Published January 4, 2016

ASU Brings Changes to Investment Categorization within Fair Value Hierarchy

Certain investments measured at net asset value are no longer subject to categorization within the fair value hierarchy, according to a recent Accounting Standards Update (ASU).  The Financial Accounting Standards Board (FASB) issued  ASU No. 2015-07, Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) to eliminate diversity in practice related to how certain investments are categorized.  This ASU will affect all entities that measure an investment’s fair value at net asset value as a practical expedient.

Currently, accounting principles generally accepted in the United States (GAAP) require that investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient be categorized within the fair value hierarchy on the basis of whether the investment is:

  • Redeemable with the investee at net asset value on the measurement date.
  • Never redeemable with the investee at net asset value.
  • Redeemable with the investee at net asset value at a future date.

A reporting entity must take into account the length of time until investments become redeemable at the future date to determine the classification within the fair value hierarchy.

The new ASU eliminates the requirement to categorize investments with a fair value measured using the net asset value per share practical expedient within the fair value hierarchy. Removing this requirement not only eliminates diversity in practice, but also ensures that all investments categorized under fair value hierarchy are classified using a consistent approach. In addition, FASB also removed the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient.

Public business entities should apply amendments in this ASU for fiscal years beginning after December 15, 2015. The amendments will be effective for all other entities for fiscal years beginning after December 15, 2016. Reporting entities should apply this ASU retrospectively to all periods presented. Applying the amendments retrospectively will require that an investment whose fair value is assessed through the net asset value per share practical expedient be eliminated from the fair value hierarchy in all periods presented in financial statements. Earlier application is permitted for financial statements that have not been issued.

If you have questions about this ASU or what it means for your business, or would like to request a speaker on this topic for your organization or event, contact a related author listed below at PYA, (800) 270-9629.

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