GASB proposes fair value guidance.
In May 2014, the Governmental Accounting Standards Board released an exposure draft on Fair Value Measurement and Application. The proposed new guidance follows closely on the heels of a recent GASB Concepts Statement that addressed the appropriate measurement of assets and liabilities. In the newly released ED, the GASB proposes specific guidance on the nature and application of one of the four measurement approaches identified in that Concepts Statement: fair value.
The GASB is proposing that fair value be defined 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." That is, fair value is intended to describe a market-based exit price (for example, the sell price of an investment security rather than its buy price) in the government's principal market (or most advantageous market, if there is no principal market).
The ED suggests that fair value could be measured using either: 1) a market approach; 2) a cost approach; or 3) an income approach. A market approach would measure fair value using prices generated by actual market transactions involving identical or similar assets or liabilities. A cost approach would measure fair value based on the current cost to replace the service capacity of an asset. An income approach would measure fair value as the current value of future cash flows.
The ED underscores that the reliability of any of these measurement approaches depends on the quality of the inputs used to make the calculation. The ED proposes to classify potential inputs into three levels: 1) quoted prices in active markets for identical assets or liabilities; 2) other observable inputs (e.g., quoted prices for similar assets or liabilities in active markets; and 3) unobservable inputs, and would direct governments to maximize the use of higher level inputs.
In the case of nonfinanciai assets (e.g., land held for resale), the ED proposes that fair value be determined based on their highest and best use, taking into consideration what is: 1) physically possible; 2) legally permissible; and 3) financially feasible in a government's specific circumstances.
For liabilities, the ED proposes that fair value be based on the amount that would have to be paid as of the measurement date for someone else to assume them (rather than extinguish them).
Finally, the ED proposes to distinguish fair value (a market-based exit price) from acquisition value (a market-based entry price) and use the latter for valuing donated capital assets, donated works of art, historic treasures, and capital assets received in connection with service concession arrangements.
The new ED can be downloaded, free of charge, from the GASB's website. The GASB has requested that those interested in commenting on the proposal do so by no later than August 15, 2014.
STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.
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|Title Annotation:||The Accounting Angle; Governmental Accounting Standards Board|
|Author:||Gauthier, Stephen J.|
|Publication:||Government Finance Review|
|Date:||Aug 1, 2014|
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