Increased fair value disclosures – ASU 10-06

Fair value disclosures will increase for December 2010 financial statements.  Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820) will require a few new items.  The two main items I see for small and medium-sized NPOs are first, disclosing transfers in & out of Level 1 & 2, and second, disaggregation of fair value disclosures.

Transfers in and out – Just like transfers in and out of level 3 must be disclosed, now transfers into and out of both level 1 and level 2 must be disclosed. This would especially highlight transfers between levels 1, 2, and 3.   I don’t see that ASU 10-06 requires a roll forward from last year’s fair value to this year, just transfer in and out.  Grossed up, not netted, of course.

Disaggregation of assess and liabilities – The update says financial statements “should provide fair value measurement disclosures for each class of assets and liabilities.  A class is often a subset of assets or liabilities within a line item in the statement of financial position.”  The illustration in Case A breaks out equity securities into real estate, oil & gas, and other.  That appears to be an industry concentration  Debt securities are split into residential MBS, commercial MBS, CDOs, Treasuries, and corporate bonds.  Those are obviously very different types of fixed income investments.  The illustration would seem to provide readers more information about liquidity, concentration, industry, interest rate risks, and default risks than you would often see in current disclosures.  The practical impact for medium-sized NPOs with substantial investment portfolios is that the disclosures should have more detail than just the typical three lines of fixed income, equity, and CDs.

One peculiar comment in ASU 10-06 is that entities will need to use judgment to determine the level of disaggregation that is needed.  Odd to me that the FASB saw it necessary to put in that comment when the disaggregation comment is already somewhat vague in terms of how much detail is needed.  I think they are inferring it is up to the considered judgment of the entity to decide how far to disaggregate instead of giving a list of specific, bright-line rules. 

Effective date – Transition is for annual periods beginning after December 15, 2009.  As always I translate that to when I have to begin applying the rules, so this will first be effective for December 31, 2010 financial statements.

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