When using the portfolio exception, the unit of measurement is the net position of the portfolio even though the unit of account is the individual instrument. The "portfolio exception" allows for the fair value of those financial assets, financial liabilities, and nonfinancial items accounted for as derivatives under ASC 815 to be measured based on the net positions of the portfolios (i.e., the price that would be received to sell a net long position or transfer a net short position for a particular market or credit risk exposure), rather than the individual values of financial instruments within the portfolio. Note that SEC Rule 2a-5 is applicable only to registered investment companies and business development companies and does not impact GAAP practices under ASC 820. The rule outlines new procedures required of registered investment companies and business development companies for estimating the fair values of their investments in good faith under the Investment Company Act of 1940. The release of this rule by the SEC is the first to address registered investment companies’ valuation practices since the original release of ASR 118 back in 1970. However, in December 2020 the SEC passed Rule 2a-5, Good Faith Determinations of Fair Value, whose implementation has rescinded the ASR 118 standard effective March 8, 2021. ASR 118 states: “Some companies as a matter of general policy use the bid price, others use the mean of the bid and asked prices, and still others use a valuation within the range considered best to represent the value in the circumstances each of these policies is acceptable if consistently applied.” The bid-ask pricing described in ASC 820 is consistent with ASR 118, which is only applicable to registered investment companies. ASR 118 was intended to establish board practices to determine the fair value of securities when market quotations were not readily available, such as when only a bid or asked price are available on the valuation date, the spread between bid and ask is substantial, or the security is thinly traded. Under US GAAP, bid-ask spread pricing methods appropriate under ASR 118, Accounting for Investment Securities by Registered Investment Companies, are appropriate for determining fair value. Therefore, similar to any other asset or liability, when determining the fair value measurement of an instrument traded in a secondary market with limited activity, it is necessary to consider all available trade data in developing market participant assumptions, including from thinly traded secondary markets. However, this type of secondary market tends to be less liquid than those of publicly traded instruments. Secondary markets also exist for private equity investments, where both current funded private equity investments as well as any remaining unfunded commitments are traded. The New York Stock Exchange is a type of liquid secondary market for stocks of publicly traded companies. In secondary markets, sometimes called “aftermarket,” the issuer of the instrument is typically not involved in the transaction, as the instrument has already been issued. Secondary markets exist when investors trade among themselves, rather than investing directly through the issuer of a financial instrument in the primary market. ASC 820 requires that each reporting unit consider the facts and circumstances appropriate to its valuation of the asset or liability being valued and follow the framework, independent of other reporting units that may be valuing an identical or similar asset or liability. The fair value measurements reported by the operating units may differ at times due to differences in the markets to which they have access and the level of activity for the asset in each market. For example, a reporting entity’s operating units located in Asia, Europe, and the US may each hold investments in the same debt and equity securities. Therefore, the same reporting entity could have different fair value measurements for identical or similar assets or liabilities, depending on the operating units holding the assets or liabilities and differences in the markets to which they have access and the differences in assumptions of the market participants in those markets. In addition, different operating units within a reporting entity may have access to different markets and each separate unit should individually consider the principal market, and in the absence of a principal market, the most advantageous market. Transfers and servicing of financial assets Revenue from contracts with customers (ASC 606) Loans and investments (post ASU 2016-13 and ASC 326) Investments in debt and equity securities (pre ASU 2016-13) Insurance contracts for insurance entities (pre ASU 2018-12) Insurance contracts for insurance entities (post ASU 2018-12) IFRS and US GAAP: Similarities and differences Business combinations and noncontrolling interestsĮquity method investments and joint ventures
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