Fitch Ratings calls for improved “fair value” disclosure

Fitch Ratings is looking for improved “fair value” disclosure for assets whose measurement is relatively subjective so-called ‘Level 2’ assets the ratings agency said recently in a special report.
“The need for better fair value disclosures is an important part of the ongoing fair value debate,” Fitch notes in its special report, ‘Fair Value Disclosures: A Reality Check.’
The report outlines the fair value hierarchy employed in the U.S. GAAP, which consists of three different levels. Each level “prioritizes the relative reliability of the fair value inputs to a valuation technique,” Fitch notes.
Level 1 represents the most objective, reliable fair value inputs, and include quoted prices in active markets for identical assets or liabilities that a reporting entity has the ability to access at the measurement date.
Level 2 inputs include some degree of interpretation, in the sense that the quoted prices in active markets are based on similar, rather than identical, assets and liabilities in markets that are not active (i.e. closing prices, bid/asking prices, bank prime rates, prices to customers, etc.)
Level 3 inputs are unobservable inputs that include the reporting entity’s own assumptions based on available market information.
Fitch said it would like to see more information disclosed about Level 2 inputs (which include most of the financial assets and liabilities reported at fair value for banking groups).
“It would be particularly informative for users of the accounts to have the most reliable and least reliable Level 2 measurements reported separately, potentially introducing Level 2A and 2B categories,” Fitch said.
In addition, Fitch said it would like to see Level 3 disclosures apply to Level 2 assets and liabilities, because many Level 2 assets and liabilities share the same unobservable characteristics of the Level 3 assets and liabilities (and hence require a similar disclosure of assumptions).