To provide more and improved disclosures about fair value measurements, the Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. This ASU affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements under FASB Accounting Standards Codification Topic 820, originally issued as FASB Statement No. 157, Fair Value Measurements. The ASU requires the following new disclosures:
- Transfers in and out of Levels 1 and 2: A reporting entity must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.
- Activity in Level 3 fair value measurements: In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (i.e., on a gross basis rather than as one net number).
The ASU also clarifies two existing disclosures as follows:
- Level of disaggregation: Currently, entities are required to provide disclosures about fair value measurements for each major category of assets and liabilities. Some users noted that many companies seem to have interpreted the phrase major category to mean a line item in the statement of financial position. The FASB decided that disclosures about fair value measurements would be more useful if the entities provided them for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.
- Disclosures about inputs and valuation techniques: The ASU clarifies that an entity is required to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements – not just nonrecurring fair value measurements. Also, those disclosures are required for fair value measurements that fall in either Level 2 or Level 3 – not just those in Level 3.
The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. In the period of, and periods after, initial adoption, comparative disclosures are required only for periods ending after initial adoption.
The ASU is available in full at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156622659.
Source: McGladrey & Pullen
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