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Society supports FASB proposal on practical expedient-valued investments

Chris Gaetano
Published Date:
Mar 16, 2015
The NYSSCPA expressed support for a proposal by the Financial Accounting Standards Board (FASB) that, if approved, would make it easier to consistently categorize investments in the fair value hierarchy. The Society weighed in with a Jan. 15 comment letter written by members of its Financial Accounting Standards Committee.

The FASB’s proposal, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” was released in October. In essence, it is an attempt to standardize where investments valuated using the practical expedient fall within the fair value hierarchy—that is, the level of judgment used in estimating the fair values of assets or liabilities. With the practical expedient, an investment’s fair value is measured based on the net asset value of the investee.

According to the FASB, investments valued using the practical expedient are currently categorized within the fair value hierarchy based on three factors: whether the investment is redeemable at net asset value on the measurement date; never redeemable with the investee at net asset value; or redeemable with the investee at the net asset value at a future date. If it’s the latter, the reporting entity must take into account the length of time until those investments become redeemable in determining where within the fair value hierarchy that investment will fall. However, the board said, this has produced inconsistencies in practice.
As an alternative, the FASB has proposed altogether eliminating the requirement that investments valued using the practical expedient be categorized within the fair value hierarchy. It would also remove the requirement that entities make certain disclosures for all investments that are eligible to be measured at fair value using the practical expedient; disclosures would only be required to do so if the entity decided to go ahead and classify that investment within the fair value hierarchy.

“Removing those investments from the fair value hierarchy not only would eliminate the diversity in practice in how investments measured at net asset value (or its equivalent) with future redemption dates are classified, but also would ensure that all investments categorized in the fair value hierarchy would be classified using a consistent approach,” the FASB said.

Moreover, the board felt the change would provide greater transparency to financial statement users.  
Overall, the Society expressed support for the measure.

“It makes things easier for the reporting entity and for the auditor, by providing a set of guidelines that everyone understands and everyone can apply,” said Craig T. Goodman, vice chair of the Financial Accounting Standards Committee and one of the letter’s authors.

However, the Society did disagree with the FASB’s suggestion that the standard, if approved, should be applied retrospectively. While the FASB said “the retrospective approach would require investments for which fair value is measured at net asset value using the practical expedient to be removed from the fair value hierarchy in all periods presented in the entity’s financial statements,” the Society felt that “because the Proposed Update would not have an effect on the investment valuation of assets measured using the practical expedient, we do not believe retrospective application should be required, but we believe retrospective application should be optional.”

The effective date, if approved, will be determined after feedback and other considerations have been accounted for.

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