WASHINGTON — The Governmental Accounting Standards Board has released a proposed statement that provides more guidance about how state and local governments should measure the fair value of investments for financial reporting purposes.
The GASB issued its draft statement on Thursday, and stakeholders have until Aug. 15 to provide comments. The requirements of the statement would be effective for financial statements for periods starting after June 15, 2015.
State and local governments measure some investments and derivatives at fair value on their financial statements. Under the proposed statement, 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 be defined as assets that governments hold for the purpose of income or profit and have a present service capacity based only on their ability to generate cash or be sold to generate cash. While investments would generally be measured on financial statements at fair value, some investments would be continue to be excluded from being measured this way, including investments in money market instruments with maturities of one year or less at the time of purchase, GASB said.
The proposed guidance would lead to increased disclosure. Currently, governments have to disclose how they arrived at measures of fair value if they don't stem from quoted market prices, GASB said.
However, under the proposed guidance, disclosures would be expanded to include the inputs governments' use to measure fair value and the judgements made to come to those inputs. The disclosures will indicate the relative reliability of the fair value measurements. Also, state and local governments would need to make additional disclosures regarding alternative investments such as hedge funds and private equity.
"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 release. "The Board believes that fair value measurements enhance the relevance of reported financial information, particularly when accompanied by robust disclosures."
The current guidance "needed to be updated," in light of circumstances that have been seen in the market, Randy Finden, a project manager at GASB, said in an interview. For example, the proposed guidance addresses how to adjust fair value when markets are inactive, as they were during the credit crisis.
