Since its introduction in 2006, ASC 820 (then known as “Statement of Financial Accounting Standard 157”) has undergone several changes, most recently by way of update ASU 2018-13 (Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement). Changes to ASU 2018-13 brings the standard into alignment with an overarching disclosure framework project which aims “to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP.”
ASU 2018-13 is a welcome change, especially to nonpublic entities, whose disclosures will see only modifications or removal of prior requirements (discussed in detail, below). It should be noted, however, that public companies will need to adhere to a few additional requirements set forth by ASU 2018-13. For the scope of this article, we will discuss the impact on nonpublic entities. Additionally, ASU 2018-13 has an implicit relationship with the fair value hierarchy defined in ASC 820-10-35.
Removal of Disclosure Requirements
ASU 2018-13 has removed the following four requirements from ASC 820 meaning there is no longer a requirement to disclose:
- The amount of, nor the reasons for, assets and liabilities that have been transferred between Level 1 and Level 2 of the fair value hierarchy;
- The policy for timing of transfers between any levels (including Level 3);
- The valuation process for assets and liabilities categorized as Level 3 fair value measurements; and
- The changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.
Modification of Disclosure Requirements
In addition to the removal of disclosure requirements, ASU 2018-13 also includes the following three modifications to ASC 820:
- Prior to ASU 2018-13, ASC 820 required a rollforward for Level 3 fair value measurements which was generally presented within financial statement footnotes in the form of a table. ASU 2018-13 now modifies that requirement. In lieu of the rollforward, the entity is only required to disclose transfers in the fair value hierarchy into and out of Level 3. Disclosure of purchases and issues of Level 3 assets and liabilities must still be provided.
- For investments in certain entities that calculate net asset value, the entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
- The measurement uncertainty disclosure is also clarified and intended to communicate information about the uncertainty in fair value measurement as of the reporting date. Therefore, the reporting entity is now required to provide a narrative description of the uncertainty of the fair value measurement at the reporting date which modifies prior language about sensitively to changes in significant unobservable inputs.
Adoption Now Required for Fiscal Year 2020
Although early adoption has been permitted, ASU 2018-13 is officially effective for fiscal years beginning after December 15, 2019. Therefore, for those entities with calendar year reporting dates that have not yet adopted ASU 2018-13, it is important to note that adoption will be required for your December 31, 2020 year-end. Narrative descriptions of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption, whereas all other amendments should be applied retrospectively to all periods presented upon their effective dates. Overall, the disclosure changes implemented through ASU 2018-13 are an excellent example of the disclosure framework project as they effectively improve and facilitate clear communication which is meaningful to financial statement users. ASU 2018-13 effectively removes the prior burden on users by eliminating less valuable (and more costly to compile) information from the equation.
You can access the Financial Accounting Standard Board’s ASU 2018-13 update, to review the standard. If you have additional questions about ASU 2018-13 and its impact on fair value disclosure for your nonpublic entity, contact your Untracht Early advisor for guidance.