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By: Dmitry Volfson, HoganTaylor Assurance Manager

In May 2015, the FASB issued an Accounting Standards Update (ASU) 2015-07 with the objective to aid in the current diversity in practice related to how certain investments measured at net asset value (NAV) with redemption dates in the future are categorized within the fair value hierarchy. As a quick background, reporting entities are permitted to use NAV as a practical expedient to measure the fair value of an investment if both of the criteria are met at the entity’s measurement date[1]:

  • The investment does not have a readily determinable fair value
  • The investment is in an investment company within the scope of Topic 946

Prior to the Update, categorization within the fair value hierarchy of an investment to which the practical expedient is applied depended on its redemption attributes such as the length of time until investments became redeemable determined the classification within the fair value hierarchy as either Level 2 or Level 3.   Under this Update, such investments should no longer be categorized in the fair value hierarchy and certain disclosure requirements are no longer applicable. Although those investments are no longer required to be categorized within the fair value hierarchy, the reporting entity must disclose the amount of investments measured at NAV under the practical expedient to allow users of the financial statements to reconcile back to the statement of financial position. For all other investments that practical expedient was not applied to measure NAV are still required to categorize within the fair value hierarchy and apply the required disclosures.

The Update is effective for not-for-profit entities for fiscal years beginning after December 15, 2016. Early application of the Update is permitted and must be applied retrospectively. For this reason, it is important now to speak with your investment advisors and auditors whether your reporting entity will be impacted by this Update.

[1] FASB Codification 820-10-15-4

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