GASB proposes measurement, fair value approaches

GASB on Thursday proposed a two-approach system to guide standard setting for measuring assets and liabilities of state and local governments. The board also issued its preliminary views regarding the measurement of fair value and the application of fair value, including note disclosures.

The two-approach system is described in the proposed concepts statement Measurement of Elements of Financial Statements. Initial amounts and remeasured amounts form the two approaches described in the proposal.

Initial amounts are determined at the time an asset is acquired or a liability is incurred. Remeasured amounts are determined anew as of the date of each year’s financial statements. GASB also is proposing four measurement attributes or characteristics of assets or liabilities that are being measured:

• Historical cost is the price paid to acquire an asset or the amount received when a liability is incurred in a transaction.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability at the measurement date.
• Replacement cost is the price that would be paid to acquire an asset with equivalent service potential at the measurement date.
• Settlement amount is the amount at which an asset could be realized or a liability could be liquidated with the counterparty, other than in an active market.

“Measurement is a necessary component of a complete GASB conceptual framework, which will enhance consistency in future standards setting for state and local governments,” GASB Chairman Robert Attmore said in a statement.

Fair value measurement and application
 
The Fair Value Measurement and Application preliminary views document describes:

• How fair value should be defined and measured.
• What assets and liabilities should be measured at fair value.
• What information about fair value should be disclosed in the notes to the financial statements.

GASB’s preliminary view is that investments should be measured at fair value. Investments would be defined as securities or other assets that a government holds primarily to generate income or profit, the present service capacity of which is based solely on its ability to generate cash, to be sold to generate cash, or to procure services.

Certain investments would be excluded from measurement at fair value and would continue to be measured according to existing standards. These would include investments in money market instruments with remaining maturity at time of purchase of one year or less.

Current accounting standards require state and local governments to disclose how they arrived at their measures of fair value if they are not based on quoted market prices. GASB proposes expanding these disclosures to include the levels of inputs a government uses to measure fair value and the judgments made to arrive at those inputs.

“In conjunction with the proposed concepts statement, the proposed changes to GASB’s fair value standards are intended to increase consistency and comparability in governments’ fair value measurements and related disclosures,” Attmore said.

A plain-language supplement discussing both proposals also is available. Stakeholders can visit GASB’s website to comment on the proposals through Sept. 30. State or local governments interested in participating in a field test of the preliminary views on fair value measurements can contact GASB Project Manager Randy Finden at rjfinden@gasb.org.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.