News and Updates

FASB Simplifies the Disclosures Related to Fair Value Measurement in ASU 2018-13: Implications for Private Funds

The Financial Accounting Standards Board continues on its path to improve the effectiveness and simplify the disclosure requirements in the notes to financial statements as part of its disclosure framework project. In August 2018, FASB released an Accounting Standards Update that has relevant implications for investment companies that report using U.S. generally accepted accounting principles (U.S. GAAP).

This articles outlines some of the key provisions of ASU 2018-13 as they apply to investment companies that qualify as “nonpublic” entities, a category that typically includes private equity funds, hedge funds and fund of funds that qualify for exemption from registration with the U.S. Securities and Exchange Commission under the 1940 Investment Company Act.[1]

REMOVED DISCLOSURES

The following disclosure requirements were removed from Topic 820 for nonpublic entities:

  • Valuation process for Level 3 fair value measurements.

Comment: ASU 2018-13 removes the requirement under ASC 820-10-55-105 to include in the financial statements: a) a description of the group responsible for valuation policies and procedures; b) its methods of calibration and back testing and other testing procedures of pricing models; c) its process for analyzing changes in fair value measurements; d) its process for analyzing third-party information used in valuation such as broker quotes or pricing services; and e) its methods used to develop and substantiate unobservable inputs.

  • Policy for the timing of transfers between levels in the fair value hierarchy.

Comment: firms are still required to have policies and procedures in place concerning the valuation process for Level 3 assets and liabilities and for the timing of transfers. ASU 2018-13 removes the requirement to disclose such policies in the entity’s financial statements.

  • Changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

Comment: Under the superseded guidance of ASC 820-10-50-1, firms have typically disclosed the changes in unrealized gains and losses included in earnings for recurring Level 3 investments held at the end of the reporting period as a supplemental section in the Level 3 roll forward table or in the accompanying narrative. ASU 2018-13 removes this requirement.

MODIFIED DISCLOSURES

The following disclosure requirements were modified in Topic 820 for nonpublic entities:

  • Level 3 rollforward: a full rollforward for Level 3 fair value measurements that reconciles beginning and ending balances is no longer required. Instead, a nonpublic entity is required to continue to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities. Transfers into Level 3 must be disclosed and discussed separately from transfers out of Level 3. In a similar way, purchases and issues of Level 3 assets and liabilities must be disclosed separately.

  • Timing of expected liquidity events and redemption restrictions for investments valued using the practical expedient (for instance, investments in other funds that are valued based on the reported unadjusted net asset value): ASU 2018-13 maintains the requirement for funds to disclose the estimated timing of distributions from the investee entity, or of lifting of redemption restrictions only if the fund has received this information from the investee entity, either directly or through a public announcement. If the reporting entity (fund of funds) has NOT received such information from the investee entity, the reporting entity is no longer required to provide its own estimates as to the timing of liquidity events or lifting of redemption restrictions. Instead, reporting entities will have to disclose that the timing of such events is unknown and how long the restriction has been in effect.

EFFECTIVE DATE

ASU 2018-13 is effective for the interim and annual reporting periods in fiscal years that begin after December 15, 2019. Therefore the effective date for a calendar year private investment company is January 1, 2020. Early adoption is permitted. We expect that most fund will take advantage of the early adoption to simplify their financial statement disclosures for the year ending December 31, 2018.


[1] A “Nonpublic entity” is an entity that does not meet any of the following conditions:

  1. Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.

  2. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).

  3. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.

  4. It is required to file or furnish financial statements with the Securities and Exchange Commission.

  5. It is controlled by an entity covered by criteria (1) through (4)

Antonella Puca