GASB Redefines Fair Value – More Disclosures Coming Your Way

GASB has updated the reporting standards it’s had in place since 1997 regarding fair value measurement. The update clarifies the definition of fair value, provides measurement and application guidance, and requires new disclosures. Governments with more intricate investment portfolios will likely feel a greater impact from the change.

What does fair value mean?

GASB now defines fair value as, “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.”

How will it affect my financial statements?

Additional disclosures will be included in your notes to the financial statements. These disclosures will be new for your entity. For all assets and liabilities that are recorded under the fair value measurement in your statements of Net Position, a fair value hierarchy will be required. There are three levels within the hierarchy. These levels are defined by the input used to arrive at fair value.

  • Level 1: Quoted prices for identical assets or liabilities traded in active markets
  • Level 2: Observable inputs for similar assets or liabilities such as:
    • quoted prices in active markets; and
    • quoted prices for identical or similar assets in inactive markets
  • Level 3: Unobservable inputs that reflect your entities’ own assumptions about the inputs a market participant would use

If an asset or liability has characteristics of more than one level, the entity would select the lowest level. An illustration of the hierarchy is provided at the end of this article.

Exceptions

GASB requires fair value measurement for most assets. However, there are always exceptions. Certain investments, such as investments in 2a7-like external pools and money market investments continue to be excluded as they are considered to be measured as a fair value equivalent.

Use of Net Value Asset (NAV)

You may invest in securities that do not have a readily determinable fair value, such as hedge funds, funds of funds, and limited partnerships but provide and calculate the fair value using the NAV per share. The government is allowed to use the NAV per share as the fair value. These investments are excluded from the hierarchy, however, they need to be included at the end of the table to reconcile the total securities to the statements of Net Position. Additional disclosures such as significant investment strategies, redemption rights and periods and unfunded commitments are also required.

More disclosures, what needs to be included?

Governments will now disclose the methods used to arrive at an asset or liability’s fair value in addition to where the asset or liability falls within the fair value hierarchy.

When do they affect me?

The updates are effective for periods beginning after June 15, 2015.  Early application is encouraged. The update should be applied retrospectively unless restatement of assets that will no longer be measured at fair value is not practical.

Illustrative Example

(taken from GASB Statement No. 72)

Please contact us with any questions on how this update may affect your entity.

Carrie Rice
Carolyn Rice | Partner
Jill Mulcahy | Senior Associate