As discussed at NP 9.3, NFPs (other than NFP HCOs) can elect to measure investments in a portfolio held for the objective of earning investment return (current income, capital appreciation, or both) at fair value. This election is referred to as the portfolio-wide fair value option, or “PWFVO.” In our view, the PWFVO’s scope is limited to investments entered into for purposes of earning investment return; it should not be applied to investments made for purposes of carrying out the NFP’s operating mission.

When this approach is taken, the spectrum of accounting approaches for equity interests in Figure NP 9-3 (in NP 9.5) is largely disregarded, and the model is highly simplified.

Figure NP 9-4A illustrates the accounting for equity interests in portfolios for which the PWFVO has been elected.

Figure NP 9-4A
Decision tree—accounting for equity interests under portfolio-wide fair value option

For equity interests in the form of shares of common stock, an NFP must evaluate whether consolidation is required (see NP 9.7.1). If not, fair value measurement can be used. For equity interests in limited partnerships, fair value measurement is used regardless of the level of ownership or extent of control. For equity interests in limited liability companies, the ability to use fair value measurement depends on whether the LLC is the functional equivalent of a corporation or is more like a limited partnership, as discussed in NP 9.9.1.

Figure NP 9-5A depicts the measurement of various equity interests within a portfolio subject to a PWFVO election.

Figure NP 9-5A
Measurement approaches for investments in a portfolio subject to a PWFVO prior to adoption of ASU 2016-01

Equity interests measured at fair value under the PWFVO are reported at fair value on a recurring basis. Fair value is determined in accordance ASC 820. However, for investments in funds that have the characteristics of an investment company specified in ASC 946 (such as hedge funds, private equity funds, and the like), fair value of the investment can be measured by reference to the net asset value (NAV) reported by the investee, as long as certain disclosures regarding the investment’s nature and risk are provided by the investor. This so-called “NAV practical expedient,” which is an accounting policy election described in ASC 820-10-35-59. FV 6.2.6 discusses the NAV practical expedient and the circumstances in which it can be elected.