Fair Value: Diversity in Measuring Investments at the Net Asset Value (NAV) per Share

This article analyzes a current financial reporting and accounting issue regarding diversity in financial reporting practice. Since the Financial Accounting Standards Board (FASB) first issued accounting statement 157 Fair Value Measurements, entities have been required to measure investments at fair market values. This included the requirement to categorize investments within a fair value hierarchy in preparation to report such in the financial statements. To do this, the FASB allows companies to either categorize the investment in the fair value hierarchy using three different input levels (Level 1, 2 and 3) or by estimating the net asset value as a practical expedient. If the entity uses the practical expedient, the investment would be placed within the fair value hierarchy based on whether the investment is redeemable with the investee at the measurement date, never redeemable, or redeemable in the future. Based on this information, the investment would be placed in either level 2 or 3 of the hierarchy. As a result, there is diversity in practice when estimating the length of time in the near term the investment would be redeemed. This article reports the results of evaluating how can the diversity in accounting practice related to how certain investments measured at net asset value are categorized within the fair value hierarchy be resolved. The results of the qualitative research conducted on the FASB proposal concluded that fourteen out of the eighteen public comment letters agreed with FASB proposal that eliminating the requirements to classify these investments in the fair value hierarchy would increase comparability in accounting practice among entities.