The FASB and IASB issued new guidance on fair value measurements and disclosures which completes a major joint project towards convergence.  The requirements do not extend the use of fair value measurement.  Instead, the Boards intended to improve guidance on how fair value measurement should be applied in situations where fair value measurements are already required or permitted.  The guidance was issued by the FASB in Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS, under Topic 820, Fair Value Measurements.

The FASB provided three clarifications about the application of existing fair value measurement and disclosure requirements in ASU 2011-04.  The ASU clarifies that:

·      The concept of highest and best use applies only to non-financial assets.

·      The fair value of an entity's equity interest should be measured from the perspective of a market participant who holds that equity instrument as an asset.

·      Reporting entities should disclose quantitative information about unobservable inputs categorized as Level 3 inputs.

ASU 2011-04 contains some changes in principles and requirements for fair value measurements. 

·         When financial instruments are managed within a portfolio and the risks associated with the instruments are managed on a net basis rather than a gross basis, fair value can be measured using the price to sell a net position or transfer a net liability.

·         The application of premiums and discounts in the measurement of fair value is related to the unit of account for the asset or liability being measured.  In the absence of a Level 1 input, a reporting entity should apply premiums or discounts to the asset or liability if a market participant would apply a premium or discount when pricing the asset, consistent with the unit of account.

Based on requests for more information from users of financial statements, the FASB has expanded disclosures about fair value measurements.  Expanded disclosure requirements include:

·         New Level 3 fair value measurements disclosures explaining:

o   The valuation process used by the reporting entity

o   The sensitivity of fair value measurements to changes in unobservable inputs

o   The interrelationships between observable inputs, if any

·         Whether the use of a non-financial asset differs from the highest and best use assumed in the fair value measurement or disclosure of that asset

·         The fair value hierarchy level applicable to balance sheet items disclosed, but not measured at fair value

ASU 2011-04 applies to all reporting entities that measure or disclose fair value. However, in an effort to reduce the reporting burden for private companies, some disclosures have been eliminated.  Non-public companies are not required to disclose:

·        Transfers between Level 1 and Level 2 measurements

·        The sensitivity of Level 3 measurements to changes in unobservable inputs

·         Relationships between unobservable Level 3 inputs

·        The fair value hierarchy level applicable to balance sheet items disclosed, but not measured at fair value

The amendments under ASU 2011-04 are to be applied prospectively.  For public entities, the requirements are effective for interim and annual periods beginning after December 15, 2011.  Early adoption is not permitted.   Non-public entities can choose early adoption, but no earlier than for interim periods beginning after December 15, 2011.

You may read the entire ASU at the FASB website.