The process tribes use to determine values for some investments is changing due to the Governmental Accounting Standards Board’s (GASB) Statement No. 72, which provides guidance on fair value measurement and reporting for state, local, and tribal governments.
Although the standard has wide-ranging impacts, this article focuses only on changes related to investments. The standard is effective for periods beginning after June 15, 2015.
GASB’s goal with this statement is to adopt consistent definitions and accepted investment valuation techniques. The statement also introduces the concept of a fair value hierarchy to governments and categorizes the inputs to valuation techniques into three levels. Below are five guidelines to get started on implementation:
Understand Which Investments Are Affected
Investment assets will require fair value measurement if they:
- Are held primarily for the purpose of income or profit
- Have a present service capacity based solely on the ability to generate cash or to be sold to generate cash
Understand the Key Items of Fair Value
Fair value is defined as the price that would be received by the government to sell an asset in an orderly transaction between market participants at the measurement date. The focus of measuring fair value is on the exit price—selling an asset—not on the purchase or entry price.
Become Familiar with the Fair Value Hierarchy
The inputs to measure fair value are prioritized into the following three broad categories:
Level 1 inputs include quoted prices in active markets for identical assets and generally provide the most reliable and unbiased data.
Level 2 inputs include:
- Quoted prices for similar assets or liabilities in active markets
- Quoted prices for identical or similar assets or liabilities in inactive markets
- Market-corroborated inputs
- Other observable market data, such as interest rates or yield curves that are observable at commonly quoted intervals
Level 3 inputs are unobservable inputs.
The goal of applying valuation techniques is to maximize the use of the relevant observable inputs and minimize the use of unobservable inputs. This input hierarchy was originally developed by the Financial Accounting Standards Board (FASB) and is already used by those who report financial statements under FASB standards. Investments measured at net asset value (NAV) per share are excluded from the fair value hierarchy.
Understand Valuation Techniques, Approaches for Fair Value Measurement
Governments can use various valuation techniques, including one or more of these three approaches:
- The market approach measures fair value using prices and other information generated by market transactions involving identical or comparable assets or liabilities—quoted market prices, for example.
- The cost approach measures fair value as the price to replace the present service capacity of an asset, adjusted for obsolescence.
- The income approach measures fair value by calculating the current market expectations of future cash flows or revenues and expenses.
This statement allows governments to use the NAV per share for investments in nongovernmental entities when readily determinable fair value isn’t available, such as for an investment in a hedge fund. However, the NAV per share fair value measurement can’t be used when it’s probable that the government will sell the investment at a different price.
Become Familiar with Additional Disclosures
These additional disclosures the statement requires for financial reporting include:
- Fair value measurement at the end of the reporting period
- Level of fair value hierarchy
- Description of the valuation techniques used
- Valuation techniques changes—if significant—and the reason for making them
Additional disclosures will be needed for investments measured at NAV per share to help users of the financial statements understand the investment’s nature and risks as well as whether such investments are likely to be sold at an amount different from NAV per share.
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