5/8/2014. Investments ASC 820

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1 Investments ASC 820 1

2 Fair Value Measurements Disclosure Requirements (ASC ) FAS 157 Fair Value Measurements Defined fair value Established three levels of fair value hierarchy Increased fair value disclosures 3 Definition of Fair Value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 4 2

3 Fair Value Measurements Disclosure Requirements (ASC ) The reporting entity shall disclose all of the following information for each interim and annual period separately for each class of assets and liabilities: a. The fair value measurements at the reporting date b. The level within the fair value hierarchy in which the fair value measurements in their entity fall, segregating fair value measurements using any of the following: 1. Quoted prices in active markets for identical assets or liabilities (Level 1) 2. Significant other observable inputs (Level 2). 3. Significant unobservable inputs (Level 3). 5 Level 1 Inputs Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. (ASC ) Common examples Common stock Mutual funds 6 3

4 Level 2 Inputs Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. (ASC ) Level 2 inputs include a. Quoted prices for similar assets or liabilities in active markets b. Quoted prices for identical or similar assets or liabilities in markets that are not active c. Inputs other than quoted prices that are observable for the asset or liability 7 Level 2 Inputs Common Examples Units of common/collective trusts Pooled separate accounts Corporate bonds valued using matrix pricing method 8 4

5 Level 3 Inputs If key inputs used to value an asset or liability are only observable based on information provided by the reporting entity, then they should be considered Level 3. Common Example: Fair value of fully benefit-responsive Guaranteed Investment Contacts Alternative Investments 9 ASU Fair Value Measurements and Disclosures Objective to converge U.S. GAAP and IFRS in this area Key areas changed under U.S. GAAP Highest and best use and valuation premise concepts Option to measure groups of assets/liabilities net Incorporation of certain premiums and discounts Measurement of items in shareholders' equity Reason for fair value measurement Description of valuation techniques and inputs for Level 2 and Level 3 measurements 10 5

6 ASU Disclosure Requirements The following disclosures are required for fair value measurements: A description of the valuation technique(s) and the inputs used in fair value measurements An unobservable inputs table for measurements using Level 3 inputs A description of valuation processes for Level 3 measurements All transfers between levels of the fair value hierarchy with the description including the reasons for the transfers and the entity s policy for determining when transfers occur. A narrative description of the fair value measurements sensitivity to changes in unobservable inputs 11 ASU Nonpublic entity is any entity that does not meet any of the following conditions: a. Its debt or equity securities trade in a public market either on a stock exchange b. It is a conduit bond obligor for conduit debt securities that are traded in a public market c. It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market d. It is required to file or furnish financial statements with the Securities and Exchange Commission e. It is controlled by an entity covered by (a) through (d) 12 6

7 ASU Deferral of Certain Fair Value Disclosures ASU No , Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No For plans that are not subject to SEC filing requirements, the disclosures required by ASC (bbb)(2) are deferred indefinitely. These plans will not need to disclose the quantitative information about the significant unobservable inputs used in the fair value measurement for the plan sponsor's own nonpublic entity equity securities, and nonpublic affiliated entities securities which are categorized as Level 3 Effective upon issuance (July 8, 2013) 13 Types of Investments 7

8 Understand And Identifying Common Plan Investments Common Stock Corporate Bond Government Backed Fixed Income Mutual Fund Money Market Fund Pooled Separate Account (PSA) Common/Collective Trust (CCT) Guaranteed Investment Contract (GIC) Self-Directed Brokerage Accounts Limited Partnership (LP) Hedge Fund 15 Pooled Separate Accounts A pooled investment vehicle in the form of a special account that is separate from the general assets of an insurance company. Permits commingled investment of plan assets of employee benefit plans sponsored by unrelated employers. 16 8

9 Common/Collective Trusts (CCTs) Pooled investment vehicle, in the form of a trust, sponsored and maintained by a bank or trust company. It is subject to state or federal banking law. Permits the collective investment, on an undivided, unitized basis, of plan assets of employee benefit plan sponsored by unrelated employers. 17 Common/Collective Trusts (CCTs) CCTs Generally Identified: By reference to sponsoring bank or trust company Name sometimes includes Common Trust Fund or Collective Investment Fund Pricing not available publicly How are they valued? Fair value of the CCT is determined based on fair value of the underlying investments, which may or may not be traded on active markets themselves. Generally a level 2 or 3 investment 18 9

10 Guaranteed Investment Contracts (GICs) What are they? GICs are an investment contract between an insurance company and a plan that provides for a guaranteed return on principal invested over a specified time period. 19 Guaranteed Investment Contracts (GICs) Common Features Issued through the general account of the insurance company Plan owns the contract, not the underlying investments Could be benefit responsive or non-benefit responsive 20 10

11 Guaranteed Investment Contracts (GICs) Fully Benefit Responsive Participants may transact at contract or book value and are allowed to trade in and out of the fund with out penalties. Non-fully benefit responsive means to transact at fair value Participants may transact at fair value and may be assessed a penalty for early withdrawal to transact out of the fund. 21 Limited Partnership Investments A limited partnership is typically a form of partnership that offers the protection of limited liability to some of its partners (limited partners). The rights and obligations of limited partners are usually different from those of general partners who take part in management. Typically valued based on plan s interest in net asset value (as the practical expedient). Audited f/s are sometimes available. If not, Management is responsible to determine fair value

12 Limited Partnership Investments The Plan sponsor can use the services of a specialist to estimate the fair value The auditor is responsible for reviewing the procedures adopted by the plan to value securities and to test those procedures 23 Hedge Funds Issues same as LPs Typically not valued daily Limited redemptions 24 12

13 Testing Valuation of Investments Pricing Information Market data Models Broker quotes Issues How current is price? What assumptions were used? 26 13

14 Fair Value Measurements Disclosure Requirements (ASC B) Major security types shall be based on the nature and risks of the security. In determining whether disclosure for a particular security type is necessary and whether it is necessary to further separate a particular security type into greater detail, an entity shall consider all of the following: a. Shared activity or business sector b. Vintage c. Geographic concentration d. Credit quality e. Economic characteristic 27 Fair Value Measurements Disclosure Requirements Class examples Mutual funds could be grouped by investment strategy (cap size, sector or both) Common stocks could be grouped by cap size, industry, geographic location (foreign or domestic) Pooled separate accounts and common/collective trusts could be grouped by investment strategy Bonds could be grouped by credit rating Brokerage accounts 28 14

15 Contact Information Jim Jenkins Director Visit: Phone: (800)