11.1 Introduction
11.1.1 Background
The disclosure requirements in ASC 820 apply to items (1) measured at fair value
on a recurring or nonrecurring basis and (2) not measured at fair value on a
recurring or nonrecurring basis but for which fair value is disclosed in the
financial statements. However, they do not apply to fair value measurements at
initial recognition. ASC 820’s disclosure requirements related to recurring or
nonrecurring fair value measurements after initial recognition apply to all
entities other than the plan assets of a defined benefit pension or other
postretirement plan in the sponsor’s financial statements. ASC 715 contains fair
value disclosure requirements that apply to the plan assets of a defined benefit
pension plan or other postretirement plan that is accounted for in accordance
with ASC 715.
Under ASC 825, an entity also must provide incremental disclosures about the following:
- The fair value of certain financial instruments, whether recognized or unrecognized in an entity’s statement of financial position.
- Concentrations of credit risk of financial instruments.
- The market risk of financial instruments.
- Eligible items measured at fair value in accordance with the FVO.
This chapter discusses the fair value disclosures required by ASC 820 and the
incremental fair value disclosures required by ASC 825 for certain financial
instruments. Chapter 12 discusses the
incremental disclosures required for eligible items measured at fair value in
accordance with the FVO. Appendix A
addresses the disclosures required by ASC 715 for plan assets of a defined
benefit pension plan or other postretirement plan as well as fair-value-related
disclosures required by other Codification topics. The disclosure requirements
in ASC 825-10-50-20 through 50-23 related to concentrations of credit risk and
market risk of financial instruments are outside the scope of this
publication.
Since the issuance of FASB Statement 157, the FASB has amended
the fair value disclosure requirements in ASC 715, ASC 820, and ASC 825 on
numerous occasions. As of the date of this publication, all entities subject to
these requirements will have adopted all of the relevant amendments made in
various ASUs except for those made by ASU 2022-03 (issued in June 2022), which
requires entities to provide specific disclosures about equity securities that
are subject to contractual sale restrictions. Section 11.1.2 provides more information
about the disclosure requirements and transition provisions of ASU 2022-03.
Section 11.2
addresses the disclosure requirements in ASC 820 and ASC 825 for all
entities.
11.1.2 ASU 2022-03
ASC 820-10
Transition Related to Accounting
Standards Update No. 2022-03, Fair Value
Measurement (Topic 820): Fair Value Measurement of
Equity Securities Subject to Contractual Sale
Restrictions
65-13 The following
represents the transition and effective date information
related to Accounting Standards Update No. 2022-03,
Fair Value Measurement (Topic 820): Fair Value
Measurement of Equity Securities Subject to
Contractual Sale Restrictions:
-
For public business entities, the pending content that links to this paragraph shall be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted.
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For all other entities, the pending content that links to this paragraph shall be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.
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An entity shall apply the pending content that links to this paragraph to equity securities within the scope of the pending content that links to this paragraph as follows:
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For entities that meet the definition of an investment company in accordance with the guidance in paragraphs 946-10-15-4 through 15-9, on a prospective basis to an equity security in which the contractual restriction that prohibits the sale of the equity security is executed or modified on or after the date at which the investment company first applies the pending content that links to this paragraph. An investment company that holds an equity security that is subject to a contractual sale restriction executed before the date at which the investment company first applies the pending content that links to this paragraph shall continue to account for that equity security using the accounting policy applied before the adoption of the pending content that links to this paragraph until the contractual sale restriction expires or is modified. An entity shall account for a modification to a contractual sale restriction in accordance with (c)(2) on the date of modification. Any adjustments as a result of applying the pending content that links to this paragraph shall be recognized as an adjustment to current-period earnings on the date the contractual sale restriction is modified.
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For all other entities, on a prospective basis to all equity securities. Any adjustments as a result of applying the pending content that links to this paragraph shall be recognized as an adjustment to current-period earnings on the date at which an entity first applies the pending content that links to this paragraph.
-
- An entity that adopts the
pending content that links to this paragraph in
accordance with (c)(1) shall disclose the
following in each period that the entity continues
to apply a discount to equity securities subject
to contractual sale restrictions executed before
adopting the pending content that links to this
paragraph:
-
The fair value of equity securities subject to a contractual sale restriction on the statement of financial position to which the entity continues to apply a discount.
-
The nature and remaining duration of the contractual sale restriction.
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The circumstances that could cause a lapse in the restriction.The equity securities included in (d)(1) through (3) shall be excluded from the amounts disclosed as required by paragraph 820-10-50-6B.
-
-
An entity that adopts the pending content that links to this paragraph in accordance with (c)(2) shall disclose the amount recognized as an adjustment to earnings in the period that the entity first applies the pending content that links to this paragraph.
ASU 2022-03 clarifies that a “contractual sale restriction
prohibiting the sale of an equity security is a characteristic of the reporting
entity holding the equity security” and is not included in the equity security’s
unit of account. Accordingly, an entity should not consider the contractual sale
restriction when measuring the equity security’s fair value. That is, in
accordance with ASC 820-10-35-36B (as amended by the ASU), the entity should not
apply a discount related to the contractual sale restriction. In addition, the
ASU prohibits an entity from recognizing a contractual sale restriction as a
separate unit of account.
ASU 2022-03 requires entities to disclose certain information about equity
securities that are subject to contractual sale restrictions. Such information
includes (1) the fair value of those equity securities that is reflected in the
balance sheet, (2) the nature and remaining duration of the corresponding
restrictions, and (3) any circumstances that could cause a lapse in the
restrictions.
For investment companies (as defined in ASC 946), the amendments in ASU 2022-03
should be applied to equity securities with a contract containing a sale
restriction that is executed or modified on or after the adoption date. For
equity securities with a contract containing a sale restriction that was
executed before the adoption date, investment companies should continue to apply
the historical accounting policy for measuring such securities until the
contractual restriction expires or is modified. In addition, if an investment
company continues to apply a discount to equity securities subject to a
contractual sale restriction, it should provide the disclosures required by ASU
2022-03 for those equity securities separately from similar equity securities to
which a discount is no longer applied.
ASU 2022-03 is effective for public business entities in fiscal
years beginning after December 15, 2023, and interim periods within those fiscal
years. For all other entities, the ASU is effective in fiscal years beginning
after December 15, 2024, and interim periods within those fiscal years. Early
adoption is permitted.
11.1.3 Applicability of Disclosure Requirements to Certain Entities
ASC 820’s disclosure requirements apply to all entities other than the plan
assets of a defined benefit or other postretirement plan that are accounted for
in accordance with ASC 715. The disclosure requirements of ASC 820 differ
depending on whether an entity is a nonpublic entity. ASC 820-10-20 defines the
term “nonpublic entity” as follows:
Any entity that does not meet any of the following conditions:
-
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.
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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).
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It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.
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It is required to file or furnish financial statements with the Securities and Exchange Commission.
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It is controlled by an entity covered by criteria (a) through (d).
In this chapter, any entity that is not a nonpublic entity is referred to as an
“other-than-nonpublic entity.”
The ASC 825 fair value disclosure requirements pertaining to financial
instruments not recognized at fair value apply only to public business entities.
ASC 825-10-20 defines the term “public business entity” as follows:
A public business entity is a business entity meeting any one of the
criteria below. Neither a not-for-profit entity nor an employee benefit
plan is a business entity.
-
It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
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It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
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It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
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It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
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It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely
because its financial statements or financial information is included in
another entity’s filing with the SEC. In that case, the entity is only a
public business entity for purposes of financial statements that are
filed or furnished with the SEC.
11.1.4 Applicability of Disclosure Requirements to Interim Financial Information of Publicly Traded Companies
ASC 270-10
Disclosure of
Summarized Interim Financial Data by Publicly Traded
Companies
50-1 Many publicly traded
companies report summarized financial information at
periodic interim dates in considerably less detail than
that provided in annual financial statements. While this
information provides more timely information than would
result if complete financial statements were issued at
the end of each interim period, the timeliness of
presentation may be partially offset by a reduction in
detail in the information provided. As a result, certain
guides as to minimum disclosure are desirable. (It
should be recognized that the minimum disclosures of
summarized interim financial data required of publicly
traded companies do not constitute a fair presentation
of financial position and results of operations in
conformity with generally accepted accounting principles
[GAAP].) If publicly traded companies report summarized
financial information at interim dates (including
reports on fourth quarters), the following data should
be reported, as a minimum: . . .
k. The information about the use of fair value
to measure assets and liabilities recognized in
the statement of financial position pursuant to
Section 820-10-50 . . .
m. The information about financial instruments
as required by Section 825-10-50 . . . .
Publicly traded companies (e.g., SEC registrants) should include
the fair value disclosures required by ASC 820 and ASC 825 in their interim
financial statements in accordance with ASC 270-10-50-1(k) and (m). Disclosures
related to amounts as of the end of the reporting period (or, for nonrecurring
fair value measurements, disclosures related to amounts as of the measurement
date) should be provided for the most current date, and any preceding dates, of
the statement of financial position that are included in the interim financial
statements. The activity-related disclosures (e.g., the Level 3 fair value
rollforward information) should be included on a quarterly and year-to-date
basis for the current quarter and current year-to-date period, as well as any
preceding quarters and year-to-date periods, included in the interim financial
statements. Qualitative disclosures should also include information that applies
to all the financial reporting periods included in the interim financial
statements. The scope of the fair value disclosure requirements for interim
financial statements is the same as their scope for annual financial statements
(i.e., any exceptions that apply to an entity’s annual financial statements
would similarly apply to its interim financial statements).
While the above guidance pertains to publicly traded companies, if interim
financial statements are issued by an entity that does not meet the definition
of a publicly traded company, those financial statements must also include the
disclosures required by ASC 820 and ASC 825 to comply with ASC 270.
11.1.5 Recurring Versus Nonrecurring Fair Value Measurements
An entity must provide the disclosures required by ASC 820 for both recurring and
nonrecurring fair value measurements. ASC 820-10-50-2(a) defines recurring and
nonrecurring, as used in this context, as follows:
Recurring fair value measurements of assets or
liabilities are those that other [Codification topics] require or permit
in the statement of financial position at the end of each reporting
period. Nonrecurring fair value measurements of assets or liabilities
are those that other [Codification topics] require or permit in the
statement of financial position in particular circumstances (for
example, when a reporting entity measures a long-lived asset or disposal
group classified as held for sale at fair value less costs to sell in
accordance with Topic 360 because the asset’s fair value less costs to
sell is lower than its carrying amount).
In other words, assets and liabilities measured at fair value on
a recurring basis are those that are remeasured at fair value, after initial
recognition, in each financial reporting period. Assets and liabilities measured
at fair value on a nonrecurring basis are those that, because of a specific
event or circumstance, must be remeasured after initial recognition at fair
value in accordance with other Codification topics. An entity must apply the
disclosure requirements in ASC 820 for nonrecurring fair value measurements of
assets and liabilities in reporting periods in which (1) those assets or
liabilities are subject to fair value remeasurement after initial recognition
and (2) the resulting measurement is recognized in the financial statements. In
some cases, an item may be remeasured to fair value in consecutive reporting
periods but the remeasurement is nonrecurring because the provision in the other
Codification topic that requires or permits such measurement does not apply to
all changes in fair value (e.g., a long-lived asset or disposal group classified
as HFS may be remeasured to fair value less costs to sell in each financial
reporting period until its disposal because there is a decrease in the fair
value less costs to sell in each financial reporting period).
For certain assets, other Codification topics require that
entities recognize recoveries (not to exceed the original cost basis) of
previously recognized impairment losses or lower-of-cost-or-fair-value
adjustments (e.g., a recovery of an impairment of a loan classified as HFS). In
such circumstances, the recognized amounts of recoveries that do not exceed the
prior write-downs are considered nonrecurring fair value measurements that are
subject to ASC 820’s nonrecurring fair value disclosure requirements. However,
to the extent that the fair value amount exceeds the original cost basis, the
fair value measurement is not subject to these requirements because the amount
reflected in the financial statements (i.e., the cost basis) is not a
nonrecurring fair value measurement.
The disclosure requirements for nonrecurring fair value measurements are
generally less extensive than those for recurring fair value measurements. For
example, all entities are exempt from disclosing the following for nonrecurring
fair value measurements:
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Transfers between categories of the fair value hierarchy.
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The Level 3 rollforward.
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Unrealized gains and losses for the period that are recognized in income or OCI.
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The narrative description of the uncertainty (or sensitivity) of a Level 3 fair value measurement that results from unobservable inputs.
However, entities must disclose the reason for each nonrecurring
fair value measurement and the date or period of the measurement’s recognition,
if not as of the date of the statement of financial position. See Section 11.2.2.1 for
further discussion of the disclosures required for nonrecurring fair value
measurements.
The table below lists examples of recurring and nonrecurring
fair value measurements, and Example 11-1 illustrates a nonrecurring fair value measurement
of a finite-lived intangible asset. See Section 2.1.2 for further discussion of
other Codification topics that permit or require measurement of an item at fair
value.
Table
11-1
|
Examples of Recurring Fair Value Measurements
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Examples of Nonrecurring Fair Value Measurements
|
|---|---|
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Trading or available-for-sale debt securities within the
scope of ASC 320.
|
Mortgage loans HFS or mortgage-backed
securities HFS that are remeasured at the lower of cost
or fair value in accordance with ASC 948-310-35-1
through 35-3.
|
|
Investments in equity securities that are periodically
measured at fair value under ASC 321 (i.e., those with
readily determinable fair values or without readily
determinable fair values to which the measurement
alternative in ASC 321-10-35-2 is not applied).
|
Investments in equity securities that
are accounted for by using the measurement alternative
in ASC 321-10-35-2 when (1) an observable price change
occurs for the identical or a similar security in
accordance with ASC 321-10-35-2 or (2) the security is
impaired in accordance with ASC 321-10-35-3.1
|
|
Investments in equity securities with readily
determinable fair values or debt securities owned by NFP
entities in accordance with ASC 958-320 and ASC
958-321.
|
Other-than-temporarily impaired equity method investments
in accordance with ASC 323-10-35-31 and 35-32.
|
|
Derivative assets and liabilities within the scope of ASC
815, including bifurcated embedded derivatives and
hybrid financial instruments that an entity has elected
to remeasure at fair value in their entirety.
|
Impaired loan receivables that, as a practical expedient,
are remeasured on the basis of (1) their observable
market price in accordance with ASC 310-10-35-22 or (2)
the fair value of the collateral if the loan is
collateral-dependent in accordance with ASC 310-10-35-22
and ASC 310-10-35-32.
|
|
Investments owned by investment companies in accordance
with ASC 946.
|
Impaired finite-lived intangible assets in accordance
with ASC 350-30-35-14.
|
|
Liabilities measured at fair value, with changes in fair
value recognized in earnings, in accordance with ASC
480-10-35-5.
|
Impaired indefinite-lived intangible assets in accordance
with ASC 350-30-35-19.
|
|
Nonderivative written call options carried at fair value
in accordance with the SEC staff’s long-standing
position that written options should be initially and
subsequently recognized at fair value.
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Impaired goodwill in accordance with ASC 350-20-35-4
through 35-19.
|
|
Financial assets or financial liabilities for which an
entity has elected the FVO in accordance with ASC 825
(e.g., certain equity method investments or an entity’s
own debt).
|
Impaired (1) long-lived assets to be held and used, (2)
long-lived assets to be disposed of other than by sale,
or (3) long-lived assets to be disposed of by sale in
accordance with ASC 360-10-35-17 through 35-43.
|
|
Classes of servicing assets or liabilities for which an
entity has elected the fair value measurement method in
accordance with ASC 860-50-35-1.
|
Classes of servicing assets or liabilities for which an
entity has elected the amortization method in accordance
with ASC 860-50-35-1 when those servicing assets are
impaired or the fair value of those servicing
liabilities has increased above the carrying amount in
accordance with ASC 860-50-35-9 through 35-12.
|
Example 11-1
Nonrecurring Fair Value Measurement of a Finite-Lived
Intangible Asset
Company X (which has a calendar year-end) acquires
Company Y on December 31, 20X7. In the purchase price
allocation, X allocates $100,000 to a finite-lived
intangible asset on the basis of its fair value. Assume
straight-line amortization of $1,250 per quarter. As of
December 31, 20X7, X is not required to include the
finite-lived intangible asset in the nonrecurring
disclosure table because the only fair value measurement
recognized in the financial statements related to the
asset occurred at initial recognition.
As of September 30, 20X8, (1) the finite-lived intangible
asset is recorded at $96,250 ($3,750 of amortization has
occurred since initial recognition); (2) an event or
change in circumstances has occurred, indicating that
the carrying amount of the asset may not be recoverable
(e.g., adverse changes in the business climate); and (3)
X has tested the asset for impairment and determined
that no impairment exists. The finite-lived intangible
asset is not included in the ASC 820 disclosures because
no nonrecurring fair value measurement of the asset was
recognized in the financial statements during the
reporting period.
Because of continued concerns regarding the business
climate, X tests the finite-lived intangible asset for
impairment as of December 31, 20X8, and records an
impairment charge of $5,000 to reduce the carrying
amount of the asset to its fair value of $90,000. As of
this date, X should include the finite-lived intangible
asset in its ASC 820 disclosures (see ASC 820-10-50-2)
because a nonrecurring fair value measurement of the
asset was reflected in the statement of financial
position during the period.
Because of improvements in the business climate, as of
March 31, 20X9, X no longer tests the finite-lived
intangible asset for impairment. Company X does not
include the asset in the ASC 820 disclosures for the
March 31, 20X9, reporting period because a nonrecurring
fair value measurement was not recognized in the
financial statements during the reporting period.
Footnotes
1
ASU 2019-04
clarified that the occurrence of any remeasurement
event in ASC 321 for equity securities without
readily determinable fair values accounted for
under the measurement alternative in accordance
with ASC 321-10-35-2 represents a nonrecurring
fair value measurement under ASC 820. ASU 2019-04
also added ASC 321-10-50-2B, which states:
“To the extent that the
disclosure requirements in this Subtopic [ASC
321-10] achieve the fair value disclosure
requirements described in Section 820-10-50 on
disclosing fair value measurement, an entity need
not duplicate the related fair value
disclosure.”