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20.4 Fair value hierarchy for net asset value
Publication date: 13 Nov 2019
us Financial statement presentation guide
Investments in equity securities of investment companies are required to be measured at fair value just like equity investments in other types of entities in the scope of ASC 820. Many investment companies maintain a net asset value (NAV) for purposes of subscriptions and redemptions or solely for reporting purposes. NAV may or may not be equal to fair value depending on the ability to transact at NAV. If the investment does not have a readily determinable fair value, as discussed in FV 6.2.2, it may qualify for a practical expedient by which reporting entities may instead use NAV, without adjustment, to measure investments in certain funds (e.g., hedge funds, private equity funds, real estate funds, venture capital funds, commodity funds, funds of funds).
FV 6.2.6 discusses when the NAV as a practical expedient is allowed. It is important for a reporting entity to determine whether it is using NAV as a practical expedient or NAV as fair value, since the required disclosures will differ depending on the answer.
Reporting entities with investments measured at NAV as a practical expedient need not disclose the investment’s level in the fair value hierarchy or any of the related disclosures in ASC 820-10-50-2. For example, there is no requirement to include these investments in the Level 3 rollforward. As such, the total fair values by level in the fair value hierarchy will not agree to the balance sheet. Therefore, reporting entities are required to provide a reconciliation of the fair value hierarchy disclosure to the balance sheet by disclosing the fair value of investments measured at NAV as a practical expedient.
Figure FSP 20-4 summarizes the typical level in the fair value hierarchy of investments measured at NAV in various scenarios.
Figure FSP 20-4
Fair value hierarchy of investments measured at NAV
Fair value hierarchy of investments measured at NAV
Investment measurement |
Typical level in the fair value hierarchy |
Fair value equals NAV |
Level 1 |
Fair value equals NAV, adjusted |
Level 2 or 3 |
NAV as a practical expedient, unadjusted |
N/A measurements are not “fair value” under ASC 820 |
20.4.1 Disclosures related to investments measured at NAV
For investments measured using NAV as a practical expedient on a recurring or nonrecurring basis, ASC 820-10-50-6A requires the following disclosures for each interim and annual period for each class of investment:
- The nature and risks of the investments and whether the investments are probable of being sold at amounts different from NAV per share (for investments for which NAV per share is calculated)
- The fair value of the investments and a description of the significant investment strategies
- For each class of investments that can never be redeemed, but the reporting entity receives distributions through the liquidation of the underlying assets, the period of time over which the underlying assets are expected to be liquidated by the investee if the investee has communicated the timing to the reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity should disclose that fact.
- The amount of the reporting entity’s unfunded commitments related to the investments
- A general description of the redemption terms
- The circumstances when an otherwise redeemable investment may not be redeemable. For redeemable investments that are restricted from redemption, disclose when the restriction might lapse if the investee has communicated the timing to the reporting entity or announced the timing publicly. If the timing is unknown, the reporting entity should disclose that fact and how long the restriction has been in effect.
- Any other significant restriction on the ability to sell the investment
- If a group of investments is likely to be sold at an amount other than NAV, but the individual investments have not been identified so the investments continue to qualify to use NAV as a practical expedient, disclose the plans to sell and any remaining actions required to complete the sale
See ASC 820-10-55-107 for an illustration of the disclosure requirements.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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