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By: Karis Call

The Board meeting of the Financial Accounting Standards Board (FASB) on November 22, 2011 could lead to less stringent fair value measurement requirements for nonprofits and nonpublic companies in early 2012. Currently, private companies are required to disclose the basis for valuing Level 3 measurements on the fair value hierarchy, which encompass “significant unobservable inputs” as defined by FASB.  The discussion deliberated by Board members was whether or not to continue to require the disclosure of these measurements, as they impose significant costs on private entities.

The decision to introduce a new agenda project related to the Level 3 financial instruments was the result of concerns addressed in roundtable discussions with private company stakeholders in October. FASB Chairman Leslie F. Seidman made the final decision to begin researching the effects of eliminating Level 3 disclosures when presenting the financial statements of private companies. While Level 3 disclosures provide information regarding the basis for valuing inputs not available in the open market, users of nonpublic entity financial statements argue that the information is costly and unnecessary for the intended use of the statements.

If successful, the new agenda project may result in the modification of the current fair value measurement disclosures of Level 3 financial instruments required by FASB for nonpublic companies, and could lead to the issuance of new fair value guidance addressed in a new Accounting Standards Update in 2012.

The discussion of the parameters of fair value measurements has been ongoing since the issuance of Fair Value Measurement: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, effective for annual reporting periods of nonpublic companies beginning on or after December 15, 2011. The main purpose of ASU No. 2011-04 was to converge the fair value reporting requirements of IFRS and GAAP in the ongoing effort of FASB to increase the transparency of reporting requirements between international and American companies. Whether or not a new Accounting Standards Update would apply to nonpublic companies applying IFRS has yet to be determined. The agenda project currently focuses on nonpublic companies utilizing GAAP standards.

For more information, the Board’s decision regarding the implementation of the new agenda project as well as Accounting Standards Update No. 2011-04 can be found at www.fasb.org.  We will keep you informed of any new developments in this area.