Two-at-Desk-Financials-GASB-72

State and local governments should follow these five steps to properly comply with the new standard for footnote disclosures.

Regulations

GASB 72: Five Implementation Steps for Government Retirement Systems

  • Jason Ostroski
  • 8/17/2016

The Governmental Accounting Standards Board (GASB) issued Statement Number 72, Fair Value Measurement and Application, in February 2015. Since then, state and local governments have had to evaluate their fair value calculations and disclosures to comply with the new rules now in effect. 

In almost all situations, this new standard has not impacted the determination of fair value in your government’s retirement system investments, which you have been reporting at fair value for years. But there are some changes required in your financial statements’ footnote disclosures, and you will have to round up considerably more information. 

Follow these five steps to properly implement the new standard in your footnote disclosures. 

1. Contact your custodial bank for detail of investments by level 

To get the newly required detail of your investments by level, reach out to your custodial bank. GASB 72 was designed to mirror many of the requirements already in place for private companies, so custodial banks have provided this type of information to other clients for some time and are familiar with what must be reported. Even so, there may be some errors or omissions in their reports as they translate them for governmental entities, so be sure to proactively review the detail for accuracy. 

Some defined contribution plans may not have direct access to their custodial banks. If that’s true for you, work with your third-party administrator to get this information. 

2. Identify investments utilizing net asset value (NAV) for measurement 

Funds valued at NAV will generally include most non-custodial investments, including private equity, real estate, hedge funds, and other commingled funds. The “unit of account concept” described in GASB 72 will be important in this determination, and in some cases professional judgement may be necessary to determine the appropriate treatment. 

These investments must be separately identified because they are not included in the hierarchy of inputs. They also have more extensive disclosure requirements, including a description of the investment’s strategies, unfunded commitments, redemption provisions, restrictions and periods of lapse, restrictions on the ability to sell, and pending sale information. This is a change from the prior approach (taken by FASB in ASC 820) regarding the treatment of investment funds reported at NAV. 

Investments measured using NAV should be identified during the initial review of the hierarchy of inputs that your custodial bank provides. But take note: Because of the historical approach for reporting under ASC 820, your custodial bank may report many of the investments measured at NAV as level 3. To streamline the preparation of these disclosures in future years, work with the custodial bank to create a new category in the level reports for the investments measured at NAV, and have these investments reclassified to that category. 

3. Identify investments not reported at fair value 

Investments not reported at fair value are not included in the disclosure requirements for GASB 72, such as fully benefit-responsive stable value funds (measured at contract value) and investments held by 2a7-like external investment pools (measured at amortized cost). These investment and others not reported at fair value are not included in the hierarchy of inputs and should be excluded entirely from the GASB 72 disclosure. 

It is possible, however, that these investments must be included to reconcile the investment balances reported in the GASB 72 disclosure to the financial statements. 

4. Document your valuation techniques 

A description of the valuation techniques used to measure fair value is required for those investments that remain in the hierarchy of inputs, whether they are level 1, 2, or 3. An investment valuation policy is an excellent source of information for determining valuation techniques. If a valuation policy does not exist, then your financial reporting and investment personnel and the custodial bank should work together to evaluate and document the various estimation techniques used within each level. 

5. Draft the new disclosure 

Prepare a draft of the footnote using the information gathered in the previous four steps for interim or prior period balances. This proactive approach to planning and preparing for implementation will make the year-end close and financial statement preparation more effective and efficient. 

How we can help 

CLA’s state and local government professionals are deeply familiar with the requirements imposed by GASB 72. We can help you understand and implement the new rule in its entirety, submit all necessary information, and teach your people to proactively comply.