NACUBO Responds to GASB's Fair Value Proposal
August 20, 2014
NACUBO's August 15 comments to the Governmental Accounting Standards Board (GASB) on the Exposure Draft (ED), "Fair Value Measurement and Application," support GASB's overall approach and point out known valuation and reporting challenges. NACUBO's comments draw from industry experience with complex investment instruments in college and university endowments. Although the 2013 NACUBO-Commonfund Study of Endowments shows that public institutions divest 52 percent of their endowment portfolios into alternative investment strategies, there is no current guidance for valuing or explaining these assets in GASB's literature.
The starting point for GASB's evaluation and application of fair value measurement is the Financial Accounting Standards Board's (FASB's) authoritative literature on fair value accounting and reporting (FASB Codification Topic 820). NACUBO recommended the following clarifications to the ED:
1. The addition [or inclusion] of an explanation of the difference between unit of account measurement and what the reporting entity should recognize.
Since alternative investments often have complex structures, it is important to differentiate whether an investor owns an underlying asset or a percentage of an investment structure (such as a limited partnership). NACUBO recommended that GASB clarify this directly in the ED and expand the examples in Appendix C to include a limited partnership investment, where the governmental entity owns an "interest" (or percentage) of the investments held by the partnership. The limited partnership structure is quite common among colleges and universities with alternative investments in their endowment pool; often the reporting entity owns an interest in the whole of the investee fund portfolio and lacks the ability to dispose of individual assets and liabilities in the investee fund portfolio.
2. Enhance the definition of how fair value might be determined when there is no available market.
NACUBO asked GASB to consistently apply the definition of fair value referenced in the glossary. As such, the comment letter points out that (even in a hypothetical transaction) buyers and sellers are market participants and when an asset is sold or a liability is transferred, the price is the amount that a buyer will pay (and the seller will receive).
3. Adjustments to Level 1 and Level 2 inputs, respectively.
NACUBO observed that the ED did not clearly state that input level adjustments result in the asset no longer being classified in that level. For example, although circumstances are listed in which adjustments could be made to Level 1 inputs, once an adjustment is made to a Level 1 input, it becomes a Level 2 or Level 3 input.
4. Comparability and consistency with FASB fair value disclosure requirements for investments that have no readily determinable market value—especially since FASB and preparers who follow FASB have years of experience with such investments.
NACUBO observed that the GASB proposal inconsistently added asset "type" terminology to disclosure requirements where FASB currently only requires that disclosures be made at the asset "class" level. Further, GASB does not define the terms "class" and "type" in the glossary or allow for flexibility and judgment when it may not make sense for certain investments to be disaggregated. The proposed requirements would lead public institutions to have lengthier disclosures than private institutions or affiliated foundations (that report under FASB) for the same alternative investment instruments.
5. An extension of the effective date by one year.
Based upon knowledge from higher education institutions that follow FASB guidance, a significant amount of time will be required for implementation, especially for those that have a large number of alternative investments. Proper leveling of investments within the fair value hierarchy requires assessing each investment; reviewing the terms of each investment, documenting the methodology used by third parties to estimate fair value, and understanding any limitations on redemption. NACUBO also believed implementation guidance would be necessary and questioned whether GASB's proposal to have implementation guides cleared by the Board would allow time for guidance issuance if the effective date was not moved forward.
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