FASB clarifies fair value disclosure exemption

The US Financial Accounting Standards Board has released a proposal that aims to clarify that non-public entities, which includes most private equity firms and their portfolio companies, are not required to disclose certain details related to assets not reported at fair value on their balance sheets.

Under US Generally Accepted Accounting Principles, fair value represents the exit price that would be received to sell an asset in an orderly transaction at the time of measurement. The framework uses a three-level “fair value hierarchy” that separates assets based on the amount of judgment involved in estimating their exit value – with “Level 1” assets requiring the least amount of judgment and “Level 3”, which represents most private equity assets, requiring more assumptions and subjective value judgments in determining its fair value measurement.

The proposed amendment would clarify that the requirement to disclose “the level of the fair value hierarchy, within which the fair value measurements are categorised in their entirety (Level 1, 2, or 3),” does not apply to non-public entities for items that are not measured at fair value in the statement of financial position, but for which fair value is disclosed. 

According to sources familiar with the matter, legacy language contained in Accounting Standards Update 2011-04 released in May 2011 caused confusion as to which non-public entities qualified for the disclosure exemption. The proposal aims to clarify the board’s intent that all non-public entities would qualify. 

Comments, which are due by 22 January, can be submitted using this electronic feedback form.