By Tara Fenner
Governmental Accounting Standards Board (GASB) Statement No. 72: Fair Value Measurement and Application, was issued in February 2015 to provide more consistent reporting with regard to investment measurement to assist financial statement users with more relevant information about the impact of investments on a governmental entity’s financial position.
Implementation of this standard is required for governmental financial statements issued for periods beginning after June 15, 2015 (6/30/16 fiscal year and later). There are two main components of this standard that will need to be addressed: measurement of certain investments at fair value in the financial statements and additional footnote disclosures. Fair value, often referred to as an exit price, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The investment types required to be reported at fair value include those held for the purpose of income and those held solely for generating cash or to be sold to generate cash. There are also several investment types excluded from this guidance such as money market accounts, life insurance and guaranteed investment contracts, and 2a7-like external investment pools (non-SEC registered investment companies that operate in accordance with SEC’s Rule 2a7 of the Investment Company act of 1940).
Valuations are done by unit of account for the investments held. For fair value measurements, there are three approved valuation techniques.
Market Approach – Measurements are based on prices and other information from market transactions involving similar assets and liabilities.
Cost Approach – Measurements are consistent with the replacement cost of an asset.
Income Approach – Measurements are based on the conversion of future amounts (cash flows, for example) to a current discounted amount.
Techniques used must be consistent and maximize observable inputs rather that unobservable inputs. Levels (1, 2, and 3), referred to as a fair value hierarchy, have been developed to assist management and financial statement users with determining the type of inputs that have been used for the fair value measurements.
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – observable inputs, other than quoted market prices
Level 3 – unobservable inputs, such as appraisals and management’s assumptions
At a minimum, disclosures required under GASB 72 include the valuation techniques used and the leveling within the fair value hierarchy for investments organized by type of investment. These disclosures and leveling decisions must be made by management. Additional information about various investment types and illustrative disclosures can be found on the GASB website at http://gasb.org/.