Auditing Employee Benefit Plans. Josie Hammond
fair value. The guidance requires that valuation techniques should always maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy in FASB ASC 820 categorizes and prioritizes these inputs into three broad levels, as follows:
Level 1 inputs. Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. Quoted market prices in an active market provide the most reliable evidence of fair value and should be used without adjustment to measure fair value whenever available.
Level 2 inputs. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (such as quoted prices for similar assets or liabilities in active markets).
Level 3 inputs. Unobservable inputs used when relevant observable inputs are not available. Unobservable inputs should be developed based on the best information available.
FASB ASC 820-10-50 expands the disclosure requirements for assets and liabilities measured at fair value. Disclosures include the fair value measurements, the hierarchy within which they are categorized, significant transfers between levels, the reasons for those transfers, and the policy for determining when those transfers have occurred. A reconciliation from the opening to closing balances is required for Level 3 measurements. A description of the valuation process and a table for unobservable inputs is also required for Level 3 measurements. Public entities have certain additional disclosures. Readers should consult the full text of FASB ASC 820 and subsequent Accounting Standards Updates (ASUs) for further guidance and disclosure requirements.
Help Desk. In August 2018, FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements in FASB ASC 820, Fair Value Measurement. FASB ASU No. 2018-13 contains amendments that remove, modify or add disclosure requirements including those relating to: transfers between levels of the fair value hierarchy, level 3 fair value measurements and entities that calculate net asset value. The amendments in FASB ASU No. 2018-13 are effective for all entities for fiscal years beginning after December 15, 2019. Early adoption is permitted. Readers are encouraged to consult the full text of this ASU on FASB’s website at www.fasb.org. See the Recent Developments section of this chapter for discussion of new standards that have a significant impact on the FASB ASC 820 disclosures for employee benefit plans.
Although plans generally report investments at fair value in both their financial statements and regulatory filings, the provisions of FASB ASC 820 may have a significant effect on a plan’s financial statements depending on the types of investments held by the plan, such as hard-to-value alternative investments.
Help desk. The AICPA issued Technical Questions and Answers (Q&A) section 6931.11, “Fair Value Measurement Disclosures for Master Trusts” (AICPA, Technical Questions and Answers), to provide guidance on the required fair value measurement disclosures to be made when a plan holds investments in a master trust. This Q&A has not been updated for the amendments of FASB ASU No. 2017-06.
FASB ASC 820 provides guidance on determining fair value when the volume and level of activity for the asset or liability has significantly decreased. Guidance is also included in identifying transactions that are not orderly.
FASB ASC 820 also provides guidance on using the net asset value (NAV) per share provided by investees, as a practical expedient, to estimate the fair value of an alternative investment that does not have a readily determinable fair value. Such investments include interests in hedge funds, private equity funds, real estate funds, venture capital funds, commodity funds, offshore fund vehicles, and funds of funds. Benefit plans often invest in such alternative investments.
FASB ASC 820 requires disclosures by major category of investments and about the attributes of those investments, such as the nature of any restrictions on the investor’s ability to redeem its investments at the measurement date, any unfunded commitments, and the investment strategies of the investment. Investments valued at NAV as a practical expedient are no longer categorized within the fair value hierarchy. However, 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 statements of net assets available for benefits. Investments that calculate NAV per share (or its equivalent), but for which the practical expedient is not applied, will continue to be included in the fair value hierarchy.
For investments that file Form 5500 as a direct filing entity and for which fair value is estimated using the NAV (or its equivalent) as a practical expedient, disclosure of the investment’s strategy is no longer required, in accordance with FASB ASC 960-325-50-6, FASB ASC 962-325-50-9, and FASB ASC 965-325-50-4.
Note: See the Recent Developments section of this chapter for discussion of new standards that have a significant impact on the FASB ASC 820 disclosures.
Help desk. In November 2017, the AICPA updated the following Qs and As of section 2200, Long-Term Investments:
2220.18–.28, which are intended to assist reporting entities in applying the provisions of FASB ASC 820 to estimate the fair value of their investments in certain entities that calculate NAV.
2220.18, “Applicability of Practical Expedient,” to reflect conforming changes necessary due to the issuance of FASB ASU No. 2015-10, Technical Corrections and Improvements, concerning the revised definition of readily determinable fair value. 2220.28, “Definition of Readily Determinable Fair Value and Its Interaction With the NAV Practical Expedient,” to provide nonauthoritative guidance concerning the definition of RDFV and its interaction with the NAV practical expedient.
Note: On March 1, 2017, FASB discussed the definition of readily determinable fair value and stated that “…users of the financial statements would not be misled when provided either set of disclosures. The Board would encourage entities to provide the disclosure that are consistent with the conclusions previously reached on the measurement of the investment.” Further information on this meeting can be found on the FASB website.
FASB ASC 825, financial instruments
FASB ASC 825 creates a fair value option under which an organization may irrevocably elect fair value as the initial and subsequent measure for many financial instruments and certain other items that are not already required to be reported at fair value, with changes in fair value recognized in the statement of activities as those changes occur. An election is made on an instrument-by-instrument basis (with certain exceptions), generally when an instrument is initially recognized in the financial statements. Additional disclosures are required for entities that make the fair value election.
FASB ASC 825 also requires the following financial instruments general disclosures:
In the body of the financials or in the accompanying notes, the fair value of financial instruments for which it is practicable to estimate fair value
The method(s) and significant assumptions used to estimate the fair value of financial instruments consistent with the requirements of “Pending Content” in FASB ASC 820-10-50-2(bbb), except that a reporting entity is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements of investments held by an employee benefit plan in the plan sponsor’s own private company stock categorized within Level 3 of the fair value hierarchy required by that paragraph
A description of the changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments, if any, during the period
The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety