemption as of
reporting entity’s measurement date:
‒ Best estimate of when restriction from redemption might lapse; or
‒ Fact that an estimate cannot be made.
• Other significant restrictions on the reporting entity’s ability to sell the investment
as of measurement date.
• Sale of investments:
‒ Total fair value and remaining actions required to finalize sale of investments for which it
is probable that the reporting entity will sell the investment for an amount other than NAV
‒ However, if reporting entity has not identified the individual investment that it is probable
will be sold, reporting entity must still disclose its plan to sell and remaining actions
required to complete the sale
• Example Case D Disclosure in ASU 2009-12
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ASU 2009-12
AICPA Resource
• AICPA issued guidance in the form of Technical Questions and Answers (TIS)
(commonly referred to as Technical Practice Aids or TPAs) and placed them in
TIS Sections 2220, Long-Term Investments, including them in TIS Sections
2220.18-27 (Alternative Investments TPA)
• Guidance considered non-authoritative and not part of the FASB Accounting
Standards Codification
• Available on the AICPA’s Web site.
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ASU 2010-06
When Issued and What Changed
• Issued January 2010
• Amends ASC 820 (formerly SFAS No.157):
‒ New requirements for disclosures about transfers into and out of Level 1 and Level 2
‒ Separate disclosures about purchases, sales, issuances, and settlements relating to
Level 3 measurements
‒ Clarifies existing fair value disclosures about level of disaggregation and inputs and
valuation techniques used to measure fair value
• Generally effective for first interim or annual reporting period beginning after
December 15, 2009 (2010 for calendar year entities)
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ASU 2010-06
Level of Disaggregation
• Existing Disclosure--provide disclosures by each “major category” of assets and
liabilities.
‒ Term “major category” often has been interpreted to be a line item in the statement of
financial position
• New/Amended Disclosure—provide disclosures by each “class” of asset and
liability
‒ Determine “class” on basis of nature and risks of securities--consider activity or business
sector, vintage, geographic concentration, credit quality, and economic characteristic
(consistent with FASB Topic ASC 320, Investments—Debt and Equity Securities)
‒ For other assets and liabilities:
• Use judgment to determine appropriate classes
• Consider requirements under other U.S. GAAP--e.g., disclosure level for derivatives per ASC Topic
815 Derivatives and Hedging
‒ In addition to nature and risks, also consider placement in fair value hierarchy (i.e.,
Levels 1, 2, or 3)—e.g., greater number of classes may be necessary for fair value
measurements with significant unobservable inputs (Level 3) due to increased
uncertainty and subjectivity
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ASU 2010-06
Transfers into/out of Levels 1, 2 and 3
• Existing Disclosure—transfers into/out of Level 3 only
• New/Amended Disclosure:
‒ Significant transfers between Level 1 and Level 2 and reasons for transfers
‒ Transfers into/out of Level 3 and reasons for transfers
‒ Consistent application of policies for determining when transfers are recognized and
policies should be the same for transfers into/out of Levels 1, 2 and 3
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ASU 2010-06
Level 3 Reconciliation
• Existing Disclosure:
‒ No separate disclosures of total gains/losses recognized in OCI
‒ Purchases, sales, issuances and settlements (on net basis)
‒ Transfers into/out of Level 3
• New/Amended Disclosure:
‒ Total gains/losses recognized in OCI
‒ Purchases, sales, issuances and settlements (on gross basis)
‒ Transfers into/out of Level 3 (separately if significant ) and reasons for transfers
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ASU 2010-06
Valuation Techniques and Inputs
• Existing Disclosure:
‒ Input and valuation technique(s) used to measure fair value
‒ Discussion of changes in valuation techniques and related inputs, if any, during period
• New/Amended Disclosure--for Levels 2 and 3:
‒ Description of valuation techniques and input used to determine fair values of each class
‒ Discussion of changes in valuation techniques, if any, and reasons for them
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ASU 2010-06
Effective Date
• Generally effective for first interim or annual reporting period beginning after
December 15, 2009 (2010 for calendar year entities)
‒ Requirement to provide Level 3 activity of purchases, sales, issuances. and settlements
(on gross basis) effective for fiscal years beginning after December 15, 2010 (2011 for
calendar year entities)
• In period of initial adoption, not required to provide amended disclosures for any
previous periods presented
• Early adoption permitted
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FSP FAS 157-4
Timeline of Events
September 2006
FASB Statement No.
157, Fair Value
Measurements,
established a single
definition of fair value
and a framework for
measuring fair value.
The statement also
expanded disclosures
of fair value
measuerment.
October 2008
FASB issued FSP
FAS 157-3,
Determining the Fair
Value of a Financial
Market when the
Market for that Asset
is not Active.
Primary intent was to
reinforce the
principles of FAS 157
and to emphasize the
ability of an entity to
use its own
assumptions when
obeservable inputs
are not available.
December 2008
The Emergency
Economic
Stabilization Act of
2008 mandated the
SEC to conduct a
study on market-tomarket accounting
standards.
The study was
released in December
2008, concluding that
existing fair value
accounting
requirements should
not be supsended and
recommended
measures to improve
the application of such
requirements.
April 2009
February 2009
The Valuation
Resource Group
provided their views to
FASB that additional
guidance on inactive
markets and
distressed
transactions was
warranted.
FASB issues FSP
157-4, Determining
Fair Vlaue when the
Volume and Level of
Activiity for the Asset
or Liability Have
Significantly
Decreased and
Identifying
Transactions that are
Not Orderly.
FSP 157-4
superseded FSP FAS
157-3.
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FSP FAS 157-4
What it Does
• Provides application guidance
‒ Determining fair value when the volume and level of market activity has significantly
declined
‒ Identifying transactions that are not orderly
‒ Fair value is a market-based measurement, not an entity-specific measurement
‒ Use of significant judgment
• Reemphasizes the exit price notion
• Amends disclosures
• Supersedes FSP FAS 157-3
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FSP FAS 157-4
What Changed
• Significant changes from Exposure Draft:
‒ Eliminates presumption that all transactions are distressed in inactive markets
‒ Exit price notion under current market conditions vs. hypothetical active market
‒ Focus is on markets with a significant decline in market activity vs. markets which have
always been inactive
Effective Date
• Effective for interim and annual periods ending after June 15, 2009 (2009 for
calendar year entities)
• Early application permitted for interim and annual periods ending after March 15,
2009
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FSP FAS 157-4
Decrease in Trading Volume
• Description of factors (not all-inclusive) that might indicate a decrease in trading
volume occurred:
‒ scarcity of recent transactions
‒ price quotes are not based on current information
‒ substantial variation in price quotes
‒ indexes no longer correlated with indications of fair values
‒ widening difference between present value of future cash flows versus quoted or
transaction prices (implying discounts relating to liquidity and other performance
indicators)
‒ wider bid-ask spread
‒ less new issuance in the market for similar assets or liabilities
‒ little information is available publicly
• If significant decline, transaction price or quoted price may not be
representative of fair value; perform additional analysis
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FSP FAS 157-4
Determining Whether a Transaction is Orderly
• Must not presume that all transactions are not orderly (forced or distressed)
• Assess factors to determine if the transaction is not orderly:
‒ Not adequate exposure to market (before measurement date) to allow for marketing
activities that are usual and customary under current conditions
‒ Seller marketed the asset to a single participant
‒ Seller is in or near bankruptcy or receivership, or required to sell to meet regulatory
requirements (that is, forced)
‒ Transaction price is an outlier when compared to other recent transactions (for same or
similar assets or liability)
Note
Entities may consider additional factors. Must evaluate the circumstances to determine
whether the transaction is orderly based on the weight of the evidence.
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FSP FAS 157-4
Determining Whether a Transaction is Orderly (continued)
A reporting entity shall evaluate the circumstances to determine whether the
transaction is orderly based on the weight of the evidence.
Transaction is not
orderly
• Place little, if any, weight on that transaction price
Transaction is orderly
• Consider the transaction price when estimating fair value
• Weighting depends on facts and circumstances such as the volume of the
transaction, comparability of transaction and the proximity of the transaction with
measurement date
Insufficient evidence to
determine if transaction
is orderly
• Consider the transaction when estimating fair value
• Transaction price may not be determinative of fair value
• Weighting of a transaction in which there is not sufficient information shall be less
than a transaction which is known to be orderly
What does
this mean?
Entities should “not ignore information that is available without undue cost and effort.”
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FSP FAS 157-4
Quoted Prices
• Does not exclude the use of quoted prices (broker quotes or pricing services)
• Entities should evaluate whether the quoted price is based on:
‒ Current information that reflects orderly transactions, or
‒ A valuation technique that reflects market participant assumptions (including about risk)
• Appropriately weight the quoted price in determining fair value:
‒ Indicative
‒ Binding
• If a significant decrease in trading volume, quotes may not represent fair value
What does
this mean?
Entities should assess the nature of the quoted price and, based on its assessment,
appropriately weight the quoted price along with other inputs in determining fair value.
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FSP FAS 157-4
Additional Reporting Requirements
FSP amends FASB Topic 820 (formerly SFAS No.157):
• Requires disclosure of inputs and valuation technique(s) used to measure fair
value and discussion of changes in valuation techniques and related inputs, if
any.
• Defines major category1 for equity securities and debt securities to be major
security types as described in paragraph 19 of FASB Statement No. 115, which
states in part:
“Major security types shall be based on the nature and risks of the security. An enterprise should
consider the (shared) activity or business sector, vintage, geographic concentration, credit quality,
or economic characteristic in determining whether disclosure for a particular security type is
necessary and whether it is necessary to further separate a particular security type into greater
detail.”
1
See paragraphs 32 and 33 of Statement 157
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FSP FAS 157-4
Additional Reporting Requirements (continued)
Major security types include:
1. Equity securities (segregated by industry type, company size, or investment objective)
2. Debt securities issued by the U.S. Treasury and other U.S. government corporations
and agencies
3. Debt securities issued by states of the United States and political subdivisions of the
states
4. Debt securities issued by foreign governments
5. Corporate debt securities
6. Residential mortgage-backed securities
7. Commercial mortgage-backed securities
8. Collateralized debt obligations
9. Other debt obligations
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FSP FAS 157-4
Additional Reporting Requirements (continued)
Example level disclosure:
Level 1
Common stocks - Consumer
durable goods
Common stocks - Consumer
nondurable goods
$
Level 2
1,086,000 $
Level 3
-
$
Total
-
$
1,086,000
3,280,000 $
3,435,000
155,000
-
921,000
-
-
$
921,000
Convertible bonds
-
5,400,000
-
$
5,400,000
Mortgage-backed securities
-
2,710,000
-
$
2,710,000
U.S. government obligations
-
3,475,000
-
$
3,475,000
Repurchase agreements
-
500,000
-
$
500,000
3,280,000 $
17,527,000
Common stocks - Other industries
TOTAL
$
2,162,000 $
12,085,000 $
The FSP also requires the reconciliation of beginning and ending Level 3 holdings
(i.e., the Level 3 “roll-forward”) to be provided by major security type.
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Other
FASB ASU 2010-10, Consolidation (Topic 810) – Amendments for Certain
Investment Funds (issued Feb 2010) (ASU 2010-10):
‒ Amends consolidation requirements for variable interest entities (“VIEs”) contained in FASB
Statement No. 167, Amendments to FASB Interpretation 46(R) [issued June 2009]
• FASB No. 167 would have required, under certain circumstances, a reporting entity such as a commodity pool
operator (CPO) to consolidate, in its audited financial statements, the funds it sponsors (effective 2010)
‒ Application of the FASB No. 167 consolidation requirements are deferred for certain entities (e.g.,
mutual funds, hedge funds, private equity funds, etc.)
‒ However, certain disclosures for all VIEs in which the reporting entity holds a variable interest,
including VIEs that qualify for the ASU 2010-10 deferral, are required
FASB ASU, 2010-09, Subsequent Events (Topic 855)—Amendments to Certain
Recognition and Disclosure Requirements (Feb 2010)
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Contact Information
Jim Laures (Chicago)
jlaures@deloitte.com
(312) 486-3331
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