Board Meeting Handout Disclosure Framework Fair Value Measurement March 4, 2015

Transcription

1 Board Meeting Handout Disclosure Framework Fair Value Measurement March 4, 2015 PURPOSE OF THIS MEETING 1. The March 4, 2015, Board meeting is a decision-making meeting on fair value measurement disclosures and related transition. The Board initially discussed this topic at the September 3, 2014, Board meeting. BACKGROUND INFORMATION 2. During 2014, the staff conducted a field study on preparers use of discretion in applying disclosure requirements. On April 4, 2014, the Board reviewed the field study results and asked the staff to (a) analyze a few disclosure sections, including fair value measurement, and (b) suggest changes in the existing requirements on the basis of the 2014 proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting Chapter 8: Notes to Financial Statements. 3. The staff assessed the indicated disclosures for fair value measurements on the basis of the concepts and decision questions in the proposed Concepts Statement. TOPIC 1: DISCLOSURES TO CONSIDER MODIFYING 4. The staff has identified six disclosures that are not consistent with the proposed Concepts Statement: (a) Policy for timing of transfers between levels (Subissue 1) (b) Valuation processes for Level 3 fair value measurements (Subissue 2) (c) Estimates of timing of future events (Subissue 3) (d) Level 3 rollforward (Subissue 4) (e) Transfers between Level 1 and Level 2 (Subissue 5) The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations. Page 1 of 8

2 (f) Sensitivity information (Subissue 6). Subissue 1 Policy for Timing of Transfers between Levels 5. Paragraph C requires a reporting entity to disclose and follow a consistent policy for the timing of transfers between levels of the fair value hierarchy (for example, event date, beginning or end of period). Because the requirement to follow a policy consistently is not a disclosure, the Board s discussion will not address this requirement, except as it relates to the section it is located within the FASB Accounting Standards Codification. Question for the Board 1. Should a reporting entity be required to disclose its policy for timing of transfers between levels of the fair value hierarchy? Subissue 2 Valuation Processes for Level 3 Fair Value Measurements 6. Paragraph (f) requires a reporting entity to disclose its valuation processes for Level 3 fair value measurements. The implementation guidance contained in paragraph lists the following as information that a reporting entity might disclose to comply with paragraph (f): (a) For the group within the reporting entity that decides the reporting entity s valuation policies and procedures: 1. Its description 2. To whom that group reports 3. The internal reporting procedures in place (for example, whether and, if so, how pricing, risk management, or audit committees discuss and assess the fair value measurements). (b) The frequency and methods for calibration, back testing, and other testing procedures of pricing models. (c) The process for analyzing changes in fair value measurements from period to period. (d) How the reporting entity determined that third-party information, such as broker quotes or pricing services, used in the fair value measurement was developed in accordance with this Topic. (e) The methods used to develop and substantiate the unobservable inputs used in a fair value measurement. Page 2 of 8

3 Question for the Board 2. Should a reporting entity be required to disclose its valuation processes for Level 3 fair value measurements? Subissue 3 Estimates of Timing of Future Events 7. For entities with investments in entities that report net asset value, the following disclosures are required, among others: (a) Paragraph A(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 reporting entity s estimate of the period of time over which the investee s assets are expected to be liquidated by the investees. (b) Paragraph A(e). For those otherwise redeemable investments that are restricted from redemption as of the reporting entity s measurement date, the reporting entity should disclose its estimate of when the restriction from redemption might lapse. If an estimate cannot be made, the reporting entity should disclose that fact and how long the restriction has been in effect. Questions for the Board 3. Should a reporting entity be required to disclose the estimated timing of liquidation of an investee s assets and the date when the restrictions from redemption might lapse? 3(a). If not, should a reporting entity be required to disclose the timing if it has been communicated to the reporting entity by the investee? Subissue 4 Level 3 Rollforward 8. Paragraph (c) requires a reporting entity with recurring Level 3 fair value measurements to present a reconciliation of the opening balances to the closing balances, disclosing separately: Page 3 of 8

4 (a) Total gains or losses for the period recognized in earnings or comprehensive income, and the line item(s) in which those gains or losses are recognized (b) Purchases, sales, issues, and settlements (each disclosed separately) (c) Amounts of any transfers into or out of Level The staff has identified the following alternatives for the Board s consideration: (a) Alternative A: Remove the Level 3 rollforward requirement but retain the requirement to disclose the amounts and reasons for any transfers into or out of Level 3. (b) Alternative B: Retain the Level 3 rollforward requirement and add a Level 2 rollforward requirement. (c) Alternative C: Retain the Level 3 rollforward requirement and do not add any further requirements. Questions for the Board 4. Does the Board prefer Alternative A, B, or C? 4(a). If the Board selects Alternative B, should the decision apply to private companies based on the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies 4(b). If the Board selects Alternative C, should the decision apply to private companies based on the Private Company Decision-Making Framework guide? Subissue 5 Transfers between Level 1 and Level Paragraph (bb) requires public reporting entities (but not private entities) to disclose the following: For assets and liabilities held at the end of the reporting period that are measured at fair value on a recurring basis, the amounts of any transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for those transfers, and the reporting entity s policy for determining when transfers between levels are deemed to have occurred. Page 4 of 8

5 Question for the Board 5. Should a reporting entity be required to separately disclose the amounts of and reasons for transfers between Level 1 and Level 2? Subissue 6 Sensitivity Information 11. Paragraph (g) requires public reporting entities (but not private entities) to disclose the following information about recurring Level 3 fair value measurements: (a) A narrative description of the sensitivity of the measurement to changes in unobservable inputs that would change the measurement significantly (b) A description of any interrelationships of those inputs with other inputs and how they might magnify or mitigate each other s effects, including, at a minimum, the unobservable inputs disclosed when complying with paragraph (bbb). 12. Paragraph 93(h)(i) of IFRS 13, Fair Value Measurement, has the same requirement as is included in paragraph (g), but goes one step further than generally accepted accounting principles (GAAP) and also requires the following for recurring fair value measurements categorized within Level 3 of the fair value hierarchy in paragraph 93(h)(ii): for financial assets and financial liabilities, if changing one or more of the unobservable inputs to reflect reasonably possible alternative assumptions would change fair value significantly, an entity shall state that fact and disclose the effect of those changes. The entity shall disclose how the effect of a change to reflect a reasonably possible alternative assumption was calculated. For that purpose, significance shall be judged with respect to profit or loss, and total assets or total liabilities, or, when changes in fair value are recognized in other comprehensive income, total equity. 13. The staff has identified the following alternatives for the Board s consideration: (a) Alternative A: Remove the disclosure required by paragraph (g). Page 5 of 8

6 (b) Alternative B: Retain the disclosure required by paragraph (g) and require disclosure of the quantitative information as described in paragraph 93(h)(ii) of IFRS 13. (c) Alternative C: Modify the disclosure required by paragraph (g) so that it is limited to circumstances in which the changes and interrelationships would not be apparent to a reasonably informed user. Question for the Board 6. Does the Board prefer Alternative A, B, or C? TOPIC 2: DISCLOSURE TO CONSIDER ADDING 14. The staff identified one disclosure that is consistent with the proposed Concepts Statement, but is not part of the existing requirements: (a) Gains and losses (Subissue 7). Subissue 7 Gains and Losses 15. Paragraphs (c)(1) and (d) require the following disclosures for recurring Level 3 fair value measurements: (c)...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 (d) the amount of the total gains or losses for the period in (c)(1) included in earnings (or changes in net assets) 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 of income (or activities) in which those unrealized gains or losses are recognized. Page 6 of 8

7 Questions for the Board 7. Should a reporting entity be required to disclose fair value changes by statement of comprehensive income line item related to assets and liabilities held at the end of the reporting period disaggregated by the levels within the fair value hierarchy? 7(a). If the Board were to add the requirement for entities to disclose fair value changes by statement of comprehensive income line item related to assets and liabilities held at the end of the reporting period disaggregated by the levels within the fair value hierarchy, should the decision apply to private companies based on the Private Company Decision-Making Framework guide? TOPIC 3: INDUSTRY-SPECIFIC TOPICS 16. The staff analyzed whether any of the requirements in Topic 820, Fair Value Measurement, should be moved into the Financial Services Topics (Topics 940 through 950) within the Codification. 17. The staff analyzed whether certain fair value measurement disclosures should be moved into the Financial Services Topics by considering the following questions: (a) Are the disclosures broadly relevant? (b) Are materiality assessments likely to be costly? Question for the Board 9. Should any of the Topic 820 disclosures be moved into the Financial Services Section of the Codification? TOPIC 4: TRANSITION AND PERMISSION TO BALLOT 18. The staff analyzed transition into four subissues based on the nature of the potential decisions that the Board will make on the previous issues, namely: (a) Disclosure objective and discretion (February 18, 2015, Board meeting) (Subissue 1) (b) Qualitative disclosures (Subissue 2) Page 7 of 8

8 (c) Quantitative disclosures, removal (Subissue 3) (d) Quantitative disclosures, additions (Subissue 4). Questions for the Board 8. Does the Board think that the guidance should be applied on a retrospective basis or prospective basis? 8(a). Does the Board grant the staff permission to draft new guidance in an Exposure Draft of a proposed Accounting Standards Update for vote by written ballot? 8(b). If yes, what comment period does the Board select for this proposed Update? Page 8 of 8

9 Board Meeting Handout Financial Statements of Not-for-Profit Entities March 4, 2015 PURPOSE OF THIS MEETING 1. The purpose of this meeting is to discuss Board members views about the expected benefits, costs, and complexities associated with the proposed Accounting Standards Update (ASU) Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954) Presentation of Financial Statements of Not-for-Profit Entities (proposed Update). The staff will also ask the Board for permission to proceed with preparing a proposed Update for vote by written ballot. BENEFITS, COSTS, AND COMPLEXITIES 2. At the October 8, 2014 Board meeting the staff provided alternatives to the Board to lessen cost and complexity concerns voiced by Not-for-Profit Advisory Committee (NAC) members and others. At that meeting, the Board revised its previous decisions on capital-like transactions and presentation of governing board designations, appropriations, and similar transfers in order to lessen some of those concerns raised. In particular, the Board tentatively decided to do the following: (a) No longer propose to require an NFP to report subsequent transfers back into operations over time to reflect use of capital-like items for operations (b) Require that resources restricted for the acquisition of capital-like items be released from restrictions within operations and subsequently transferred out of operations (c) Prescribe the presentation and disclosure of governing board designations, appropriations, and transfers, including requiring that: (1) all transfers be reported in a separate, discrete section; (2) a subtotal be reported for the net amount of operating revenues, expenses, gains and losses before such transfers; The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations. Page 1 of 5

10 (3) at a minimum, the aggregation of transfers out of operating activities be reported separate from the aggregation of transfers into operating activities on the face of the statement of activities; and (4) unless all transfers are displayed on the face, a note to disclose the details of the aggregated transfers with a qualitative description of their purpose, amounts, and types. 3. At that same October 2014 meeting, the staff was instructed to begin drafting the proposed Update for external review, after which the Board would have the opportunity also to consider comments received from external reviewers before making their overall assessment of the expected benefits, costs, and complexities related to the proposed Update. With the exception of the issue raised by some external reviewers about better aligning the operating notion between the statement of activities and statement of cash flows, external reviewers raised no incremental concerns about the operationality or usefulness of the proposed amendments beyond those already provided to and discussed by the Board. Therefore, the staff believes Board members can utilize the benefits, costs, and complexities discussion already provided by the staff as a basis for their discussion of the overall benefits, costs, and complexities. 4. At the February 25, 2015 Board meeting, the Board discussed and reached tentative decisions for (a) sweep issues identified during drafting and external review and (b) proposed transition and effective date and comment period length. Those tentative decisions are included as Appendix I. The Board also discussed some of the expected benefits and perceived costs of implementing the proposed Update and asked the staff to discuss the recent decisions reached with the NAC at its March 3, 2015 meeting. 5. At the March 4, 2015 Board meeting, the staff will also provide the Board with a verbal summary of the discussion that took place at the previous day s NAC meeting and will ask the Board to complete its discussion of the overall benefits, costs, and complexities of the proposed Update. Page 2 of 5

11 Questions for the Board 1. Subject to what is learned through comment letters and other stakeholder outreach, do the expected benefits of the proposed Update justify the perceived costs? 2. Should the staff proceed to drafting a proposed Update for a vote by written ballot? NEXT STEPS 6. If the Board grants permission to the staff to proceed to the balloting stage, the staff will incorporate in the preballot draft both the external review feedback and the sweep issues identified and discussed by the Board at the February 25, 2015 meeting. The staff plans on issuing the preballot draft within the next 7-10 days and the Exposure Draft by mid-april The staff also recommends that the Exposure Draft include, if the Board approves, an announcement of a plan to hold two roundtables to gather further insight from stakeholders shortly after the close of the comment period. The Board tentatively decided that the comment period will be through July 31, Page 3 of 5

12 APPENDIX I: FEBRUARY 25, 2015 TENTATIVE BOARD DECISIONS The Board discussed various issues identified during the drafting of a proposed Accounting Standards Update (ASU). The Board also discussed the proposed transition and effective date and comment period length. Finally, the Board discussed a staff analysis of the expected benefits and perceived costs of the proposed changes. Alignment of Operating Definitions in the Statements of Activities and Cash Flows The Board decided to maintain tentative definitions for operations in the statements of activities and cash flows but decided to seek input in the forthcoming Exposure Draft on whether and how those definitions might be further aligned. Presentation and Disclosure of Investment Return The Board decided not to require disclosure of unrelated business income taxes or excise taxes that are netted against investment return and to eliminate the disclosure of the following: 1. Components of investment return as both a separate disclosure and part of the endowment rollforward 2. The total performance of other investment portfolios that is currently required for institutions of higher education. Accounting Write-Offs and Equity Transfers The Board decided that the following items should be reported separately from revenues, expenses, gains, and losses and presented within the operating activity section of the statement of activities and before the section of governing board transfers: 1. The immediate write-off of goodwill upon acquisition of an entity (required of notfor-profit entities (NFPs) predominantly supported by contributions and investment income), unless the acquired entity is for a purpose or purposes that are not directed at carrying out the purpose for the acquirer s existence 2. Accessions and deaccessions of noncapitalized collection items acquired with resources that are without donor restrictions 3. Equity transfers, unless they are not for current period use in carrying out the purpose for the reporting entity s existence. The Board also decided that NFPs should classify as operating cash flows their (1) cash outflows for purchases of collection items, (2) cash inflows on the sale of collection items, and (3) cash inflows for contributions received that are restricted for the acquisition of collection items. Governing Board Designations The Board decided to clarify that presentation of governing board designations, appropriations, or similar transfers on the statement of activities would include decisions made by the governing board s designees. Page 4 of 5

13 Proposed Transition and Effective Date and Comment Period Length The Board decided to require retroactive application of the proposed changes. In the initial year of application of the proposed changes, the annual financial statements would disclose the nature of any reclassifications or restatements and their effects, if any, on the change in the net asset classes for each year or period presented. Application to interim financial statements would not be required in the initial year of application. The Board also decided not to propose a specific effective date and will instead ask respondents to provide information that would help the Board in determining an appropriate date (or dates) during redeliberation. The Board also decided that, based on an expectation that the forthcoming Exposure Draft would be issued by mid-april, the comment period would end on July 31, Potential Benefits, Costs, and Complexities of the Proposed Amendments The Board discussed an analysis of the expected benefits and perceived costs of implementing the proposed changes. The Board will continue that discussion after its March 3, 2015 meeting with the Not-for-Profit Advisory Committee (NAC). Next Steps The Board directed the staff to discuss the summary of decisions reached at this meeting with the NAC during its March 3, 2015 meeting. The Board will consider this feedback at the March 4, 2015 Board meeting and decide whether the overall expected benefits of the proposed amendments justify the perceived costs, and, if so, will direct the staff to proceed with drafting a proposed ASU. Page 5 of 5