The statement redefines fair value and imposes hefty new disclosure requirements for higher education institutions.
Measuring assets and liabilities at fair value may not be a concept that finance officers at public colleges and universities give much thought to when preparing financial statements. But GASB’s Statement No. 72 Fair Value Measurement and Application changes that. The definition of fair value is fundamentally different, and your school has new related disclosure requirements.
Updated definition of fair value
Fair value is now defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. In determining this amount, three valuation techniques are available:
- Market approach — This technique uses prices generated for identical or similar assets or liabilities. The most common example is an investment in a public security traded in an active exchange such as the New York Stock Exchange.
- Cost approach — The cost approach determines the amount required to replace the current asset and may be ideal for valuing donations of fixed assets or historical treasures.
- Income approach — This technique converts future amounts (such as cash flows) into a current discounted amount.
Each of these valuation techniques requires inputs to calculate a fair value. Observable inputs should be maximized in fair value measures, and unobservable inputs should be minimized.
Hierarchy of inputs
GASB 72 establishes a hierarchy of inputs to the valuation techniques above. This hierarchy has three levels:
- Level 1 — Quoted prices in active markets for identical assets or liabilities. Example: ownership in shares of a company that is publicly traded on the Nasdaq exchange.
- Level 2 — Quoted market prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other-than-quoted prices that are not observable. Example: ownership of a corporate bond that trades on an exchange that is not active.
- Level 3 — Unobservable inputs. Example: ownership in a private hedge fund that does not trade on a public exchange.
When measuring an asset or liability at fair value, your higher education institution should maximize use of relevant observable inputs and minimize use of unobservable inputs.
No additional fair value measurements
Good news: GASB 72 does not require any additional assets or liabilities to be measured at fair value. The assets and liabilities currently recorded at fair value on the statement of net position, such as investments and interest rate swap liabilities, must be measured, recognized, and disclosed in accordance with the statement. Existing exceptions to fair value, such as investments similar to 2a-7 pools, will remain in place.
New disclosure requirements
Depending on the amount and complexity of your school’s assets and liabilities measured at fair, additional required disclosures can be significant. For each class or type (e.g., fixed income governmental, corporate, United States, etc.), assets and liabilities measured at fair value must disclose:
- Fair value measurement at the end of the reporting period (for recurring fair value measures)
- Level of the fair value hierarchy within which the fair value measurements are categorized (Level 1, 2, or 3)
- Descriptions of the valuation techniques
These disclosures must be organized by type of asset or liability. Presenting the required disclosures on one line in the notes to the financial statements labeled “investments” would not be enough information, whereas making the required disclosures for each and every individual security within your investment portfolio would be too much.
In assessing the proper level of disaggregation, GASB 72 states the following items should be considered:
- Nature, characteristics, and risks of the assets and liabilities. Assets and liabilities that share these attributes can be aggregated.
- Level of the fair value hierarchy the fair value measurement is categorized. Fair value measurements categorized in Level 3 of the fair value hierarchy may need greater disaggregation.
- Whether GASB 72 or another statement specifies a type for an asset or a liability. Disclosures should be disaggregated by type as specified by relevant accounting standards.
- Objective or the mission of your school. The level of aggregation or disaggregation may differ based on your institution’s objective or mission.
- Characteristics of your institution. Additional disclosures may be appropriate if the risk exposure of a particular fund is significantly greater than the deposit and investment risks of the primary institution.
- Relative significance of assets and liabilities
- Whether separately issued financial statements are available. A school may further aggregate disclosures if a component unit issues its own separate financial statements containing disaggregated information.
- Line items presented in the statement of net position. A type of asset or liability will often require greater disaggregation than the line items presented in the statement of net position.
Additional disclosure requirements may be necessary if there has been a significant change in valuation technique, what that change is, and the reasons for making it. For nonrecurring fair value measures, the reason(s) for the measurement must be disclosed.
For certain investments, most notably alternative investments such as private hedge funds, a net asset value (NAV) equivalent is used to estimate fair value. These investments do not need to be categorized as Level 1, 2, or 3, but additional disclosures are required, such as:
- Description of the investment’s strategies
- Your institution’s unfunded commitments
- Redemption provisions
- Redemption restrictions and period of lapse
- Restriction on the ability to sell
- Pending sale information
Examples of all of the above noted disclosures are included in GASB 72. Private companies have had similar fair value disclosure requirements for years, so they can also serve as examples of different assets and liabilities measured at fair value.
How we can help
CLA’s higher education professionals understand the requirements and intricacies of GASB 72, how it will impact the measurement and recognition of assets and liabilities measured at fair value, and the significant disclosures that are now required. We can guide you through the multifaceted changes, provide informative training on key issues, help implement internal compliance protocols, and assist in identifying effective protocols for your school’s needs.