How are transfers between fair value hierarchy levels recognized and disclosed?

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AcadiFi · Accepted Answer

Transfers happen when the observability of inputs changes. Direction and policy both matter. **Recognition timing** (entity must disclose its policy): (a) beginning of the reporting period, (b) date of the event causing the transfer, or (c) end of the reporting period. Most entities pick a consistent policy and apply it to all transfers. **Common trigger events**: market for a security becomes illiquid during stress (Level 1 → Level 2 or Level 2 → Level 3); new observable data becomes available (Level 3 → Level 2); security resumes active trading (Level 2 → Level 1). Worked example: Westbrook Signal Funds held $8M of Cerulean Maritime Corp 6.5% senior notes. In Q1, the bond traded actively at quoted prices → Level 1. In Q2, Cerulean restructured and bond volume dropped to 2 trades per month. Westbrook reassessed and transferred the position to Level 2 using matrix pricing off comparable restructured shipping credits. **Disclosures required**: - Amount of transfers in and out of each level, separately (not netted) - Reason for the transfer - Consistent accounting policy for timing ```mermaid graph LR A[Level 1
Active quotes] -->|Liquidity dries up| B[Level 2
Matrix pricing] B -->|Models require
private inputs| C[Level 3
Unobservable] C -->|IPO or new
market data| B B -->|Trading resumes| A ``` Exam pitfall: transfers IN and OUT must be disclosed separately — netting is not permitted. Also, transfers don't generate P&L directly — unrealized gains/losses are reported in the standard fair value line.

How are transfers between fair value hierarchy levels recognized and disclosed?

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