Fair value measurement

Fair value accounting continues to be a topic of significant interest and debate. Fair value guidance is a principles-based global framework that, with few exceptions, impacts all fair value measurements in a reporting entity’s financial statements.

Video perspectives

Fair value. It’s easy to say, sometimes harder to do. Hear PwC’s Maria Constantinou discuss the the fundamentals of fair value, such as determining market participant, principal market and unit of account, as well as how to apply them, using debt as a real life example. Watch now to learn more.

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Fair value fundamentals, financial liability

 

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Key developments in accounting for fair value

  • The 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) in May 2015. This standard eliminates the requirement to include investments from the fair value hierarchy table whose fair values are measured at net asset value (NAV) using the practical expedient. It is important to note that for some investments, NAV is fair value, not a practical expedient. In those cases, the investments must still be included in the fair value table.
  • The new guidance is effective for fiscal years beginning after December 15, 2015 for public business entities. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted.
  • Reporting entities must apply the new guidance retrospectively to all periods presented. Additionally, a reporting entity should disclose the nature of and reason for the change in accounting.

Why it's important

 

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  • Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. Following the implementation of this guidance, the only criterion for categorizing investments in the fair value hierarchy will be the observability of the inputs.
  • Because a reporting entity’s investments measured at NAV as a practical expedient for fair value will no longer be categorized in the fair value hierarchy, the total of the fair value hierarchy disclosure will not agree to the total investments at fair value on the balance sheet. Therefore, the new guidance requires reporting entities to reconcile the fair value hierarchy disclosure to the balance sheet by disclosing the amount of investments measured using the practical expedient.
  • Although the underlying investments have been removed from the fair value hierarchy, the new guidance still requires reporting entities that elect the practical expedient to make certain disclosures about the nature and risks of the investments. However, the previous standard required companies to include certain disclosures for items that were eligible to use the NAV whether or not NAV was elected. The amendments remove these disclosure requirements.
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