FASB Tackles Stream-Lining, Improving Fair Value Measurement Disclosures

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By Steve Burkholder

March 4 — What auditors and investors call sensitivity analysis will undergo more study by the staff of the Financial Accounting Standards Board as the panel seeks to streamline and improve footnote disclosures about fair value measurements of financial instruments, FASB tentatively decided.

The sensitivity disclosures would home in on, for example, a range of change in values should a capital market deteriorate, as the board discussed at its weekly meeting March 4.

A more appropriate term for the sensitivity reporting is “measurement uncertainty analysis,” said Thomas Linsmeier. Measurement uncertainty in the fair values assigned to instruments and investments—particularly when there is a lack of pricing information from active markets—was a common thread through much of the discussions on fair value measurements at the FASB meeting.

Disclosure Framework: The Project

FASB considered footnote reporting on fair value measurements as part of its multi-faceted disclosure framework project.

In that, the board aims to make disclosures more effective by both setting out a blueprint for how standard setters decide more generally on what information should be disclosed in footnotes.

In the project, FASB also seeks to define reporting entities' roles in making useful disclosures. The board is pursuing a related objective—to potentially provide flexibility in disclosure requirements for companies, with an emphasis on utility of disclosures for investors.

Golden: Getting at `Squishiness.'

“Squishiness” was the technical accounting term used by FASB Chairman Russell Golden as he tried to frame the next steps in exploring sensitivity disclosures. In recent years, progress in laying out sensitivity disclosures in the realm of instruments—particularly in quantifying such disclosure—has been elusive.

The informal wording Golden used describes the reasons behind a range of estimates or variation that might come into play in fair valuations carried out by the management of a bank, for example. Reporting enterprises carry out the fair value measurements using the “fair value hierarchy,” based on market participant information, prescribed in Accounting Standards Codification 820, formerly FAS 157, on fair value measurements.

Level 1 in the hierarchy connotes observable quoted prices for identical assets or liabilities in active markets at the measurement date, according to ASC 820.

Level 2 is for observable quoted prices of similar assets in active markets.

Level 3 connotes “unobservable inputs” for valuation, such as inputs derived through extrapolation or interpolation, that can't be backed up by observable data, according to the FASB standard.

Asked by board colleague Harold Schroeder how one would “get to the squishy factor,” Golden said that “you'd have to ask management to judge the critical assumption and you'd have to limit it to one or two, and then say, ‘shock it by X percent.’”

“I think you'd have to mandate what the shock is, so that then you can forecast how important it is,” the FASB chairman added.

Golden recalled the earlier, stalled effort on quantifying sensitivity disclosures. “The problem is, the last time we did this, we tried, and we had these assumptions that countered each other.”

Decision on Roll-Forward Information 

In other action on disclosures, FASB tentatively decided to retain the Level 3 roll-forward requirement in ASC 820 and to not introduce more requirements.

In that disclosure provision, a reporting entity with recurring Level 3 fair value measurements must present a reconciliation of the opening balances to the closing balances. That is coupled with specifically prescribed separate disclosures for certain gains and losses; for purchases, sales, issues, and settlements; and “amount of any transfers into or out of Level 3” (ASC 820-10-50-2(c).)

The disclosure provision would apply to public companies. Private enterprises would be exempted from that prescription, FASB tentatively decided.

At the March 4 meeting, FASB also tentatively endorsed a list of generally staff-recommended modifications aimed at streamlining disclosures on fair value measurements and making them more effective.

For a discussion of fair value measurements, see 5127-2nd, Fair Value Measurements: Valuation Principles and Auditing Techniques, at 5127.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh in Washington at asartipzadeh@bna.com

A staff-written meeting handout describing the disclosure issues considered by FASB March 4 is available at http://www.fasb.org/resources/ccurl/812/558/bmho-2015030415.pdf.

The board plans to post a summary of board decisions on fair value measurement disclosures, at http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079432.