At its board meeting earlier today, FASB authorized its staff to proceed to ballot draft on a proposed Accounting Standards Update on Improvements to Fair Value Disclosures
. [ASU is the new term used by FASB for proposed changed to U.S. Generally Accepted Accounting Principles, which as of July 1 are contained in FASB’s Codification.] The proposed effective date will be reporting periods (annual or interim) ending after 12/15/2009 except for Level 3 sensitivity disclosures which would be effective for reporting periods (annual or interim) ending after 03/15/2010. Staff expects to have the proposed ASU ready for release by the end of August, and there will be a 45-day comment period.
According to FASB's Summary of Board Decisions
, "The Board will propose three new disclosure requirements:
- Information about the sensitivity of certain fair value measurements: If a change in one or more of the significant inputs to a Level 3 fair value measurement would significantly change the fair value, the reporting entity would state that fact and disclose the effect of those changes.
- Information about transfers in and/or out of Levels 1 and 2: A reporting entity would disclose information about significant transfers in and out of Levels 1 and 2 and the reasons for the transfers.
- Gross reporting of changes in Level 3 fair value measurements: Information about purchases, sales, issuances, and settlements, included in the reconciliation of Level 3 fair value measurements, would be presented on a gross basis rather than a net basis."
Additionally, FASB's Summary of Board Decisions states "The Board will propose two clarifications of existing disclosure requirements:
Sensitivity Analysis a Sensitive Issue
- Level of disaggregation: An entity is currently required to provide fair value measurement disclosures for each major category (class) of assets and liabilities, and the Board plans to provide guidance on the meaning of the term class. The Board believes a class is often a subset of assets or liabilities within a line item in the statement of financial position. An entity would apply judgment in determining the appropriate classes of assets and liabilities.
- Disclosures about inputs and valuation techniques: An entity is currently required to provide disclosures about the valuation techniques used to measure fair value. The Board will clarify that the disclosures about the inputs used are required for both recurring and nonrecurring fair value measurements. The Board also will clarify that those disclosures are required for fair value measurements that fall in both Level 2 and Level 3."
The propsed disclosure of sensitivity analysis proved to be a sensitive issue. As discussed at today's board meeting, the FASB board had previously asked the staff (at the May 27 board meeting) to conduct some preliminary outreach to preparers on the proposed sensitivity analysis disclosures for level 3 assets.
FASB Project Manager Bob Bhave provided the results of that outreach to the board today. He stated: "Preparers provided extensive feedback and suggestions to improve the proposed guidance, [including] concerns about operationality... based on input received from preparers during the outreach process and discussed last week at [FASB's] Ed session [referring to Educational sessions the FASB board frequently holds to provide additional information to the board], the staff's recommendation is that the board proceed with the proposal including all the proposed disclosures at the May 27 board meeting EXCEPT FOR the sensitivity disclosures for Level 3 measurements... [and] come back to the sensitivity disclosures after further progress is made on the Financial Instruments Recognition and Measurement (FIRM) project." Some board members noted that with the apparent direction to move more assets to fair value as part of the FIRM project, the need for some of the sensitivity analysis information may change. Other board members noted the board also recently launched a disclosure framework project.
The board considered the staff's recommendation, but a majority of board members (including FASB Chair Bob Herz and FASB board members Tom Linsmeier and Mark Siegel) disagreed with the staff recommendation, and voted to keep the sensitivity analysis disclsoures in the proposal. (Board members Leslie Seidman and Larry Smith sided with the staff view.)
Herz explained he was in favor of including the proposed sensitivity analysis to get additional preparer feedback on the operationality of the proposed disclosures, as well as additional feedback from users of financial reporting (investors and others).
He noted: "Every time we meet with sophisticated users, they always talk about sensitivity analysis." He added that he'd like to obtain, through the public comment period, "a little better understanding from some more users, what exactly they are going to do with the information; they say they want it, but [for us to] say, you’ve got this piece of information, now what do you do [with it]?"
There were also varying views expressed by board members as to whether the proposed sensitivity analysis disclosures would, or would not, be akin to the kind of 'stress test' exercise performed by U.S. banking regulators earlier this year.
Use of pricing services for illiquid assets was also discussed, with Seidman noting: "We need to proactively reach out to a couple of pricing services [during the public comment period], it’s a real issue raised by every kind of constituent we have."
On the question of practicality/operationality, Smith suggested: "I’d like to ask a specific question [in the proposed ASU] about the ability [of companies] to do this on a quarterly basis and meet filing deadlines that currently exist. We have consistently continued to add to quarterly disclosure requirements, I question whether there is enough time for people to do things effectively."
The board had also asked the staff to gather some preliminary feedback from preparers on the level of disaggregation of the proposed fair value disclosures, and as noted above, agreed to simplify the level of disaggregation of the proposed fair value disclosures, to be more in line with that described in para. 5, pg. 2 in today’s board handout
Linsmeier asked if the level of disaggregation would be based on the categories in the statement of financial position (balance sheet), or the footnotes (which are generally more detailed). It was not clear to me from the discussion that ensured as to what the response to that question was; reference should be made to FASB's Summary of Board Decisions
and the proposed ASU. Proposal Coming On Oil & Gas Reporting
In other matters discussed at today's FASB board meeting, the board agreed to proceed with a proposed ASU to conform oil and gas reporting to SEC’s final rule on that topic issued last year. The effective date of the proposed ASU would be annual reporting periods ending on or after December 31, 2009. Early application would not be permitted.Final Standard Coming On Fair Value of Alternative Investments
Also at today's FASB meeting, the board agreed to finalize an ASU on fair value of alternative investments, following discussion of comments received on related proposed FSP FAS 157-g. The board agreed the final ASU would be effective at year-end (specifically, periods ending after Dec. 15, 2009), with early adoption permitted.Additional Information
For official results of FASB meetings, refer to FASB’s Summary of Board Decisions, generally posted same-day or next-day in FASB’s News Center
Additional background on matters discussed at today’s FASB meeting can be found in the board handout
, and in FASB’s project summaries on improving fair value disclosures, fair value of alternative investments,
and oil & gas reporting.