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Quick Updates: ASU 2018-13

November 15, 2018

During August 2018 the Financial Accounting Standards Board (“FASB”) released ASU 2018-13 Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which alters the disclosures related to the fair value hierarchy, impacting financial statement preparers and users.

Key Changes

  • The FASB removed disclosure related to transfers and valuation processes for the fair value hierarchy.
  • Modifications to the level 3 disclosure requirements, disclosures related to liquidation and redemption of investments in entities that calculate NAV, and the measurement uncertainty disclosure
  • Certain additions were added to the Level 3 disclosure requirements for public entities.

Who Does it Affect and When?

  • Affects all entities that are required to disclose recurring and nonrecurring fair value measurements.
  • Effective for public and non-public entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years.
  • Early adoption of any or part of this ASU is permitted.

Removals

  • The amount of and reason for transfer between Level 1 and Level 2 of the fair value hierarchy.
  • The policy for timing of transfers between levels.
  • The valuation process for Level 3 fair value measurements.
  • 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 holding period.

Mazars Insight

The reason for the above removals stems from the need to disclose pertinent information to the users of financial statements. The FASB strives to issue guidance for reporting entities to improve the effectiveness of the disclosures, while maintaining an appropriate amount of discretion. Focusing on meaningful material disclosures assists in keeping the costs from outweighing the benefits of such disclosures.

Modifications

  • In lieu of a roll-forward 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.
  • The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

Mazars Insight

The modifications refine and simplify the disclosures to increase the usefulness to the reader of the financial statements.  The first modification removes the roll forward, but still requires the financial statements to disclose the changes for the reporting period.  The second modification eliminates the need to estimate the timing of future events related to investments in certain entities valued using NAV, but requires disclosure of definitive events when communicated to the investor, which is valuable to the user for planning, evaluating, and forecasting purposes.  Enhancing the measurement uncertainty narrative provides insight with respect to the variability of significant unobservable inputs and the impact that variability could have on the fair value measurements as of the reporting date.  The overall goal is to improve the users understanding of management’s assumptions and increase the usability of the information contained in the disclosures.

Additions

  • 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.
  • 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.

Note: The above additions are not required for nonpublic companies.

Mazars Insight

The above additions add clarity for the users of the financial statements.  Enlightening the reader to the relationship between the unrealized gains and losses and the statement of comprehensive income aids the understanding of possible net cash flows resulting from dispositions of assets and liabilities recorded at fair value.  The second addition provides the users of the financial statements with the details surrounding the significant inputs used by management to calculate fair value, in order to better understand and analyze changes in those inputs relative to economic factors.  Broadening the information presented in the notes provides management the opportunity to communicate more meaningful information to the users of the financial statements.

What’s Next?

  • How will these changes be perceived and executed by preparers of financial statements?
  • Will users of the financial statements find these changes to be beneficial?
  • Will entities experience enriched disclosures while improving the cost of such disclosures?

In Conclusion

This ASU advances the goals set out in the FASB’s disclosure framework project.  These significant overall changes to the fair value hierarchy disclosures improve reporting by providing management with more discretion on how best to convey information in a manner that will be more meaningful to the users of the financial statements.

When evaluating the impact of this ASU, management should consider what will enable the reader to more accurately and effectively understand the assets and liabilities measured at fair value and the impact that external factors have on those measurements.

Source: Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.

For more information contact:
JOHN CONFREY, CPA | MANAGER | REAL ESTATE GROUP  | +1 212.375.6610  | [email protected]
BONNIE MANN FALK, CPA, MBA | DIRECTOR  | +1 212.375.6552 |  [email protected]
 


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  INDUSTRIES  
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Mazars USA LLP is an independent member firm of Mazars Group.

Legal and privacy policy    Contact us    Terms and Conditions