U.S. accounting standards setters have published a draft guideline that seeks to improve fair valuing disclosure practices.

On Friday, the Financial Accounting Standards Board issued a draft of a proposed accounting standards update intended to improve disclosures about fair value measurements. FASB said that users of financial statements have requested more information about fair value measurements that use significant unobservable inputs (so-called Level 3 inputs) because they are more subjective. Therefore, for these inputs, it has proposed that firms make disclosures about any significant effects on fair value measurements that could occur if the firm were to use “reasonably possible alternative inputs”.

The proposal also seeks to address requests from users for segregating information for different classes of assets and liabilities that are determined based on their nature and risk characteristics and their placement in the fair value hierarchy (Level 1, 2, or 3), FASB notes.

Additionally, it says that, users need more robust disclosures about valuation techniques and inputs for both Level 2 and Level 3 measurements because many consider these measurements to be less reliable than Level 1 measurements.

“A number of constituents have recommended that the board improve disclosures about fair value measurements. The board believes that the increased transparency resulting from the proposed disclosures would benefit financial statement users,” stated FASB chairman Robert Herz. “We encourage constituents to review the proposal and provide comments on whether they believe it would accomplish this goal in a cost-beneficial manner.”

The proposed changes would affect all entities that are required to make disclosures about recurring and nonrecurring fair value measurements. The deadline for comments on the proposed update is October 12.

IE