12.5 Disclosures

12.5.1 General

ASC 825-10

Transactions

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 Those requirements are not superseded or modified by this Subsection.

Fair Value Option

50-23A This guidance discusses the applicability of the disclosure requirements in this Subsection to all entities that have elected the fair value option.

50-24 The principal objectives of the disclosures required by paragraphs 825-10-50-28 through 50-32 are to facilitate both of the following comparisons:

Comparisons between entities that choose different measurement attributes for similar assets and liabilities
Comparisons between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities.

50-25 Those disclosure requirements are expected to result in the following:

Information to enable users of its financial statements to understand management’s reasons for electing or partially electing the fair value option
Information to enable users to understand how changes in fair values affect earnings for the period
The same information about certain items (such as equity investments and nonperforming loans) that would have been disclosed if the fair value option had not been elected
Information to enable users to understand the differences between fair values and contractual cash flows for certain items.

To meet those objectives, the disclosures described in paragraphs 825-10-50-28 through 50-32 are required for items measured at fair value under the option in this Subtopic and the option in paragraph 815-15-25-4. Those disclosures are not required for securities classified as trading securities under Topic 320, life settlement contracts measured at fair value pursuant to Subtopic 325-30, or servicing rights measured at fair value pursuant to Subtopic 860-50. Those Subtopics include disclosure requirements not affected by this Subtopic.

50-26 Entities shall provide the disclosures required by paragraphs 825-10-50-28 through 50-32 in both interim and annual financial statements.

50-27 The disclosure requirements in paragraphs 825-10-50-28 through 50-30 do not eliminate disclosure requirements included in other Subtopics, including other disclosure requirements relating to fair value measurement. Entities are encouraged but are not required to present the disclosures required by this Subtopic in combination with related fair value information required to be disclosed by other Subtopics (for example, the General Subsection of this Section and Topic 820).

Both ASC 820 and ASC 825 contain fair value disclosure requirements that pertain to (1) items measured at fair value on a recurring or nonrecurring basis and (2) items not measured at fair value but for which fair values are disclosed. The fair value disclosures in ASC 825 consist of two types — general fair value disclosures and incremental disclosures required for items measured at fair value in accordance with the FVO in ASC 825 or ASC 815-15. As discussed in ASC 825-10-50-9 and ASC 825-10-50-27, the disclosure requirements of other U.S. GAAP are not superseded by the incremental disclosure requirements in ASC 825 for items measured at fair value by using the FVO. Thus, for items elected under the FVO, an entity must provide the general fair value disclosures required by ASC 820 and ASC 825 in addition to the incremental disclosures required by ASC 825. See Chapter 11 for more information about the other fair value disclosures required by ASC 820 and ASC 825.

ASC 825-10-50-24 through 50-27 outline the objectives of the disclosure requirements for items measured at fair value in accordance with the FVO in ASC 825 or ASC 815-15. Entities must provide these disclosures in interim and annual financial statements. As noted in ASC 825-10-50-25, these disclosures do not apply to certain items measured at fair value in accordance with other Codification topics. ASC 825-10-50-25 lists examples of such items, including debt securities classified as trading under ASC 320, life settlement contracts measured at fair value under ASC 325-30, and servicing rights measured at fair value under ASC 860-50. In addition, we believe that the FVO disclosure requirements do not apply to equity securities measured at fair value under ASC 321. Entities should look to the disclosure requirements of other Codification topics that permit entities to measure these other items at fair value. See further discussion in Appendix A.

12.5.2 Income Statement Disclosures

ASC 825-10

Required Disclosures for Each Period for Which an Interim or Annual Income Statement Is Presented

50-30 For each period for which an income statement is presented, entities shall disclose all of the following about items for which the fair value option has been elected:

For each line item in the statement of financial position, the amounts of gains and losses from fair value changes included in earnings during the period and in which line in the income statement those gains and losses are reported. This Subtopic does not preclude an entity from meeting this requirement by disclosing amounts of gains and losses that include amounts of gains and losses for other items measured at fair value, such as items required to be measured at fair value.
A description of how interest and dividends are measured and where they are reported in the income statement. This Subtopic does not address the methods used for recognizing and measuring the amount of dividend income, interest income, and interest expense for items for which the fair value option has been elected.
For loans and other receivables held as assets, both of the following:
1. The estimated amount of gains or losses included in earnings during the period attributable to changes in instrument-specific credit risk
2. How the gains or losses attributable to changes in instrument-specific credit risk were determined.
For liabilities, all of the following about the effects of the instrument-specific credit risk and changes in it:

1. The amount of change, during the period and cumulatively, of the fair value of the liability that is attributable to changes in the instrument-specific credit risk . . .

3. How the gains and losses attributable to changes in instrument-specific credit risk were determined.

4. If a liability is settled during the period, the amount, if any, recognized in other comprehensive income that was recognized in net income at settlement.

For each interim or annual period with an income statement, the disclosures above are required for items accounted for at fair value by using the FVO. See ASC 825-10-55-6 through 55-13 for examples illustrating these disclosures.

12.5.3 Disclosures in the Statement of Financial Position

12.5.3.1 Required Disclosures

ASC 825-10

Required Disclosures as of Each Date for Which an Interim or Annual Statement of Financial Position Is Presented

50-28 As of each date for which a statement of financial position is presented, entities shall disclose all of the following:

Management’s reasons for electing a fair value option for each eligible item or group of similar eligible items
If the fair value option is elected for some but not all eligible items within a group of similar eligible items, both of the following:
1. A description of those similar items and the reasons for partial election
2. Information to enable users to understand how the group of similar items relates to individual line items on the statement of financial position.
For each line item in the statement of financial position that includes an item or items for which the fair value option has been elected, both of the following:
1. Information to enable users to understand how each line item in the statement of financial position relates to major classes of assets and liabilities presented in accordance with the fair value disclosure requirements of Topic 820. (Paragraph 825-10-50-11 also requires an entity to relate carrying amounts that are disclosed in accordance with that paragraph to what is reported in the statement of financial position.)
2. The aggregate carrying amount of items included in each line item in the statement of financial position that are not eligible for the fair value option, if any.
The difference between the aggregate fair value and the aggregate unpaid principal balance of each of the following:
1. Loans and long-term receivables (other than securities subject to Topic 320) that have contractual principal amounts and for which the fair value option has been elected
2. Long-term debt instruments that have contractual principal amounts and for which the fair value option has been elected.
For loans held as assets for which the fair value option has been elected, all of the following:
1. The aggregate fair value of loans that are 90 days or more past due
2. If the entity’s policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status
3. The difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in nonaccrual status, or both.
For investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required by paragraph 323-10-50-3 (excluding the disclosures in paragraph 323-10-50-3(a)(3); (b); and (d)).

50-29 The disclosure in paragraph 825-10-50-28(f) applies to investments in common stock, investments in in-substance common stock, and other investments (for example, partnerships and certain limited liability corporations) that both:

Would otherwise be required to be accounted for under the equity method under other generally accepted accounting principles (GAAP)
Would be required to satisfy the disclosure requirements of paragraph 323-10-50-3.

When applying paragraph 825-10-50-28(f), an entity shall apply the guidance from paragraphs 323-10-50-2 and 323-10-50-3(a) and (c).

For each interim or annual period with a statement of financial position, the disclosures above are required for items accounted for at fair value by using the FVO. See ASC 825-10-55-6 through 55-13 for examples illustrating these disclosures.

12.5.3.2 Investments That Would Have Otherwise Been Accounted for by Using the Equity Method

Note that for investments that would have been accounted for under the equity method if the entity had not elected the FVO, the investor must still disclose the information required by ASC 323-10-50-3 except for that in ASC 323-10-50-3(a)(3), ASC 323-10-50-3(b), and ASC 323-10-50-3(d). Thus, for such investments, the following information must be disclosed in the notes to the financial statements or in separate statements or schedules:

“The name of each investee and percentage of ownership of common stock” (ASC 323-10-50-3(a)(1)).
“The accounting policies of the investor with respect to investments in common stock. Disclosure shall include the names of any significant investee entities in which the investor holds 20 percent or more of the voting stock, but the common stock is not accounted for on the equity method, together with the reasons why the equity method is not considered appropriate, and the names of any significant investee corporations in which the investor holds less than 20 percent of the voting stock and the common stock is accounted for on the equity method, together with the reasons why the equity method is considered appropriate” (ASC 323-10-50-3(a)(2)).
“If investments in common stock of corporate joint ventures or other investments accounted for under the equity method are, in the aggregate, material in relation to the financial position or results of operations of an investor, it may be necessary for summarized information as to assets, liabilities, and results of operations of the investees to be disclosed in the notes or in separate statements, either individually or in groups, as appropriate” (ASC 323-10-50-3(c)).

Further, paragraph 2400.4 of the FRM states, in part, that “the [SEC] staff believes that the significance tests in S-X 3-09 and S-X 4-08(g), with the modifications described in Section 2435, should be used by analogy as presumptive thresholds for when the disclosures in ASC 323-10-50-3c should be provided for an equity method investment accounted for using fair value in accordance with ASC 825.” Section 2435 of the FRM describes in detail the modifications that an entity should make to the significance tests in SEC Regulation S-X, Rules 3-09 and 4-08(g), when applying the disclosure requirements in those rules to equity investments that would have been accounted for by using the equity method if the FVO is not elected.

12.5.4 Other Disclosures

ASC 825-10

Other Required Disclosures

50-31 In annual periods only, an entity shall disclose the methods and significant assumptions used to estimate the fair value of items for which the fair value option has been elected. For required disclosures about the method(s) and significant assumptions used to estimate the fair value of financial instruments, see paragraph 820-10-50-2(bbb) except that an 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 that paragraph.

50-32 If an entity elects the fair value option at the time one of the events in paragraph 825-10-25-4(d) through (e) occurs, the entity shall disclose both of the following in financial statements for the period of the election:

Qualitative information about the nature of the event
Quantitative information by line item in the statement of financial position indicating which line items in the income statement include the effect on earnings of initially electing the fair value option for an item.

ASC 825-10-50-31 indicates that ASC 820-10-50-2(bbb) addresses the requirement for entities to provide, only for annual periods, disclosures about “the methods and significant assumptions used to estimate the fair value of items for which the [FVO] has been elected.” However, ASC 825-10-50-31 also contains an exception to this requirement under which an entity does not need to “provide the quantitative disclosures about significant unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy.” See Chapter 11 for more information about these disclosures.

ASC 825-10-50-32 contains additional disclosure requirements related to FVO elections that occur after a qualifying event under ASC 825-10-25-4(d) and (e). Those events are discussed in Sections 12.3.2.1 and 12.3.2.2.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.