GASB 72 – Fair Value Measurement and Application
Last year, GASB issued Statement No. 72, Fair Value Measurement and Application. Is your agency ready?
This key GASB provision amends the definition of fair value to be consistent with definitions and principals provided in other Accounting Standards. The objective of this Statement is to improve financial reporting by clarifying the definition of fair value for financial reporting purposes, establishing general principles for measuring fair value, providing additional fair value application guidance, and enhancing disclosures about fair value measurements.
The statement enhances comparability of financial statements among governments by requiring consistent measurement of certain assets and liabilities reported at fair value.
Fair value is 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.
Fair value is described as an exit price. Fair value measurements assume that a transaction takes place in a government’s principal market, or a government’s most advantageous market in the absence of a principal market. The fair value also should be measured assuming that general market participants would act in their economic best interest. Fair value should not be adjusted for transaction costs. To determine a fair value measurement, a government should consider the unit of account of the asset or liability.
An investment is defined as a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.
- Requires additional analysis of fair value if the volume or level of activity for an account has significantly decreased, as well as transactions that are not orderly.
- This Statement generally requires investments to be measured at fair value.
- Permits use of net asset value per share (or its equivalent) of the investment in the absence of readily determinable fair value.
- Requires disclosures of fair value measurements, the level of fair value hierarchy, and valuation techniques used.
- Requires governments to categorize Fair Values based on the criteria of the Fair Value Hierarchy.
The requirements of this Statement are effective for financial statements for periods beginning after June 15, 2015.