11.2 Fair Value Disclosures Requirements

11.2.1 Objectives and Scope

ASC 820-10

50-1C The objective of the disclosure requirements in this Subtopic is to provide users of financial statements with information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements:

The valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes
The uncertainty in the fair value measurements as of the reporting date
How changes in fair value measurements affect an entity’s performance and cash flows.

50-1D When complying with the disclosure requirements of this Subtopic, a reporting entity shall consider all of the following:

The level of detail necessary to satisfy the disclosure requirements
How much emphasis to place on each of the various requirements
How much aggregation or disaggregation to undertake
Whether users of financial statements need additional information to evaluate the quantitative information disclosed.

50-2 A reporting entity shall disclose . . . information for each class of assets and liabilities (see paragraph 820-10-50-2B for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Topic) in the statement of financial position after initial recognition. . . .

50-10 Plan assets of a defined benefit pension or other postretirement plan that are accounted for in accordance with Topic 715 are not subject to the disclosure requirements in paragraphs 820-10-50-1C through 50-8. Instead, the disclosures required in paragraphs 715-20-50-1(d)(iv) and 715-20-50-5(c)(iv) shall apply for fair value measurements of plan assets of a defined benefit pension or other postretirement plan.

ASC 825-10

50-1 Paragraph 825-10-05-3 identifies various Topics within the Codification that address financial instruments matters. Those and other Topics in the Codification require disclosures about specific financial instruments. This Subsection addresses incremental disclosures about all of the following:

Fair value of financial instruments . . . .

Applicability of This Subsection

50-2 This guidance discusses the applicability of the disclosure requirements in this Subsection to entities and transactions.

Entities

50-2A The disclosure guidance in this Subsection applies to public business entities . . . .

Transactions

50-8 In part, this Subsection requires disclosures about fair value for all financial instruments, whether recognized or not recognized in the statement of financial position, except that the disclosures about fair value prescribed in paragraphs 825-10-50-10 through 50-13 and 825-10-50-15 are not required for any of the following:

Employers’ and plans’ obligations for pension benefits, other postretirement benefits including health care and life insurance benefits, postemployment benefits, employee stock option and stock purchase plans, and other forms of deferred compensation arrangements (see Topics 710, 712, 715, 718, and 960)
Substantively extinguished debt subject to the disclosure requirements of Subtopic 405-20
Insurance contracts, other than financial guarantees (including financial guarantee insurance contracts within the scope of Topic 944) and investment contracts, as discussed in Subtopic 944-20
Lease contracts as defined in Topic 842 (a contingent obligation arising out of a cancelled lease and a guarantee of a third-party lease obligation are not lease contracts and are subject to the disclosure requirements in this Subsection)
Warranty obligations (see Topic 450 and the Product Warranties Subsections of Topic 460)
Unconditional purchase obligations as defined in paragraph 440-10-50-2
Investments accounted for under the equity method in accordance with the requirements of Topic 323
Noncontrolling interests and equity investments in consolidated subsidiaries (see Topic 810)
Equity instruments issued by the entity and classified in stockholders’ equity in the statement of financial position (see Topic 505)
Receive-variable, pay-fixed interest rate swaps for which the simplified hedge accounting approach is applied (see Topic 815)
Fully benefit-responsive investment contracts held by an employee benefit plan
Investments in equity securities accounted for under the measurement guidance for equity securities without readily determinable fair values (see Topic 321)
Trade receivables and payables due in one year or less
Deposit liabilities with no defined or contractual maturities
Liabilities resulting from the sale of prepaid stored-value products within the scope of paragraph 405-20-40-3.

50-9 Generally accepted accounting principles (GAAP) require disclosure of or subsequent measurement at fair value for many classes of financial instruments. Those requirements are not superseded or modified by this Subsection.

ASC 820 and ASC 825 require entities to disclose fair value information about the following assets and liabilities:

Those that are measured at fair value in the statement of financial position in a financial reporting period after initial recognition (except for the plan assets of a defined benefit pension or other postretirement plan that is subject to the fair value disclosure requirements in ASC 715).
Those that are not measured at fair value in the statement of financial position but for which the fair value is disclosed.

All assets and liabilities that are measured at fair value on a recurring or nonrecurring basis are subject to the disclosure requirements in ASC 820. An entity is not required to provide fair value disclosures for assets, liabilities, and instruments classified in a reporting entity’s shareholders’ equity that are initially recognized at fair value in accordance with ASC 820. However, other Codification topics may require specific fair value disclosures. See Chapter 2 for more information about the scope of ASC 820, including the application of the ASC 820 disclosure requirements to specific types of assets and liabilities. See Appendix A for a discussion of other Codification topics that require incremental fair value disclosures, including disclosures about fair value on initial recognition.

ASC 825 specifies the fair value disclosure requirements that apply to certain financial instruments, regardless of whether they are recognized in the statement of financial position. These disclosures, which only public business entities are required to provide, include disclosures about financial instruments that are not measured at fair value on a recurring or nonrecurring basis (e.g., financial assets and financial liabilities measured at amortized cost). ASC 825-10-50-8 provides exceptions from the disclosure requirements for certain financial instruments. See Chapter 2 for more information about the scope of ASC 825, including the application of its disclosure requirements to specific types of financial assets and financial liabilities.

ASC 820-10-50-1C and 50-1D outline the objective of the fair value disclosure requirements in ASC 820, along with matters for entities to consider in complying with these requirements. An entity may need to use significant judgment in determining the information to disclose and the level of detail (and aggregation or disaggregation) at which to provide such disclosures. In using such judgment, entities should consider the needs of present and potential investors, creditors, donors, and other financial statement users. Entities may determine that it is necessary to provide supplemental information (i.e., disclosures in addition to those required by ASC 820) in certain circumstances. See Section 11.2.3.1 for more information about determining classes of assets and liabilities for disclosure purposes.

Connecting the Dots

ASC 820-10-15-1 indicates that in the absence of a specific exception, “[t]his Topic [ASC 820] applies when another [Codification] Topic requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements).” Thus, entities have the option of providing ASC 820 and ASC 825 disclosures for assets or liabilities for which such disclosures are not required. An entity may wish to disclose fair value information for certain assets and liabilities to give a more complete picture of their value or to provide supplemental information that is considered helpful to users of the entity’s financial statements.

There are various matters to consider regarding the voluntary disclosure of fair value information for assets and liabilities for which the disclosures in ASC 820 or ASC 825 are not required. Such considerations include the following:

In addition to disclosing a fair value amount, an entity should consider the incremental disclosure requirements in ASC 820-10-50-2E for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed (see ASC 820-10-50-2(b) and ASC 820-10-50-2(h)). For such assets and liabilities, ASC 820-10-50-2E would not require the disclosure of other fair value information, such as the valuation technique, the inputs used in the valuation technique, and the quantitative disclosures about significant unobservable inputs for fair value amounts classified in Level 3 of the fair value hierarchy. However, entities can voluntarily include such disclosures for any asset or liability that is not measured at fair value in the statement of financial position.
An entity should apply a rational and consistent policy when disclosing such fair value information (e.g., from one reporting period and asset or liability to another). The entity should also ensure that its disclosures clearly indicate that such assets and liabilities for which fair value is voluntarily disclosed are not recognized at fair value on a recurring or nonrecurring basis in the statement of financial position and should separately identify the associated carrying amounts reported in the statement of financial position. This is especially important when an entity has assets or liabilities of a similar type and some but not all of those assets or liabilities are recognized at fair value in the statement of financial position.

See Section 2.3.2.2.4 for discussion of voluntary fair value disclosures of equity method investments.

The remaining discussion in this section focuses on the disclosure requirements in ASC 820 and ASC 825 (for financial assets and financial liabilities of public business entities). Also see ASC 820-10-55-99 through 55-107 for examples illustrating disclosures that are not reproduced in the discussion below.

11.2.2 Disclosure Requirements

11.2.2.1 Assets and Liabilities Measured at Fair Value in the Statement of Financial Position

ASC 820-10

50-2 A reporting entity shall disclose the following information for each class of assets and liabilities (see paragraph 820-10-50-2B for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Topic) in the statement of financial position after initial recognition. These disclosure requirements shall not apply to an investment within the scope of paragraphs 820-10-15-4 through 15-5 for which fair value is measured using net asset value per share (or its equivalent, for example, member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed) as a practical expedient, in accordance with paragraph 820-10-35-59.

a. For recurring fair value measurements, the fair value measurement at the end of the reporting period, and for nonrecurring fair value measurements, the fair value measurement at the relevant measurement date and the reasons for the measurement. Recurring fair value measurements of assets or liabilities are those that other 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 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). For nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, a reporting entity shall clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken.

b. For recurring and nonrecurring fair value measurements, the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3). . . .

bbb. The information shall include:

For recurring and nonrecurring fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, a description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in either or both a valuation approach and a valuation technique (for example, changing from matrix pricing to the binomial model or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason(s) for making it.
For recurring and nonrecurring fair value measurements categorized within Level 3 of the fair value hierarchy, a reporting entity shall provide quantitative information about the significant unobservable inputs used in the fair value measurement. A reporting entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the reporting entity when measuring fair value (for example, when a reporting entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure, a reporting entity cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the reporting entity. Employee benefit plans, other than those plans that are subject to the U.S. Securities and Exchange Commission’s (SEC) filing requirements, are not required to provide this disclosure for investments held by an employee benefit plan in their plan sponsor’s own nonpublic equity securities, including equity securities of their plan sponsor’s nonpublic affiliated entities.
1. In complying with (bbb)(2), a reporting entity shall provide the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. A reporting entity shall disclose how it calculated the weighted average (for example, weighted by relative fair value). For certain unobservable inputs, a reporting entity may disclose other quantitative information, such as the median or arithmetic average, in lieu of the weighted average, if such information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement. An entity does not need to disclose its reason for omitting the weighted average in these cases.
2. A nonpublic entity is not required to provide the information described in (bbb)(2)(i), but is required to provide quantitative information about the significant unobservable inputs used in the fair value measurement in accordance with (bbb)(2).

c. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances, disclosing separately changes during the period attributable to the following:

1. Total gains or losses for the period recognized in earnings (or changes in net assets), and the line item(s) in the statement of income (or activities) in which those gains or losses are recognized

1a. Total gains or losses for the period recognized in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognized

2. Purchases, sales, issues, and settlements (each of those types of changes disclosed separately)

3. The amounts of any transfers into or out of Level 3 of the fair value hierarchy and the reasons for those transfers. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3. See paragraph 820-10-50-2C for additional guidance. . . .

d. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the amount of the total gains or losses for the period in (c)(1) included in earnings (or changes in net assets) and in (c)(1a) included in other comprehensive income that is attributable to the change in unrealized gains or losses relating to those assets and liabilities held at the end of the reporting period, and the line item(s) in the statement(s) of comprehensive income (or activities) in which those unrealized gains or losses are recognized. . . .

g. For recurring fair value measurements categorized within Level 3 of the fair value hierarchy, a narrative description of the uncertainty of the fair value measurement from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. For example, how a change in those significant unobservable inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date. If there are interrelationships between those inputs and other unobservable inputs used in the fair value measurement, a reporting entity shall also provide a description of those interrelationships and of how they might magnify or mitigate the effect of changes in the unobservable inputs on the fair value measurement. To comply with that disclosure requirement, the narrative description of the uncertainty of the fair value measurement that would result from using unobservable inputs shall include the unobservable inputs disclosed when complying with paragraph 820-10-50-2(bbb).

h. For recurring and nonrecurring fair value measurements, if the highest and best use of a nonfinancial asset differs from its current use, a reporting entity shall disclose that fact and why the nonfinancial asset is being used in a manner that differs from its highest and best use.

50-2B . . . A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. However, a reporting entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. . . .

50-2D If a reporting entity makes an accounting policy decision to use the exception in paragraph 820-10-35-18D, it shall disclose that fact.

50-2F A nonpublic entity is not required to disclose the information required by paragraph 820-10-50-2(bbb)(2)(i), (d), and (g) and paragraph 820-10-50-2E unless required by another Topic.

50-2G In lieu of paragraph 820-10-50-2(c), a nonpublic entity shall disclose separately changes during the period attributable to the following:

Purchases and issues (each of those types of changes disclosed separately)
The amounts of any transfers into or out of Level 3 of the fair value hierarchy and the reasons for those transfers. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3. See paragraph 820-10-50-2C for additional guidance.

50-2H See paragraph 958-605-50-1A(d) through (e), which provides disclosures for a not-for-profit entity (NFP) that recognizes contributed nonfinancial assets within the scope of Subtopic 958-605. Paragraph 958-605-50-1A(d) requires that an NFP disclose a description of the valuation techniques and inputs used in fair value measurement of those assets in accordance with paragraph 820-10-50-2(bbb)(1) at initial recognition.

50-3 For derivative assets and liabilities, the reporting entity shall present both of the following:

The fair value disclosures required by paragraph 820-10-50-2(a) through (b) on a gross basis (which is consistent with the requirement of paragraph 815-10-50-4B(a))
The reconciliation disclosure required by paragraph 820-10-50-2(c) through (d) on either a gross or a net basis.

50-4A For a liability measured at fair value and issued with an inseparable third-party credit enhancement, an issuer shall disclose the existence of that credit enhancement.

50-7 As discussed in paragraph 250-10-50-5, the disclosures required by Topic 250 for a change in accounting estimate are not required for revisions resulting from a change in a valuation technique or its application.

50-8 A reporting entity shall present the quantitative disclosures required by this Topic in a tabular format.

All assets and liabilities measured in the statement of financial position at fair value after initial recognition are subject to the disclosure requirements in ASC 820-10-50-2. The nature and extent of such disclosures differ depending on the following:

Whether the reporting entity is a nonpublic entity (see Section 11.1.3).
Whether the fair value measurement is recurring or nonrecurring (see Section 11.1.5).

The table below summarizes the disclosures an entity is required to provide under ASC 820 when, in accordance with other Codification topics, an asset or liability is measured at fair value in the statement of financial position after initial recognition. This table distinguishes between (1) other-than-nonpublic and nonpublic entities and (2) recurring and nonrecurring fair value measurements. As noted in ASC 820-10-50-8, the quantitative disclosures must be presented in a tabular format. See the remaining subsections of Section 11.2 for more information about these required disclosures.

Table 11-2

Required Disclosures and Applicable References	Entities Other Than Nonpublic Entities		Nonpublic Entities
Required Disclosures and Applicable References	Recurring	Nonrecurring	Recurring	Nonrecurring
Fair value as of the reporting date or relevant measurement date (ASC 820-10-50-2(a) and ASC 825-10-50-10)	X	X(a)	X	X(a)
The reason for the fair value measurement (ASC 820-10-50-2(a))		X		X
The level in the fair value hierarchy (ASC 820-10-50-2(b) and ASC 825-10-50-10)	X	X	X	X
For fair value measurements in Levels 2 and 3 of the fair value hierarchy, a description of the valuation techniques and inputs used in the fair value measurement (ASC 820-10-50-2(bbb)(1))	X	X	X	X
For fair value measurements in Levels 2 and 3 of the fair value hierarchy, if there has been a change in a valuation approach, a valuation technique, or both, the nature of, and reason for, that change (ASC 820-10-50-2(bbb)(1))	X	X	X	X
If the highest and best use of a nonfinancial asset differs from its current use, disclosure of that fact and why the asset is being used in such a way (ASC 820-10-50-2(h))	X	X	X	X
Information sufficient to permit reconciliation of (1) disclosures about classes of assets and liabilities by level in the fair value hierarchy and (2) line items presented in the statement of financial position (ASC 820-10-50-2B)	X	X	X	X
If an entity makes an accounting policy decision to use the net risk position valuation exception in ASC 820-10-35-18D, disclosure of that fact (ASC 820-10-50-2D)	X		X
For liabilities measured at fair value, the existence of any credit enhancement and whether it is reflected in the fair value measurement (ASC 820-10-50-4A)	X	X	X	X
The disclosures below apply only to Level 3 fair value measurements.
Quantitative information about the significant unobservable inputs used in the fair value measurement (ASC 820-10-50-2(bbb)(2))	X(b)	X(b),(c)	X(b)	X(b),(d)
In complying with the requirement in ASC 820-10-50-2(bbb)(2) to disclose quantitative information about significant unobservable inputs, an entity would disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and how the weighted average was calculated. For certain unobservable inputs, an entity may disclose other quantitative information, such as the median or arithmetic average, in lieu of the weighted average, if using such information would be a more reasonable and rational method for reflecting the distribution of unobservable inputs used to develop the fair value measurement (ASC 820-10-50-2(bbb)(2)(i))	X	X	(e)	(e)
The Level 3 fair value rollforward (ASC 820-10-50-2(c))	X		(f)
Total amount of gains and losses for the period, recorded in current income and OCI, that is attributable to the change in unrealized gains and losses for assets or liabilities held at the end of the reporting period and the line items in which such amounts are recognized (ASC 820-10-50-2(d))	X		(e)
Narrative description of the uncertainty of the fair value measurement with respect to the use of significant unobservable inputs (i.e., those disclosed in ASC 820-10-50-2(bbb)), if those inputs could reasonably have been different on the reporting date, and a description of the interrelationships between unobservable inputs, including how such interrelationships might magnify or mitigate the impact of changes in such inputs on fair value (ASC 820-10-50-2(g))	X		(e)
Notes to table: (a) ASC 820-10-50-2(a) requires disclosure of a nonrecurring fair value measurement amount as of the date of the measurement (e.g., the impairment or recovery date), which may differ from the end of the reporting period. ASC 820-10-50-2(a) states, in part, that “[f]or nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, a reporting entity shall clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken.” ASC 820-10-50-2B further states, in part, that “a reporting entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position.” These disclosure requirements address situations for which the amounts disclosed under ASC 820 for assets or liabilities measured at fair value on a nonrecurring basis during the period are not consistent with the amounts recorded in the statement of financial position for such assets or liabilities. See also Section 11.2.3.3.2. (b) ASC 820-10-50-2(bbb)(2) states, in part: A reporting entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the reporting entity when measuring fair value (for example, when a reporting entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure, a reporting entity cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the reporting entity. Employee benefit plans, other than those plans that are subject to the U.S. Securities and Exchange Commission’s (SEC) filing requirements, are not required to provide this disclosure for investments held by an employee benefit plan in their plan sponsor’s own nonpublic equity securities, including equity securities of their plan sponsor’s nonpublic affiliated entities. (c) This disclosure is not required for fair value measurements related to the financial accounting and reporting for goodwill after its initial recognition (see ASC 350-20-50-3). (d) For nonpublic entities, this disclosure is not required for fair value measurements related to the financial accounting and reporting for (1) goodwill after its initial recognition (see ASC 350-20-50-3) and (2) indefinite-lived intangible assets after their initial recognition (ASC 350-30-50-3A). (e) ASC 820-10-50-2F exempts nonpublic entities from providing this disclosure unless it is required by another Codification topic. (f) In lieu of providing this disclosure, in accordance with ASC 820-10-50-2G, a nonpublic entity should separately disclose changes during the period that are attributable to (1) purchases and issues (each of these types of changes should be disclosed separately) and (2) the amounts of any transfers into or out of Level 3 of the fair value hierarchy and the reasons for those transfers (transfers into Level 3 should be disclosed separately from transfers out of Level 3).

See ASC 820-10-50-3 for additional disclosure requirements related to derivative assets and liabilities.

SEC Considerations

Section 9700 of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM) states:

In March and September 2008, the Division of Corporation Finance sent illustrative letters to certain public companies that reported significant amounts of asset-backed securities, loans carried at fair value or the lower of cost or market, and derivative assets and liabilities in their recent 10-K filings. The letters highlight disclosure matters relating to ASC 820, and suggest disclosures that companies may consider in preparing their MD&A.

These letters highlight disclosure matters that SEC registrants should consider in complying with SEC Regulation S-K, Item 303, which addresses the preparation of MD&A. While certain of the recommended disclosures are now required under U.S. GAAP as a result of amendments to ASC 820, SEC registrants should consider the disclosures suggested in these letters that are not otherwise provided in the notes to the financial statements.

11.2.2.2 Assets and Liabilities Not Measured at Fair Value in the Statement of Financial Position

ASC 820-10

50-2E For each class of assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed, a reporting entity shall disclose the information required by paragraph 820-10-50-2(b) and (h). However, a reporting entity is not required to provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy required by paragraph 820-10-50-2(bbb)(2). For such assets and liabilities, a reporting entity does not need to provide the other disclosures required by this Topic.

50-2F A nonpublic entity is not required to disclose the information required by paragraph 820-10-50-2(bbb)(2)(i), (d), and (g) and paragraph 820-10-50-2E unless required by another Topic.

ASC 825-10

50-2A The disclosure guidance in this Subsection applies to public business entities . . . .

50-10 A reporting entity shall disclose either in the body of the financial statements or in the accompanying notes, the fair value of financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3). . . .

For financial instruments recognized at fair value in the statement of financial position, the disclosure requirements of Topic 820 also apply.

50-11 Fair value disclosed in the notes shall be presented together with the related carrying amount in a form that clarifies both of the following:

Whether the fair value and carrying amount represent assets or liabilities
How the carrying amounts relate to what is reported in the statement of financial position.

Pending Content (Transition Guidance: ASC 815-40-65-1)

50-11A See paragraph 470-20-50-1D for additional guidance on disclosures about fair value of convertible debt instruments.

50-12 If the fair value of financial instruments is disclosed in more than a single note, one of the notes shall include a summary table. The summary table shall contain the fair value and related carrying amounts and cross-references to the location(s) of the remaining disclosures required by this Section.

50-13 This Subtopic does not prohibit an entity from disclosing separately the estimated fair value of any of its nonfinancial intangible and tangible assets and nonfinancial liabilities.

50-15 In disclosing the fair value of a financial instrument, an entity shall not net that fair value with the fair value of other financial instruments — even if those financial instruments are of the same class or are otherwise considered to be related (for example, by a risk management strategy) — except to the extent that the offsetting of carrying amounts in the statement of financial position is permitted under either of the following:

The general principle in paragraph 210-20-45-1
The exceptions for master netting arrangements in paragraph 815-10-45-5 and for amounts related to certain repurchase and reverse repurchase agreements in paragraphs 210-20-45-11 through 45-17.

Public business entities must provide additional fair value disclosures for certain financial assets and financial liabilities that are not measured at fair value in the statement of financial position, which may include financial assets or financial liabilities that were subject to a nonrecurring fair value measurement during a financial reporting period. This disclosure requirement is included in ASC 825-10-50-10 and is also addressed in ASC 820-10-50-2E. In accordance with that guidance, public business entities must disclose the following for financial assets and financial liabilities that are not (1) recognized at fair value in the statement of financial position and (2) subject to an exception in ASC 825-10-50-8:

The fair value as of the reporting date (i.e., the date of the statement of financial position).
The level of the fair value hierarchy (Level 1, 2, or 3) within which each fair value measurement is categorized in its entirety.2

These disclosures can be included in the body of the financial statements or in the notes and may be provided by classes of assets and liabilities (see Section 11.2.3.1), subject to the prohibitions against netting described in ASC 825-10-50-15. ASC 825-10-50-11 and 50-12 address considerations related to including such disclosures in the notes to the financial statements.

The fair value disclosures should be consistent with the unit of account. For example, as discussed in ASC 825-10-25-13, “[f]or the issuer of a liability issued with an inseparable third-party credit enhancement . . . , the unit of accounting for the liability . . . disclosed at fair value does not include the third-party credit enhancement.” See Section 12.3.1.1.1.2 for discussion of debt issued with government-provided guarantees.

While an entity is not precluded from also disclosing information about the valuation technique and inputs used, changes in the valuation approach or valuation technique, and significant unobservable inputs, these disclosures are not required for financial assets and financial liabilities that are not measured at fair value in the statement of financial position. ASU 2018-09 clarified that the disclosure addressed in ASC 820-10-50-2(bbb) is not required for financial assets and financial liabilities that are not measured at fair value.

Entities other than public business entities are not required to provide disclosures about the fair value of financial assets and financial liabilities that are not measured at fair value in the statement of financial position. Further, ASU 2019-04 clarified that such entities do not need to disclose the fair values of held-to-maturity classified debt securities.

See Section 11.3 for examples of financial instruments that are subject to the disclosure requirements of ASC 825-10-50-10.

11.2.2.3 Certain Entities That Calculate NAV per Share (or Its Equivalent)

ASC 820-10

Fair Value Measurements of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

50-6A For investments that are within the scope of paragraphs 820-10-15-4 through 15-5 and that are measured using the practical expedient in paragraph 820-10-35-59 on a recurring or nonrecurring basis during the period, a reporting entity shall disclose information that helps users of its financial statements to understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). A reporting entity shall disclose the following information for each class of investment:

a. The fair value measurement (as determined by applying paragraphs 820-10-35-59 through 35-62) of the investments in the class at the reporting date and a description of the significant investment strategies of the investee(s) in the class.

b. For each class of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the period of time over which the underlying assets are expected to be liquidated by the investees if the investee has communicated the timing to the reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity shall disclose that fact.

c. The amount of the reporting entity’s unfunded commitments related to investments in the class.

d. A general description of the terms and conditions upon which the investor may redeem investments in the class (for example, quarterly redemption with 60 days’ notice).

e. The circumstances in which an otherwise redeemable investment in the class (or a portion thereof) might not be redeemable (for example, investments subject to a lockup or gate). Also, for those otherwise redeemable investments that are restricted from redemption as of the reporting entity’s measurement date, the reporting entity shall disclose when the restriction from redemption might lapse if the investee has communicated that timing to the reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity shall disclose that fact and how long the restriction has been in effect.

f. Any other significant restriction on the ability to sell investments in the class at the measurement date. . . .

h. If a group of investments would otherwise meet the criteria in paragraph 820-10-35-62 but the individual investments to be sold have not been identified (for example, if a reporting entity decides to sell 20 percent of its investments in private equity funds but the individual investments to be sold have not been identified), so the investments continue to qualify for the practical expedient in paragraph 820-10-35-59, the reporting entity shall disclose its plans to sell and any remaining actions required to complete the sale(s).

ASC 820-10-35-59 permits entities, as a practical expedient, to estimate the fair value of an investment within the scope of ASC 820-10-15-4 and 15-5 by using the NAV per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed) of the investment, provided that it is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting entity’s measurement date.3 To help financial statement users understand the nature and risks of the investments and whether it is probable that they will be sold (if they are sold) at amounts that differ from the NAV per share (or its equivalent), ASC 820-10-50-6A requires specific disclosures, for each interim and annual period, for investment classes within the scope of ASC 820-10-15-4 and 15-5 that an entity measured during the period on a recurring or nonrecurring basis by using the practical expedient in ASC 820-10-35-59. See ASC 820-10-55-107 for an example illustrating such disclosures.

Although investments that an entity records when using the practical expedient in ASC 820-10-35-59 are not categorized within the fair value hierarchy, ASC 820-10-35-54B still requires such an entity to provide the amounts that it measured by using the practical expedient so that the fair value of investments included in the fair value hierarchy can be reconciled to the line items presented in the statement of financial position in accordance with ASC 820-10-50-2B.

Entities are not required to apply the practical expedient in ASC 820-10-35-59 to all investments within the scope of ASC 820-10-15-4 and 15-5. When the practical expedient is not used for such investments, the disclosures outlined in ASC 820-10-50-6A are not required. Rather, as stated in paragraph BC11 of ASU 2015-07, “the fair value of the investment will be included in the fair value hierarchy on the basis of the relative observability of the inputs used in the valuation and subject to the disclosure requirements of paragraph 820-10-50-2.”

11.2.3 Interpretive Guidance

11.2.3.1 Identifying Classes of Assets and Liabilities

11.2.3.1.1 General

ASC 820-10

50-2B A reporting entity shall determine appropriate classes of assets and liabilities on the basis of the following:

The nature, characteristics, and risks of the asset or liability
The level of the fair value hierarchy within which the fair value measurement is categorized.

The number of classes may need to be greater for fair value measurements categorized within Level 3 of the fair value hierarchy because those measurements have a greater degree of uncertainty and subjectivity. Determining appropriate classes of assets and liabilities for which disclosures about fair value measurements should be provided requires judgment. A class of assets and liabilities will often require greater disaggregation than the line items presented in the statement of financial position. However, a reporting entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position. If another Topic specifies the class for an asset or a liability, a reporting entity may use that class in providing the disclosures required in this Topic if that class meets the requirements in this paragraph.

In complying with the fair value disclosure requirements of ASC 820-10-50-2, an entity must determine appropriate classes of assets and liabilities in accordance with ASC 820-10-50-2B. An entity must use judgment and carefully consider the facts and circumstances in disaggregating assets and liabilities into separate classes. Such disaggregation often results in a more granular presentation for fair value disclosure purposes than the line items in the statement of financial position. Under ASC 820-10-50-2B, the classes of assets and liabilities should generally be consistent throughout all the fair value disclosures provided in accordance with ASC 820-10-50-2(a)–(h). Therefore, the classes of assets and liabilities used to prepare the quantitative disclosures required by ASC 820-10-50-2(bbb)(2) should generally not differ from the classes included in the other disclosures required by ASC 820-10-50-2.

When determining the appropriate level of disaggregation into classes of assets and liabilities, entities should consider the nature, characteristics, and risk profile of the assets and liabilities, as well as the level of the fair value hierarchy within which each fair value measurement has been categorized. Entities may also consider guidance in other Codification topics (e.g., ASC 320, ASC 815) when making this determination. ASC 320-10-50-1B provides guidance on class determination and useful considerations related to assessing the nature of and risks associated with debt securities. On the basis of those requirements, concentrations are likely to be important in the determination of class for all assets and liabilities.

When preparing quantitative disclosures about significant unobservable inputs used in Level 3 fair value measurements, an entity may discover that:

Different techniques are used for individual assets, liabilities, or subclasses within a previously identified class of asset or liability.
Different inputs are being used even when the same technique is used to measure different assets, liabilities, or subclasses within a class.
The quantitative information varies significantly between one asset, liability, or subclass and others within a class.

Such differences may indicate that the nature, characteristics, or risks of assets, liabilities, or subclasses within a previously identified class differ and that it would be appropriate to create more classes. When disaggregating an asset or liability class because techniques, inputs, or quantitative information about inputs differs, an entity should consider disaggregating the class in other disclosures required by ASC 820-10-50-2(a)–(h) to ensure consistency.

An entity that does not use the same classes throughout its fair value disclosures should consider reconciling, for example, the classes of assets and liabilities categorized in Level 3 of the fair value hierarchy between the leveling disclosures (see ASC 820-10-50-2(b)) and the quantitative disclosures about significant unobservable inputs (see ASC 820-10-50-2(bbb)(2)). Entities should also keep in mind the requirement from ASC 820-10-50-2B to “provide information sufficient to permit reconciliation to the line items presented in the statement of financial position.”

The examples below illustrate disaggregation of assets into classes by using various approaches.

Example 11-2

Aggregation by Valuation Technique

Entity A holds residential mortgage-backed securities (RMBSs) backed by both prime (i.e., higher credit quality) and subprime (i.e., lower credit quality) mortgages. When identifying the class of asset for disclosure purposes, A concludes that the nature, risks, and characteristics (including valuation technique) of these assets are sufficiently similar to allow aggregation of all RMBSs into one class. Entity A prepares the disclosure below. However, if A holds material amounts of RMBSs backed by mortgages of significantly differing credit quality, this disclosure may not provide sufficient information for financial statement users to understand and evaluate the quantitative information provided. In such a case, A could consider an alternative such as the one presented in Example 11-3.

Example 11-3

Disaggregation by Risk

This presentation alternative results in more relevant information for financial statement users than the approach in the example above, enabling them to better understand and evaluate the techniques and inputs used. In particular, disaggregating the asset class gives users insight into the different assumptions used when risk and other characteristics differ. Because the guidance that applies to determination of class for this disclosure is the same as the guidance that applies to determination of class for a disclosure of fair value by level in the fair value hierarchy (i.e., the requirement in ASC 820-10-50-2(b)), it would be a best practice to use the same classes for both. When an entity does not use the same classes (e.g., in providing disclosures about fair value by level in the fair value hierarchy and quantitative disclosures about significant unobservable inputs), the entity should provide a reconciliation so that the relationship between the classes is clear.

11.2.3.1.2 Derivative Contracts

ASC 815-10-50 requires entities to provide tabular disclosures about derivatives by “type of contract.” Depending on the facts and circumstances, the classes of derivative contracts under the ASC 820 fair value disclosure requirements may differ from the type of contracts used to provide tabular disclosures under ASC 815. The classes of derivative contracts may be more disaggregated under ASC 820 than the type of contract under ASC 815 but generally should not be more condensed.

An entity should consider the types of derivative contracts it holds. Under ASC 820-10-50-2B, class is based on the derivatives’ characteristics, nature, risks, and classification in the fair value hierarchy. Class is often at a greater level of disaggregation than the line items in the statement of financial position. Therefore, in determining the characteristics, nature, and risks of its derivative contracts, an entity should consider the following factors (in addition to the type of contracts):

The valuation techniques and inputs used to determine fair value.
The classification in the fair value hierarchy.
The level of disaggregation in the statement of financial position.

An entity may also consider the level of disaggregation it uses for other ASC 815 disclosures (e.g., qualitative and volume), which may vary from the level of disaggregation it uses for the ASC 815 tabular disclosures.

ASC 320-10-50-1B provides guidance on class determination and useful considerations related to assessing nature and risks for debt securities. On the basis of those requirements, concentrations are likely to be important in the determination of class for all assets and liabilities. For example, an entity that engages in material commodity transactions may consider concentrations by commodity type, or an entity with a material foreign exchange portfolio may consider concentrations by discrete currencies.

11.2.3.1.3 Disposal Group or Assets to Be Disposed Of

An entity may have a long-lived asset disposal group classified as HFS under ASC 360 (which may include or represent a discontinued operation). The individual assets and liabilities within a disposal group that are measured at fair value on a recurring or nonrecurring basis are subject to the disclosure requirements in ASC 820.4

When considering the appropriate classes of assets and liabilities under ASC 820-10-50-2B and preparing fair value disclosures, an entity should distinguish assets and liabilities that are part of a disposal group classified as HFS from its other assets and liabilities. This separate presentation is consistent with the requirements in ASC 205-20-45-10 and 45-11 and ASC 360-10-45-14, under which an entity must separately disclose the major classes of assets and liabilities of the discontinued operation (or the major classes of assets and liabilities classified as HFS) either on the face of the statement of financial position or in the notes to the financial statements. The ASC 820 disclosures required for certain items within a disposal group should be consistent with the disclosures under ASC 205-20-45-10 and 45-11 or ASC 360-10-45-14.

ASC 360-10-35-43 requires an entity to measure a disposal group at the lower of its carrying amount or fair value less costs to sell. Furthermore, ASC 360-10-35-40 states:

A loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain shall be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized (for a write-down to fair value less cost to sell). The loss or gain shall adjust only the carrying amount of a long-lived asset, whether classified as held for sale individually or as part of a disposal group.

ASC 820-10-50-2(a) requires an entity to disclose, “[f]or recurring fair value measurements, the fair value measurement at the end of the reporting period, and for nonrecurring fair value measurements, the fair value measurement at the relevant measurement date and the reasons for the measurement.” ASC 820-10-55-100 includes an example of a nonrecurring disclosure.

In certain circumstances, an impairment loss may be recognized for some assets within a disposal group that also includes assets and liabilities measured at fair value on a recurring basis. Thus, the asset group contains assets that are measured on both a recurring and nonrecurring basis. In periods in which an impairment of a disposal group is recognized, the nonrecurring fair value disclosures related to that impairment should reflect the incremental amount beyond what has already been disclosed in the recurring and nonrecurring fair value tables for the other assets and liabilities that are included in the disposal group.5 See the example below.

Example 11-4

Disposal Group for Which There Are Recurring and Nonrecurring Fair Value Measurements

In November 20X9, Entity B, a calendar-year-end company, enters into an agreement to sell Subsidiary X. The transaction is expected to close in May 201X. In accordance with ASC 360-10-45-9, X is a disposal group that B presents as HFS in its December 31, 20X9, balance sheet.

Assume the following:

The disposal group consists of property, plant, and equipment (PP&E) and equity securities (real estate industry) measured at fair value through earnings. Subsidiary X does not have intangible assets, goodwill, or liabilities.
The PP&E has a carrying value of $30 million.
The fair value of the equity securities (real estate industry) is $65 million, measured on the basis of a quoted price in an active market (Level 1).
The fair value of the disposal group is $80 million, measured on the basis of significant unobservable inputs (Level 3).
The cost of selling the disposal group is $10 million.

Therefore, on B’s balance sheet, the disposal group is shown as consisting of $70 million of assets HFS ($80 million fair value less $10 million costs to sell). The disclosures required by ASC 820-10-50-2(a) and (b) could be presented in the manner described below.

For the assets measured at fair value on a recurring basis during the period, B would present the following:

For the assets measured at fair value on a nonrecurring basis during the period, in addition to narrative disclosures about why this remeasurement was made, B would present the following:

In calculating the fair value amounts for the above disclosure, X considers the guidance in ASC 360 on impairment or disposal of long-lived assets. Subsidiary X (i.e., the disposal group) has a carrying amount of $95 million (PP&E of $30 million and equity securities [real estate industry] of $65 million) and a fair value of $80 million (which includes $65 million of equity securities in real estate). When considering the costs to sell of $10 million, X recognizes an impairment loss of $25 million in earnings for the period (i.e., $80 million fair value, less $95 million carrying cost, less selling costs of $10 million). This loss is recorded as a write-down of the carrying amount of the long-lived assets within the disposal group.

Note that the above presentations represent one alternative; entities should determine that the disclosure objectives in ASC 205-20, ASC 360, and ASC 820, as appropriate, are met for an asset group or disposal group. The entity would also be subject to (1) the disclosure requirements in both ASC 205-20-50 and ASC 360-10-50 and (2) other relevant fair value disclosure requirements in ASC 820-10-50-2.

11.2.3.2 Disclosures Related to the Fair Value Hierarchy

11.2.3.2.1 General

ASC 820-10-50-2(b) requires all entities to disclose the level of the fair value hierarchy within which all recurring and nonrecurring fair value measurements are categorized.6 ASC 820-10-50-2E and ASC 825-10-50-10 also require public business entities to disclose the level of the fair value hierarchy for assets and liabilities that are not measured at fair value but for which fair value is disclosed. Such classifications in the fair value hierarchy are made on the basis of the classification of the asset or liability in its entirety.

Fair value measurements often consist of multiple inputs that span multiple levels within the fair value hierarchy. In these circumstances, the asset or liability is classified in its entirety on the basis of the lowest-level input that is deemed significant to the fair value measurement. See Section 8.1.2 for more information.

11.2.3.2.2 Transfers Between Levels

ASC 820-10

50-2C A reporting entity shall consistently follow its policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred. The policy about the timing of recognizing transfers shall be the same for transfers into the levels as for transfers out of the levels. Examples of policies for determining the timing of transfers include the following:

The date of the event or change in circumstances that caused the transfer
The beginning of the reporting period
The end of the reporting period.

ASC 820-10-50-2C requires all entities to develop and consistently apply a “policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred.” However, ASC 820 does not prescribe a method for determining the timing of transfers between levels. Rather, ASC 820-10-50-2C indicates that to determine when transfers have occurred, entities may use the fair value of the asset, liability, or instrument classified in a reporting entity’s shareholders’ equity as of (1) the “date of the event or change in circumstances that caused the transfer,” (2) the “beginning of the reporting period,” or (3) the “end of the reporting period,” provided that the approach applied is used consistently. Accordingly, it is not appropriate for an entity to determine the amount of “transfers in” by using the beginning-of-period fair value and the amount of “transfers out” by using the end-of-period fair value, or vice versa. Such an approach is not acceptable because no gain or loss would be attributed to items transferred into or out of Level 3, thus diminishing the usefulness of the Level 3 rollforward disclosure.

Entities may, but are not required to, disclose either of the following:

Transfers between Levels 1 and 2 of the fair value hierarchy for assets and liabilities held at the end of the reporting period that are measured at fair value on a recurring basis (other-than-nonpublic entities were previously required to provide this disclosure).
Their accounting policy for determining when transfers are deemed to have occurred.

Thus, in accordance with ASC 820-10-50-2(c)(3) and ASC 820-10-50-2G(b), all entities are only required to disclose the “amounts of any transfers into or out of Level 3 of the fair value hierarchy and the reasons for those transfers.” Further, transfers into Level 3 would be “disclosed and discussed separately from transfers out of Level 3.” While entities are not required to disclose their accounting policy for determining when transfers between levels are recognized, they may determine that such disclosure is useful and provide it anyway.

Connecting the Dots

An entity commonly measures the fair value of its assets and liabilities more frequently (e.g., monthly) for internal management reporting purposes than for external reporting purposes. As part of its periodic fair value measurement processes, the entity may incorporate a system for identifying the date of the transfers into or out of Level 3. The fair value amount for transfers determined through the entity’s periodic (i.e., monthly) process could then be used to furnish the disclosures required by ASC 820-10-50-2(c)(3) and ASC 820-10-50-2G(b) at the end of the reporting period.

The example below illustrates how an entity may determine the date of transfers into or out of Level 3.

Example 11-5

Transfers Into or Out of Level 3 of the Fair Value Hierarchy

Assume the following:

Entity C holds two securities and is preparing its quarterly financial statements for the period ended September 30, 20X0.
Security A, which is classified in Level 2 at the beginning of the period (July 1, 20X0), is transferred into Level 3 on July 15, 20X0.
Security B, which is classified in Level 3 at the beginning of the period (July 1, 20X0), is transferred out of Level 3 (into Level 2) on August 15, 20X0.

The following table illustrates the fair values under the three acceptable methods for disclosing the relevant transfers into and out of Level 3 in accordance with ASC 820-10-50-2C:

Analysis

11.2.3.2.3 Cash Collateral Receivables and Payables

See Section 11.2.3.5.2.3.5 for discussion of the presentation of cash collateral receivables and payables related to derivative instruments.

11.2.3.2.4 Assets and Liabilities of a CFE

Under ASC 810, an entity that consolidates an eligible CFE may elect to measure the less observable of the fair value of the CFE’s financial assets or the fair value of the CFE’s financial liabilities by using the more observable of the two measurements. See Section A.19 for information about the additional disclosures an entity is required to provide when it makes this election. See Section 8.1.2 for discussion of the determination of the level of the fair value hierarchy in which an entity should categorize the less observable fair value measurement.

11.2.3.3 Reconciliation of Disclosures to the Statement of Financial Position

11.2.3.3.1 General

Under ASC 820, entities must reconcile the disclosed fair value amounts to the statement of financial position when:

The classes of assets or liabilities are more disaggregated than the line items in the statement of financial position (see Section 11.2.3.1).
The amount of an asset or liability on the date of the statement of financial position does not equal the amount of a nonrecurring fair value measurement that was recognized for the asset or liability during the financial reporting period (see Section 11.2.3.3.2).
An entity estimates the fair value of certain investments by using NAV per share as a practical expedient (see Section 11.2.3.3.3).

11.2.3.3.2 Nonrecurring Fair Value Measurements

ASC 820-10-50-2(a) requires entities to disclose, for nonrecurring fair value measurements, the fair value as of the measurement date and the reasons for the measurement. ASC 820-10-50-2(b) further requires disclosure of the level of the nonrecurring fair value measurement within the fair value hierarchy, which is also determined as of the measurement date. If a nonrecurring fair value measurement occurs on any date other than the date of an entity’s statement of financial position, the entity must, as stated in ASC 820-10-50-2(a), “clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken.” In meeting this objective, entities should consider the guidance in ASC 820-10-50-2B, which states, in part, that “a reporting entity shall provide information sufficient to permit reconciliation to the line items presented in the statement of financial position.” Thus, the entity should provide supplemental information that reconciles (1) the ASC 820 nonrecurring fair value amounts disclosed and (2) the carrying amount as of the date of the statement of financial position.

For example, assume that a long-lived asset classified as held and used is impaired from its current carrying value of $100 to its fair value of $75 as of November 30, 20X7 (assume a calendar-year-end entity). In this case, the amount disclosed as a nonrecurring fair value measurement will be $75. However, since the asset is held and used, subsequent amortization through December 31, 20X7 (the balance sheet date), is recognized. Assume that $1 of subsequent amortization is recognized in December 20X7. The balance sheet will reflect the amortization, while the nonrecurring disclosure will not. The entity should provide supplemental information that reconciles the ASC 820 nonrecurring amount disclosed to the recorded amount as of the balance sheet date.

In addition, the amount of a nonrecurring fair value measurement may not equal the recognized amount of the asset or liability subject to such measurement on the date the measurement is recognized. For example, ASC 360-10-35-43 requires that a disposal group classified as HFS be measured at the lower of its carrying amount or fair value less costs to sell. However, ASC 820 clarifies that costs to sell (transaction costs) are not included in a fair value measurement. Thus, when an impairment of a long-lived asset classified as HFS has occurred during a financial reporting period, the nonrecurring fair value amount disclosed under ASC 820 will not be consistent with the carrying amount reflected in the balance sheet as of the reporting date. As previously stated, entities should provide supplemental information that reconciles the ASC 820 nonrecurring disclosure amount to the recorded amount as of the balance sheet date. See notes (c)–(e) of Example 9 in ASC 820-10-55-100 for an illustration of such disclosure.

11.2.3.3.3 Certain Entities That Calculate NAV per Share (or Its Equivalent)

As discussed in Section 11.2.2.3, although investments that an entity records when using the practical expedient in ASC 820-10-35-59 are not categorized within the fair value hierarchy, an entity is still required under ASC 820-10-35-54B to provide the amounts that it measured by using the practical expedient so that the fair value of investments included in the fair value hierarchy can be reconciled to the line items presented in the statement of financial position in accordance with ASC 820-10-50-2B. ASC 820-10-50-6A further requires that entities “disclose [additional] information that helps users of [their] financial statements to understand the nature and risks of the investments.” See Note (f) of Example 9 in ASC 820-10-55-100 for an illustration of such disclosure.

11.2.3.4 Disclosure of Valuation Techniques and Inputs

ASC 820-10-50-2(bbb)(1) requires entities to disclose (1) a description of the valuation technique(s) and inputs for each class of assets and liabilities measured at fair value on a recurring or nonrecurring basis and classified within Level 2 or Level 3 of the fair value hierarchy and (2) any changes in a valuation approach, valuation technique, or both in connection with such measurements, as well as the reasons for such changes. In accordance with ASC 820-10-50-7, a change in the valuation approach or valuation technique does not cause an entity to be subject to the disclosure requirements in ASC 250 related to a change in accounting estimate.

The objective of these disclosure requirements is to help financial statement users understand not only the valuation techniques and inputs but also the judgments the entity uses when measuring fair value. To meet this objective, entities should consider disclosing the following information about the valuation techniques and inputs used in Level 2 and Level 3 fair value measurements:

Whether the entity can choose between various valuation techniques and how it makes that choice.
A description of the valuation techniques selected and the risks or shortcomings (if any) of those techniques.
When a model is used, a description of the model and related inputs, as well as how the inputs are sourced.
If the valuation technique has changed since previous reporting periods, the reason why the entity made the change and a quantification of the change’s impact on the financial statements.
The methods the entity uses to calibrate models to market prices and how frequently it uses these methods.
A description of the use of broker quotes or pricing services. Such a description may include:
- How many quotes were obtained, how these quotes were verified, and which brokers or pricing services the entity used and why.
- A summary of known valuation techniques used by brokers and pricing services and to what extent observable market information, as opposed to unobservable market information, was used to determine the quote.
- Whether quotes are adjusted and how the ultimate fair value was determined.
- Whether a quote is binding or nonbinding.
When an entity measures fair value by using prices for similar instruments, how the entity adjusts these prices to reflect the characteristics of the instruments subject to the measurement.
The key drivers of value for each significant Level 2 and Level 3 asset/liability class and the extent to which the inputs used are observable or unobservable.
An entity’s consideration of illiquidity when performing the valuation. Factors to consider include:
- Specific assumptions used.
- How the assumptions were developed.
- How and why assumptions changed from period to period.
- Whether valuation techniques/models changed as a result of the lack of liquidity.
- Whether alternative valuation techniques for illiquid instruments would have resulted in materially different fair values.
How the entity’s and counterparty’s nonperformance risk was taken into consideration in the valuation (e.g., for derivatives or debt instruments).

ASC 820-10-55-103 and 55-104 provide examples illustrating how an entity might comply with the requirement to disclose the valuation techniques and inputs used in the measurement of fair value.

For Level 3 fair value measurements, entities are also required to disclose quantitative information about the significant unobservable inputs used in the measurement (see ASC 820-10-50-2(bbb)(2)), and for recurring fair value measurements, other-than-nonpublic entities must provide a narrative description of the uncertainty of the fair value measurement with respect to the use of significant unobservable inputs (see ASC 820-10-50-2(g)). Entities are permitted, but not required, to disclose quantitative information about inputs used in Level 1 or Level 2 fair value measurements (i.e., the information that must be disclosed about Level 2 fair value measurements in ASC 820-10-50-2(bbb)(1) may be qualitative instead of quantitative). See Sections 11.2.3.5.1 and 11.2.3.5.4 for more information about the disclosures of unobservable inputs related to Level 3 fair value measurements.

11.2.3.5 Level 3 Measurements

11.2.3.5.1 Quantitative Information About Significant Unobservable Inputs

ASC 820-10-50-2(bbb)(2) requires entities to disclose, for each class of assets and liabilities measured at fair value on a recurring or nonrecurring basis in the statement of financial position after initial recognition, “quantitative information about the significant unobservable inputs used” in those Level 3 fair value measurements.7 In complying with this requirement, other-than-nonpublic entities must, in accordance with ASC 820-10-50-2(bbb)(2)(i), “provide the range and weighted average of significant unobservable inputs used to develop” those Level 3 fair value measurements. ASC 820-10-50-2(bbb)(2)(ii) clarifies that nonpublic entities are exempt from disclosing this information but are still required to provide quantitative information about significant unobservable inputs used in Level 3 fair value measurements. All entities are exempt from disclosing quantitative information about inputs used in Level 1 and Level 2 fair value measurements; however, entities are permitted to provide disclosures for those measurements when they are similar to the quantitative disclosures of significant inputs required for Level 3 fair value measurements.

In a manner consistent with the FASB’s stated objectives in requiring the aforementioned disclosures, entities must determine the following in providing the Level 3 disclosures required for significant unobservable inputs:8

The types of quantitative information to disclose (see Section 11.2.3.5.1.1).
How detailed the disclosures should be (i.e., the level of aggregation or disaggregation) (see Section 11.2.3.5.1.2).
What information should be provided, if any, when the entity uses prices from prior transactions or third-party pricing information (see Section 11.2.3.5.1.3).

11.2.3.5.1.1 Types of Quantitative Information

Entities must use judgment in deciding what types of quantitative information to provide about significant unobservable inputs. In complying with the guidance in ASC 820-10-50-2(bbb)(2)(i), other-than-nonpublic entities are required to disclose the following:

The range and weighted average used to develop these inputs.
How that weighted average was calculated for each fair value measurement categorized within Level 3 of the fair value hierarchy.

However, entities may disclose other quantitative information, such as median or arithmetic average, in lieu of the weighted average if they determine that providing such disclosures constitutes a more reasonable and rational method of reflecting the distribution of significant unobservable inputs used to develop Level 3 fair value measurements. Paragraph BC51 of ASU 2018-13 cites the use of unobservable inputs to develop fair value measurements of derivative instruments as an example of when it would be more reasonable and rational to use other quantitative information, rather than a weighted average, to reflect the distribution of significant unobservable inputs used to develop Level 3 fair value measurements. In this and similar cases, entities are not required to disclose their reasons for omitting the weighted average. See ASC 820-10-55-103 for an example illustrating this disclosure requirement.

In determining which disclosures to provide, an entity should consider whether the information it plans to furnish would enable a reasonable investor (or another financial statement user, such as a regulator) to assess the entity’s views on individual inputs. An entity may determine that it needs to provide information in addition to that required in ASC 820-10-50-2(bbb)(2) to appropriately convey the nature and significance of inputs used. Such information may include narrative disclosures, other types of quantitative information (e.g., mean, median, standard deviation), and other alternatives.

In addition, ASC 820-10-55-104 states that “a reporting entity should provide additional information that will help users of its financial statements to evaluate the quantitative information disclosed.” For example, ASC 820-10-55-104(a) lists the following information that an entity might consider disclosing for RMBSs:

The types of underlying loans (for example, prime loans or subprime loans)
Collateral
Guarantees or other credit enhancements
Seniority level of the tranches of securities
The year of issue
The weighted-average coupon rate of the underlying loans and the securities
The weighted-average maturity of the underlying loans and the securities
The geographical concentration of the underlying loans
Information about the credit ratings of the securities.

Further, ASC 820-10-55-104(b) indicates that for all assets and liabilities, entities should consider disclosing “[h]ow third-party information such as broker quotes, pricing services, net asset values, and relevant market data was taken into account when measuring fair value.” In doing so, entities should consider clearly identifying the fair value of assets and liabilities measured by using third-party information.

11.2.3.5.1.2 Disaggregation of Inputs

Entities must disclose quantitative information about all significant unobservable inputs. The meaning of the term “significant” in this context is the same as that in ASC 820-10-35-37A, which states, in part:

[A] fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to the entire measurement requires judgment, taking into account factors specific to the asset or liability.

ASC 820 does not establish a bright line for significance or mandate that significance be determined quantitatively or be based on any specific quantitative approach. ASC 820-10-35-37A notes that an entity must use judgment in determining significance, “taking into account factors specific to the asset or liability.” Entities should establish a method for determining whether an input is significant to a fair value measurement in its entirety and should apply it consistently. As discussed in Section 8.1.2, one possible method for determining whether an input is significant to a fair value measurement is to use a threshold or percentage of the overall measurement amount as a benchmark for significance.9 In determining significance when using a particularly complex valuation technique, an entity may need to consider how a particular input or inputs behave within a reasonable range of expected outcomes (i.e., by performing a sensitivity analysis).

While the process described in Section 8.1.2 is generally used to identify only the lowest-level input that is significant to the measurement in its entirety, the same process can be used to identify all significant unobservable inputs. The following is a summary of the process described in Section 8.1.2, modified to highlight considerations uniquely relevant to ASC 820-10-50-2(bbb)(2):

Determine a threshold or percentage of the overall measurement amount as a benchmark for significance. An entity may determine the threshold by considering whether a reasonable investor would believe that variations in underlying inputs and the resultant variations in fair value measurements would significantly alter the total mix of information available. In making this determination, entities may consider SAB Topic 1.M and PCAOB Auditing Standard 11. “Significance” is not the same as “materiality,” but entities can apply similar concepts to this determination.
Inventory all inputs used in a Level 3 fair value measurement (i.e., make a list and ensure that it is complete).
Perform a sensitivity analysis for each unobservable input by recalculating fair value, altering the unobservable input so that fair value is calculated by using the low and high values in a range of reasonably possible alternative values for that input. In identifying a range of reasonably possible alternative values, entities could consider (1) prevailing market conditions, (2) input from internal or external specialists, or (3) known or implied amounts in sales or transfer transactions observed for similar assets or liabilities.
Determine whether the percentage change in fair value resulting from the sensitivity analysis in step 3 exceeds the benchmark for significance identified in step 1.
Because SEC and PCAOB guidance on materiality clearly notes that materiality is not solely a quantitative concept, supplement the quantitative analysis in step 4 with a consideration of qualitative factors such as the nature of the input (e.g., for certain derivatives, all inputs may be considered significant).
If the input is determined to be significant on the basis of the above steps, include the input in the tabular fair value disclosure.
Repeat these steps for other unobservable inputs identified in step 2.
Aggregate individually insignificant inputs by level to determine whether a combination of such inputs is significant to the measurement in its entirety. If so, disclose these inputs.

This process would not need to be repeated in each reporting period unless facts and circumstances change. In identifying significant inputs, management may also consider (1) specialists’ input; (2) competitors’ disclosures, analyst reports, or both; and (3) its own judgment based on experience with the products.

11.2.3.5.1.3 Third-Party Pricing Information

Paragraph BC90 of ASU 2011-04 states the following regarding quantitative disclosures about significant unobservable inputs related to use of third-party pricing information:

[T]he Boards understand that fair value is sometimes measured on the basis of prices in prior transactions (for example, adjustments to the last round of financing for a venture capital investment) or third-party pricing information (for example, broker quotes). Such measurements might be categorized within Level 3 of the fair value hierarchy. In such cases, the Boards concluded that the reporting entity should be required to disclose how it has measured the fair value of the asset or liability, but that it should not need to create quantitative information (for example, an implied market multiple or future cash flows) to comply with the disclosure requirement if quantitative information other than the prior transaction price or third-party pricing information is not used when measuring fair value. However, the Boards concluded that when using a prior transaction price or third-party pricing information a reporting entity cannot ignore other quantitative information that is reasonably available. If there was an adjustment to the price in a prior transaction or third-party pricing information that is significant to the fair value measurement in its entirety, that adjustment would be an unobservable input about which the reporting entity would disclose quantitative information, even if the reporting entity does not disclose the unobservable information used when pricing the prior transaction or developing the third-party pricing information.

In considering the guidance in paragraph BC90 of ASU 2011-04, an entity must disclose the following information about its Level 3 fair value measurements:

How it has used third-party pricing information to measure the fair value of assets or liabilities.
Quantitative information about significant unobservable inputs used to develop significant adjustments, if any, that the entity applies to third-party pricing information (or prior transactions).
Quantitative information about significant unobservable inputs used by the third party if such information is reasonably available to the entity.

Entities should make a reasonable effort to gather sufficient qualitative and quantitative information to determine whether fair value measurements based on third-party information are prepared in accordance with ASC 820 and to prepare applicable disclosures about fair value measurements. If, despite an entity’s efforts, quantitative information about significant unobservable inputs used by third-party pricing services is not reasonably available, the entity would not be required to create such information. Specifically, ASC 820-10-50-2(bbb)(2) states, in part:

A reporting entity is not required to create quantitative information to comply with this disclosure requirement if quantitative unobservable inputs are not developed by the reporting entity when measuring fair value (for example, when a reporting entity uses prices from prior transactions or third-party pricing information without adjustment). However, when providing this disclosure, a reporting entity cannot ignore quantitative unobservable inputs that are significant to the fair value measurement and are reasonably available to the reporting entity.

Notwithstanding this guidance, management must understand the information furnished by third-party service providers. If third-party service providers supply entities with details about the methods and assumptions used and with quantitative information to support the entity’s efforts to comply with the disclosure requirements in ASC 820, quantitative information about significant unobservable inputs may be reasonably available and should be disclosed.

Quantitative information about significant unobservable inputs used by a third party may become reasonably available to the entity in various ways, including, but not limited to:

Recalculation of substantially all fair value measurements provided by third parties for a given class of asset or liability as part of the reporting entity’s process to ensure that these measurements are developed in accordance with ASC 820 or to comply with management’s responsibilities outlined in ASC 820-10-35-54K through 35-54M.10
Inquiry and examination of supplemental information provided by third parties to either (1) comply with management’s responsibilities or (2) support a leveling disclosure (ASC 820-10-50-2(b)) and other required disclosures.

ASC 820 does not clearly address whether an other-than-nonpublic entity is subject to the requirement in ASC 820-10-50-2(g) to disclose qualitative information about the uncertainty of a Level 3 fair value measurement that results from the use of unobservable inputs when the entity does not also disclose quantitative information about significant unobservable inputs used by a third-party pricing service to develop the fair value measurement. In the absence of further clarification from standard setters or regulatory bodies, an entity should make a reasonable effort to disclose useful qualitative information about the uncertainty of a Level 3 fair value measurement that results from the use of unobservable inputs. Such information might be obtained as part of management’s process for understanding the valuation techniques and assumptions that the third party used in measuring fair value. See Section 10.8 for more information about management’s responsibilities when it uses fair value information provided by a third party.

11.2.3.5.1.4 Examples

ASC 820-10-55-103 and 55-104 illustrate the disclosure of quantitative information about significant unobservable inputs. Below is an additional example.

Example 11-6

Disclosure of Quantitative Information About Significant Unobservable Inputs

Entity D invests in various equity securities and RMBSs. In accordance with ASC 820-10-50-2B, D identifies three classes of equity securities, differentiating each class on the basis of the investees’ industry, and three classes of RMBSs based on the creditworthiness of underlying mortgage holders. (Note that an entity is not required to differentiate classes of debt investments on the basis of creditworthiness but should consider disaggregating classes when nature, characteristics, or risks differ in accordance with ASC 820-10-50-2B.) The following table presents the fair value by level within the fair value hierarchy for corresponding measurements as of December 31, 20X2:

For the $25 million in Level 3 RMBSs, D uses unadjusted third-party information to measure the $16 million fair value of the RMBSs as follows: (1) $12 million of agency-backed RMBSs and (2) $4 million (of the $6 million) of subprime RMBSs. In preparing its fair value disclosures, D makes reasonable efforts to gather qualitative and quantitative information about the methods and assumptions used by third parties to price these RMBSs. Entity D concludes that it has sufficient information to comply with all other disclosure requirements but is not able to gather sufficient quantitative information about significant unobservable inputs used by third parties in their fair value measurements. Entity D has qualified for the disclosure exception in ASC 820-10-50-2(bbb)(2). Paragraph BC90 of ASU 2011-04 provides additional information on this issue.

For the remaining $9,000 of Level 3 RMBSs (i.e., the $7 million of prime RMBSs and $2 million of subprime RMBSs), D measures fair value on the basis of a discounted cash flow technique. The significant unobservable input in these Level 3 fair value measurements is the discount rate. Entity D uses multiple assumptions (i.e., underlying inputs) to develop the discount rates on these debt investments. Entity D performs the process described in Section 11.2.3.5.1.2 and determines that the following inputs underlying the discount rates are individually significant to each fair value measurement:

Level 2 risk-free interest rate based on U.S. Treasury yields.
Level 3 assumptions about prepayment speeds.
Level 3 assumptions about loss severities.
Level 3 assumptions about default rates.

Entity D separately discloses such inputs in accordance with ASC 820-10-50-2(bbb)(2) as follows:

This presentation provides relevant information about the techniques and inputs used. In particular:

Disclosing the fair value for measurements derived by using a given technique when multiple techniques were used makes it clear what technique was used to measure the fair value for respective portions of D’s RMBSs.
Disaggregating the asset class gives users insight into the different assumptions used when risk and other characteristics differ.
Disaggregating the discount rate into individually significant inputs increases the transparency of the assumptions used by management and the sources of potential uncertainty in the fair value measurements.
Disclosing a weighted-average value for each input helps users understand the values applied to a majority of the securities in a given class. (Note that ASC 820-10-50-2(bbb)(2)(i) requires an other-than-nonpublic entity to disclose how it calculated the weighted average. Thus, D would also need to disclose how it calculated the weighted averages in the table above.)

11.2.3.5.2 Level 3 Fair Value Rollforward

11.2.3.5.2.1 General

As discussed in Section 11.2.2.1, ASC 820-10-50-2(c) requires other-than-nonpublic entities to disclose a “reconciliation from the opening balances to the closing balances” (i.e., beginning-of-period to end-of-period balances) for all classes of assets and liabilities measured at fair value on a recurring basis that are classified within Level 3 of the fair value hierarchy. In that reconciliation, the following must be disclosed in tabular format:

“Total gains or losses for the period recognized in earnings” by income statement line item.
“Total gains or losses for the period recognized” in OCI by line item in the statement of OCI.
“Purchases, sales, issues, and settlements” (each of which is separately disclosed).
The amount of transfers “into or out of Level 3 of the fair value hierarchy” and the reasons for those transfers (with transfers into Level 3 disclosed and discussed separately from transfers out of Level 3).

The example in ASC 820-10-55-101 illustrates how an entity might comply with this requirement.

ASC 820-10-50-2G states that, in lieu of providing the Level 3 rollforward, nonpublic entities “shall disclose separately changes during the period attributable to the following:

Purchases and issues (each of those types of changes disclosed separately)
The amounts of any transfers into or out of Level 3 of the fair value hierarchy and the reasons for those transfers. Transfers into Level 3 shall be disclosed and discussed separately from transfers out of Level 3.”

In paragraph BC71 of ASU 2018-13, the FASB acknowledged that users of nonpublic-entity financial statements “do not seek the same level of detailed information as users of public company financial statements” but that any information that “could signal an increase or decrease in the uncertainty of the fair value measurements” is relevant. The FASB believes that disclosing Level 3 purchases, issues, and transfers could enhance a user’s understanding of such uncertainty. Therefore, in lieu of applying ASC 820-10-50-2(c), nonpublic entities are subject to the disclosure requirements in ASC 820-10-50-2G.

11.2.3.5.2.2 Day 1 Gains or Losses

When the transaction price differs from the exit price at initial recognition of an asset or liability that is recognized at fair value on a recurring basis, an inception (or “day 1”) gain or loss is recognized in earnings. Other-than-nonpublic entities should include the impact of day 1 gains and losses in the Level 3 rollforward disclosure as well as in the disclosure required by ASC 820-10-50-2(d).11 A separate line item identifying the impact of day 1 gains or losses is not required unless an entity reports a “dealer profit” (i.e., day 1 gain) in an income statement line item separate from other gains and losses on derivatives. See the example below for a related illustration. Also see Section 9.2 for further discussion of when the transaction price differs from the exit price at initial recognition of an asset or liability.

Example 11-7

Impact of Day 1 Gain on Level 3 Rollforward

Entity E, a broker-dealer, enters into a long-dated derivative contract with a counterparty in which it pays the counterparty $5 million at execution of the trade. However, E determines that it has not transacted in the principal (or most advantageous) market for the long-dated derivative (i.e., E can exit the long-dated derivative in the interdealer market at a higher price). Entity E determines that the fair value at inception is $8 million and that the inputs to the valuation of the long-dated derivative have a significant impact as a result of Level 3 inputs. At the end of the reporting period, E determines that the fair value of the long-dated derivative is $12 million (still with significant effects from Level 3 inputs). Entity E would provide the following disclosure regarding the long-dated derivative at the end of the period (in millions):

Under ASC 820, E would not be required to separately identify the day 1 gain or loss (i.e., the $3 million profit at inception calculated as the difference between the $8 million fair value at inception and the $5 million transaction price) in the rollforward or supplemental disclosures unless it reports a “dealer profit” (i.e., day 1 gain) in a separate income statement line item. In either case, in the period of the transaction, the day 1 gain or loss is a component of the rollforward.

11.2.3.5.2.3 Derivatives

11.2.3.5.2.3.1 General

In preparing the Level 3 rollforward, an entity needs to take additional considerations into account for classes of assets and liabilities that meet the definition of a derivative instrument under ASC 815. Those considerations are explained below.

11.2.3.5.2.3.2 Determination of Gains and Losses on Financial and Physical Derivatives

ASC 820-10-50-2(c)(1) requires other-than-nonpublic entities to disclose “[t]otal gains or losses for the period recognized in earnings . . . and the line item(s) in the statement of income . . . in which those gains or losses are recognized,” and ASC 820-10-50-2(c)(1a) requires other-than-nonpublic entities to disclose “[t]otal gains or losses for the period recognized in other comprehensive income, and the line item(s) in other comprehensive income in which those gains or losses are recognized.” Further, ASC 815-10-50-4A through 50-4F require entities to provide separate disclosures about the location and amount of all gains and losses reported in the income statement for derivatives. Specifically, ASC 815-10-50-4A(b) requires the following disclosures:

The location and amount of the gains and losses on derivative instruments (and such nonderivative instruments) and related hedged items reported in any of the following:

The statement of financial performance
The statement of financial position (for example, gains and losses initially recognized in other comprehensive income).

The objectives of the gain and loss disclosure requirements of ASC 820 and ASC 815 are to provide information about the performance of an entity’s derivative instruments from an economic perspective (i.e., the impact of derivative instruments on the equity of the entity through net earnings or OCI).12 Neither the disclosure requirement in ASC 820-10-50-2(c)(1) and (c)(1a) nor that in ASC 815-10-50-4A(b) distinguishes between financially and physically settled derivatives (i.e., those that are settled gross through the receipt or delivery of the underlying asset in exchange for cash). Thus, the objectives of the gain and loss disclosure requirements for derivative instruments in ASC 820 are the same as those in ASC 815, regardless of whether the instruments are financially or physically settled. Moreover, although the scope of ASC 820-10-50-2(c)(1) and (c)(1a) is broader than that of ASC 815-10-50 in one respect (i.e., it applies to all recurring fair value measurements, not just derivative instruments) and narrower in another respect (i.e., it applies only to Level 3 measurements), the method an entity uses to determine the amount of gains or losses to disclose under ASC 820-10-50-2(c)(1) and (c)(1a) should be consistent with the method it uses to determine the amount of gains or losses under ASC 815-10-50-4A(b). ASC 815-10-50 implicitly suggests that the amount of gains and losses to be disclosed includes both realized and unrealized gains and losses, which is consistent with the disclosure requirement in ASC 820-10-50-2(c)(1) and (c)(1a).

For financial derivatives, economic performance is demonstrated by the changes in fair value and resulting net settlements that occur over the life of the instrument. The determination of gains or losses on financial derivatives is based on the cash settlement activity. In contrast, physical fixed-price derivatives feature a gross exchange of an underlying asset (e.g., a physical commodity) and cash based on a pre-established price. However, the objective of the gain or loss disclosure remains the same — that is, to require entities to provide information about the performance of the derivative instrument from an economic perspective.

For example, a physical fixed-price forward commodity contract economically consists of two elements:13

A physical purchase or sale of the underlying commodity at the market price on the date of delivery. This results in a physical receipt or delivery of the commodity at its spot market price at the time of the settlement of the contract.
A financial fixed-price forward contract based on the same underlying commodity as the physical purchase or sale. This results in a hypothetical net cash settlement based on the difference between the spot market price of the commodity at the time of the settlement of the contract and the fixed price established by the physical derivative contract.

The second element’s change in fair value during the reporting period (i.e., the financial fixed-price forward contract) should be reflected as a gain or loss in the required disclosures. This approach achieves symmetry between financial and physical derivatives and provides financial statement users with relevant information about derivative performance.

Reflecting gross settlement amounts for physical derivatives in the settlement line of the ASC 820 Level 3 rollforward (i.e., the full settlement amount, including cash flows from the physical market purchase or sale element) would constitute an overstatement of gains or losses and would fail to reflect the economic impact of the contract on an entity’s equity. For example, a physical sale that is accounted for as a derivative instrument, that does not contain a financing element (e.g., that does not contain off-market terms or necessitate an up-front cash payment), and that is settled at the money (i.e., the spot market price equals the fixed price at the time of the settlement of the contract) does not result in any net economic benefit or detriment. An entity that enters any amount other than zero in the settlement line of the ASC 820 Level 3 rollforward would be required to increase or decrease another line of the reconciliation (presumably the gain or loss) to balance the reconciliation. However, reflecting the gross sales price established by the contract as a derivative gain would be a misrepresentation because it would ignore the fact that the entity delivered an asset of equal value. Likewise, a physical purchase that is accounted for as a derivative, that does not contain a financing element, and that is settled at the money does not result in an economic detriment, and reflecting the gross purchase price established by the contract as a derivative loss would be misrepresentative because the entity received an asset of equal value.

The example below illustrates the application of this guidance to financial derivatives and physical derivatives. In contemplating how gains or losses are determined and ultimately disclosed, an entity should also consider the guidance in ASC 820-10-50-2B and assess the appropriate classes of assets and liabilities for disclosure.

Example 11-8

Financial Contract

Level 3 Rollforward

Physical Contract

Level 3 Rollforward

See Section 11.2.3.5.2.3.3 for discussion of how to determine the amounts of purchases, sales, issues, and settlements of derivative instruments that other-than-nonpublic entities must reflect in the Level 3 rollforward. (Note that nonpublic entities are only required to present purchases and issues of derivative instruments in accordance with ASC 820-10-50-2G.)

11.2.3.5.2.3.3 Determination of Purchases, Sales, Issues, and Settlements for Derivatives

ASC 820-10-50-2(c)(2) requires other-than-nonpublic entities to disclose “[p]urchases, sales, issues, and settlements (each of those types of changes disclosed separately)” as part of the Level 3 rollforward. Note that ASC 820-10-50-2G states that nonpublic entities are not required to complete Level 3 rollforward disclosures. Rather, in lieu of applying ASC 820-10-50-2(c), nonpublic entities must separately disclose changes during the period attributable to purchases and issues (each type separately) in accordance with ASC 820-10-50-2G(a).

When determining the amounts to disclose for individual derivative contracts for purchases, sales, issues, and settlements, an entity should evaluate the consideration exchanged (e.g., cash) between the counterparty and itself. However, an entity should not offset cash collateral receivables and payables with derivative assets and liabilities (see Section 11.2.3.5.2.3.5).

Typically, a derivative transaction that does not involve an up-front exchange of consideration (e.g., an at-market swap) should not be disclosed in the purchases, sales, or issues line items. Any ongoing payments under the contract would be reflected in the settlements line item. An up-front premium payment may not be required for an option acquired by an entity; instead, the entity may be required to make periodic premium payments to the counterparty over the term of the contract (i.e., the option premium is effectively financed by the counterparty). In this situation, the entity should consider the deferred premium payments as ongoing settlements rather than an up-front exchange of consideration, which the entity would typically present in the purchases line item.

The guidance below outlines the presentation of various types of payments related to derivative contracts within the Level 3 rollforward as purchases, sales, issues, or settlements.

Purchases — An entity should present a derivative requiring an initial cash outlay (or other up-front consideration) in the purchases line item. Such presentation would include premium payments to purchase an option or up-front payments related to an off-market swap asset. Payments to acquire a derivative asset (through a contract assignment) should also be presented in the purchases line item.
Sales — If an entity assigns a derivative asset to a third party for consideration, the payment should be presented in the sales line item. An assignment of a derivative liability should be disclosed as a settlement rather than as a sale (see the discussion in the “Settlements” bullet below for further details).
Issues — If an entity executes a derivative and receives an initial cash inflow (or other up-front consideration), the up-front payment should be presented in the issues line item. In this situation, the entity has issued a derivative liability in return for consideration. Such presentation would include receipt of premium payments on written options or receipt of up-front payments related to an off-market swap liability. Payments received to assume a derivative contract liability (through a contract assignment) should also be presented in the issues line item and accompanied by separate disclosure describing the nature of the assignment transaction and the assignment amount related to the transaction. Alternatively, an entity may adopt a policy of presenting the consideration related to assignments of derivative liabilities in a separate line item other than purchases, sales, issues, or settlements, along with a disclosure describing the nature of the assignment transactions.
Settlements — All ongoing contractual cash payments (or other consideration) made under the derivative contract should be disclosed in the settlements line item. Such disclosure would include payments on a multiperiod settled derivative (e.g., interest rate swaps that are net-cash-settled on a quarterly basis) or payments between the entity and counterparty to terminate a derivative or to exercise an option. In addition, if an entity assigns a derivative liability to a third party and is required to make a payment to the third party as part of the transaction, the payment should be presented in the settlements line item and accompanied by separate disclosure describing the nature of the assignment transaction and the settlement amount related to the transaction. An assignment of a derivative liability is akin to an early termination and thus a settlement of the original derivative. Alternatively, an entity may present the consideration related to assignments of derivative liabilities in a separate line item other than purchases, sales, issues, or settlements, along with a disclosure describing the nature of the assignment transactions.

The table below summarizes the application of ASC 820-10-50-2(c)(2) to various derivative transactions and highlights the concept of symmetry between the entity and counterparty.

Table 11-3

Transaction (From Reporting Entity’s Perspective)	Presentation by:
Transaction (From Reporting Entity’s Perspective)	Reporting Entity	Counterparty (or Third-Party Assignee)
Purchase of an option for up-front premium	Purchases	Issues
Writing of an option for up-front premium	Issues	Purchases
Assignment of derivative asset contract to a third party (assignee makes payment)	Sales	Purchases
Assignment of derivative liability contract to a third party (assignee receives payment)	Settlements*	Issues*
Periodic cash settlement of a swap contract	Settlements	Settlements
Early termination of derivative contract between parties to original contract	Settlements	Settlements
* If an entity adopts a policy of disclosing the consideration related to assignments of derivative liabilities as settlements (for assignments to third parties) or issues (for assignments from third parties), the entity should also include a separate disclosure describing the nature of the assignment transactions and the settlement amounts related to the transactions. Alternatively, an entity may adopt a policy of presenting the consideration related to assignments of derivative liabilities in a separate line item other than purchases, sales, issues, or settlements, along with a disclosure describing the nature of the assignment transactions. This policy should be disclosed and consistently applied.

The example below illustrates the application of this guidance to financial derivative instruments.

Example 11-9

Determination of Purchases, Sales, Issues, and Settlements for Financial Derivative Instruments

Assume the following:

Financial Derivative 1 — Beginning balance of $100 asset; $10 change in fair value during period (i.e., increase in the fair value of the asset); termination cash payment of $110; zero ending balance.
Financial Derivative 2 — Beginning balance of $0; entity wrote a strip of interest rate caps and received consideration of $100; $500 change in fair value of derivative during period (i.e., increase in the fair value of the liability); one cap was exercised by the counterparty, for which a cash outflow of $75 during the period was required; ending derivative liability of $525.
Financial Derivative 3 — Beginning balance of $0; entity purchased an option for $50 up front; $30 change in fair value during period (decrease in the fair value of the asset); no settlement or exercise during the period; ending derivative asset of $20.

The entity has determined that Financial Derivative 1, Financial Derivative 2, and Financial Derivative 3 are separate classes (separate rollforwards are therefore required). See Section 11.2.3.1.2 for guidance on determining classes of derivative contracts.

Level 3 Rollforward in Period 1*

Assume the following additional facts (related to preparation of the disclosures for the second reporting period):

Financial Derivative 1 — Settled in prior period.
Financial Derivative 2 — Beginning liability balance of $525; $80 change in fair value of derivative during period (decrease in the fair value of the liability); no regular settlements during the period.
Financial Derivative 3 — Beginning asset balance of $20; $5 change in fair value during period (decrease in the fair value of the asset); no settlement or exercise during the period.

Upon downgrade of its credit rating by a rating agency, the entity is forced to terminate its entire portfolio of derivatives. The entity makes one cash payment of $430 to assign Financial Derivative 2 and Financial Derivative 3 to an independent third party.

Level 3 Rollforward in Period 2*

11.2.3.5.2.3.4 Gross Versus Net Presentation of Purchases, Sales, Issues, and Settlements for Derivatives

In accordance with ASC 820-10-50-2(c)(2), other-than-nonpublic entities must present, as part of the Level 3 rollforward, purchases, sales, issues, and settlements related to derivative instruments.14 ASC 820-10-50-3(b) addresses whether derivative assets and derivative liabilities must be presented on a gross or net basis in the Level 3 rollforward and allows entities to present derivative instruments on either a gross or net basis. Whether an entity chooses to present derivative instruments net (i.e., in one table) or gross (i.e., derivative assets and liabilities in two separate tables), the entity must still present purchases, sales, issues, and settlements separately for each class of derivative contract. That is, an entity that chooses to present derivative instruments on a net basis under ASC 820-10-50-3(b)is still required to separate the purchases, sales, issues, and settlements related to those derivatives in complying with the Level 3 rollforward requirement in ASC 820-10-50-2(c)(2). See also the two examples below.

Example 11-10

Entity Purchases an Option and Writes an Option

Assume the following:

Entity F has a policy of presenting derivative contracts on a net basis in accordance with ASC 820-10-50-3(b).
Entity F acquires an option for a $50 up-front payment and separately writes an option in return for a $100 up-front payment during the same period.
In aggregating the fair value disclosures, F determines the class to be the same for each option.

It would not be appropriate for F to net the $50 purchase with the $100 issue and present a net $50 issue. Rather, F should, in the Level 3 rollforward, separately present the $50 purchase and $100 issue that occurred during the period.

Further assume that in a subsequent period, offsetting cash payments are made on these options. In this situation, because both option contracts are considered to be in the same class for aggregation purposes, F should net the subsequent payments associated with these contracts and present the net amount separately in the “settlements” line item.

Example 11-11

Entity Assigns Derivative Asset and Derivative Liability

Assume the following:

Entity G chooses to present derivative contracts on a net basis in accordance with ASC 820-10-50-3(b).
Entity G has a derivative asset with a fair value of $100 and a derivative liability with a fair value of $25.
In aggregating the fair value disclosures, G determines the class to be the same for each derivative.
During the period, G assigns the derivative asset and derivative liability to an independent third party in return for a cash payment of $75.

In this scenario, it would be acceptable for G to present the $75 payment received in the “sales” line item. Alternatively, G could allocate the $75 payment between the derivative asset and derivative liability and present these amounts separately in the Level 3 rollforward; the $100 related to the derivative asset would be presented in the sales line item, and the $25 related to the derivative liability would be presented in the settlements line item. Entity G could also present the derivative liability portion in a separate line item within the rollforward (e.g., a line item called “assignments of liabilities”). See Section 11.2.3.5.2.3.3 for additional guidance on presenting various types of payments related to derivative contracts within the Level 3 rollforward as purchases, sales, issues, or settlements. Regardless of the policy it selects, G should also include a separate disclosure describing the nature of the assignment transaction and the settlement amounts related to the transaction.

If G were instead to make a net payment to the third party in this example to assign a net derivative liability, G should present such a payment as a settlement. An allocation between the settlement of a derivative liability and sale of a derivative asset would also be acceptable.

11.2.3.5.2.3.5 Presentation of Cash Collateral Receivables and Payables

Under ASC 815-10-45-3 through 45-7, an entity may elect to offset, in its statement of financial position, fair value amounts recognized for its derivative instruments with fair value amounts recognized for the right or obligation to reclaim or return cash collateral (i.e., offset its derivative assets and liabilities with cash collateral receivables and payables). An entity that makes this election should not offset cash collateral receivables and payables with derivative assets and liabilities in ASC 820 disclosures, including the Level 3 rollforward. Although such fair value amounts are offset in the statement of financial position, such offsetting is inappropriate in the ASC 820 disclosures because doing so would be misleading. For example, assume that the net amount is the credit exposure under a particular master netting arrangement rather than the fair value amounts (measurements) of the derivative positions. Disclosure of the net amount would not allow financial statement users to identify the fair value amounts of the derivative instruments and where they are categorized in the fair value hierarchy. The example below illustrates an acceptable way of presenting the cash collateral receivables and payables in the ASC 820 disclosures.

Example 11-12

Presentation of Cash Collateral on Derivative Instruments

Cash collateral receivables and payables are presented in a separate column with other counterparty netting adjustments made under ASC 815-10-45-3 through 45-7. The entity uses the separate column to facilitate reconciliation with the balance sheet.

Note that this presentation method for cash collateral receivables and payables and other counterparty netting adjustments made under ASC 815-10-45-3 through 45-7 does not apply in other circumstances (e.g., portfolio-level adjustments). See Section 11.2.3.5.5 for guidance on the allocation of portfolio-level adjustments.

11.2.3.5.3 Unrealized Gains and Losses on Level 3 Assets and Liabilities

ASC 820-10-50-2(d) requires other-than-nonpublic entities to separately disclose, for recurring fair value measurements categorized within Level 3 of the fair value hierarchy, “the amount of the total gains or losses for the period . . . included in earnings [or in comprehensive income] that is attributable to the change in unrealized gains or losses relating to those assets and liabilities held at the end of the reporting period, and the line item(s) . . . in which those unrealized gains or losses are recognized.”

In determining the unrealized portion of total gains or losses on Level 3 assets or liabilities held at the end of the reporting period, an entity should follow its established policy for determining when transfers between levels of the fair value hierarchy are deemed to have occurred (see Section 11.2.3.2.2) to ensure that amounts are reconciled to the amounts presented in the Level 3 rollforward (see Section 11.2.3.5.2). ASC 820-10-55-102 contains an example illustrating how an entity might separately disclose the unrealized portion of total gains and losses, by respective financial statement line item, as required by ASC 820-10-50-2(d).

In accordance with ASC 820-10-50-2F, nonpublic entities are not required to disclose the information required by ASC 820-10-50-2(d) unless another Codification topic requires them to do so.

11.2.3.5.4 Qualitative Uncertainty Disclosure for Level 3 Assets and Liabilities

ASC 820-10-50-2(g) requires other-than-nonpublic reporting entities to disclose “a narrative description of the uncertainty of [a] fair value measurement from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date.” Entities should consider, at a minimum, the uncertainty of those unobservable inputs disclosed in accordance with ASC 820-10-50-2(bbb) when complying with this disclosure requirement and should also disclose any interrelationships between significant unobservable inputs that might exacerbate those measurement differences. The objective of such disclosure(s) is to help financial statement users understand not only the valuation techniques and inputs but also the judgments the entity uses when measuring fair value. See ASC 820-10-55-106 for further implementation guidance, including a sample disclosure about RMBSs.

In accordance with ASC 820-10-50-2F, nonpublic entities are not required to disclose the information required by ASC 820-10-50-2(g) unless another Codification topic requires them to do so.

11.2.3.5.5 Use of Net Risk Exception for Portfolio-Based Fair Value Measurements

Under ASC 820-10-35-18D, the fair value of a group of financial assets, financial liabilities, nonfinancial items accounted for as derivatives in accordance with ASC 815, or combinations of these items, can be measured on the basis of what would be received to exit a net-long or net-short risk position, provided that certain provisions are met. ASC 820-10-50-2D requires an entity to disclose the fact that it made an accounting policy decision to use the exception in ASC 820-10-35-18D. See Section 10.2.8 for further discussion of this valuation approach.

Credit valuation adjustments (CVAs) are commonly made at the portfolio level as long as the requirements outlined in ASC 820-10-35-18E through 35-18H are met. An entity might incorporate the effect of exposure to a particular counterparty’s credit by netting its derivative asset and liability contracts with a given counterparty in accordance with a master netting arrangement and then calculate a CVA on the basis of the net position with the counterparty.15 Thus, a CVA might apply to, and be calculated on the basis of, a portfolio of contracts that are individually classified in different levels of the fair value hierarchy. ASC 820-10-35-18L provides the following additional guidance about CVAs:

[T]he reporting entity shall include the effect of the reporting entity’s net exposure to the credit risk of that counterparty or the counterparty’s net exposure to the credit risk of the reporting entity in the fair value measurement when market participants would take into account any existing arrangements that mitigate credit risk exposure in the event of default (for example, a master netting agreement with the counterparty or an agreement that requires the exchange of collateral on the basis of each party’s net exposure to the credit risk of the other party). The fair value measurement shall reflect market participants’ expectations about the likelihood that such an arrangement would be legally enforceable in the event of default.

As long as the requirements outlined in ASC 820-10-35-18E through 35-18H are met, mid-to-bid or mid-to-ask adjustments can also be made at the portfolio level. A derivatives dealer might initially use the midpoint in the bid-ask spread to value a portfolio of both its long (buys) and short (sells) derivative positions with the same underlying. The derivatives dealer would then make a mid-to-bid or mid-to-ask adjustment to effectively move the net open position of the portfolio to the bid or ask depending on whether the portfolio is net long or net short in each period. Thus, a mid-to-bid or mid-to-ask adjustment might apply to, and be calculated on the basis of, all of a portfolio’s derivative contracts that are individually classified in different levels of the fair value hierarchy. ASC 820-10-35-18I through 35-18K discuss additional considerations related to when an entity that uses the exception in ASC 820-10-35-18D is exposed to market risks and measures fair value.

An entity must allocate portfolio-level adjustments to the individual assets and liabilities in complying with ASC 820’s disclosure requirements. ASC 820-10-35-18G indicates the following:

A reporting entity shall make an accounting policy decision to use the exception in paragraph 820-10-35-18D. A reporting entity that uses the exception shall apply that accounting policy, including its policy for allocating bid-ask adjustments (see paragraphs 820-10-35-18I through 35-18K) and credit adjustments (see paragraph 820-10-35-18L), if applicable, consistently from period to period for a particular portfolio. [Emphasis added]

The ASC 820 disclosure requirements must be applied in a manner consistent with the asset’s, liability’s, or own equity instrument’s unit of account (which is generally specified by Codification topics other than ASC 820). This is the case even when the ASC 820-10-35-18D exception has been applied. The unit of account under ASC 815 is each individual derivative. Accordingly, a CVA related to a portfolio of derivatives must be allocated to each individual derivative contract within the portfolio.

ASC 820 does not prescribe an approach for allocating portfolio-level adjustments to individual assets and liabilities. However, ASC 820-10-35-18G requires that an entity’s policy be consistently applied. Entities must apply a reasonable method for allocating portfolio-level adjustments and should consider disclosing their policy in the notes to the financial statements.

An allocated portfolio adjustment is an input in the measurement of the fair value of the contract. Accordingly, an allocated portfolio adjustment that is a Level 3 input (i.e., either the portfolio adjustment or the allocation itself is unobservable) and that has a significant effect on the measurement of fair value of an individual asset, liability, or own equity instrument would cause the fair value of the entire individual asset, liability, or own equity instrument to be considered Level 3. Therefore, if a CVA is made on the basis of unobservable inputs, and that amount is allocated to individual derivative instruments within a portfolio, each individual derivative would represent a Level 3 fair value measurement solely on the basis of the CVA allocation if that allocation is significant to the measurement of this individual derivative instrument in its entirety.

Footnotes

ASC 820-10-50-2E also refers to the disclosure requirement in ASC 820-10-50-2(h). However, since public business entities are not required to disclose the fair value of nonfinancial assets that are not recognized at fair value, it is unlikely that this disclosure will be relevant to the disclosure of the fair values of items not recognized at fair value.

See Sections 2.2.2 and 10.9 for further discussion of this practical expedient.

The assets and liabilities of an asset group to be held and used in an entity’s business would also be subject to ASC 820’s disclosure requirements if they are measured at fair value on a recurring or nonrecurring basis.

The same approach would apply to long-lived assets held and used that constitute an asset group.

Assets measured on a recurring basis by using the NAV practical expedient are not subject to such disclosure requirements. See Section 11.2.2.3 for more information.

See footnotes (c) and (d) of Table 11-2 for exceptions to this disclosure requirement.

Paragraph BC86 of ASU 2011-04 states, in part:

“The Boards noted that the objective of the disclosure is not to enable users of financial statements to replicate the reporting entity’s pricing models but to provide enough information for users to assess whether the reporting entity’s views about individual inputs differed from their own and, if so, to decide how to incorporate the reporting entity’s fair value measurement in their decisions. The Boards concluded that the information required by the disclosure will facilitate comparison of the inputs used over time, providing users with information about changes in management’s views about particular unobservable inputs and about changes in the market for the assets and liabilities within a particular class. In addition, that disclosure might facilitate comparison between reporting entities with similar assets and liabilities categorized within Level 3 of the fair value hierarchy.”

As noted in Section 8.1.2, an entity should not use a percentage of a particular component of a fair value measurement or the income statement effect of a fair value measurement (i.e., the threshold should be based on a balance sheet approach).

Note that entities are generally not required to disclose quantitative inputs about techniques that are used to validate other valuation techniques (e.g., secondary techniques that are not weighted in the fair value measurement).

Nonpublic entities are subject to the disclosure requirement in ASC 820-10-50-2G, with which they must comply in lieu of the Level 3 rollforward.

Paragraphs E82 and E83 of FASB Concepts Statement 8, Chapter 4, define gains (or losses) as increases (or decreases) in “equity (net assets) from transactions and other events and circumstances affecting an entity except those that result from revenues [or expenses] or investments by [or distributions to] owners.”

For simplicity, physical delivery risk (sometimes referred to as “index” risk), which is typically considered in the fair value calculation of a physical derivative, is not discussed here.

Nonpublic entities are not required to complete the Level 3 rollforward disclosure. However, in accordance with ASC 820-10-50-2G(a), they must still disclose purchases and issues (each type separately) for assets and liabilities classified within Level 3 of the fair value hierarchy.

Because some derivatives can be assets or liabilities depending on changes in market conditions, entities may employ more sophisticated techniques that factor in reasonably possible market fluctuations in determining the appropriate CVA. For simplicity, this guidance assumes that current exposure approximates expected exposure.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.