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GASB proposes new guidance on measurement.

In June, the Governmental Accounting Standards Board released two documents proposing guidance on the measurement of assets and liabilities in state or local government financial statements. One of the documents is an exposure draft of a proposed Concepts Statement on Measurement of Elements of Financial Statements. The other presents the board's Preliminary Views on Fair Value Measurement and Application.


The GASB's ED of a proposed new GASB Concepts Statement on Measurement of Elements of Financial Statements focuses on the measurement of assets and liabilities. The ED identifies two basic measurement approaches. One approach is to report a value based on an initial amount (when the asset was acquired or the liability was incurred), subject to subsequent adjustments (depreciation or amortization). The other approach is to report an asset or liability at a re-measurement amount (a value that is updated annually as of the reporting date).

The ED also identifies four specific measurement attributes to which the two measurement approaches just described could be applied: historical cost, fair value, replacement cost, and settlement amount.

The ED takes the position that generally re-measured amounts provide better information regarding service potential, whereas initial amounts normally provide better cost-of-services information. Accordingly, "trade-offs" sometimes must be made. The board concludes in the ED that:
      In these circumstances, the cost-of-services
   information has greater
   relevance in the governmental
   environment than the service-potential
   information because of
   the importance of providing information
   they can be used to assess
   inter-period equity.


The PV on Fair Value Measurement and Application: 1) defines the term fair value; 2) addresses how fair value should be measured; and 3) identifies situations where the GASB believes fair value should be used as the measure of a given asset or liability.

Definition. The PV proposes to define 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." Two specific aspects of this definition are especially noteworthy. First, the proposed definition of fair value focuses on an exit price (to sell/transfer) rather than on an entry price (to acquire). Second, the proposed definition is market-related.

The term market, as used in this definition, is intended to apply to the principal market for a given asset or liability (that is, the market with the greatest volume and level of activity for a given asset or liability). In the absence of a principal market, the appropriate focus for measurement would be the most advantageous market. The fair value of a non-financial asset would be its value at its highest and best use, taking into consideration what is physically possible, legally permissible, and financially feasible, in the circumstances.

In the case of investments, the PV takes the position that transaction costs should be reported as expense in the period in which the transaction occurs, rather than as an adjustment to fair value.

Measurement. The PV identifies three approaches to measuring fair value:

* Market Approach. Determine fair value based on market transactions involving identical or comparable assets and liabilities.

* Cost Approach. Determine fair value based on the amount that would be required currently to replace service capacity of an asset.

* Income Approach. Determine fair value based on related future amounts converted to a single amount (for example, the present value of projected cash flows).

Rather than focusing on which approach to use to measure the fair value of a given asset or liability, the PV focuses instead on the quality of the inputs used, which it classifies, in descending order of reliability, as follows:

* Level 1 Inputs. Unadjusted market prices in active markets for identical assets or liabilities.

* Level 2 Inputs. Other inputs that are directly or indirectly observable (independently verifiable) because they are derived from or corroborated by observable market data (for example, quoted prices for similar assets or liabilities).

* Level 3 Inputs. Unobservable inputs (for example, an estimate of the fair value of mortgage-backed securities based on the government's internally generated assumptions concerning prepayment rates, probability of defaults, and loss severity).

The PV proposes that financial statement preparers maximize the use of higher level inputs and would limit the use of Level 3 inputs to situations where Level 1 and Level 2 inputs are not available.

The PV specifies that the appropriate measure of fair value for liabilities would be the amount necessary to transfer a given liability to another party as of the measurement date, assuming that party would continue to fulfill the obligation (that is, not the amount at which the liability could be settled or otherwise extinguished). Such a measurement would ignore any restrictions on the transfer of the liability.

Application. As a general rule, investments would be reported at fair value. For this purpose, the PV proposes to define an investment as: "... a security or other asset that a government holds primarily for the purpose of income or profit, and its present service capacity is based solely on its ability to generate cash, to be sold to generate cash, or to procure services for the citizenry."

At the same time, the PV would exempt the following specific types of investments from fair value reporting:

* Certain money market investments and participating interest-earning investment contracts.

* Investments in 2a7-like pools.

* Investments in life insurance (other than investments in life settlement contracts).

* Investments in common stock that meet the criteria for use of the equity method.

* Nonparticipating interest earning investment contracts.

* Unallocated insurance contracts.

* Synthetic guaranteed investment contracts that are fully benefit responsive.

The PV also would introduce the notion of acquisition value reporting for a number of assets other than investments, such as donated capital assets.


The GASB has set September 30, 2013, as the comment deadline for both the ED on measurement and the PV on fair value. It also has scheduled a public hearing for both in Flushing, New York, on November 1.

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
Geographic Code:1USA
Date:Aug 1, 2013
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