There are several ways to calculate the value of an asset, and financial institutions have a number of options for determining the Net Asset Value Per Share.
They also have to make what is sometimes a difficult judgment call, and a new accounting regulation is designed to simplify that process.
Formerly, institutions had three ways to calculate NAV, depending upon whether an investment was:
The judgment call comes when assets are not redeemable at NAV at the measurement date, but will become redeemable at a future date. In that case, the current regulations say that institutions take into account the length of time until those investments become redeemable. Based on that, institutions either characterize the investment as Level 2 (redeemable at the measurement date at the NAV) or Level 3 (investments that will never be redeemable at the NAV).
Recently, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The goal of that update is to simplify the way organizations report NAV, and reduce the diversity of ways in which organizations make those reports.
The updated regulations remove the requirement to characterize an investment as Level 2 or Level 3. They apply to any entity that elects to estimate the fair value of an investment within the scope of paragraphs 820-10-15-4 through 15-5, using the net asset value (or its equivalent) of the investment.
The new regulations are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the regulations are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The regulations are retroactive.
The FASB believes that the newly amended regulations will reduce confusion and help institutions report NAV in a more consistent way.
For more information on these changes and how they differ from GAAP and IFRS regulations, or to learn how Baker Tilly banking industry specialists can help, connect with our team.