Changes in Fair Value Reporting – Assets Measured at NAV

Fair value (FASB ASC 820) is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Per the fair value standard, the reporting entity is required to present the quantitative disclosures in a tabular format, segregating investments between level 1, level 2, and level 3 for each year presented in the financial statements.

The levels are defined as follows:

  • Level 1 – Quoted prices in active markets for identical assets or liabilities.
  • Level 2 – Valuation based on market observables.  An identical asset may not exist or the market may be less active or a quoted market price is unavailable.
  • Level 3 – Unobservable valuation used when level 1 and level 2 inputs are not available.

Assets that are calculated at Net Asset Value per share (NAV) were being classified inconsistently in financial statements between level 2 and level 3 investments.  Investments valued at NAV that are redeemable at the Balance Sheet date are considered level 2.  Investments valued at NAV that can never be redeemed are considered Level 3. However, investments valued at NAV that are not redeemable at the Balance Sheet date but are redeemable at some point required professional judgment to determine proper presentation. In an effort to make financial reporting more consistent, FASB recently released ASU 2015-07 entitled “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).”

Main Provisions

To remove the inconsistency of practice regarding assets valued at NAV, the ASU no longer requires these investments to be categorized by level within the fair value hierarchy tabular format.

However, investments that calculate NAV will continue to be included in the fair value hierarchy table to facilitate reconciliation between the fair value disclosures and the financial statements. They will only appear in the total column and not any of the individual levels. In addition, the required disclosures for these investments will continue to be made.

Applying the Standard

This standard becomes effective for public companies for years beginning after December 15, 2015 and for all other entities for years beginning after December 15, 2016.  Earlier adoption is permitted.  This standard should be applied retrospectively to all periods presented.

Jeff Carlini has lived and practiced public accounting in Charlotte, North Carolina since 2002.  He graduated from Lehigh University earning a B.S. and M.S. in accounting.  Jeff started his career at Deloitte in Charlotte where he became a senior auditor.  Following Deloitte Jeff was a lecturer of accounting at UNCC before becoming a manager at a regional accounting firm in Charlotte.  Jeff is currently partner at Carlini CPA, PLLC.  Jeff belongs to and is involved in the AICPA and the NCACPA, and is currently serves on the A&A committee of the NCACPA.