The Governmental Accounting Standards Board (GASB) issued Statement No. 72, Fair Value Measurement and Application, on February 27, 2015. The statement is in response to stakeholder requests for additional guidance on fair value issues. Fair value is the measurement of assets and liabilities at the expected 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; in other words, fair value is an exit price. For governmental accounting, fair value issues generally arise in the area of investments made by state and local governments. GASB No. 72 defines an investment as a security or other asset that a government holds primarily for the purpose of income or profit.
In order to measure fair value, information (i.e., inputs) about the asset or liability must be collected. Governments may use one of the following valuation techniques to gather information:
Market Approach: Prices and relevant market information
Cost Approach: The amount to replace the asset and its service capacity
Income Approach: Convert future cash flows into a single, current amount
Once gathered, the inputs’ objectivity and reliability must be assessed. GASB No. 72 uses the fair value hierarchy to differentiate the quality of the informational inputs into three levels:
Level 1 – Inputs are quoted prices in active markets for assets or liabilities identical to the ones being measured
Level 2 – Inputs are observable for similar assets or liabilities
Level 3 – Inputs are unobservable (e.g., management’s assumptions of the default interest rate for similar items)
Exceptions to fair value measurement include investments in external pools, money market investments, and investments in certain entities (i.e., alternative investments) that calculate net asset value rather than fair. Donated items (e.g., capital assets, works of art and historical treasures, and capital assets received in service concession arrangements) are measured at acquisition value; the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction, rather than at fair value. In other words, this is an entry price. Disclosures require a discussion of the fair value measurements, including the valuation techniques and levels of inputs used. If fair value estimates are not readily available from stock markets, professional judgment and the use of estimates may be required. This introduces uncertainty into fair value determination. GASB No. 72’s intent is to improve the consistency and comparability in measuring and applying fair value. Governments must now provide additional fair value disclosure information to assist users in making more informed decisions about the effect of fair value measurements.
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