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FASB eliminates disclosures for fund-of-funds, hedge funds and other entities that invest in funds

ASU articleThe FASB recently published ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The guidance specifically clarifies how investments valued using the net asset value (NAV) practical expedient within the fair value hierarchy should be classified.

The ASU was issued in order to address diversity in practice. The amended standard’s key provision exempts investments measured using the NAV practical expedient as defined in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy and related disclosures.

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Why ASC 820 was amended
Under ASC 820, entities are permitted to estimate the fair value of certain investments using NAV as a practical expedient. Investments were formerly categorized in three ways:

  • Redeemable at the measurement date. Entities were required to categorize them in Level 2 of the fair value hierarchy.
  • Never redeemable. Entities were required to categorize them in Level 3.
  • Redeemable after the measurement date. Investments were categorized in Level 3 if the future redemption dates were not known or would not occur in the “near term.”

ASC 820 did not specifically define the amount of time that could be used for valuing future redemption dates. An additional issue that developed was that some entities reclassified certain investments between Levels 2 and 3 each period based on the relationship between the measurement date and next redemption date.
The guidance specifically clarifies how investments valued using the NAV practical expedient within the fair value hierarchy should be classified.
Significant changes included in ASU 2015-07
ASU 2015-07 addresses the issues with ASC 820 and removes the requirement to categorize all investments within the fair value hierarchy for which fair value is measured using NAV as a practical expedient. Instead, entities are required to separately disclose the information required under ASC 820-10-50-6A for assets measured using the NAV practical expedient. Entities are also required to show the carrying amount of investments measured using the NAV practical expedient as a reconciling item between the total amount of investments categorized within the fair value hierarchy and total investments measured at fair value on the face of the financial statements.

ASU 2015-07 also amends two other pieces of guidance:

  • ASC 230-10-15-4, Statement of Cash Flows, is amended so that an investment company is exempt from presenting a statement of cash flows when substantially all of its investments are measured at Level 1 or Level 2 of the fair value hierarchy or using the NAV practical expedient, and redeemable in the near term at all times.
  • ASC 715, Compensation — Retirement Benefits, states that entities can value pension plan assets using the NAV practical expedient and such investments should not be categorized within the fair value hierarchy in the plan sponsor’s financial statements.

The guidance requires retrospective application to all periods presented and is effective for public entities after Dec. 15, 2015. Non-public entities will have an additional year. Early adoption is permitted.
We recommend early adoption, which can save time on year-end audits.
Financial statement example: Assets measured at fair value
For assets and liabilities measured at fair value at the reporting date, quantitative disclosures about the fair value measurements for each class of assets and liabilities at the end of the reporting period are required. Sufficient information must be provided to permit reconciliation of the fair value of assets categorized within the fair value hierarchy to the amounts presented in the statement of financial position. At a minimum, a reporting entity might disclose the following for assets to comply with paragraph 820-10-50-2(a) through (b) and paragraph 820-10-50-2B:

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Conclusion
Grant Thornton believes ASU 2015-07 addresses important concerns about the previous disclosure requirements when investments are valued using the NAV practical expedient. In eliminating certain disclosures for fund-of-funds, hedge funds, benefit plans and not-for-profit entities, it reflects the thinking of industry experts as put forth in numerous comment letters on the proposed amendments during the FASB’s process. In addition, we recommend early adoption, which can save time on year-end audits.

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Contacts
Michael Patanella
Audit Partner
U.S. Asset Management
Sector Leader
T +1 212 624 5258
E michael.patanella@us.gt.com

Peter Ladas
Senior Manager
Financial Services Audit
T +1 212 624 5386
E peter.ladas@us.gt.com


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