Fair Value

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FASB Accounting Standards Updates - Accounting Standards Update No. 2022-03 —Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

Fair Value Measurement –FASB Discusses Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

FASB Accounting Standards Updates - Accounting Standards Update No. 2022-01 —Derivatives and Hedging (Topic 815): Fair Value Hedging —Portfolio Layer Method

Equity Securities – FASB Proposes Improvements to Fair Value Guidance for Equity Securities

Share-Based Awards – FASB Endorses PCC Consensus

Exposure Draft - Proposed Accounting Standards Update 2020-200 —Compensation —Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards

FASB Accounting Standards Updates No. 2018-13 —Fair Value Measurement (Topic 820) —Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement

Fair Value - AICPA Issues New Technical Questions and Answers

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FASB Accounting Standards Updates - Accounting Standards Update No. 2022-03 —Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

Summary - The FASB has issued an Accounting Standards Update (ASU) that improves financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.

Topic 820, Fair Value Measurement, states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value.

Some stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.

To address this, the amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about the restriction including the nature and remaining duration of the restriction.

ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. For all other entities, it is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

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Fair Value Measurement –FASB Discusses Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on March 23, 2022, and began its redeliberations on the effect of contractual sale restrictions on fair value measurement that was included in the proposed ASU, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The FASB affirmed the proposed scope that the clarifying amendments would apply to all equity securities subject to any contractual sale restriction.

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FASB Accounting Standards Updates - Accounting Standards Update No. 2022-01 —Derivatives and Hedging (Topic 815): Fair Value Hedging —Portfolio Layer Method

Summary - The FASB issued an Accounting Standards Update (ASU) No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, intended to better align hedge accounting with an organization’s risk management strategies.

In 2017, the FASB issued a new hedging standard to better align the economic results of risk management activities with hedge accounting. That standard increased transparency around how the results of hedging activities are presented, both on the face of the financial statements and in the footnotes, for investors and analysts when hedge accounting is applied.

One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows.

Since issuing that standard, stakeholders have told the FASB that the ability to elect hedge accounting for a single layer is useful, but hedge accounting could better reflect risk management activities if expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

ASU No. 2022-01 expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method.

Additionally, the ASU:

Expands the scope of the portfolio layer method to include nonprepayable assets;
Specifies eligible hedging instruments in a single-layer hedge;
Provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method; and
Specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

The ASU applies to all entities that elect to apply the portfolio layer method of hedge accounting. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted.

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Equity Securities – FASB Proposes Improvements to Fair Value Guidance for Equity Securities

Summary - The FASB issued a proposed Accounting Standards Update (ASU) that would improve financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities. Stakeholders are encouraged to review and provide comment on the proposed ASU by November 14, 2021.

To address this, the amendments in the proposed ASU would clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

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Share-Based Awards – FASB Endorses PCC Consensus

Summary - As reported in its “Summary of Board Decisions” publication, the FASB met on August 4, 2021 and endorsed the PCC’s consensus reached at its June 22, 2021 meeting on Issue No. 2018-01, “Practical Expedient to Measure Grant-Date Fair Value of Equity-Classified Share-Based Awards.” The FASB decided to issue a final ASU.

The FASB endorsed the PCC’s consensus to issue a final Update for a practical expedient for a private company to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees. That consensus describes the characteristics of a reasonable application of a reasonable valuation method using the same description provided within the Treasury Regulations related to Section 409A of the U.S. Internal Revenue Code as of the issuance date of a final ASU.

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Fair Value Hedging – FASB Discusses Comments Received on Proposal

Summary - As reported in its “Summary of Decisions” publication, the FASB met on March 31, 2021, and discussed external review comments on a draft of a proposed Accounting Standards Update (ASU), sweep issues, and whether to issue a proposed ASU. Regarding the Portfolio Layer Method (multiple layer model), the FASB decided the following related to the attributes of assets included in the closed portfolio:

All assets in the closed portfolio should have a contractual maturity date on or after the end of the earliest-ending hedge period of hedges associated with the closed portfolio. For each period hedged, the closed portfolio should include an amount of assets with a contractual maturity date on or after the end of the hedge period that is greater than the aggregate amount of the hedged layers.
This would allow an entity to segregate the closed portfolio into subgroups based on the contractual maturity dates of the assets in the closed portfolio.
All assets in the closed portfolio should be or should become prepayable by the end of the latest-ending hedge period of hedges associated with the closed portfolio.

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Exposure Draft - Proposed Accounting Standards Update 2020-200 —Compensation —Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards

Summary - The FASB issued a proposed Accounting Standards Update (ASU) intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date. Stakeholders are encouraged to review and provide comment on the document, as issued by the Private Company Council (PCC) by October 1, 2020.

“Members of the PCC conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders,” stated FASB Chair Richard R. Jones. “The proposed ASU puts forth a potential solution to this issue, and we look forward to hearing what our stakeholders think about it.”

The PCC shared stakeholder concerns that determining the fair value of traditional private company share-option awards is often costly and complex. This is primarily because the private company equity shares underlying the share option often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist.

The proposed ASU would allow a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the U.S. Department of the Treasury that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the U.S. Internal Revenue Code.

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FASB Accounting Standards Updates No. 2018-13 —Fair Value Measurement (Topic 820) —Disclosure Framework —Changes to the Disclosure Requirements for Fair Value Measurement

Summary - The FASB has issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.

ASU No. 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820 as follows:

Removals

The following disclosure requirements were removed from Topic 820:

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;
The policy for timing of transfers between levels;
The valuation processes for Level 3 fair value measurements; and
For nonpublic entities, 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.

Modifications

The following disclosure requirements were modified in Topic 820:

In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities;
For investments in certain entities that calculate net asset value, an 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; and
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Additions

The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities:

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

In addition, the amendments eliminate at a minimum from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

Effective Date

The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.

Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date.

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Fair Value - AICPA Issues New Technical Questions and Answers

Summary - The AICPA has released a new Technical Question and Answer (TQA) and amendments for TQA Section 2220, Long-Term Investments.

Technical Questions and Answers

The new TQA is Section 2220.28, Definition of Readily Determinable Fair Value and Its Interaction With the NAV Practical Expedient. The amendments include changes as follows:

Amendments to TQA section 2220.18, "Applicability of Practical Expedient;"
Deletion of TQA section 2220.24, "Disclosures-Ability to Redeem Versus Actual Redemption Request;" and
Deletion of TQA section 2220.25, "Impact of 'Near Term' on Categorization Within Fair Value Hierarchy."

The AICPA developed TQA Sections 2220.18-.28 to assist reporting entities in implementing FASB ASC 820, Fair Value Measurements, to estimate the fair value of investments in certain entities that calculate net asset value. Sections 2220.18-.27 apply to investments that are required to be measured and reported at fair value and are within the scope of paragraphs 4-5 of FASB ASC 820-10-15.

New Section 2220.28 provides guidance in interpreting and applying the FASB Master Glossary definition of "readily determinable fair value."

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