At their December 21, 2010 board meeting, FASB tentatively decided not to allow exceptions for nonpublic entities to the fair value principles and concepts applicable to the measurement of fair value in the amendments to Topic 820, Fair Value Measurements and Disclosures. The amendments will require nonpublic entities to disclose the following:
- The current use when a nonfinancial asset is measured subsequently at fair value and the highest and best use of the asset differs from its current use as well as the reasons why the asset is being used in a manner that differs from its highest and best use. The Boards also tentatively decided to require that disclosure only when the asset is recognized at fair value in the statement of financial position, not when the fair value is disclosed.
- For assets and liabilities categorized within Level 3 of the fair value hierarchy that are measured at fair value in the statement of financial position on a recurring basis after initial recognition:
- A quantitative disclosure of the unobservable inputs and assumptions used in the measurement
- A description of the valuation processes in place.
- The level in which a fair value measurement would be categorized within the fair value hierarchy for assets and liabilities not recognized at fair value but for which disclosure of fair value is required
- Transfers between Levels 1 and 2 of the fair value hierarchy
- A qualitative discussion about the sensitivity of a Level 3 fair value measurement to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement.
Business appraisers can provide significant assistance to private company issuers as well as their audit team colleagues by identifying the unobservable inputs in Level 3 analyses, consulting regarding the ‘quantitative disclosure,’ and/or pointing to auditable data sources supporting unobservable inputs. In particular, business appraisers use data sources and publications in their routine daily work that auditors, and quite possibly management preparing the Level 3 analyses, are not aware of. Not only can appraisers identify these sources, but also confirm the pervasive use of such data sources in the valuation profession. These include not only transaction data but also credible industry and economic data, forecasts and so on that provide a backdrop for management projections which are inherently unobservable when prepared.