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Changes to Fair Value Disclosure Procedure Now in Effect

Not-for-profit entities will need to raise the bar when addressing fair value disclosures that need to be incorporated in financial statements.

The Financial Accounting Standards Board issued new amendments to U.S. generally accepted accounting principles (GAAP) last May in the form of an update that amends literature currently being used by not-for-profit entities to properly address disclosure matters in their financial statements.

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The new requirements that will have the greatest impact on how not-for-profit entities draft note disclosures are outlined below.

Highest and best use concept. There is a clarification related to how a core principle in the fair value guidance needs to be addressed in developing fair value measurements and financial statement note disclosures built-around those measurements.

The highest and best use and valuation premise applies only in measuring fair value of nonfinancial assets. This conclusion is based, in part, upon the notion that financial assets and liabilities, by definition, do not have alternative uses.

Instruments classified within net assets. The fair value of an instrument that is classified in the net assets section of the statement of financial position should be measured from the perspective of a market participant holding that instrument as an asset. Essentially, the fair value of an instrument classified in net assets is estimated from the perspective of a market participant holding the identical item as an asset.

Premiums and discounts. The authoritative literature now includes the stipulation that premiums or discounts may be applied in a fair value measurement to the extent that they are consistent with the unit of account and market that participants would consider them in a transaction for the asset or liability.

This issue comes into play when, for example, a significant volume of investment securities might be valued based on the amount that could be received upon sale.

Incremental disclosure issues. For certain hard-to-quantify fair value measurements, disclosure is needed related to the valuation processes used, to include a narrative description of how those measurements might change significantly based on a variety of different factors.

Disclosure relief for other than public entities. The new disclosure requirements are more robust for entities that are public entities when compared to private entities, including not-for-profit entities.

For example, certain reclassifications within the fair value measurement hierarchy do not need to be disclosed for nonpublic entities. Additionally, some of the more onerous disclosures related to how fair value measurements could change given a variety of factors do not need to be addressed by not-for-profit entities.

Effective date and transition. The new fair value measurement and disclosure guidance needs to be applied prospectively by both public nonpublic entities.

For public entities, the new guidance is effective for interim and annual periods beginning after Dec. 15, 2011. For nonpublic entities, which include most not-for-profit entities, the amendments are effective in annual periods beginning after Dec. 15, 2011.


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