As you may recall, the Financial Accounting Standards Board (FASB) issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) in May 2015. This ASU was issued as a continuation of the FASB’s ongoing initiative to simplify and improve accounting standards. This update is applicable to organizations with investments such as alternative investments in real estate or private equity funds that are measured using the net asset value (NAV) practical expedient.
Topic 820 of the Accounting Standards Codification addresses NAV. Organizations can utilize the practical expedient to measure investments at NAV if both of the conditions below are met:
- The investment does not have a readily determinable fair value.
- The investment is in an investment company within the scope of Topic 946.
Previously, organizations have been required to classify investments measured at NAV within the fair value hierarchy, which is used to categorize investments at Levels 1, 2, or 3 based on the observability of the inputs to investment. Investments measured at NAV have previously been categorized at Level 2 or Level 3, depending on the terms of redemption. Investments that are redeemable within 60 days have generally been considered to be Level 2, while investments with infrequent redemption ability are generally considered to be Level 3. Additionally, investments classified at Level 3 (due to causes such as unobservable inputs or having an illiquid market) require additional disclosures, including disclosure of a rollforward of the detailed activity within the investment balance during the periods presented in the financial statements. Because this approach can cause differences in classification due to differing opinions, a more consistent approach was needed.
ASU 2015-07 has eliminated the requirement to classify investments measured at NAV within the fair value hierarchy if an organization elects to use the practical expedient. The reporting organization can instead do the following:
- Disclose the use of the NAV practical expedient for fair value measurement.
- Disclose the amounts of the investments that are measured at NAV, in order to allow users of the financial statements to reconcile total investments on the balance sheet or statement of financial position to total investments disclosed within the footnotes.
Because organizations will no longer be required to make a determination of whether these investments should be categorized at Level 2 or Level 3 in the fair value hierarchy, and will not be required to include the additional Level 3 disclosures, this change is expected to reduce the complexity of the footnotes.
For privately held companies and not-for-profit organizations, the changes are effective for fiscal years beginning after December 15, 2016, and accordingly will be effective for any fiscal years ending on or after December 30, 2017. The FASB permits early application of ASU 2015-07. Organizations that currently utilize the net asset value per share practical expedient and have a fiscal year-end such as June or September may want to early adopt this change due to the simplification of disclosures provided.
Paul Biggs, CPA