The process tribes use to determine values for some investments is changing due to the Governmental Accounting Standards Board’s (GASB) Statement No. 72, which provides guidance on fair value measurement and reporting for state, local, and tribal governments.
Although the standard has wide-ranging impacts, this article focuses only on changes related to investments. The standard is effective for periods beginning after June 15, 2015.
GASB’s goal with this statement is to adopt consistent definitions and accepted investment valuation techniques. The statement also introduces the concept of a fair value hierarchy to governments and categorizes the inputs to valuation techniques into three levels. Below are five guidelines to get started on implementation:
Investment assets will require fair value measurement if they:
Fair value is defined as the price that would be received by the government to sell an asset in an orderly transaction between market participants at the measurement date. The focus of measuring fair value is on the exit price—selling an asset—not on the purchase or entry price.
The inputs to measure fair value are prioritized into the following three broad categories:
Level 1 inputs include quoted prices in active markets for identical assets and generally provide the most reliable and unbiased data.
Level 2 inputs include:
Level 3 inputs are unobservable inputs.
The goal of applying valuation techniques is to maximize the use of the relevant observable inputs and minimize the use of unobservable inputs. This input hierarchy was originally developed by the Financial Accounting Standards Board (FASB) and is already used by those who report financial statements under FASB standards. Investments measured at net asset value (NAV) per share are excluded from the fair value hierarchy.
Governments can use various valuation techniques, including one or more of these three approaches:
This statement allows governments to use the NAV per share for investments in nongovernmental entities when readily determinable fair value isn’t available, such as for an investment in a hedge fund. However, the NAV per share fair value measurement can’t be used when it’s probable that the government will sell the investment at a different price.
These additional disclosures the statement requires for financial reporting include:
Additional disclosures will be needed for investments measured at NAV per share to help users of the financial statements understand the investment’s nature and risks as well as whether such investments are likely to be sold at an amount different from NAV per share.
To better understand how this may affect your organization, contact your Moss Adams professional.