Where companies are required to measure assets and liabilities at fair value, they’ll have some new disclosures to provide regarding changes in how they measure those values.

The Financial Accounting Standards Board has finalized Accounting Standards Update No. 2010-06 to amend Accounting Standards Codification Topic 820 in a way that elicits new disclosures about how fair value is measured and synchronizes the disclosure requirements with international rules. It takes effect for the 2010 reporting year for calendar-year companies.

The new rule requires companies to disclose where they transfer items in and out of “Level 1” and “Level 2” measurement methods under the three-level hierarchy for measuring fair value. Level 1 measurements rely solely on objective market evidence of fair value, while Level 2 measurements are based on a mixture of market evidence and internally development assumptions or estimates.

The new rules also require companies to describe activity that takes place in Level 3 measurements, where fair values are established based solely on models and other internal estimates and assumptions. For instruments measured at Level 3, companies will be required to present separate information, not final net numbers, on purchases, sales, issuances, and settlements.

David Larsen, managing director for Duff & Phelps, said the update clarifies that fair-value measurements for major classes of assets and liabilities should be disclosed separately. It also clarifies the required disclosure of the techniques and inputs companies use to estimate fair value, he said.

“The update will require some additional effort by companies to prepare,” said Larsen. “However, all required data should be readily available.”

The final rule does not include any new requirements for a “sensitivity analysis,” said Larsen, or disclosure of the impacts if the company were to use other possible alternative inputs. FASB proposed some requirements around sensitivity analysis but dropped the requirement from the final guidance.

Larsen said FASB and the International Accounting Standards Board are working jointly on how to harmonize fair-value requirements, including whether and how to require some kind of sensitivity analysis.

Some companies are still struggling with new requirements for pension plan disclosures, prompting PricewaterhouseCoopers to publish some guidance of its own to help clarify things.

The Financial Accounting Standards Board adopted a staff position in late 2008 now found in the Accounting Standards Codification at ASC 715-20-50 describing expanded new disclosure requirements about investments and other assets that are funding pension and other post-employment benefit obligations. The new disclosure requirements took effect Dec. 31 for calendar year-end companies.

PwC says the economic environment has caused a number of employers to take actions such as freezing plans that trigger requirements to remeasure plan obligations and plan assets—and the timing of those requirements can vary depending on the specific circumstances at play. That has led to a lot of questions, says PwC Partner Murray Akresh. “Getting the accounting right for the plan freeze is sometimes complicated,” he said.

Companies also are finding a lot of complexity around how to make proper disclosure for plans that are offered and administered in various different countries. “They have to get this new information not only for their U.S. plans, but also their foreign plans, summarize it, and draft up the new disclosure requirements,” he said. “It’s a pretty quick timetable for companies. There are a lot of things to do in a short period of time. It’s a lot of new information.”

Akresh said companies are encountering problems not only in gathering the data they need to prepare the new disclosures, but also questions about how to present it. Companies have some latitude to use their own judgment, he said, “so it take some thought by companies about how to use that judgment.”

The 15-page PwC guidance covers plan disclosure requirements, interim re-measurements, assumptions, accounting changes, valuation of plan assets, and changes brought about with the Pension Protection Act.

Thanks to new disclosures hitting corporate financial statements, analysts are learning a little more about who uses derivatives to hedge different kinds of risks and how they do it.

Fitch Ratings studied first-quarter 2009 filings of 100 companies from a range of industries and found derivative positions in excess of $296 trillion. Fitch found that 89 percent of the companies reviewed utilized derivatives, 90 percent of which elected to designate derivatives for hedge accounting purposes. Five major financial services firms in the review carried some 80 percent of the derivative assets and liabilities residing on corporate balance sheets.

The study also revealed that 58 percent of the companies reviewed disclosed the presence of credit risk-related contingent features in their derivative positions, which generally require a company to post additional collateral or settle any outstanding derivative liability if the company’s credit rating is downgraded. Fitch said the use of credit derivatives was limited to financial institutions, with only 17 of the 100 companies reviewed reporting such exposure.

Generally, non-financial companies appear to use derivatives only for hedging specific risks, Fitch said. Derivative valuation often is based on models, making changes in significant valuation assumptions particularly important. The firm said its analysis would be better if companies provided more disclosure on how sensitive their derivative valuations are to major assumptions.

“The new derivative disclosures are a welcome addition for analysts, and investors and they bring much needed transparency to financial reporting,” said Olu Sonola, director at Fitch, in a statement. “The disclosures reveal plenty, but careful analysis and additional scrutiny must be applied.”

Companies generally use derivatives to manage risks related to interest rates, foreign currency exchange rates, equities, and commodity prices, and sometimes more obscure risks like weather or longevity. With the first quarter of 2009, companies came under comprehensive new derivatives disclosures under Financial Accounting Statement No. 161: Disclosures about Derivative Instruments and Hedging Activities.

Under FASB’s new Accounting Standards Codification, those requirements are found under ASC 815-10-50. They generally require enhanced disclosures regarding how and why the entity uses derivatives, how derivatives and related hedged items are accounted for, and how derivatives and related hedged items affect the entity’s financial statements.

After years of adding disclosure requirements one at a time, Bob Herz, chairman of the Financial Accounting Standards Board has decided it’s time to step back and take a look at all those disclosure requirements more comprehensively.

Herz added a project to the FASB agenda to establish a disclosure framework, a game plan of sorts for how to make all financial statement disclosures more effective, more coordinated, and less redundant. The project is “not meant to be additive to disclosures, but rather to develop an overall framework for disclosures,” said Herz. “It will look at a better way to organize and standardize disclosures and footnotes.”

The focus of the project is to sort out the network of disclosure requirements for financial statement footnotes, and perhaps look at how it can be better integrated with information in management’s discussion and analysis and other disclosures, said Herz. The objective is to produce a principles-based disclosure framework that will enable companies to communicate more effectively with investors and to help eliminate redundancy and outdated disclosure requirements.

As part of the deliberations, the board also will consider whether such a framework should apply to interim reporting as well as annual reporting, and whether it should apply to private entities as well as public. Herz predicted the board may be able to issue a “preliminary views” document for comment in the first half of 2010.

As turmoil persists in financial markets and shakes confidence in the economy, investor advocates are cautioning analysts to be vigilant for signs of aggressive accounting tactics and fraud.

RiskMetrics Group is telling analysts to be especially skeptical about information companies present or dress up as measures of their financial health—“particularly non-GAAP or newly introduced metrics that are emphasized to investors but are not subject to rigorous audit procedures.” In a Webcast this week, RiskMetrics outlined its hot list of accounting issues that are most likely to create tension in varying ways among preparers, auditors, regulators, analysts, and investors.

Among the big concerns, valuation and impairment of financial instruments tops the list. RiskMetrics expects more “fast-tracked rule changes” related to fair value, impairments, and reserves. The Financial Accounting Standards Board has a number of short-term, quick-fix projects on its agenda related to fair value and impairment, sparked by the credit crisis and its mushrooming effects. One in particular would require more interim disclosure around fair value, and one would streamline the model for impairments.

While the reporting problems are especially pertinent for financial institutions, other public companies can run into problems as well, says Jeremy Perler, co-head of an accounting research group at RiskMetrics. Companies reporting their interests in other companies, for example, may assert that depressed values are temporary, he says. “If you own this company, you want to know the potential that that impairment is not just temporary,” he says.

Perler says companies are expected to face a raft of new disclosure requirements, many of them focused on complicated financial instruments, fair value, derivatives, off-balance-sheet entities, pension plans, contingencies, credit derivatives, discontinued operations, and oil and gas reserves. “The standard setters have been pretty active recently in requiring new disclosure,” he says. “This year we expect to see a ton of them in different areas.”

RiskMetrics says analysts and investors should also look cautiously at anything related to off-balance-sheet entities, pension plans, business combinations, convertible debt, and revenue recognition. Longer term, the group says companies should also keep close tabs on developments in the shift to International Financial Reporting Standards and in the movement to develop a new presentation system for financial statements.

In its second analysis of comment letters issued by the Securities and Exchange Commission, Deloitte & Touche finds SEC staff is showing keen interest in all the accounting and disclosure issues that stem from troubled credit markets.

Deloitte staff studied comment letters issued by the SEC’s Division of Corporation Finance to get a feel for any emerging themes. The staff found plenty of evidence to suggest the SEC staff is scrutinizing, for example, goodwill and intangible asset impairments, other-than-temporary impairments, deferred tax valuation allowance, compliance with debt covenants, fair-value measurements, and the allowances for loan losses. That’s in addition to all the usual hot-button issues, such as revenue recognition, business combinations, segment reporting, financial instruments, and impairments.

“Especially closer to the end of the year, in November and December, we saw a real theme on disclosures that arose from liquidity, sources and uses of cash, and how a company is impacted by the current economic environment,” said Christine Davine, a partner-in-charge at Deloitte and co-author of the firm’s report.

The focus isn’t terribly surprising, said Davine, in part because the SEC has been proactive in recent years in trying to communicate to registrants and the accounting profession where it has concerns about financial reporting—and the staff has made plenty of pleas in speeches and publications recently for plenty of disclosure related to the economic meltdown. “The SEC tries to do a pretty good job of outreach,” she said. “They’re trying to make it a transparent process so companies can enhance their disclosures.”

On the legal side, Deloitte’s comment letter study also revealed the SEC is paying close attention to executive compensation disclosures, said Davine. “This is a huge area of emphasis, and not unexpected,” she said. “They’re looking for transparency in the compensation discussion and analysis. There’s lots of talk about executive compensation generally, and so that translates into disclosures.”

Deloitte’s report says the SEC staff frequently asks for disclosures that explain the basis for compensation decisions and what happens in compensation if there’s a change of control within the company, especially whether and how the company uses performance targets. Executive compensation disclosure requirements allow companies to exclude performance targets and other data involving confidential information if disclosing it would be damaging competitively, the report says. “While companies are not required to formally request confidential treatment to omit these disclosures, they must meet the confidential-treatment standard and demonstrate to the staff upon request that they have done so,” the report reminds companies.