GASB Issues Preliminary Views on Fair Value Measurement
June 27, 2013
On June 20th the Governmental Accounting Standards Board (GASB) issued a "Preliminary Views" (PV) document, entitled "Fair Value Measurement and Application," that focuses on fair value measurement and note disclosures. A PV is a board document used to solicit feedback on complex matters in the early stages of a technical project; a PV is an important step toward an exposure draft of a statement.
The objectives of the GASB's project on fair value measurement and application are to study attributes of fair value, establish a measurement framework for fair value, define fair value, provide guidance for applying fair value measurements to assets and liabilities, and recommend appropriate disclosures. Consequently the project addresses assets and liabilities that are already measured at fair value and investments - such as alternative investments - previously not measured at fair value.
The PV can be downloaded from the GASB's website. The comment deadline is September 30, 2013.
In 1997, GASB Statement No. 31, "Accounting and Financial Reporting for Certain Investments and for External Investment Pools," established accounting and financial reporting standards for investments held by governmental entities such as public colleges and universities. The statement defined fair value for certain types of investments and market related securities that have a readily determinable fair value. Because alternative investments are not addressed in statement 31, there is no authoritative guidance in GASB's literature that addresses the measurement of alternative investments, which have become a growing percentage of higher education endowment portfolios. NACUBO estimates that at least thirty percent of endowments established to support public institutions are held directly by public institutions rather than not-for-profit affiliated foundations. Many public institutions have been relying on guidance established by the Financial Accounting Standards Board (FASB) for valuing investments that do not have a readily available market price.
Over the years, other governmental entities have also wrestled with measurement issues related to alternative financial instruments. As a result, the Governmental Accounting Standards Advisory Council recommended that a fair value project be added to GASB's technical agenda. Since 2008, the board and staff have been monitoring developments in fair value related accounting standards issued by the FASB and the International Accounting Standards Board.
Because one of the objectives of the fair value project is a measurement framework, GASB has also been addressing an overall conceptual framework for measuring assets and liabilities. Consequently, the Board released a concept statement exposure draft (on the same day that the fair value PV was released) that seeks to establish that fair value is a measurement attribute of assets and liabilities. A measurement attribute is the feature or characteristic of the asset or liability that is measured. The proposed concept statement addresses two approaches to measuring assets and liabilities, (1) initial amounts which are recorded at the time an asset is acquired or a liability is incurred, and (2) remeasured amounts which are measured anew as of the date of each year's financial statements. Fair value would fall under the remeasured approach.
The Board's preliminary view is that an investment should be defined as a security or other asset that a government holds primarily for the purpose of income or profit, and the present service capacity of which is based solely on its ability to generate cash, to be sold to generate cash, or to procure services for the citizenry. Such investments should generally be measured at fair value.
Fair value 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. As such, fair value is an exit price. The market to which the definition of fair value refers is the principal market for the asset or liability or, when there is not a principal market, the entity's most advantageous market.
It is the Board's preliminary view that assets and liabilities measured at fair value should be organized into a hierarchy based on the levels of inputs used to measure fair value. The Board believes that there are qualitative differences among inputs used to measure fair value. These qualitative differences suggest that inputs should be organized into three levels:
- Level 1 inputs are unadjusted market prices in active markets for identical assets or liabilities
- Level 2 inputs are quoted prices for similar assets or liabilities or market corroborated observable inputs
- Level 3 inputs are those with no observable market data for the assets or liabilities
A governmental entity would first consider Level 1 inputs, then Level 2 inputs if Level 1 inputs are not available, and finally Level 3 inputs if both Level 1 and Level 2 inputs are not available.
It is the Board's preliminary view that different valuation techniques can be used to estimate the fair value of an asset or liability. The objective of using a valuation technique would be to estimate the price at which an orderly sale of an asset or transfer of a liability would take place between market participants, at the measurement date, under current market conditions. Valuation techniques would maximize the use of observable inputs and minimize the use of unobservable inputs.
Valuation approaches are used in conjunction with valuation techniques and include market, cost, and income approaches.
- A market approach uses prices and other relevant information generated by market transactions involving identical or similar assets, liabilities, or a group of assets and liabilities.
- A cost approach reflects the amount that would be required currently to replace the service capacity of an asset.
- An income approach would convert future amounts (for example, cash flows) to a single discounted amount
A government would be permitted, as a practical expedient to estimate the fair value of an investment that does not have a readily determinable fair value using the net asset value per share (or its equivalent) of the investment. This expedient would be available if the net asset value per share of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles for investment companies as of the government's measurement date
Concerning disclosures, it is the Board's preliminary view that, when fair value measurements are used in determining the amounts recognized in the financial statements, a disclosure should be made regarding how those amounts are determined. The Board believes that such disclosures would provide users with essential information regarding the reliability and sensitivity of the amounts recognized, which may vary depending on the type of asset or liability. The Board notes that the current literature already requires significant disclosures. For example, Statement 31 requires disclosure of the methods and significant assumptions used to estimate the fair value of investments, if that fair value is based on other than quoted market prices.
Provide Feedback to the GASB
The NACUBO Accounting Principles Council will study the PV and inform NACUBO's industry comment letter, which is due September 30, 2013. NACUBO encourages public institutions to submit comments directly to GASB or send comments to NACUBO for inclusion in the industry comment letter and public testimony which will be held in New York on November 1, 2013. NACUBO also encourages public institutions to consider participating in a fair value field test. Please contact Sue.Menditto@nacubo.org if you are interested.
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