Public entities must discuss in Management's Discussion and Analysis (MD&A) any known trends or any known demands, commitments, events, or uncertainties reasonably expected to have a material favorable or unfavorable impact on results of operations, liquidity, and capital resources. Under FASB Statement No. 157, Fair Value Measurements, judgment must be applied in using unobservable (Level 3) inputs to determine the fair value of assets and liabilities, and use of them can have a material effect on results of operations, liquidity, and capital resources, where, for example, the fair value determined falls within a broad range. As a result, the SEC’s Division of Corporation Finance recently identified a number of disclosure issues related to Statement No. 157 that public entities may wish to consider in preparing MD&A for their Form 10-Qs.
Per the SEC, if the use of unobservable inputs is material, MD&A disclosure should discuss how the unobservable inputs were determined and how the resulting fair value of assets and liabilities and possible changes to those values, impacted or could impact results of operations, liquidity, and capital resources. Depending on the circumstances, the following disclosures may be relevant in preparing MD&A:
- The amount of assets and liabilities measured using significant unobservable inputs as a percentage of the total assets and liabilities measured at fair value.
- The amount and reason for any material increase or decrease in Level 3 assets and liabilities resulting from transfer of assets and liabilities from, or into, Level 1 or Level 2.
- If a material amount of assets or liabilities was transferred into Level 3 during the period, a discussion of:
- The significant inputs that management no longer considers to be observable; and
- Any material gain or loss recognized on those assets or liabilities during the period, and, to the extent that amount is excluded from the realized/unrealized gains (losses) line item in the Level 3 reconciliation, the amount excluded.
- With regard to Level 3 assets or liabilities, a discussion of, to the extent material:
- Whether realized and unrealized gains (losses) affected results of operations, liquidity, or capital resources during the period, and if so, how;
- The reason for any material decline or increase in the fair values; and
- Whether management believes the fair values diverge materially from the amounts management currently anticipates realizing on settlement or maturity. If so, disclose why and provide the basis for management’s views.
- The nature and type of assets underlying any asset-backed securities.
In addition, regardless of how assets and liabilities were classified within the hierarchy of Statement No. 157, certain additional information should be provided in MD&A on Form 10-Q, if not already provided in Form 10-K. See further guidance at http://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0308.htm. |
