The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...
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.
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.
“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.”
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 firstname.lastname@example.org
To contact the editor responsible for this story: Ali Sartipzadeh in Washington at email@example.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.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)