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New and Clarified Fair Value Disclosures

May 2010
Dr. Steve Grice

During 2006 the FASB released SFAS No. 157, entitled “Fair Value Measurements.”  This fair value guidance provided a definition of fair value, established a framework for measuring fair value, and expanded disclosure requirements in financial statements that incorporate fair value measurements.  SFAS No. 157 was codified within Accounting Standards Codification (ASC) Topic 820, entitled “Fair Value Measurements and Disclosures.”  Recently, the FASB issued Accounting Standards Update (ASU) 2010-06, entitled “Improving Disclosures about Fair Value Measurements.” The guidance in ASU 2010-06 establishes some new fair value disclosures and also provides clarification for the some of the previously required disclosures when applying FASB ASC Topic 820. 

The new disclosure requirements are intended to address concerns related to the need for increased transparency associated with the fair value disclosures.  All reporting entities that are required to make disclosures about recurring or nonrecurring fair value measurements need to follow the disclosure provisions set forth in ASU 2010-06.  The new disclosure requirements ushered in by ASU 2010-06 are as follows:

1. Transfers in and out of Levels 1 and 2—Reporting entities need to separately-disclose the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.
2. Activity in Level 3 fair value measurements—In  the reconciliation for fair value measurements using significant unobservable inputs (Level 3), reporting entities need to separately-present information about purchases, sales, issuances, and settlements [i.e., on a gross basis rather than as one net number]. 

These new disclosures described in #1 above are effective for interim and annual reporting periods beginning after December 15, 2009.  The new Level 3 disclosures described in #2 above are effective for interim and annual reporting periods beginning after December 15, 2010.  ASU 2010-06 also provides clarification for the some of the previously required disclosures.  Those clarifications are as follows:

1. Level of disaggregation—Reporting entities need to provide fair value measurement disclosures for each class of assets and liabilities.  A class often is a subset of assets or liabilities within a line-item within the statement of financial position.  Judgment will need to be utilized in determining the appropriate classes of assets and liabilities.
2. Disclosures about inputs and valuation techniques—Reporting entities need to provide disclosures about the valuation techniques and inputs used in measuring fair value for both recurring and nonrecurring fair value measurements.  These type disclosures are required for fair value measurements in Level 2 or Level 3.

It should be noted that ASU 2010-06 also includes amendments related to employer disclosures about postretirement benefit plan assets (ASC Topic 715) to change the terminology from major categories of assets to classes of assets.  These amendments also include cross-references in the codification related to how the appropriate classes need to be determined in presenting fair value disclosures.