Instructions:
The purpose of this assignment is for
you to learn more about the fair value disclosure requirements included in the
FASB
Accounting Standards Codification
(the
Codification). You will do so by examining
disclosures included in the following filings:
·
Form 10-Q (second quarter) for the assigned
financial firm and non-financial firm
·
Form 10-K for the assigned financial firm and
non-financial firm
Most of the questions in this
assignment can be answered by referring to the Notes to the Financial Statements
(Footnotes) in these SEC filings. Feel
free to copy and paste answers when it is appropriate to do so.
5 Facebook/Meta
and Toronto-Dominion
Questions:
Non-Financial Firm
(Insert Name)
1.
List
the three categories of investments held by the company for which the
corresponding fair value measurements fall within
Level 1
of the fair value hierarchy. How does the relevant footnote describe Level
1 inputs?
Answer:
2.
List
the various categories of investments held by the company for which the
corresponding fair value measurements fall within
Level 2
of the fair value hierarchy. How does the relevant footnote describe Level
2 inputs?
Answer:
3.
List
the categories of assets and liabilities held by the company for which the
corresponding fair value measurements fall within
Level 3
of the fair value hierarchy. How does the relevant footnote describe Level
3 inputs?
Answer:
4.
Using
the same portion of the footnote that you used to answer the previous three
questions, what does the company say about derivative assets and liabilities at
Levels 1 and 2 of the fair value hierarchy?
Answer:
5.
How
are the gains (losses) on derivative instruments designated as cash-flow hedges
initially reported and subsequently recognized?
Answer:
6.
How
are the gains (losses) from changes in fair values on derivative instruments
not designated as hedges primarily recognized?
Answer:
7.
How does the company measure its
equity investments without readily determinable fair values on a nonrecurring
basis?
Answer:
8.
For what purpose does the company use
derivative instruments? What is their
stated objective for holding derivatives?
Answer:
9.
What is the gross amount of derivative
assets held by the company at the end of the second quarter and at the end of
the year? What is the breakdown of these derivative assets between Level 1,
Level 2, and Level 3?
Answer:
10.
What
was the total carrying value and estimated fair value of the company’s
long-term debt, including the current portion, as of the end of the year? How
do these figures compare to the total carrying value and estimated fair value
as of the end of the second quarter? The estimated fair values at both dates
are based upon inputs at what level in the fair value hierarchy?
Answer:
11.
Explain
the procedure that the company uses to determine the fair value of its
financial instruments. What does the company say about the use of valuation
specialists?
Answer:
12.
What
is the purpose of the controls in the company’s “fair value processes” that are
used to measure the fair value of its investments? What types of controls does the
company have in place with respect to these “processes”?
Answer:
Questions:
Non-Financial Firm (Insert Name)
13.
Complete the following table as it
applies to the financial firm’s financial assets accounted for at fair value
under the fair value option or in accordance with other U.S. GAAP as of the end
of the year. Show your calculations for percentages (round percentages to two
decimal places).
|
Level 1
|
Level 2
|
Level 3
|
Investments in Funds at NAV
|
Counterparty and Cash Collateral
Netting
|
Total financial assets at fair value
|
Amount
|
|
|
|
|
|
|
% of total financial assets at
fair value
|
|
|
|
|
|
|
Answer:
14.
Complete
the following table as it applies to the financial firm’s financial liabilities
accounted for at fair value under the fair value option or in accordance with
other U.S. GAAP as of the end of the year. Show your calculations for
percentages (round percentages to two decimal places). Also, what is meant by “counterparty and cash
collateral netting”?
Answer:
|
Level 1
|
Level 2
|
Level 3
|
Counterparty and Cash Collateral
Netting
|
Total financial liabilities at fair
value
|
Amount
|
|
|
|
|
|
%
of Total financial liabilities at fair value
|
|
|
|
|
|
15.
List
the various categories of cash instruments held by the financial firm that are
included in Level 1 of the fair value hierarchy. How are these Level 1 cash
instruments valued?
Answer:
16.
List
the various categories of cash instruments held by financial firm that are
included in Level 2 of the fair value hierarchy. Describe the valuation process
for these cash instruments.
Answer:
17.
Describe
the valuation process for cash instruments that are included in Level 3 of the
fair value hierarchy.
Answer:
18.
Complete the table below regarding the
fair value of the financial firm’s cash instrument assets and liabilities at
the end of the second quarter and at the end of the year.
Answer:
In millions
|
Level 1
|
Level 2
|
Level 3
|
Total Cash Instrument Assets as of Second Quarter
|
|
|
|
Total Cash Instrument Liabilities as of Second Quarter
|
|
|
|
Total Cash Instrument Assets as of Year End
|
|
|
|
Total Cash Instrument Liabilities as of Year End
|
|
|
|
19.
What
is the amount of net unrealized gains on the financial firm’s cash instruments
assets classified within Level 3 of the fair value hierarchy for a) the three
months ended the second quarter and b) the six months ended the second quarter?
What was the primary contributor to the net unrealized gains or losses for each
of the two amounts?
Answer:
20.
What
items were transferred from Level 1 or Level 2 into Level 3 for the cash
instrument assets for the year? What triggered these items to be
transferred? What items were transferred
from Level 3 into Level 1 or Level 2 for cash instrument assets for the year? What triggered these items to be transferred?
Answer:
21.
How does the financial firm define
“derivatives”?
Describe the financial firm’s types of
over-the-counter (OTC) derivatives.
Answer:
22.
Identify and describe the types of
derivatives that the financial firm enters into.
Answer:
23.
Under
what circumstances does the financial firm include exchange-traded derivative
contracts within Level 2 or Level 3 of the fair value hierarchy?
Answer:
24.
How does the financial firm value Level
2 and Level 3 derivatives? Does the firm address the concept of price
transparency for derivatives? What do you think it means? Does the firm mention
product type? If so, what are the “product
types” that are being referred to?
Answer:
25.
Some
financial firms value Level 3 derivatives using models which utilize observable
Level 1 and/or Level 2 inputs, as well as unobservable Level 3 inputs. What
does your financial firm say about this?
Answer:
26.
For
each of the product types from the answer to question 24 that are Level 3
derivatives, describe the unobservable inputs used in the fair value
measurement.
Answer:
Product Type
|
Unobservable Inputs
|
|
|
|
|
|
|
|
|
27.
Compare the information disclosed by
1) the non-financial company and 2) the financial firm to comply with the fair
value disclosure requirements with the guidance found in ASC 820-10-50 in the
Codification. Comment on the overall value of the information disclosed by 1) the
non-financial company and 2) the financial firm. For each, focus on the
understandability and usefulness of the disclosures to the users of the
financial statements. Finally, compare the extent of the non-financial company’s
disclosures to those made by the financial firm. Why do you think that there is
a difference in the level of disclosure details for the two organizations? Does
your group believe that despite the differences in disclosures both organizations
comply with ASC 820?
Answer:
28.
FASB
released ASU 2018-13 in August 2018. This ASU impacts the disclosures for fair
value measurement (ASC 820)
a.
Why
did FASB issue this update?
b.
Who
is affected by the amendments in this update
c.
The
main provisions of the ASU fall into what three categories?
d.
When is ASU 2018-13 effective?
Answer: