United States

Disclosures: Investments measured at NAV using the practical expedient

FINANCIAL REPORTING INSIGHTS  | 

It is common for entities that make investments in investment companies to measure those investments at net asset value (NAV) as a practical expedient for fair value. Further, it is common for those investments to allow for redemption on certain dates, the frequency of which generally depends on the nature of the underlying investments made by the investment companies. 

FASB Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, currently addresses the categorization within the fair value hierarchy for investments reported at fair value using the practical expedient. Investments that are redeemable at the measurement date at the NAV are always categorized in Level 2, and investments that will never be redeemable at the NAV are always categorized in Level 3. However, for investments that are not redeemable at NAV at the measurement date but become redeemable at a future date, judgment is applied in the determination of whether the fair value measurement is Level 2 or Level 3. When applying judgment for investments that may be redeemable with the investee at a future date, ASC paragraph 820-10-35-54B suggests that reporting entities take into account the length of time until those investments become redeemable. Thus, there is diversity in practice related to how certain investments measured at NAV with redemption dates in the future (including periodic redemption dates) are categorized within the fair value hierarchy.

Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the FASB Emerging Issues Task Force), to address this diversity in practice. This ASU removes the requirement to categorize within the fair value hierarchy investments for which fair values are measured at NAV using the practical expedient. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice in how investments measured at NAV (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy to permit reconciliation to the line items presented in the statement of financial condition. 

The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. Rather, upon adoption, the disclosures required by ASC paragraph 820-10-50-6A will be limited to investments for which the entity has elected to measure the fair value using that practical expedient.

The ASU is effective for public business entities for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. Retrospective application in this case requires that investments valued using the NAV per share practical expedient be removed from the fair value hierarchy in all periods presented. Earlier application is permitted.