ASC 820 Disclosure Requirements for Fair Value Measurements

ASC 820 disclosure requirements set out what an entity must tell financial statement users about every asset and liability it measures at fair value: the amount, where the measurement sits in the fair value hierarchy, the valuation techniques and inputs used, and, for the most judgment-heavy measurements, the assumptions and uncertainty behind the number. How much you disclose scales with how much judgment went into the measurement. A quoted market price for an exchange-traded stock needs little explanation. An internally modeled value for a private equity stake needs a great deal. ASU 2018-13, effective for fiscal years beginning after December 15, 2019, reshaped the framework by removing some disclosures, adding others, and widening the gap between what public and nonpublic entities must report.¹

How the Fair Value Hierarchy Drives Disclosure

Every fair value measurement is classified into one of three levels based on the lowest-level input that is significant to the measurement.² That classification determines almost everything about the disclosure burden.

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access on the measurement date. Exchange-traded equities and listed derivatives are the classic examples. Because pricing comes straight from real transactions in liquid markets, Level 1 items carry the lightest disclosure load.

Level 2 inputs are observable but fall short of a direct Level 1 quote. They include quoted prices for similar (not identical) items, interest rates, yield curves, and other market-corroborated data. A corporate bond priced through a model that uses observable interest rates typically lands here. Some judgment enters because the entity chooses which comparable data points apply and what adjustments to make.

Level 3 inputs are unobservable. They come into play when there is little or no market activity, forcing the entity to rely on its own assumptions, projected cash flows, or proprietary models. Private equity holdings, complex structured products, and certain derivatives commonly land in Level 3, and they trigger the most demanding disclosures in the standard.

Baseline Disclosures for Every Fair Value Measurement

Regardless of hierarchy level, ASC 820 requires a core set of disclosures for every class of asset or liability measured at fair value after initial recognition. The rules apply to both recurring measurements (taken every reporting period, such as trading securities) and nonrecurring measurements (triggered by a specific event, such as an impairment write-down).²

The fair value at the reporting date (or at the relevant measurement date for nonrecurring items) and the hierarchy level, usually presented in a table with assets and liabilities separated by class.
For nonrecurring measurements, the event that triggered the measurement, such as an impairment indicator or reclassification to held-for-sale status. If the measurement date is not period-end, that date must be disclosed.
For Level 2 and Level 3 measurements, a description of the valuation technique and inputs used. If the entity switched techniques during the period, it must disclose the change and the reason.¹
For a nonfinancial asset measured at fair value, whether its highest and best use differs from its current use, and the reason it is being used differently. The valuation premise changes depending on whether the asset is valued in combination with other assets or on a standalone basis.

Three valuation approaches recur throughout these disclosures. The market approach draws on prices from transactions involving identical or comparable items. The income approach converts future cash flows or earnings into a single present value, often through discounted cash flow models. The cost approach estimates what it would cost to replace the asset’s service capacity today. Entities identify which approach they used for each class.

Extra Disclosures Required for Level 3 Measurements

Because Level 3 measurements rely on inputs no one can independently verify, the standard layers on additional requirements aimed at exposing management’s assumptions and the resulting valuation risk.

Roll-Forward Reconciliation

For recurring Level 3 measurements, public business entities must present a full reconciliation of opening and closing balances. The roll-forward separately shows total gains and losses in earnings, total gains and losses in other comprehensive income, purchases, issues, sales, settlements, and transfers into or out of Level 3. Transfers in and transfers out are each disclosed and discussed separately.¹

The reconciliation must also isolate unrealized gains and losses — the change in fair value on items the entity still held at the balance sheet date. The entity identifies the specific income statement or other comprehensive income line where those unrealized amounts appear.¹ Transfers into Level 3 signal that formerly observable inputs have dried up. Transfers out suggest market data has become available.

Quantitative Information About Unobservable Inputs

The entity must provide quantitative information about the significant unobservable inputs feeding Level 3 measurements. Public business entities disclose the range and weighted average of those inputs, along with an explanation of how the weighted average was calculated. If another measure such as the median or arithmetic average better reflects the distribution, the entity may use that instead.¹

Typical inputs disclosed here include discount rates, expected volatility, capitalization rates, and projected default or prepayment rates. There is one carve-out: if the entity relies on third-party pricing information or prior transaction prices without adjustment, it is not required to create quantitative input data solely for disclosure purposes.²

Measurement Uncertainty

The standard requires a narrative description of the measurement’s sensitivity to changes in unobservable inputs if those inputs reasonably could have been different at the reporting date. The focus is on current-period uncertainty, not hypothetical future scenarios.¹

A disclosure for residential mortgage-backed securities, for example, might explain that the significant unobservable inputs are prepayment rates, probability of default, and loss severity, and that a significant increase in any of those inputs would lower fair value. Where interrelationships exist between inputs, such as default probability and loss severity tending to move together, the entity must describe those linkages and their combined effect.¹ A well-constructed narrative satisfies the requirement; quantitative sensitivity figures are not required.

What Nonpublic Entities Can Skip

ASC 820 draws a meaningful line between public business entities and everyone else. Nonpublic entities receive targeted exemptions:

A simplified Level 3 roll-forward: disclose purchases and issues (each separately), plus the amounts and reasons for transfers into or out of Level 3, but not the full reconciliation.¹
Quantitative information about significant unobservable inputs is still required, but the range, weighted average, or alternative statistical measure is not.¹
No narrative on measurement uncertainty.²
No separate disclosure of unrealized Level 3 gains and losses on items still held at period-end.
No fair value or hierarchy level disclosure for financial instruments carried at amortized cost, such as held-to-maturity debt or loans. Public entities must provide this; nonpublic entities are exempt entirely.
No disclosure when a nonfinancial asset is used differently from its highest and best use.

Investments Measured at NAV as a Practical Expedient

ASC 820 lets certain investments that lack a readily determinable fair value be measured at net asset value per share. The expedient typically applies to interests in investment companies (ASC 946) and real estate funds that follow investment-company accounting. Investments measured under the NAV expedient sit outside the three-level hierarchy, so the Level 1, 2, and 3 disclosure requirements do not apply to them.²

A separate set of disclosures focuses on the investment’s nature and liquidity:

The fund’s investment strategy or objective and the types of assets it holds.
Redemption terms, including frequency (monthly, quarterly, annually), advance notice period, and any other conditions.
Redemption restrictions, including lock-up periods and redemption gates, disclosed and quantified.
Any unfunded commitments to invest additional capital in the fund.
The expected timeline for liquidation of the investee fund’s assets, but only if the fund has communicated that information to the entity or publicly announced it. ASU 2018-13 narrowed this requirement.¹

Private equity fund interests, hedge fund allocations, and certain real estate fund stakes are the most common investments reported under this expedient.

Disclosures for Nonrecurring Measurements

Fair value measurements that arise only in specific circumstances have their own disclosure expectations. Impairment write-downs on goodwill or long-lived asset groups are the most common trigger, but initial measurement of an acquired liability in a business combination or a reclassification to held-for-sale can also produce nonrecurring measurements.²

The entity discloses the fair value at the measurement date, the hierarchy level, the reason for the measurement, and, for Level 2 and Level 3 classifications, the valuation techniques and inputs used. If the measurement date falls during the reporting period rather than at period-end, that timing must be clear. Nonrecurring items do not require a roll-forward reconciliation, but the entity must disclose any impairment loss or other gain or loss recognized as a result of the measurement.

What ASU 2018-13 Changed

ASU 2018-13, effective for fiscal years beginning after December 15, 2019, was the most significant overhaul of the ASC 820 disclosure framework since codification. If your templates predate 2020, work through these changes.

Removed

Amounts of and reasons for transfers between Level 1 and Level 2.¹
The entity’s policy for determining when transfers between levels are deemed to have occurred.
Description of the internal valuation processes used for Level 3 measurements.¹

Added

The amount of total gains or losses in other comprehensive income attributable to fair value changes in Level 3 items still held at the balance sheet date.¹
For public entities, the range and weighted average (or an appropriate alternative) of significant unobservable inputs used in Level 3 measurements, plus how the weighted average was calculated.

Modified

The measurement uncertainty disclosure was clarified to address uncertainty as of the reporting date, not sensitivity to future changes.
The phrase “at a minimum” was stripped from the disclosure objective paragraphs, giving entities more discretion to tailor disclosures to what is material.
The NAV liquidation-timing disclosure now applies only when the investee fund has communicated that information to the entity or publicly announced it.

1
FASB. ASU 2018-13 Fair Value Measurement Topic 820
2
FASB. ASU 2011-04 Fair Value Measurement Topic 820