What’s in a Definition? FASB Concludes on “Readily Determinable Fair Value”

Although it intended to simplify and clarify investment disclosures and create more consistent application across entities, the FASB caused some unintended confusion when it issued the following Accounting Standards Updates (ASU):

• ASU 2015-07 Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent), is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. This update clarifies that investments valued using the net asset value (NAV) practical expedient should be excluded from the fair value hierarchy classification table.
• ASU 2015-10 Technical Corrections and Improvements was effective upon issuance. This update amended the definition of readily determinable fair value (RDFV) to include:

The fair value of an equity security that is an investment in a mutual fund or in a structure similar to a mutual fund (that is, a limited partnership or a venture capital entity) is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

The Issue

Many were concerned the definition per ASU 2015-10 would result in adding certain NAV practical expedient investments back into the fair value hierarchy classification disclosures. Questions also arose regarding the definition of “published” as one is not provided in GAAP. While many entities elected to early adopt ASU 2015-07, some entities did not adopt the guidance, awaiting the FASB to clarify its intent.

Resolution

During its March meeting, the FASB stated the RDFV definition change in ASU 2015-10 was intended to assist in the determination of whether to measure certain investments (primarily certain limited partnerships and venture capital entities) at cost or fair value. The FASB voted to:

• Keep the definition of RDFV as updated in ASU 2015-10 with no further revision
• Draft an amended illustrative example for the Defined Contribution Plan financial statements included in the codification as part of the technical corrections and improvements project

The FASB acknowledged the revised RDFV definition could impact whether an entity uses fair value hierarchy disclosures or NAV practical expedient disclosures. However, financial statement users would not be misled regardless of which disclosures are used. The FASB encourages entities to provide disclosures consistent with conclusions previously reached on impacted investments.