20.3 Fair value disclosure requirements (2024)

See ASC 820-10-55-101 for an illustration of a rollforward disclosure for recurring Level 3 fair value measurements.

Question FSP20-1 illustrates how a reporting entity should calculate unrealized gains and losses for an interest bearing security in the Level 3 rollforward.

Question FSP 20-1
How should a reporting entity calculate unrealized gains and losses for an interest bearing security (e.g., trading or available-for-sale debt securities) held at period end for purposes of the Level 3 rollforward?

PwC response

There are several acceptable methods for determining unrealized gains/losses for items still held at the reporting date.

• Method A — Balance sheet view
• Determine unrealized gains and losses as the fair value of the security less its amortized cost basis. This view holds that gains and losses are realized at maturity or sale date; thus the entire gain/loss is considered unrealized until maturity or sale.
• Method B — Income statement view
• Determine unrealized gains and losses as the total gains and losses during the period less the cash received or paid (i.e., what is realized) for those items. This view holds that each individual cash receipt or settlement represents a realized gain or loss.
• Method C

First, determine any realized gains or losses as the difference between the beginning-of-period expected cash flows and actual cash flows for the period. Then, determine unrealized gains or losses as the difference between the remaining expected cash flows for future periods at the beginning and end of the period.

The fair value standard does not specify a particular method. As a result, we consider all views to be acceptable. Reporting entities should select a method, disclose which method is used, and apply it consistently.

Question FSP 20-2 evaluates the presentation of other-than-temporary impairments on available-for-sale debt securities in the Level 3 rollforward.

Question FSP20-2
Are other-than-temporary impairments (OTTI) under ASC 320 on available-for-sale debt securities considered realized or unrealized in the Level 3 rollforward?

PwC response

We believe there are two acceptable views as to whether they are realized or unrealized in the Level 3 rollforward.

• View A

Present OTTI losses as realized. This view is supported by the guidance in ASC 320, which describes the nature of OTTI losses as “realized.” Also, OTTI is realized because it is excluded from the definition of a “holding gain or loss,” which is unrealized, in ASC 320.

• View B

Present OTTI losses and significant declines in value as unrealized. The overall objective of the Level 3 rollforward disclosures is to present the income statement impact of Level 3 fair value measurements that are not verified with an observable transaction (i.e., a sale in the marketplace). Proponents of this view believe that recognition of an OTTI is not an observable or realized transaction.

Because the fair value standard does not specify a particular method, we consider both views to be acceptable. Reporting entities should select a method, disclose which method is used, and apply it consistently.

Question FSP 20-3 evaluates the presentation of credit losses on available-for-sale debt securities in the Level 3 rollforward.

Question FSP 20-3
Are credit losses under ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on available-for-sale debt securities considered realized or unrealized in the Level 3 rollforward?

PwC response

Under the guidance in ASC 326, credit losses will be recorded as an allowance as opposed to a direct write-off of the value of the security. We believe there are two acceptable views as to whether they are realized or unrealized in the Level 3 rollforward.

• View A

Present credit losses as realized because they are excluded from the definition of a “holding gain or loss,” which is unrealized, in ASC 326.

• View B

Present credit losses and significant declines in value as unrealized. The overall objective of the Level 3 rollforward disclosures is to present the income statement impact of Level 3 fair value measurements that are not verified with an observable transaction (i.e., a sale in the marketplace). Proponents of this view believe that a credit loss is not an observable or realized transaction.

Because the fair value standard does not specify a particular method, we consider both views to be acceptable. Reporting entities should select a method, disclose which method is used, and apply it consistently.

Transfers into and out of Level 3 in the hierarchy

The level of a fair value measurement may change. Reporting entities should consistently follow a policy for determining when transfers between levels are recognized. The policy should be the same for transfers in and out of all levels. Examples of the different policies that can be used to record transfers include (1) the actual date of the transfer, (2) assuming the transfer occurs at the beginning of the period, or (3) assuming the transfer occurs at the end of the period.

There are implications of the reporting entity’s policy regarding when transfers are recorded. For example, unrealized and realized gain and loss activity during the period would not be reflected in the Level 3 rollforward for the period if a reporting entity applies an end-of-period convention for transfers in.

As a practical matter, reporting entities may only have formal procedures for assessing the level in the hierarchy at the end of a reporting period. In this case, assuming end-of-period transfers in and out may be the most efficient.

A reporting entity’s policy choice with respect to the timing of transfers in and out of the levels will also impact the relationship between the year-to-date disclosures and quarter disclosures. Use of end-of-period or beginning-of-period methods generally will result in quarterly information that does not sum to the year-to-date totals because the beginning and ending dates for timing of a transfer may be different in a year-to-date disclosure than in a quarterly disclosure.

Reporting entities need to disclose transfers into Level 3 separate from transfers out of Level 3. However, they may exclude from the Level 3 rollforward instruments purchased and sold or transferred in and out of Level 3 in the same period.

Example FSP 20-1 illustrates the requirements for disclosure of amounts transferred into Level 3 in the Level 3 rollforward.

EXAMPLE FSP 20-1
Transfers into Level 3 in the rollforward

For purposes of the Level 3 rollforward, FSP Corp’s accounting policy is to show transfers into and out of Level 3 at the beginning of the quarter.

FSP Corp holds Investment A. The value of Investment A, a trading security, changes during the six-month period as follows:

Investment A is classified as Level 2 at 1/1/20X8 and 3/31/20X8. Management transfers Investment A in the second quarter ending 6/30/20X8 and classifies it as Level 3 at that date. There are no other Level 3 securities.

What amounts should be included in the disclosure for the quarter and year-to-date periods for items transferred into Level 3 during the quarter?

Analysis

The rollforward table required to be disclosed would be as follows:

Because FSP Corp has a policy that all transfers are deemed to occur at the beginning of the quarter, the unrealized loss while classified as a Level 3 investment is ($10), whereas a policy that considered the transfers as of the beginning of the period (1/1/20X8) would have reflected a cumulative year-to-date unrealized loss of ($15).

Transfer out of Level 3

Assume instead that Investment A is classified as Level 3 at 1/1/20X8 and 3/31/20X8. Management transfers Investment A out of a Level 3 measurement in the quarter ending 6/30/20X8 and classifies it as Level 2 at that date.

Example FSP 20-2 illustrates the disclosure of amounts transferred out Level 3 in the Level 3 rollforward.

EXAMPLE FSP 20-2
Transfers out of Level 3 in the rollforward

What amounts should be included in the disclosure for the quarter and year-to-date periods for items transferred out of Level 3 during the quarter?

Analysis

The rollforward table required to be disclosed would be as follows:

Because FSP Corp recorded the transfer as of the beginning of the quarter (i.e., 4/1/20X8), the unrealized loss during the three months ended June 30, 20X8 is not part of the rollforward. For the same reason, the unrealized loss reported in the first quarter is reflected in the rollforward for the six month period ended June 30, 20X8.

In this example, if FSP Corp were to deem transfers as occurring at the beginning of the year-to-date period (January 1 for the year-to-date six months ended June 30), it would result in different disclosures.