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Fair Value Measurement Brings Governments Closer to Commercial Reporting
In February 2015, the Governmental Accounting Standards Board (GASB) issued Statement No. 72 Fair Value Measurement and Application. The statement provides guidance for determining and reporting fair value measurements and brings governmental entities closer to commercial reporting standards.
Even though the enhanced disclosure of investments is not likely to have a significant impact on the way governments are audited, it may require the attention of organizations that prepare their own financial statements.
The GASB statement outlines the most common measurement approaches to determine fair market value. The market approach uses prices and market transactions involving comparable assets or liabilities. The cost approach reflects the amount that would be required to replace the present asset, while the income approach converts future cash flows or income and expenses to a single current discounted amount.
Statement No. 72 stipulates that valuation techniques should maximize the use of relevant observable inputs, and describes three basic categories of investments in detail: securities, investments not measured at fair value, and donated assets.
Anything defined as a security needs a fair value assessment. These investments can also include other assets if a government holds them for the purpose of income or profit and the investment has the ability to generate cash. The most common assets will be equity securities, but be on the lookout for alternative investments and intangible assets that may also meet the definition of an investment.
Investments not measured at fair value
Some elements of fair value have not changed as a result of Statement No. 72. For instance, many investments are still not measured at fair value:
- Money market investments
- 2a-7-like external investment pools
- Investments in life insurance contracts
- Common stock (meeting the criteria for applying the equity method)
- Unallocated insurance contracts
- Synthetic guaranteed investment contracts
Statement No. 72 continues to require measurement at acquisition value (an entry price) for donated capital assets, donated works of art, historical treasures, and similar assets and capital assets received in a service concession arrangement. There are no changes in the way clients account for these items.
When does the change occur?
Statement No. 72 is effective for reporting periods beginning after June 15, 2015. In the period this statement is first applied, changes made to comply should be treated as an adjustment of prior periods, and financial statements should be restated. In most cases, an organization’s financial statements will not look much different, however, the footnotes and the information you provide to support the numbers will require greater attention.
How we can help
A financial professional can help you fully understand the approaches you may use as well as how Statement No. 72 may affect your organization’s financial statement footnotes. The true value of following the new GASB guidance is improved transparency and a closer alignment with private sector reporting practices.