Board Meeting Handout Agenda Priority Definition of Readily Determinable Fair Value March 1, 2017

Transcription

1 Board Meeting Handout Agenda Priority Definition of Readily Determinable Fair Value March 1, 2017 PURPOSE OF THIS MEETING 1. The March 1, 2017 Board meeting is a decision-making meeting. The staff will ask the Board whether it wants to add a project about the Master Glossary definition of readily determinable fair value to the agenda, and, if yes, whether it should be addressed directly by the FASB or added to the EITF s agenda. 2. If the Board decides to add the project to its agenda and makes technical decisions, then transition method and benefits and costs also might be discussed at this meeting. BACKGROUND INFORMATION 3. The amendments in Accounting Standards Update , Technical Corrections and Improvements, which was issued in June 2015, amended condition (c) of the Master Glossary definition of readily determinable fair value (see underlined text). Paragraphs 29 and 30 of Update state: The following amendment incorporates wording from Question 5 of the FASB Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities. Question 5 indicates that condition (c) of the definition of readily determinable fair value may be applied to investments other than investments in a mutual fund. The Codification omitted this distinction from the definition of readily determinable fair value. Amend the Master Glossary term readily determinable fair value, with no link to a transition paragraph, as follows: Readily Determinable Fair Value An equity security has a readily determinable fair value if it meets any of the following conditions: 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 6

2 a. The fair value of an equity security is readily determinable if 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-thecounter 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. Restricted stock meets that definition if the restriction terminates within one year. b. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above. c. The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions. 4. After the issuance of Update , a group of stakeholders collectively raised several issues about the amended definition of readily determinable fair value. Those stakeholders raised issues about the scope of equity securities that should be evaluated for a readily determinable fair value, certain terms used in the definition, and implications on the measurement and disclosure of certain equity securities resulting from the amended definition. SUMMARY OF ISSUES RAISED Issue 1: Scope 5. Stakeholders stated that by amending the definition to include structures similar to a mutual fund (that is, a limited partnership or a venture capital entity), the scope of equity securities to be evaluated for readily determinable fair value was expanded. Stakeholders noted that before the amendment, the definition was narrowly interpreted by some to include only mutual funds. Therefore, certain investments that previously were considered to be outside the scope of the definition may now have a readily determinable fair value. Stakeholders indicated that the expanded definition Page 2 of 6

3 results in unintended consequences with the measurement and disclosures of structures similar to a mutual fund. 6. Stakeholders also raised concerns that including the wording (that is, a limited partnership or a venture capital entity) within the definition are poor examples because they are not structures that typically are similar to a mutual fund and further add to the confusion about what types of investments should be analyzed for a readily determinable fair value. 7. Stakeholders indicated that evaluating whether investments with structures similar to a mutual fund have a readily determinable fair value is based on the interpretation of the undefined terms published and basis for current transactions. While those undefined terms always have been used in the definition of readily determinable fair value, stakeholders noted that for those with a narrow interpretation of the preamended definition, the terms never drew much attention because mutual fund pricing information is regularly and widely available online. In contrast, structures similar to a mutual fund (for example, common-collective trusts) may not provide pricing information with a similar frequency or level of accessibility as a mutual fund. Consequently, introducing structures similar to mutual funds into the definition places more pressure on the undefined terms published and basis for current transactions when evaluating whether structures similar to a mutual fund have a readily determinable fair value. Issue 2: Measurement 8. Stakeholders raised an issue that the amended definition of readily determinable fair value could affect the measurement of alternative investments. First, stakeholders noted that certain alternative investments that are being measured at cost because they were thought not to be within the scope could now be determined to have a readily determinable fair value. Therefore, those investments would need to be measured at fair value. However, those stakeholders were unable to provide additional details about the pervasiveness of this concern or the type of investments that might have been measured at cost before the definition was amended. Page 3 of 6

4 9. Second, stakeholders indicated that there could be a measurement difference that arises with alternative investments that were measured using the net asset value (NAV) per share practical expedient before the definition was amended. The NAV per share practical expedient permits a reporting entity to measure the fair value of an investment on the basis of the NAV per share without any additional adjustments if both of the following criteria are met: (a) the investment must not have a readily determinable fair value and (b) the investment is in an investment company within the scope of Topic 946, Financial Services Investment Companies, 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 Stakeholders noted that because the definition was expanded to include structures similar to a mutual fund, alternative investments no longer may meet the first criteria of the NAV per share practical expedient. That is, alternative investments might have a readily determinable fair value and would be prohibited from estimating fair value using the NAV per share practical expedient. Consequently, those alternative investments would need to be measured at fair value by making additional adjustments to the NAV. Issue 3: Disclosure 11. Stakeholders raised an issue that if certain alternative investments have a readily determinable fair value and cannot be measured using the NAV per share practical expedient, then those investments would be subject to the fair value measurement disclosures required by paragraph , including the requirement to categorize the investment within the fair value hierarchy. Stakeholders asserted that the ambiguity about the scope of the investments in the amended definition leads to uncertainty about which disclosures should be provided. 12. Stakeholders representing the employee benefit plan industry noted that the illustrative example in paragraph sends mixed signals about when a common-collective trust can elect the NAV per share practical expedient. In that example, the common-collective trust has a daily redemption frequency, which those Page 4 of 6

5 stakeholders noted is a feature common to a mutual fund with a readily determinable fair value. Those stakeholders suggested that an amendment be made so it is clear that in this illustrative example the stable value collective trust fund has no readily determinable fair value. ALTERNATIVES 13. If the Board decides to add a project to its agenda, the following alternatives could be considered: (a) Alternative A: Remove references to limited partnership and venture capital entity from the definition. (b) Alternative B: Amend the illustrative example in paragraph (c) (d) Alternative C: Require NAV per share practical expedient disclosures for any investment that transacts with investors at NAV per share. Alternative D: Develop characteristics of investments for which the NAV per share practical expedient would be useful, and permit investments meeting those characteristics to use the practical expedient. Questions for the Board 1. Does the Board want to add a project to its agenda about the definition of readily determinable fair value? The remaining questions are applicable only if the Board decides to add a project to its technical agenda. 2. Should it be addressed directly by the Board or added to the EITF s agenda? 3. If the Board decides that the project should be addressed by the Board instead of the EITF, which alternative does the Board want the staff to pursue? 4. If it is addressed directly by the Board, does the Board want to include it in the project on technical corrections and improvements or as its own separate project? Page 5 of 6

6 TRANSITION 14. If the Board decides to make narrow improvements to the definition of readily determinable fair value and to the illustrative example in Topic 962, the staff has identified two alternatives for the Board s consideration for transition, namely prospective application or retrospective application. Question for the Board 5. What transition method does the Board choose? ANALYSIS OF BENEFITS AND COSTS Questions for the Board 6. Does the Board think the expected benefits of the change justify the perceived costs of the change? If not, is there additional information that the Board needs to make that determination? The remaining question is applicable only if the Board decides to add a separate project to its technical agenda. 7. If yes, what comment period does the Board select for the proposed Accounting Standards Update? Page 6 of 6