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May 2012 ASU 2011-04

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Financial Services: May 2012 Brief on Amended Common Fair Value Measurement and Disclosure

Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (amends FASB ASC 820)

As part of its ongoing efforts with the IASB to develop converged requirements for determining fair value and disclosing information concerning fair value measurements, the FASB has issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends FASB ASC 820, and re-titles it as Fair Value Measurement. The amendments (1) clarify the Board's intent regarding application of existing fair value measurement guidance, and (2) revise certain measurement and disclosure requirements to achieve convergence. Specifically, the amendments clarify the FASB's intent about application of:

  • The highest-and-best-use and valuation premise - the highest-and-best-use concept applies only to nonfinancial assets (i.e., it is not relevant when measuring fair value of a financial asset).
  • Measuring fair value of an instrument classified in equity - an entity should measure the fair value of an equity-classified financial instrument from the perspective of the market participant that holds the instrument as an asset.

Amendments that change a particular principle or requirement for measuring fair value are:

  • Measuring fair value of financial instruments managed within a portfolio - a reporting entity that holds a group of financial assets and financial liabilities is exposed to market risks (that is, interest rate risk, currency risk, or other price risk) and to the credit risk of each of the counterparties. The amendments permit an exception to the requirements in Topic 820 for measuring fair value when a reporting entity manages its financial instruments on the basis of its net exposure, rather than its gross exposure, to those risks.
  • Application of premiums and discounts (including a blockage factor) in a fair value measurement - in respect of the application of a blockage factor (i.e., an adjustment because of the size of the position relative to trading volume) and other premiums and discounts when measuring fair value, amendments have been made as follows: to prohibit use of a blockage factor if fair value is measured using a quoted price in an active market (i.e., a Level 1 input); in the absence of a Level 1 input, other premiums or discounts should be applied in measuring fair value when market participants would do so.

Finally, the amendments expand the information required to be disclosed with respect to:

  • Fair value measurements categorized in Level 3 fair value measurements - the following new disclosures are required for Level 3 fair value measurements:

- Quantitative information about unobservable inputs

- Description of the valuation processes

- Qualitative discussion about the sensitivity of the measurements

  • Use of an asset in a way that differs from the asset's highest and best use - for recurring and non-recurring fair value measurements, if the highest and best use of a non-financial asset differs from its current use, a statement to that effect and the reasons that the non-financial asset is being used in a manner that differs from its highest and best use.
  • Items not measured at fair value but for which fair value must be disclosed – requires disclosure of the level of fair value hierarchy for assets and liabilities that are not measured at fair value but whose fair value is required to be disclosed.

Some of the disclosures required by the amendments in this update are not required for nonpublic entities. Those disclosures include the following:

  • Information about transfers between Level 1 and Level 2 of the fair value hierarchy.
  • Information about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs.
  • The categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed.

Effective Date

The amendments to FASB ASC 820 made by ASU No. 2011-04 are effective as follows:

  • For public entities, for interim and annual periods beginning after December 15, 2011, with early application not permitted.
  • For nonpublic entities, for annual periods beginning after December 15, 2011, with early application permitted but only for interim periods beginning after December 15, 2011.

If you are interested in discussing any part of the update or its impact on your reporting practices, please contact:

Harry DeVerter, Managing Partner, at 215- 979-8802; or Karen Vento, Partner, at 215-797-8813.

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