GASB provides a definition of fair value and describes how it should be measured in new accounting and financial reporting guidance for state and local governments issued Monday.
Under GASB Statement No. 72, Fair Value Measurement and Application, fair value is 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.
The statement also describes which assets and liabilities should be measured at fair value and what information about fair value should be disclosed in the financial statements. The guidance defines investments—which generally are measured at fair value—as securities or other assets that governments hold primarily for the purpose of income or profit and the present service capacity of which are based solely on their ability to generate cash or to be sold to generate cash.
State and local governments previously have been required to disclose how they arrived at their measures of fair value, if their measurement was not based on quoted market prices. Statement No. 72 expands those disclosures to categorize fair values according to their relative reliability and to describe positions held in many alternative investments.
The new guidance was developed in response to requests by stakeholders for more clarity regarding the fair value standards and improved consistency and comparability in governments’ disclosures, according to GASB Chairman David Vaudt.
“The board believes that requiring governments to provide additional information about how they measure the fair value of their assets and liabilities will increase financial statement users’ understanding of the nature of the fair value information they receive and enhance users’ ability to make decisions with that information,” Vaudt said in a statement.
The guidance takes effect for financial statements for periods beginning after June 15, 2015. GASB encourages earlier application.
— Ken Tysiac is a JofA editorial director.