Fair Value Update

I recently attended the AICPA’s National Not-for-profit Financial Executives conference in San Francisco. There were many noteworthy sessions and I came away thoroughly ‘updated’ on the various accounting and tax matters related to nonprofit organizations. One session in particular was exceptional, and with verbal consent from the presenter, Jeff Mechanick (of the FASB), I am highlighting some of the key takeaways from Jeff’s session on ‘Fair Value Updates’. In particular, one of the sections of the presentation that was helpful was a section entitled ‘Common myths of FAS 157’.

As is typical with any presentation given by a FASB staff member, I am adding the disclaimer that the views expressed in the presentation materials are Jeff’s and do not represent positions of the FASB.

Common myths of FAS 157 (ASC 820):

  1. FAS 157 increases the number of assets and liabilities measured at Fair Value (FV)
    • This is a myth because FAS 157 does not dictate that certain assets/liabilities are to be measured at fair value. FAS 157 provides the methodology to measure assets/liabilities at fair value if already required by a different standard.
  2. FAS 157 does not apply to contributions receivable and split interest obligations since they’re already at FV based on discounted cash flows
    • Contributions and split interest obligations are measured at FV in the first year (initial measurement) but typically are not re-measured at FV (e.g. discounted rate typically does not change from year to year) in subsequent years.
  3. All contributions receivable and split interest obligations should be measured under FAS 157 concepts
    • This is true only if the fair value option (per FAS 159) is chosen
  4. FAS 157 drastically changes the way in which the FV of most assets and liabilities are measured
    • As in (1), FAS 157 provides clarification on the methodology for getting to fair value, and does not typically drastically change the way in which FV is measured for assets/liabilities.
  5. Under FAS 157, donor restrictions on assets contributed to a non-profit entity always/generally affect FV
    • The answer to this question hinges on if the donor restriction is an entity attribute or an asset attribute (i.e. does the nature of the asset change because of the restriction?)
  6. All assets and liabilities measured at FV must be included in the tabular disclosures required by FAS 157, categorized by level
    • Tabular disclosures are typically only required for assets and liabilities that have recurring disclosures (year over year). This would typically be for investments, beneficial interests and asset impairments.
  7. In categorizing investments in funds as to level, one should look through to how the underlying investments are categorized by the investment manager
    • The whole fund is the focus when it comes to measuring fair value, not the underlying stocks and bonds of the fund. The unit of account is the ownership interest in the fund.
  8. Categorization of an investment as level 3 means it’s a bad investment
    • The different levels per FAS 157 are a closer reference to the inherent risk (or valuation uncertainty) in the investment vs. the quality of an investment

 This brief list does not do justice at all to the quality and depth of Jeff’s presentation, but maybe it is my plug for you to consider participating in one of AICPA’s future nonprofit conferences!

Also, please see previous posts here and here written by my colleague, Jen, on the issue of fair value for further background information on the standard.


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