mhm executive education series webinar: financial instruments

MHM Executive Education Series:MHM Executive Education Series:Financial Instruments & Fair Value

Presented by:Presented by:Mike Loritz, Keith Peterka, Hal Hunt

September 20 2012September 20, 2012

A 1 Discuss basic accounting requirements for the reporting of financial instruments at fair valueA

g2

reporting of financial instruments at fair value

Discuss examples of valuation concepts and

en

2

3

fundamentals for specific financial instruments

Discuss common valuation issues for Employeend

3 Discuss common valuation issues for EmployeeStock Ownership Plans (ESOP)

a 4 Review common disclosure concepts andrequirements

Accounting Requirements –Financial Instruments and Fair Value

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Financial Instruments & Fair Value

Entities must apply “fair value” measurements in both recurring and non-recurring circumstances:

– Valuation of debt and equity securities with readily– Valuation of debt and equity securities with readily determinable fair values (certain industries report all securities at fair value)

– Year-end disclosure of financial instruments carried at other than fair value (debt, loans, etc.)

– Assets/liabilities acquired (assumed) in a business combination– Asset impairment testing– Valuation of derivatives and hedged items– Measurement of asset retirement obligations and financial

guarantees– Assets held for sale– Many others…

Adoption Timeline – Fair Value MeasurementsASU 2010 06 (adopt 2010)FAS No. 107 & 115

Investments valued at fair value

ASU 2010 – 06 (adopt 2010)- Disaggregate hierarchy disclosures by “nature

and risk” class for all assets and liabilities- Disclose transfers between Level 1 and Level 2- Other new disclosures

FAS No. 157 (adopt 2008)- Apply new fair value definition- Hierarchy disclosures (level) ASU 2010-06 (adopt 2011)

Expanded disclosure of Level 3 activity

FSP FAS No. 157-4 (adopt 2009)Disaggregate hierarchy disclosures by

“nature and risk” category for equity and

Expanded disclosure of Level 3 activity

ASU 2011-04 (adopt 2012)- Description of valuation processes for Level 3nature and risk category for equity and

debt securities

ASU 2009 12 “NAV” (adopt 2009)

Description of valuation processes for Level 3- Unobservable inputs table (quantitative) for L3- Public entities to disclose all L1 and L2

transfers- Public entities to provide narrative description

f iti it f FV t h i b blASU 2009-12 NAV (adopt 2009)- Use of NAV as a practical expedient for alt invest.- Additional disclosures and hierarchy guidance

of sensitivity of FV to changes in unobservable inputs (qualitative) for L3


Investment SecuritiesASC 320 – Debt and Equity Securities applies to:

Investments in equity securities that have readily– Investments in equity securities that have readily determinable fair values

• The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on aprices or bid and asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securitiesmarket are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC. Restricted stock meets that definition if the restriction terminates within one year

All i t t i d bt iti– All investments in debt securities


Investment SecuritiesASC 320 – Debt and Equity Securities• Debt and equity securities within the scope of ASC• Debt and equity securities within the scope of ASC

320 must be classified as either:a. Trading b. Available-for-salec. Held-to-maturity*

*Although not reported at fair value, HTM securities are subject to fair value disclosures under ASC 825 as well as non-recurring OTTI measurement when appropriatemeasurement when appropriate.


Investment SecuritiesTherefore, the following securities not within the scope ofASC 320 are not required to be recorded at fair value on aASC 320 are not required to be recorded at fair value on arecurring basis: Cost method equity securities

• Includes equity securities that do not meet the definition of• Includes equity securities that do not meet the definition of“readily determinable fair value”

Equity securities that are accounted for under theequity method (ASC 323)equity method (ASC 323)

Investments in consolidated subsidiaries

* Derivative instruments are recorded at fair value, however, are not within the scope of ASC 320.


Investment Securities - Impairment• An investment is impaired if its fair value is less than

cost. An analysis must be performed to determine if thecost. An analysis must be performed to determine if the impairment is considered other-than-temporary (OTTI).

• Analysis performed on an individual security basisEquity Securities Qualitative assessment– Equity Securities – Qualitative assessment

– Debt Securities – An entity shall compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security If thesecurity with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, an other-than-temporary impairment shall be considered toother than temporary impairment shall be considered to have occurred.


Investment Securities - ImpairmentRecognition• If sale of Equity Securities – entire difference between• If sale of Equity Securities – entire difference between

cost and fair value (impairment) is recorded in earnings• Debt Securities

– Probable – Same as equity securities (difference between cost basis and fair value is recorded to earnings)

– If sale is not probable – The amount of the impairment l d di l i d d h h i d hrelated to credit loss is recorded through earnings and the

amount related to other factors is recorded in AOCI.


Derivative Financial Instruments• ASC 815 “Derivatives and Hedging” provides guidance for the

recognition and measurement of derivative financial i t tinstruments.

• All derivatives are recorded on the balance sheet at fair value

• Specialized accounting may apply if a transaction qualifies for hedge accounting and the proper election is made

Th i l ti li t th h d d it (f i l )• The special accounting applies to the hedged item (fair value) and offsetting entry (cash flow)

• Derivative is always recorded at fair value

Financial Instruments & Fair ValueFair Value OptionFair Value OptionASC 825-10-15 provides for an entity to elect to account for certain financial instruments at fair value (recurring basis);• A recognized financial asset and financial liability• A firm commitment that would otherwise not be recognized at

inception and that involves only financial instruments• A written loan commitment• The rights and obligations under certain insurance contracts • The rights and obligations under certain warrantiesThe rights and obligations under certain warranties • A host financial instrument resulting from the separation of an

embedded nonfinancial derivative from a nonfinancial hybrid instrument under paragraph 815-15-25-1instrument under paragraph 815 15 25 1

Financial Instruments & Fair ValueA ti St d d C difi ti (ASC) 820 F iAccounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures provides guidance with respect to:p• Defines fair value• Sets out a framework for measuring fair value, which

refers to certain valuation concepts and practices• Requires certain disclosures about fair value

measurementsmeasurements

ASC 820 does not provide guidance with respect to p g pthe recognition or classification of financial

instruments.

Financial Instruments & Fair ValueFASB ASC 820 i l d di l i t hi hFASB ASC 820 includes disclosure requirements which are identified as measurement on a recurring basis or nonrecurring basis. g• Disclosure requirements include the valuation techniques and

inputs used to develop fair value measurements for • assets and liabilities that are measured at fair value on a• assets and liabilities that are measured at fair value on a

recurring basis in periods subsequent to initial recognition and • non-recurring measurements recorded during the period. Th l l ithi th f i l hi h i hi h th f i l• The level within the fair value hierarchy in which the fair value measurement in its entirety falls

Financial Instruments & Fair ValueFASB ASC 825 10 50 id dditi l id ith tFASB ASC 825-10-50 provides additional guidance with respect to fair value disclosures for (1) all public companies, (2) all nonpublic companies with total assets greater than $100 million, and (3) any company that holds or uses derivative financial instruments. • Requires fair value disclosure of all financial instruments on the

company’s balance sheet as well as the methods and significant assumptions used to determine fair value.

• The disclosure requirements apply regardless of the recognition and measurement of the financial instruments in the financial statements.

• ASU 2011-04 now requires disclosure of the classification within the fair value hierarchy as well.


Fundamentals of Fair Value per ASC 820:1. Must use market participant view in measuring fair

value (not entity specific view)value (not entity specific view)2. Fair value represents an exit price in the entity’s

principal or most advantageous marketp p g– The price that would be received for selling an asset– The price that would be paid to transfer a liability

3 Pro ides for a hierarch that req ires the se of3. Provides for a hierarchy that requires the use of observable market inputs when available– Entity specific inputs are allowed when observable market data

is not available, however, it must be from a market participant’s view!


Common issues related to fair value of financial instruments:

Bid/ask prices middle range allowed– Bid/ask prices – middle range allowed– Transactions costs – should not be included– Blockage discounts – should not be included– Inclusion of an entity’s own credit risk - required– Net Asset Value (NAV) – may not be fair value

Control premiums may be applied to Level 2 or 3– Control premiums – may be applied to Level 2 or 3 securities

– Restricted Securities – restriction must be included


• In exchange traded markets, exit prices should be based on closing market prices• May need policy election if equity securities traded on aMay need policy election if equity securities traded on a

continuous or foreign market

• In broker/dealer markets, bid/ask prices are more readily il bl th l i iavailable than closing prices:

• Fair value represents the price within the bid/ask spread that would be received to acquire the asset or transfer the liability.

• Mid-market pricing or other pricing conventions can be used as a practical expedient for fair value measurements.

• Offsetting positions should be consistent between the long and short positions.


Most Advantageous Market – Level One SecuritiesCompany A owns 1,000 shares of XYZ Corp common stock. XYZstock trades on the NYSE and the Tokyo Stock Exchange routinely iny g yboth markets. Company A believes they could sell the entire block ofshares at a $.25 per share discount. Information as of December 31,2011 is as follows:

Closing Costs Net ProceedsNYSE $5.00 $.50 $4.50TSE $5 45 $1 00 $4 45TSE $5.45 $1.00 $4.45

What is the fair value of the What if the transaction t i NYSE thWhat is the fair value of the

shares held by Company A? costs in NYSE were the same as TSE?


Valuation techniques:When fair value is directly observable (exchange traded), the quoted market price must be used for measuring fair value, generally without p g , g yany adjustments.

- Possible exceptions for inactive markets

• ASC 820-10-35-24A describes three commonly accepted valuation techniques:

Market approach– Market approach– Income approach– Cost approach


Market Approach Income Approach Cost Approach• Level 1 securities• The fair value of a

private equity security may be estimated

pp• Interest rate swap

discounted cash flows

• Option Black

Cost ApproachGenerally not

applicable to financial instruments (start up

hmay be estimated based on observable EBITDA multiples, market caps, etc. for

• Option Black Scholes, Monte Carlo model (or other option models

phase company equities possibly)

similar companies • Private company equities - DCF

Valuation Concepts

Fair Value – Financial Instruments

LoansLoans receivable that are not debt securities will bereported on the balance sheet using one of three models:reported on the balance sheet using one of three models:

• Held-for-sale - Lower of cost or fair value*• Loans held for investment - Amortized cost less anLoans held for investment Amortized cost less an

allowance for credit losses.*• Fair value for loans for which the option under ASC

825-10 has been elected.

*However fair value disclosures may still be required under ASC 325However, fair value disclosures may still be required under ASC 325

Fair Value – Financial InstrumentsLoans Fair Value MeasurementsLoans – Fair Value Measurements• Fair value is generally determined based on the loans

expected future cash flows discounted at market rates.– Impairments are measured using the loan’s effective rate

• Mortgage loans held for sale may use a market approach.(as market observable data may be available)(as market observable data may be available)

• Credit impaired loans – the credit impairment may beincorporated into the estimated cash flows or the discount

trate.• Collateral dependent - A company must measure impairment

based on the fair value of the collateral once the creditordetermines foreclosure is probable.


Investment Securities (as defined by ASC 320)• EQUITY - Publically traded equity securities and

publically traded debt are level 1 securities and shouldpublically traded debt are level 1 securities and shoulduse the closing price on the applicable exchange.

• DEBT - Most debt securities (including most US( gTreasuries) are valued using a pricing model and arelevel 2 securities.– Proprietary models used by pricing services– Proprietary models used by pricing services.– Use inputs such as credit risk and interest rates.– To be level 1, the bond must be traded and have a market

observable priceobservable price.


Investment Securities (as defined by ASC 320)• MUTUAL FUND – a mutual fund is not an exchange

traded instrumenttraded instrument– Classification may depend on the level of activity.

Most open-end funds sell shares to the public everyp p ybusiness day which are priced at net asset value(NAV).Closed end funds and some open ended funds that– Closed-end funds and some open-ended funds thatare infrequently traded may be level 2 measurements(or considered a NAV practical expedient).


Alternative Investments May report the investment in these funds at the net asset value (NAV) in certain instancesvalue (NAV) in certain instances.

–Entities that apply the investment guide and meet certain criteria (ASC 946-10-15-2)

( f )–Entities that report a NAV or it equivalent (real estate fund)

Definition Investments in private investment funds; includingInvestments in private investment funds; including

investments in hedge funds, private equity funds, venture capital funds, commodity funds, real estate funds, offshore

f d hi l d f d f f d ll b kfund vehicle, and fund-of-funds, as well as bank common/collective trust funds.


Alternative InvestmentsRequired disclosures if the NAV is used include alldisclosures required by ASC 820 plus several specificdisclosures required by ASC 820 plus several specificdisclosures regarding each major investment categoryreported at the NAV.

– Liquidation restrictions, including estimated period oftimeUnfunded commitments–Unfunded commitments

–Redemption rights and other restrictions–Potential sale at amount other than NAVPotential sale at amount other than NAV


Private Company Equity Securities • If quoted prices in active markets or arm’s length

transactions have occurred for the entity’s equitytransactions have occurred for the entity s equitysecurities, use that information first.

• If not, then management should select the valuationgmethod(s) that are appropriate for their industry, lifecycle, etc.– A single valuation method may be appropriate– A single valuation method may be appropriate– Or, it may be more appropriate to use multiple valuation

methodologies (typically market and income approach)


Private Company Securities• Valuation should consider the relative applicability of the

valuation techniques used given:valuation techniques used given:– Nature of the industry– Current market conditions– Quality, reliability and verifiability of the data used in each model– Comparability of public entity or transaction data used– Additional considerations unique to the entityq y

• Consideration should be given to significant differences in valuation methodologies (why are they different?)in valuation methodologies (why are they different?)

Fair Value – Financial InstrumentsPrivate Company SecuritiesPrivate Company Securities• Market Approach

– Market value of equity (MVE) to net income or book value– Enterprise value to EBIT– Enterprise value to EBITDA– Enterprise value to revenueEnterprise value to revenue– Enterprise value to debt free cash flows– Enterprise value to book value of assets

I A h• Income Approach– Discounted cash flows– Probability weighted cash flowsy g

Typically, a combination of these methods is appropriate.


Interest rate swaps are not traded on an exchange thus the

Settlement Value (received from the counterparty) vs Fair exchange, thus the

income approach is typically used to measure fair value

counterparty) vs Fair Value

• Settlement value does not considernot consider counterparty (CVA) or company specific creditworthiness (DVA), thus does not representthus does not represent fair value

• Many times the amount reported by the

Interest Rate Swapscounterparty includes

accrued interest receivable/payable

Swaps


Interest Rate Swaps – Income Approach1. Calculate the fixed cash flows based on the notional

amount fixed rate frequency of payments etcamount, fixed rate, frequency of payments, etc.2. Calculate the variable (floating leg) cash flows by:

1. Building a zero coupon yield curve to determine the spot rate g p y pfor each date on which a cash flow settlement occurs

2. Convert the zero coupon yield curve to a forward curve3. Calculate each floating-leg cash flow based on notional amount,3. Calculate each floating leg cash flow based on notional amount,

forward rate, etc.

3. Compute the present value of the fixed and variable cash flows using the zero coupon yield curve (need tocash flows using the zero coupon yield curve (need to consider creditworthiness)

Fair Value – Financial Instruments9/30/11 3/31/2012 9/30/2012 3/31/2013

Notional $25,000,000 $25,000,000 $25,000,000 $25,000,000

Fixed rate 5.75% 5.75% 5.75% 5.75%

Days 183/360 182/360 183/360 181/360Days 183/360 182/360 183/360 181/360

Fixed cash flows $(730,729) $(722,743) $(734,722) $(722,743)

Forward rate 6.00% 6.50% 7.03% 7.55%

Floating cash flows

$762,500 $817,052 $898,403 $949,240

Net cash flo s $31 771 $94 309 $163 681 $226 240Net cash flows $31,771 $94,309 $163,681 $226,240

Discount rate 6.00% 6.25% 6.51% 6.77%

Discount factor .97 .94 .91 .87

Present value $30,831 $88,621 $148,474 $197,939

Net PV 465,865


Interest Rate Swap• Creditworthiness is included in the valuation of an

interest rate swap by adjustment to the zero coupon rateinterest rate swap by adjustment to the zero coupon rate used to discount the expected cash flows.– Practice issue: typically little or no credit spread adjustment is

f ( O Capplied related to the large financial institutions (BOA, Chase, JPMorgan, etc.)

• The best source for credit spread adjustments is the jcredit default swap market.

• Also may need to consider entry/exit markets (liquidity discounts)discounts)


Option Contract• An option provides one party with the option, however,

not the obligation to buy or sell something in the futurenot the obligation, to buy or sell something in the future.• Some options are publically or exchange traded,

however, most are not.• Options issued as share based compensation typically

are not the same as traded options.O ti t i ll l d i th i h• Options are typically valued using the income approach (if market observable data is not available).– Black-Scholes Merton– Monte-Carlo


Option ContractInputs to a basic option pricing model:1. Underlying price (stock price)2. Strike (exercise) price3 Term (time to e piration)3. Term (time to expiration)4. Risk-free interest rate5 Expected dividends5. Expected dividends6. Volatility


Option ContractThe Black Scholes model acts in a manner to predict theexpected intrinsic value of the instrument on the date the optionexpected intrinsic value of the instrument on the date the optionwill be exercised (an expected forward stock price is determined).

–Growth is assumed at the risk-free rate.H ldi t (di id d b i t ) d d t d–Holding costs (dividends, borrowings, etc.) are deducted.

–Use of implied volatility to project a range of stock prices at the exercise date.

–Differences between estimated stock prices and the strike price are weighted to determine the expected intrinsic value.

–The expected intrinsic value is discounted using the risk free interest rate.


Stock Price $5.00 $6.00 $5.00 $5.00Exercise price $5.00 $5.00 $5.00 $5.00Current date 1/1/2011 1/1/2011 1/1/2011 1/1/2011Expiration date

1/1/2016 1/1/2016 1/1/2021 1/1/2016

Volatility 25% 25% 25% 60%Volatility 25% 25% 25% 60%Risk free rate 3.00% 3.00% 3.00% 3.00%Dividend yield 1.00% 1.00% 1.00% 1.00%

Fair Value $.7865 $1.3076 $.8926 $2.0337


Cash EquivalentsMany reporting entities classify certain short-term debt andequity securities such as treasury bills commercial paperequity securities, such as treasury bills, commercial paperand money market funds, as part of cash equivalents.

– These securities represent financial instruments andpare still subject to the fair value disclosurerequirements of ASC 820.Given the short maturity in most cases there will be no– Given the short maturity, in most cases there will be nosignificant difference between the carrying value andfair value.


Certificates of Deposit• Certificates of deposit are financial instruments

subject to fair value disclosuressubject to fair value disclosures.– A bank CD typically does not meet the definition of a

security (as defined in ASC 320), thus is not subject to theclassification guidance in ASC 320.

– Additionally, a CD typically would not be considered asecurity for purposes of applying the Not-for-Profitsecurity for purposes of applying the Not for Profitmeasurement guidance. However, if the NFP holdsany negotiable CDs, you would likely need toevaluate furtherevaluate further.


Fair Value – Liabilities

Ab t t d i f li bilit it i h ld bAbsent a quoted price for a liability, exit price should be determined from the perspective of a market participant that holds the identical liability as an asset, even when y

the asset is not traded (level 3 measurement).


Fair Value – LiabilitiesThe fair value of a company’s debt is typically determined using an income approach (DCF) which is driven by twousing an income approach (DCF) which is driven by two main inputs:

1. Interest rates2. The Company’s own creditworthiness

– A decrease in an entity’s creditworthiness can be included in two different ways:included in two different ways:» Adjusting the discount rate » Adjusting the estimated cash flows (payments)

Th i t f i bl t d bt i t i ll tThe carrying amount of variable rate debt is typically not equal to fair value!

Employee Stock Ownership Plans

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ESOP & Valuation IssuesWhat is an ESOP?What is an ESOP?• An ESOP is a qualified, defined contribution employee benefit plan

that invests primarily in the stock of the employer company.• ESOPs are “tax-qualified” in return for meeting certain rules

designed to protect the interests of plan participants and beneficiaries.

• ESOP sponsors (and selling shareholders in certain situations) also receive various tax benefits.

• A valuation of ESOP shares by an independent third party is required by the Department of Labor (DOL) and the Internal Revenue Service (IRS) to insure that the value is determined by a party who does not have a personal or financial interest in the al ation res ltvaluation result.

ESOP & Valuation IssuesWhat is the standard of value in ESOP valuations?What is the standard of value in ESOP valuations?• The IRS standard is "Fair Market Value".• Fair Market Value has a great deal of case law behind it.• The definition of Fair Market Value is most clearly defined by the

IRS in Revenue Ruling 59-60.• The DOL substantially embraces all of the aspects of Fair Market y p

Value as defined in Revenue Ruling 59-60, but the ERISA legislation imposes additional considerations.

• ERISA mandates that all qualified plans have a trustee, and the q p ,trustee has to act in the best interests of the plan participants.

• ERISA imposes fiduciary responsibilities on all of the trustees. Fiduciary responsibilities are often at the center of ESOP based y pvaluation litigation.

ESOP & Valuation IssuesWhat is “Fair Market Value”?What is “Fair Market Value”?• Fair Market Value is the price for which property would

sell under the existing market conditions for such gproperty as established in arms-length negotiations between knowledgeable and independent parties.The “Market” implied in definitions of Fair Market Value• The “Market” implied in definitions of Fair Market Valueencompasses all potential buyers and sellers of the property involved.

ESOP & Valuation IssuesHow is “Fair Market Value” determined?How is “Fair Market Value” determined?• The Fair Market Value of business interests that is generating

earnings is determined to a large degree on the basis of what a k l d bl b ld b illi t f th i tknowledgeable buyer would be willing to pay for the earnings stream considering available rates of return on relatively risk-free investments and the risks associated with the investment being appraisedappraised.

• The present value of future earnings using a risk adjusted market rate is one of the most common approaches, referred to in business valuations as Discounted Future Earnings (DFE)valuations as Discounted Future Earnings (DFE).

• Reference to the results of mathematical formulas is not the sole determinant of Fair Market Value.Co rt cases contin e to s pport the sage of both Disco nts for• Court cases continue to support the usage of both Discounts for Lack of Control and Discounts for Lack of Marketability under the Fair Market Value standard.

ESOP & Valuation IssuesWould the valuation methodology employed by theWould the valuation methodology employed by the ESOP fiduciary (i.e. Fair Market Value) vary from that of Topic 820 (i.e. Fair Value)?• May be consistent when public companies are the ESOP plan

sponsors:• Topic 820 stipulates that “fair value” must be determinedTopic 820 stipulates that fair value must be determined

based upon observable inputs (e.g. quoted market prices) where available.Th t d ti l t th t l ESOP’ h ldi h• The tax code stipulates that only ESOP’s holding shares traded on an exchange that is registered under Section 6 of the Securities Exchange Act of 1934 may rely upon quoted

i th t f l All th iti tprices as the measurement of value. All other securities must be subject to valuation based upon an independent appraisal.

ESOP & Valuation IssuesWould the valuation methodology employed by theWould the valuation methodology employed by the ESOP fiduciary (i.e. Fair Market Value) vary from that of Topic 820 (i.e. Fair Value)?• However, the two rules may be in conflict when:

– The securities are traded on the Over-the-counter Bulletin Board (“OTCBB”). The OTCBB may constitute an active market for ( ) ycertain securities, but in Notice 2011-19, the IRS emphasized that such securities must still be valued based upon an independent appraisal for purposes of those Code sections which rely on fair value of ESOP securities.

– The fiduciary uses the market to set the ESOP price, but it is the average of the 20 trading days prior to year-end, rather than the year-end price. Topic 820 would require the year-end price.

ESOP & Valuation IssuesMay be inconsistent when private companies are theMay be inconsistent when private companies are the ESOP plan sponsors:• Topic 820 stipulates certain constraints with respect to p p p

the measurement of fair value with which the fiduciary may not agree.For example premiums or discounts based upon the• For example, premiums or discounts based upon the size of a holding are not recognized under GAAP.

• The fiduciary might, however, conclude that such y g , ,premiums or discounts should be recognized for purposes of the Employee Retirement Income Security Act and the Internal Revenue Code (IRC)Act and the Internal Revenue Code (IRC).

ESOP & Valuation IssuesWhat are we to do when inconsistencies arise?What are we to do when inconsistencies arise?• Every situation is unique and requires careful analysis.• Where such circumstances arise it is important that ourWhere such circumstances arise, it is important that our

terminology clearly distinguishes what amount that is the ESOP fiduciary’s determination of value, as opposed to the Topic 820 measurement of fair valuethe Topic 820 measurement of fair value.

• Next course of action would involve the ESOP trustee, the valuation firm, ERISA counsel and others.,

Disclosures

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DisclosuresThe following disclosures are required by ASC 820:

Th f i l t t th d f th ti i d• The fair value measurement at the end of the reporting period• The level within the fair value hierarchy (Level 1, 2, or 3) (1)

• The amounts of any transfers between Level 1 and Level 2 ofythe fair value hierarchy (recurring only)*

• A description of the valuation technique(s) and the inputsused in the fair value measurement for Level 2 and 3used in the fair value measurement for Level 2 and 3instruments. (1)

• A reconciliation from the opening balances to the closingb l f L l 3 i t t ll li d dbalances for Level 3 instruments as well as realized andunrealized gains/losses.


Disclosures• A description of the valuation processes used to

determine fair value of Level 3 instrumentsdetermine fair value of Level 3 instruments• A narrative description of the sensitivity of the Level 3

fair value measurements to changes in unobservableginputs*

Disclosure not required by non public entities• Disclosure not required by non-public entities(1) Denotes disclosure required for financial instruments in which fair value is

disclosed in accordance with ASC 825 only (public companies only – not applicable to non-public entities)applicable to non public entities)


Disclosures• ASC 820 encourages companies to combine the required

disclosures under ASC 820 and ASC 825 if applicabledisclosures under ASC 820 and ASC 825, if applicable,however, such combined presentation is not required.

• The guidance in ASC 820 requires the fair valueg qdisclosures (quantitative and qualitative) to bedisaggregated by class of assets and liabilities rather thanby major categoryby major category.

–As a result, fair value measurements will typically requiregreater disaggregation than the related line item(s) in theb l h tbalance sheet.


Some typical classifications within the hierarchy:Investment Level Traded equities Level 1Traded equities Level 1US T-Bills Level 1/2US Treasuries Level 2M i i l iti L l 2Municipal securities Level 2US Agency securities Level 2Private (hedge) funds Level 2/3Private company equities Level 3Private company debt Level 3Funds - Net Asset Value (NAV) Level 2/3Funds Net Asset Value (NAV) Level 2/3Certificates of deposit Level 2Mutual Funds Level 1/2

Speaker BiographyMichael Loritz CPAMichael Loritz, CPA

Shareholder, Mayer Hoffman McCann P.C.

913.234.1226

[email protected]

Mike has 15 years of public accounting experience with financial and service basedcompanies, including the engineering and construction industry. He is a member of theMHM's Professional Standards Group, providing accounting knowledge leadership in theareas of derivative financial instruments, share-based compensation, fair value, leasing,p grevenue recognition and others.

Mike's experience includes over 14 years with a Big Four firm where he was responsiblefor client service for large and small SEC filers and non-public entities audit/accountingfor client service for large and small SEC filers and non-public entities, audit/accountingtechnical expertise and training instruction and delivery.

Speaker BiographyKeith Peterka CPAKeith Peterka, CPA

Shareholder

Mayer Hoffman McCann P.C.

610.862.2744

[email protected]

With more than 19 years of experience in public accounting, Keith performs national firmresponsibilities for IFRS, fair value accounting and auditing, revenue recognition andbusiness combinations. He has also developed national training programs for accounting

t d l ti t ipronouncements and complex accounting topics.

Keith is a subject matter expert for IFRS, SEC reporting and fair value accounting inMHM’s Professional Standards Group. He also is a member on the IFRS Foundation'spSmall & Medium-sized Entities (SMEs) Implementation Group.

Speaker BiographyHal Hunt CPAHal Hunt, CPA

Shareholder

Mayer Hoffman McCann P.C.

913.234.1012

[email protected]

Hal leads MHM’s Employee Benefit Plan Audit Practice. With over 25 years of diverseexperience with employee benefit plan accounting, auditing and compliance issues, he isalso a member of the firm’s Professional Standards Group as subject matter expert onEBP l dit ll B i C bi ti d L iEBP plan audits, as well as Business Combinations and Leasing.

As the National Practice Leader for EBP Audits, Hal is responsible for providing internaltraining on the subject, along with providing technical support to engagement teams,g j g p g pp g gserving as engagement quality reviewer and developing resource tools for our EBP auditprofessionals.

Questions?

mhm executive education series webinar: financial instruments

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