GASB updates fair value measurement requirements

March 24, 2017|Amber Danielski

Governmental standards surrounding fair value measurement have seen some changes, effective with 2016 financial statements. Be sure you understand how investments and related footnote disclosures must be handled before you get too far in the process.

The Governmental Accounting Standards Board (GASB) issued Statement No. 72, Fair Value Measurement and Application, in 2015 and it goes into effect for 2016 financial statements. Now is the time to dig into the changes and assess out how they affect your financial statements. There are a few things to take into consideration.

Let’s look at how the standard defines “investment”

The standard defines investment as a security or asset that:

  1. A government holds primarily for the purpose of income or profit, and
  2. Has a present service capacity based solely on its ability to generate cash or be sold to generate cash or income.

What government assets fit this criteria?

Identify what investments your government has. There’s the usual money market mutual funds, U.S. Treasury and agency securities, Local Government Investment Pool holdings, and so on. But does the government also hold land for resale? Is there another asset that the government holds primarily for income or profit? Identify all such items held by the government as of December 31, 2016, and assess the primary purpose or intent to use the asset. Going forward, you will make this assessment only at the time of acquisition.

Review how the fair value of those investments was determined in the past

Using that information, consider how that compares to the new accounting rules. Certain investments like Wisconsin Local Government Investment Pool and money market investments with less than one year left until maturity when purchased will be recorded at cost. Other investments will be recorded at fair value and, under the new rules, the fair value is the exit price, or the price to sell the asset at the measurement date.

You’ve probably used the market values on the bank statement for determining fair value on financial investments in the past. For other investments, you may have used recent sale prices or kept them recorded at the price when it was purchased. You need to assess whether these sources of information will provide you with the exit price or if you will need to find other sources. Once you have the information you need, you can make the adjustments to record the investments at fair value.

Evaluate your approach to footnote disclosures

GASB Statement No. 72 also added a new footnote disclosure to the financial statements. In the footnote, each type of investment is listed along with its fair value at year-end. Each type of investment will be placed in one of three levels, or categories. While these levels have nothing to do with how risky an investment may be, they are used to show the quality of the information used to determine the fair value of each investment. You are basically assessing how reliable the information used in the fair value determination is.

  • Level 1 is when you use quoted market prices in an active market for identical assets to determine fair value. Level 1 inputs are considered most reliable. 
  • Level 2 is when you use observable prices for similar assets. An example of this is matrix pricing, which is used by many investment firms.
  • Level 3 is when you had no observable inputs to use when determining fair value and relied more on assumptions.

Wisconsin statutes limit the types of financial investments a government may have, which should help make implementing the standard a little easier. If you have investments other than financial investments, you will have to devote a bit more time to implementing the standard.

For answers to your questions about implementing this new accounting standard, please contact Amber Danielski at 800-236-2246 or any member of the Schenck Government & Not-for-profit team.

Amber Danielski, CPA, CMA, is a manager who is responsible for performing the field work of audits for Wisconsin municipalities and school districts. She is a member of Schenck’s Government & Not-For-Profit team and has experience in preparing financial statements, Public Service Commission Reports, state financial report forms and more.