Expand
Resize
Add to favorites
Quantitative disclosure of all significant unobservable inputs is required even though reporting entities only have to identify one significant unobservable input to conclude that a fair value measurement should be classified as Level 3. ASC 820’s disclosure requirements, however, require reporting entities to identify all significant unobservable inputs and disclose quantitative information about them. For discussion of how to determine whether an input is significant, see FV 4.5.2.
Level of disaggregation — table of significant unobservable inputs
The quantitative disclosures of significant unobservable inputs are presented by class of asset and liability. Reporting entities need to apply judgment to determine the appropriate classes of assets and liabilities and should provide information sufficient to reconcile to the line items on the balance sheet. Although the disclosure requirements of the fair value standard do not specifically require disclosing such a reconciliation, it has become a leading practice.
The fair value standard does not prescribe the level of disaggregation (below the class level of asset and liability), but it does state that fair value measurements will often require greater disaggregation than the line items in the balance sheet and a reporting entity should determine classes based on the nature, characteristics, and risks of the assets and liabilities. The disclosure should contain sufficient detail to allow users to understand the significant unobservable inputs and how they vary over time.
When considering how detailed the quantitative disclosures should be, a reasonable starting point is an evaluation of the classes for each of the assets and liabilities included in other fair value disclosures (e.g., the fair value hierarchy), followed by consideration of the nature and risk of the types of assets and liabilities and inputs in each class. The objective of this exercise is to determine whether there are reasonable levels of homogenous pools of inputs for the Level 3 assets and liabilities that can be separated out of the related class.
The classification of measurements in the fair value disclosures as Level 3 assets or liabilities typically affects the level of disaggregation (i.e., the number of classes may need to be greater for fair value measurements using significant unobservable inputs). ASC 820-10-50-2B indicates that using the classes determined in other standards (e.g., ASC 320) is acceptable.
For example, a reporting entity’s derivative assets and liabilities may be disaggregated at the class level (e.g., interest rate instruments, commodity instruments, and foreign exchange rate instruments). However, the reporting entity’s commodity instruments may comprise a number of different types of commodities that do not share similar risk characteristics. The reporting entity may conclude that disaggregating its commodity derivatives by type of commodity would provide more meaningful information.
Similarly, a reporting entity may disaggregate mortgage-backed securities into residential and commercial securities, or disaggregate private equity securities by industry.
See ASC 820-10-55-100 for an example of disaggregation disclosure, including the reconciliation.
Inputs to inputs
Level 3 fair value measurements may contain a number of unobservable inputs. The unobservable inputs may be developed using a variety of assumptions and “underlying” unobservable inputs (e.g., a number of assumptions are used to arrive at a long-term growth rate input).
We would generally not expect these underlying inputs used to develop significant unobservable inputs (“inputs to inputs”) to be included in the quantitative disclosures. Most inputs use underlying assumptions; the disclosure of these underlying assumptions could result in a significant amount of additional information being disclosed, adding unnecessary complexity to the disclosure. As a result, the overall disclosure could become less understandable. We believe inclusion of such information is beyond the scope of the disclosure requirement.
In addition, the example in ASC 820-10-55-103 includes disclosure of inputs such as weighted average cost of capital, long-term revenue growth rate, and long-term pretax operating margin. These unobservable inputs are based on a variety of assumptions. For example, a weighted average cost of capital input may include a number of assumptions such as the risk-free rate, effective tax rate, required equity rate of return, and the proportion of debt versus equity. These underlying inputs are not included in the example disclosure.
Derivative assets and liabilities and their related significant unobservable inputs
We believe that derivative assets and liabilities should generally be presented on a gross basis by type of derivative in the fair value hierarchy table and the table of significant unobservable inputs.
Range and weighted average of significant unobservable inputs
Upon adoption of , reporting entities will be required to disclose the range and weighted average of the significant unobservable inputs and the way it is calculated. This is to de-emphasize the impact of outliers. Assuming like portfolios, weighted averages aid in comparing disclosures for different reporting entities. If a weighted average is not meaningful for a particular asset class (e.g., derivatives), a reporting entity may disclose alternative quantitative information if the alternative quantitative information is a “more reasonable and rational method to reflect the distribution” of the inputs. It need not disclose the reason for omitting the weighted average.

Excerpt from ASC 820-10-50-2(bbb)(2)(i)

For certain assets and liabilities, a reporting entity may disclose other quantitative information, such as the median or arithmetic average, in lieu of the weighted average as described in this subparagraph, if such information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement.

Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide