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FASB ASU 2011-04 and its Effects on Nonprofit Organizations

By Dick Larkin, CPA

Accounting Standards Update (ASU) 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS was issued to further conform the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) standards relating to fair value measurements. The IASB standards are referred to as International Financial Reporting Standards (IFRS). The principal remaining differences between the two sets of standards involve some terminology, and references to other standards, and matters that do not affect nonprofit organizations.

The following is not a complete summary of ASU 2011-04; rather, it lists those parts of the ASU that are specific to non-public entities – which include most nonprofit organizations. [Reminder: Some nonprofits are considered public entities, if they have conduit debt outstanding in the hands of the general public. See FASB Staff Position 126-1 (codified in Accounting Standards Codification (ASC) 825-10-50).]

ASU 2011-04 exempts non-public entities from the following requirements of ASU 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements:

A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, and describe the reasons for the transfers; and
From the following proposed requirements included in a draft ASU issued in June 2010 (which is the draft that was issued as ASU 2011-04), there are additional required disclosures, including:

Measurement uncertainty inherent in Level 3 inputs;

Categorization by input level of assets not reported at fair value (FV), but whose FVs are disclosed in notes (i.e., the disclosures that may be required by Statement of Financial Accounting Standards (SFAS) No. 107 (codified in ASC 825-10-50) for non-SFAS 124 (codified in ASC 958-320) securities).

The other proposed requirements in the June 2010 draft ASU are retained, including:

Make terminology and clarifying changes to further converge U.S. and International accounting standards
Clarify that the “highest and best use” concept would only apply to non-financial assets
Provide guidance on measuring FV of an instrument classified in equity (not normally applicable to nonprofits)
Provide additional flexibility for measuring FV of assets and liabilities managed in a portfolio on the basis of the entity’s net exposure to particular market risk (interest rate, currency, price) or credit risk of a counterparty
Expand the prohibition against applying blockage factors at all input levels; and
Require additional disclosures, including if an asset that is valued using a highest and best use basis, but is not actually being used that way.

ASU 2011-04 will become effective for annual periods beginning after December 15, 2011 - essentially for calendar 2012. Early adoption for annual periods is not permitted.