2.2 Practicability Exceptions

2.2.1 General

ASC 820-10

Practicability Exceptions to This Topic

15-3 The Fair Value Measurement Topic does not eliminate the practicability exceptions to fair value measurements within the scope of this Topic. Those practicability exceptions to fair value measurements in specified circumstances include, among others, those stated in the following:

a. The use of a transaction price (an entry price) to measure fair value (an exit price) at initial recognition, including the following:

1. Guarantees in accordance with Topic 460

2. Subparagraph superseded by Accounting Standards Update No. 2009-16.

b. Subparagraph superseded by Accounting Standards Update No. 2016-01.

1. Subparagraph superseded by Accounting Standards Update No. 2016-01.

2. Subparagraph superseded by Accounting Standards Update No. 2009-16.

c. An exemption to the requirement to measure fair value if fair value is not reasonably determinable, such as all of the following:

1. Nonmonetary assets in accordance with Topic 845 and Sections 605-20-25 and 605-20-50

2. Asset retirement obligations in accordance with Subtopic 410-20 and Sections 440-10-50 and 440-10-55

3. Restructuring obligations in accordance with Topic 420

4. Participation rights in accordance with Subtopics 715-30 and 715-60.

d. Subparagraph superseded by Accounting Standards Update No. 2015-10.

e. The use of particular measurement methods referred to in paragraph 805-20-30-10 that allow measurements other than fair value for specified assets acquired and liabilities assumed in a business combination.

ee. Financial assets or financial liabilities of a consolidated variable interest entity that is a collateralized financing entity when the financial assets or financial liabilities are measured using the measurement alternative in paragraphs 810-10-30-10 through 30-15 and 810-10-35-6 through 35-8.

f. An exemption to the requirement to measure fair value if fair value cannot be reasonably estimated, such as the following:

1. Noncash consideration promised in a contract in accordance with the guidance in paragraphs 606-10-32-21 through 32-24.

ASC 820-10-15-3 discusses various practicability exceptions that allow entities to recognize certain items at amounts other than fair value. These practical expedients merely acknowledge the measurement exceptions provided in other Codification topics. See Section 2.3 for further discussion of these practical expedients.

2.2.2 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)

15-4 Paragraphs 820-10-35-59 through 35-62 and 820-10-50-6A shall apply only to an investment that meets both of the following criteria as of the reporting entity’s measurement date:

The investment does not have a readily determinable fair value
The investment is in an investment company within the scope of Topic 946 or is an investment in a real estate fund for which it is industry practice to measure investment assets at fair value on a recurring basis and to issue financial statements that are consistent with the measurement principles in Topic 946.

15-5 The definition of readily determinable fair value indicates that an equity security would have a readily determinable fair value if any one of three conditions is met. One of those conditions is that sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group Inc. The definition notes that restricted stock meets that definition if the restriction expires within one year. If an investment otherwise would have a readily determinable fair value, except that the investment has a restriction expiring in more than one year, the reporting entity shall not apply paragraphs 820-10-35-59 through 35-62 and 820-10-50-6A to the investment.

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

35-59 A reporting entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of paragraphs 820-10-15-4 through 15-5 using the 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) of the investment, if the net asset value per share of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date.

35-60 If the net asset value per share of the investment obtained from the investee is not as of the reporting entity’s measurement date or is not calculated in a manner consistent with the measurement principles of Topic 946, the reporting entity shall consider whether an adjustment to the most recent net asset value per share is necessary. The objective of any adjustment is to estimate a net asset value per share for the investment that is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date.

35-61 A reporting entity shall decide on an investment-by-investment basis whether to apply the practical expedient in paragraph 820-10-35-59 and shall apply that practical expedient consistently to the fair value measurement of the reporting entity’s entire position in a particular investment, unless it is probable at the measurement date that the reporting entity will sell a portion of an investment at an amount different from net asset value per share (or its equivalent) as described in the following paragraph. In those situations, the reporting entity shall account for the portion of the investment that is being sold in accordance with this Topic (that is, the reporting entity shall not apply the guidance in paragraph 820-10-35-59).

35-62 A reporting entity is not permitted to estimate the fair value of an investment (or a portion of the investment) within the scope of paragraphs 820-10-15-4 through 15-5 using the net asset value per share of the investment (or its equivalent) as a practical expedient if, as of the reporting entity’s measurement date, it is probable that the reporting entity will sell the investment for an amount different from the net asset value per share (or its equivalent). A sale is considered probable only if all of the following criteria have been met as of the reporting entity’s measurement date:

Management, having the authority to approve the action, commits to a plan to sell the investment.
An active program to locate a buyer and other actions required to complete the plan to sell the investment have been initiated.
The investment is available for immediate sale subject only to terms that are usual and customary for sales of such investments (for example, a requirement to obtain approval of the sale from the investee or a buyer’s due diligence procedures).
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

The scoping conditions in ASC 810-20-15-4 and 15-5 allow certain entities, as a practical expedient, to estimate the fair value of certain investments that do not have a readily determinable fair value at NAV per share (or its equivalent). As noted in ASC 820-10-35-61, the decision of whether to apply this practical expedient is made on an investment-by-investment basis. An entity that chooses to use this practical expedient must apply it consistently to the fair value measurement of the entity’s entire position in a particular investment, unless it is probable as of the measurement date that the entity will sell a portion of the investment at an amount different from NAV value per share (or its equivalent), in which case use of the practical expedient is not permitted.

ASC 820-10-35-62 indicates that, for a sale of an investment to be probable, four criteria must be met as of the measurement date. For these four criteria to be met, the entity must identify the individual investment(s) to be sold. That is, if the entity decides to sell a portion of a group of assets (e.g., 25 percent of the total group) but has not identified the individual investments to be sold, the entity could not conclude that it is probable that any individual investment will be sold.

An entity must often use significant judgment in evaluating whether a sale for an amount different from NAV per share (or its equivalent) is considered probable and should establish consistent processes and documentation protocols for evaluating and supporting its conclusions, including the probability assertion based on the four criteria in ASC 820-10-35-62. Management should carefully assess any changes in assertions. For example, a change in assertion that results in the triggering of significant profits (or losses) in a particular period could call into question the primary intent of the change and the validity of the entity’s assertion.

If an entity subsequently determines that it is no longer probable that the reporting entity will sell the investment for an amount different from NAV per share (or its equivalent) (i.e., the criteria in ASC 820-10-35-62 are no longer met), the entity is permitted to use NAV as a practical expedient in measuring the fair value of the investment provided that the investment continues to be within the scope of ASC 820-10-15-4 and 15-5. This conclusion is consistent with informal discussions with the FASB staff.

See Sections 10.9 and 11.2.2.3 for further discussion of the NAV practical expedient.

2.2.3 Mid-Market and Other Pricing Conventions

ASC 820-10-35-36D states that “[t]his Topic [ASC 820] does not preclude the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread.” See Section 10.4.4 for more information.

2.2.4 Simplified Hedge Accounting Approach

ASC 815-10-35-1A contains a practical expedient related to the requirement in ASC 815-10-35-1 to measure all derivative assets and liabilities at fair value. Under the practical expedient, a receive-variable, pay-fixed interest rate swap to which an entity applies the simplified method of hedge accounting in ASC 815-20-25 (see Section 10.10.14) “may be measured subsequently at settlement value instead of fair value.” ASC 815-10-35-1B states that “[t]he primary difference between settlement value and fair value is that nonperformance risk is not considered in determining settlement value.” ASC 815-10-35-1C clarifies that “[i]f any of the conditions . . . for applying the simplified hedge accounting approach subsequently cease to be met or the relationship otherwise ceases to qualify for hedge accounting,” the interest rate swap must be recognized at fair value both as of the date of the change and prospectively.

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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.