GASB Clarifies How Fair Value Should be Defined and Measured

A proposal issued by the Governmental Accounting Standards Board (GASB) last week explains how fair value measurement should be defined for state and local government financial reporting.

The exposure draft, Fair Value Measurement and Application, which was issued by the GASB on May 15, describes how fair value should be defined and measured, what assets and liabilities should be measured at fair value, and what information about fair value should be disclosed in the notes to the financial statements.

“The proposed changes to the GASB’s fair value standards are intended to increase clarity, consistency, and comparability in governments’ fair value measurements and their related disclosures,” GASB Chairman David Vaudt said in a written statement. “The board believes that fair value measurements enhance the relevance of reported financial information, particularly when accompanied by robust disclosures.”

Under the proposal, fair value would 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. Investments would also generally be measured at fair value and be defined as a security or other asset that a government holds primarily for the purpose of income or profit and the present service capacity of which is based solely on its ability to generate cash or to be sold to generate cash.

Certain investments would continue to be excluded from measurement at fair value, such as investments in money market instruments with remaining maturities at time of purchase of one year or less, the GASB noted.

Under current accounting standards, state and local governments are required to disclose how they arrived at their measures of fair value if they are not based on quoted market prices. GASB is proposing to expand those disclosures to include the inputs a government uses to measure fair value and the judgments made to arrive at those inputs.

Stakeholders are being asked to review the proposals and provide comments to the GASB by August 15.

The GASB will hold a live, one-hour, CPE webinar on the exposure draft at 1 p.m. EDT on July 15 aimed at auditors and preparers. On July 17 at 1 p.m. EDT, the GASB will host a one-hour, non-CPE webinar for financial statement users. Registration for both events will be announced on the GASB website in the coming weeks.

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