January 22, 2010 Volume 17, Issue 6

Heads Up
In This Issue:
Background Disclosure Requirements Effective Date and Transition Appendix

The FASBs Early Valentine FASB Finalizes ASU on Improving Disclosures About Fair Value Measurements
by Ana Zelic, Beth Ann Reese, and Magnus Orrell, Deloitte & Touche LLP

Background
On January 21, 2010, the FASB issued Accounting Standards Update (ASU) 2010-06.1 The ASU amends ASC 8202 (formerly Statement 1573) to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also claries existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The above disclosures are similar to those in the exposure draft (ED) of the proposed ASU.4 Unlike the ED, the ASU does not require entities to provide sensitivity disclosures.5 The FASB will consider whether to require sensitivity disclosures jointly with the IASB as part of a new convergence project on fair value measurement and disclosures. The FASB made this decision in view of comments received during the exposure period about the operationality and costs of such disclosures and its October 2009 decision to converge with the IASB on fair value measurement and disclosure. The ASU also amends guidance on employers disclosures about postretirement benet plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. With one exception, the ASU is effective for the rst reporting period (including interim periods) beginning after December 15, 2009 (see Effective Date and Transition section below). An overview of the ASUs disclosure requirements is provided below. In addition, the appendix of this Heads Up contains a table comparing the existing fair value disclosure requirements of ASC 820 with the ASUs new or amended disclosure requirements.

Unlike the ED, the ASU does not require entities to provide sensitivity disclosures.

 FASB Accounting Standards Update No. 2010-06, Improving Disclosures About Fair Value Measurements. For titles of FASB Accounting Standards Codication (ASC) references, see Deloittes Titles of Topics and Subtopics in the FASB Accounting Standards Codication. 3  FASB Statement No. 157, Fair Value Measurements. 4  Exposure draft of a proposed Accounting Standards Update, Improving Disclosures About Fair Value Measurements. 5  Under the ED, for Level 3 fair value measurements, if changing one or more of the signicant unobservable inputs to reasonably possible alternative inputs would have changed the fair value signicantly, entities would have stated that fact and disclosed the total effect of those changes. In addition, entities would have needed to describe how the effect of a change to a reasonably possible alternative input was calculated. The ED also proposed that an entity disclose, for each class of Level 3 measurements, quantitative information about the signicant inputs used and reasonably possible alternative inputs.
1 2

Disclosure Requirements
Level of Disaggregation
ASC 820s existing guidance requires entities to provide fair value measurement disclosures by major category of assets and liabilities. The term major category has often been interpreted to be a line item in the statement of nancial position. The ASU amends ASC 820 to require entities to provide fair value measurement disclosures for each class of assets and liabilities. Providing the disclosures by class may be more useful since a class is often a subset of assets or liabilities within a line item in the statement of nancial position. When providing disclosures for equity and debt securities, entities should determine class on the basis of the nature and risks of the securities, in a manner consistent with ASC 320-10-50-1B and, if applicable, ASC 942-320-50-2. Under ASC 320-10-50-1B, in determining the nature and risks of the securities, entities should consider activity or business sector, vintage, geographic concentration, credit quality, and economic characteristics. ASC 942-320-50-2 requires nancial institutions to disclose all of the following major security types (although additional types also may be necessary):
a. Equity securities, segregated by any one of the following:

The ASU requires an entity, in determining the appropriate classes of assets and liabilities, to consider the nature and risks of the assets and liabilities as well as their placement in the fair value hierarchy (i.e., Level 1, 2, or 3).

1. Industry type 2. Entity size 3. Investment objective; b. Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies; c. Debt securities issued by states of the United States and political subdivisions of the states; d. Debt securities issued by foreign governments; e. Corporate debt securities; f. Residential mortgage-backed securities; ff. Commercial mortgage-backed securities; fff. Collateralized debt obligations; g. Other debt obligations.

For all other assets and liabilities, entities should use judgment to determine the appropriate classes of assets and liabilities for which they should provide disclosures about fair value measurements. The ASU requires an entity, in determining the appropriate classes of assets and liabilities, to consider the nature and risks of the assets and liabilities as well as their placement in the fair value hierarchy (i.e., Level 1, 2, or 3). For example, a greater number of classes may be necessary for fair value measurements with signicant unobservable inputs (i.e., Level 3 measurements) because of the increased uncertainty and subjectivity involved in these measurements. In determining the appropriate level of disaggregation, an entity should also consider what is required for specic assets and liabilities under other U.S. GAAP (e.g., the disclosure level required for derivative instruments under ASC 815).

Transfers Into and Out of Levels 1, 2, and 3

For assets and liabilities that are measured at fair value on a recurring basis in periods after initial recognition (e.g., trading securities), the ASU requires an entity to disclose the amounts of signicant transfers between Levels 1 and 2, and transfers into and out of Level 3, of the fair value hierarchy and the reasons for those transfers. An entity must disclose and discuss signicant transfers into each level separately from transfers out of each level. For this purpose, signicance is judged with respect to earnings and total assets or total liabilities or, when changes in fair value are recognized in other comprehensive income, with respect to total equity. In addition, an entity should disclose and consistently follow its policy for determining when transfers between levels are

recognized (e.g., as of the (1) actual date of the event or change in circumstances that caused the transfer, (2) beginning of the reporting period, or (3) end of the reporting period). The policy for transfers into Levels 1, 2, and 3 should be the same as that for transfers out of Levels 1, 2, and 3. Editors Note: Note that before the ASU, ASC 820 did not require an entity to disclose separately the amounts of signicant transfers into and out of Levels 1 and 2 and to describe the reasons for the transfers. For Level 3 transfers, ASC 820 did not require disclosures about the entitys policy for determining when transfers into and out of Level 3 are recognized and did not address whether that policy should be the same for transfers into and out of Level 3. ASC 820 also did not require disclosures about the reasons for the transfers into and out of Level 3.

Reconciliation on a Gross Basis

The ASU amends the reconciliation of the beginning and ending balances of Level 3 recurring fair value measurements. In periods after initial recognition, an entity presents information about purchases, sales, issuances, and settlements for signicant unobservable inputs (Level 3) on a gross basis rather than as a net number as currently required. Financial statement users have indicated that gross presentation is more useful.

Disclosures About Inputs and Valuation Techniques

The ASU claries that a description of the valuation technique(s) (e.g., market approach, income approach, or cost approach) and inputs used to measure fair value is required for both recurring and nonrecurring fair value measurements. In addition, such disclosures are required for fair value measurements classied as either Level 2 or Level 3. If the valuation technique has changed, entities should disclose that change and the reason for the change.

Effective Date and Transition

The guidance in the ASU is effective for the rst reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for scal years beginning after December 15, 2010, and for interim periods within those scal years. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. However, those disclosures are required for periods ending after initial adoption. Early adoption is permitted.

Appendix
Recurring Fair Value Measurements
Topic
Level of disaggregation Transfers into and out of Levels 1, 2, and 3

Existing Disclosures Under ASC 820

Provide disclosures by each major category of assets and liabilities Transfers into and out of Level 3

ASUs New or Amended Disclosures

Provide disclosures by each class of assets and liabilities Signicant transfers between Levels 1 and 2 and the reasons for those transfers; transfers into and out of Level 3 and the reasons for those transfers. The policy for determining when transfers between levels are recognized should be applied consistently, and the policy for transfers into Levels 1, 2, and 3 should be the same as that for transfers out of Levels 1, 2, and 3. Total gains and losses recognized in other comprehensive income Purchases, sales, issuances, and settlements (each type disclosed separately) Transfers into and out of Level 3 (separately when signicant) and the reasons for the transfers

Level 3 reconciliation

No separate disclosure of total gains and losses recognized in other comprehensive income Purchases, sales, issuances, and settlements (net) Transfers into and out of Level 3

Valuation techniques and inputs

The inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period

For Levels 2 and 3, a description of valuation techniques and inputs used to determine fair values of each class of assets or liabilities; if the valuation technique has changed, that change and the reason for the change should be disclosed

Nonrecurring Measurements
Topic
Level of disaggregation Valuation techniques and inputs

Existing Disclosures Under ASC 820

Provide disclosures by each major category of assets and liabilities The inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period

ASUs New or Amended Disclosures

Provide disclosures by each class of assets and liabilities For Levels 2 and 3, a description of valuation techniques and inputs used to determine fair values of each class of assets or liabilities; if the valuation technique has changed, that change and the reason for the change should be disclosed.

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