A fair value disclosure is typically a short statement made in addition to the standard financial statement. Accountants provide these short statements — approved by management — in order to inform stakeholders about how a company values assets and liabilities. These latter two groups of items usually need a fair value disclosure at some time during the company’s lifetime. The statement usually includes information on why the company made a fair value adjustment, the method used to do so, and any positive or negative effects on the company’s financial statements. Disclosures with quarterly financial statements are most common with companies.
Accountants often include a fair value disclosure as a footnote in quarterly management reports made for executives and the general public. This method keeps the actual financial statements neat and clean, free from any confusing additions. Multiple footnotes may be necessary if a company has several different asset or liability groups that need disclosures. Accountants place marks with each disclosure to indicate which item corresponds with the note on the financial statement. The disclosures are usually three to five sentences in length, unless a complex adjustment was necessary and needs an explanation.
Most assets and liabilities need a fair adjustment at some time according to national accounting standards. In the fair value disclosure, accountants must dictate why the specific asset needed an adjustment. A short reference to the accounting standard and other reasons will start the note. In some cases, auditors may suggest fair value adjustments in order to rectify issues in the accounting information. The disclosure will certainly need to note this data as well.
Fair value adjustments may not always fall under the same process. Most companies can use one of three methods to make a fair value adjustment. These include using current market prices for identical items, observing current market data for similar items in an open market, and making an estimate based on unobserved data when no traditional market exists. The fair value disclosure needs to detail the method used and why. A few short specifics on the method used may also be helpful in the disclosure.
Perhaps the most important part of a fair value disclosure is the effects the change has on a company’s financial statements. Accountants need to provide information on the positive or negative effects for each specific item on the financial statements. The frequency of such changes may also be included. Publicly held companies can indicate how the change will affect earnings reported for stockholders. Again, however, the explanation should be brief and top level in nature.