Project Pages

Fair Value Measurement and Application

Project Description: The objective of this project is to review and consider alternatives for the further development of the definition of fair value, the methods used to measure fair value, the applicability of fair value guidance to investments and other items currently reported at fair value, and potential disclosures about fair value measurements.

Status:
Currently being deliberated
Exposure Draft approved on May 2014
Added to Research Agenda: April 2008
Added to Current Agenda: August 2011

Fair Value Measurement and Application—Project Plan


Background
: Practitioners have been asking for more guidance on fair value measurements. Some governments that are business-type activities are inquiring whether Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements, is applicable Other practitioners also are looking to FASB Statement 157 for guidance on fair value measurement methodologies. Fair value measurement issues have the potential to affect multiples areas of governmental financial statements and are not limited to investments. In staff’s conversations with practitioners, the absence of guidance creates uncertainties about how to value investments. This uncertainty, for example, presents the possibility that pension plan assets and net asset values reported by external investment pools may not be reliably reported.

Within the general issue of fair value are questions regarding measurement of specific investment types, such as alternative investments. Project staff’s research of the types of investments as reported in financial statement disclosures suggests that public universities (especially endowments), pension plans, and state governments would be affected by any guidance. Some western states report state land trusts. Project staff’s research indicates that preparers report these assets inconsistently because there is a lack of guidance. In turn, financial statement users may be uncertain of what the values of these alternative investments represent. Providing guidance in this area will lead to increased comparability between governments, greater accountability, and a better measure of the resources available to governments.

Accounting and Financial Reporting Issues:

  1. What is the objective of fair value measurements in financial reporting? 
  2. What guidance should be provided for appropriate methods and inputs for the development of fair values? 
  3. For the development of fair value estimates, should there be a hierarchy of inputs, such as between market-observed prices and model-based information?
  4. Should all investments reported by governments be measured at their fair values? 
  5. Should additional guidance be provided that further defines an investment? 
  6. What fair value disclosures are appropriate?
Project History:
  • Pre-agenda research approved: April 2008
  • Added to current technical agenda: August 2011
  • Task force established? Yes
  • Deliberations began: October 2011
  • Preliminary Views approved: June 2013
  • Comment period: June–September 2013
  • Field test conducted: June–September 2013
  • Public hearings held: November 2013
  • Redeliberations began: December 2013
  • Exposure Draft approved: May 2014
  • Comment period: May–August 2014
Current Developments: An Exposure Draft was approved on May 5, 2014. The comment period ends August 15, 2014.

Work Plan:

September 2014:

Redeliberate scope, applicability, and general principles issues.

October 2014 (T/C):

Redeliberate valuation technique and approaches and measurement principles issues.

November 2014:

Redeliberate application of fair value issues.

December 2014:

Redeliberate disclosure issues and review illustrations.

January 2015: Review preballot draft of a final Statement.

February 2015 (T/C):

Review ballot draft and issue final Statement.


Fair Value Measurement and Application—Recent Minutes


Minutes of Meeting, September 30- October 1, 2014

The Board began reviewing the comment letters received in response to the Exposure Draft, Fair Value Measurement and Application.

The Board tentatively agreed to make certain clarifying edits in order to increase readability of the final Statement. The Board tentatively decided to reaffirm the definition of fair value 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 Board also tentatively decided to define the term measurement date as the point in time when the fair value of an asset or liability is determined.

Minutes of Teleconference, May 5, 2014

The Board considered how to account for common stock that is received by a government in connection with its economic development activities. If the criteria for the equity method of reporting common stock are not met, the Board tentatively agreed to propose that if such stock does not meet the definition of an investment, it should be reported using the cost method.

The Board reviewed the draft of a proposed Statement on Fair Value Measurement and Application. The Board tentatively agreed to various clarifying changes to the Exposure Draft. Finally, the Board unanimously agreed to move forward with issuance of the Exposure Draft for comment.

Minutes of Meetings, April 8-10, 2014

The Board reviewed the preballot draft of the Exposure Draft of a proposed Statement on Fair Value Measurement and Application. The Board tentatively agreed the Exposure Draft should not pose any specific questions to respondents. (Respondents are encouraged to comment on all aspects of the proposed standards.) Based on the due process efforts associated with the Preliminary Views, the Board tentatively agreed that neither a public hearing nor a user roundtable should be held.

The Board also tentatively agreed that the Exposure Draft should not contain a provision introducing acquisition value in the matter of nonmonetary assets acquired in an exchange. The Board tentatively agreed that securitized mortgage loan receivables held by housing finance agencies should be classified as investments. Finally, the Board tentatively agreed to various clarifying changes to the draft and directed the project staff to prepare a ballot draft for the proposed Statement.

Minutes of Teleconference, March 24, 2014

The Board deliberated issues related to the draft text of the standards section of an Exposure Draft on the Fair Value project. The Board tentatively agreed that material related to highest and best use included in FASB Accounting Standards Codification Topic 820, Fair Value Measurement, should not be included in the text of the Exposure Draft. The Board also tentatively agreed that material related to application issues associated with the valuation premise of nonfinancial assets included in FASB Codification Topic 820 should not be included in the text of the Exposure Draft. The Board tentatively agreed that material related to offsetting positions included in FASB Codification Topic 820 should not be included in the text of the Exposure Draft.

The Board also discussed how the terms readily determinable, if practicable, and if practical have been used in GASB literature. The Board tentatively agreed that, at transition, assets that will no longer be measured at fair value should be restated at historical cost unless restatement is not practical.

The Board then reviewed the draft text of the standards section of the Exposure Draft and tentatively agreed to clarifying changes.

Minutes of Meetings, March 3-5, 2014

The Board continued its redeliberations of issues addressed in the Preliminary Views, Fair Value Measurement and Application, concentrating on due process comments related to fair value disclosures as described in Chapter 4 of the Preliminary Views. The Board also deliberated issues surrounding transition, effective date, and cost-benefit considerations.

The Board tentatively reaffirmed its preliminary view regarding disclosures that address the level of detail for fair value disclosures. The Board tentatively agreed to propose that fair value disclosures be organized by type or class of asset or liability, using the criteria set forth in the Preliminary Views.

The Board tentatively reaffirmed its preliminary view related to recurring and nonrecurring measurements. The Board tentatively agreed to propose that governments disclose the following: the fair value measurement at the end of the reporting period, the level of the fair value hierarchy within which the fair value measurements are categorized (Level 1, 2, or 3 as defined in the Preliminary Views), a description of the valuation techniques, if there has been a change in valuation technique and the reason for making the change, and for nonrecurring measurements only, the reason for the measurement.

The Board discussed the disaggregation of equity investments in an illustration included in the Preliminary Views in response to due process comments regarding disaggregation by industry. The Board tentatively elected to maintain the illustration as shown in the Preliminary Views in the forthcoming Exposure Draft.

The Board tentatively reversed its preliminary view requiring disclosure of quantitative information about the significant unobservable inputs used in the fair value measurements of Level 3 investments. In response to due process comments citing cost-benefit concerns, the Board tentatively agreed with those respondents that the benefits of this proposed disclosure did not exceed its costs. Further, the Board agreed that risk disclosures required by Statement No. 40, Deposit and Investment Risk Disclosures, adequately address the need for certain of this information.

The Board tentatively reversed its preliminary view requiring disclosure of a narrative description of the sensitivity of fair value measurements to changes in unobservable inputs used in the measurements of Level 3 investments. In response to due process comments questioning the decision usefulness of the information, the Board tentatively decided not to propose this disclosure in the forthcoming Exposure Draft.

The Board tentatively reaffirmed its decision to propose additional disclosures for investments that calculate net asset value per share or its equivalent. The Board considered due process comments concerned with the potential length of this disclosure for entities with a large number of these investments. In response, the Board requested that the illustration in the forthcoming Exposure Draft provide an example in which a large number of these investments have been aggregated.

The Board tentatively decided to propose that governments recognize the change in value when measuring an asset or liability at fair value for the first time due to adoption of the proposed Fair Value Statement as a cumulative effect restatement of beginning net position, fund balance, or fund net position, as appropriate, and that the nature of the restatement and its effect be disclosed.

The Board tentatively decided to propose that assets and liabilities that are currently measured at fair value and will be now required to be reported at historical cost based on the provisions of this proposal may use fair value at transition if the actual historical cost is not readily determinable. The Board directed the staff to research alternatives to the term readily determinable.

The Board tentatively decided to propose that governments recognize the change in value when an asset or liability currently measured at fair value is no longer required to be measured at fair value upon adoption of the proposed Fair Value Statement as a cumulative effect restatement of beginning net position, fund balance, or fund net position, as appropriate, and that the nature of the restatement and its effect should be disclosed.

The Board tentatively decided to propose that use of acquisition value in certain transactions be applied prospectively to new transactions, and retroactive adjustment of transactions previously recognized at fair value not be necessary.

The Board tentatively decided to propose that when comparative financial statements are prepared, the provisions be applied retrospectively. However, the Board also tentatively decided to propose that if restatement of all prior periods is not practical, the cumulative effect adjustment may be reported as a restatement of beginning net position, fund balance, or fund net position, for the earliest period restated.

The Board tentatively affirmed that the expected benefits of the Fair Value Statement, as currently proposed, outweigh the perceived implementation and ongoing costs associated with the proposed Statement. The Board considered due process comments regarding cost-benefit concerns on many issues throughout its deliberations of the proposed Fair Value Statement.

The Board tentatively decided to propose an effective date for the proposed standard of periods beginning after June 15, 2015. The Board considered the timing of other proposed standards when making this decision. In addition, the Board tentatively decided to propose that early application of the proposed Fair Value Statement be encouraged.

Minutes of Meetings, January 27-29, 2014

The Board continued its redeliberations of issues addressed in the Preliminary Views, Fair Value Measurement and Application, concentrating on due process comments related to the application of fair value to assets and liabilities as described in Chapter 3 of the Preliminary Views.

The Board tentatively reaffirmed its preliminary view that the proposed definition of investment should be “a security or other asset that a government holds primarily for the purpose of income or profit, and its present service capacity is based solely on its ability to generate cash, to be sold to generate cash, or to procure services for the citizenry.” However, in response to due process comments addressed later in the meeting, the Board tentatively decided that the phrase “to procure services for the citizenry” should be deleted in the proposed definition presented in the next due process document.

In response to due process comments regarding improvements to the examples provided in the Preliminary Views, the Board tentatively agreed that those examples struck the right balance between not being overly prescriptive and providing adequate guidance. The Board tentatively agreed that the examples presented in the Preliminary Views should be presented as an appendix in the next due process document, and additional examples can be provided in the implementation guide, if needed.

The Board tentatively agreed, in response to due process comments, that a specific asset cannot simultaneously meet the proposed definition of an investment and the definition of a capital asset, the proposed definition of an investment in its preliminary view is neither too restrictive nor too broad, and investments should be limited to assets.

In response to due process comments regarding how the definition of an investment would affect reporting for land and real estate assets, the Board tentatively agreed that the proposed scope of the Fair Value Measurement and Application project should not include extending fair value measurement to real property that could be reclassified as investment property. The Board also tentatively agreed that trust lands that meet the definition of an investment asset should be classified as investment property and, hence, measured at fair value.

The Board tentatively agreed, in response to due process comments regarding how to evaluate a change in how an asset is used by the government, that additional guidance is not needed as to a government’s usage of an asset as it was discussed in the characteristics of an investment.

The Board also tentatively decided that the Fair Value Measurement and Application project should continue as one project. The Board tentatively agreed that the codification of a final standard should be divided between a general discussion and description of fair value, and the application of fair value.

Given the due process feedback, including the results of the field test, the Board tentatively decided to propose that an investment be defined as “a security or other asset that a government holds primarily for the purpose of income or profit, and its present service capacity is based solely on its ability to generate cash or to be sold to generate cash.”

The Board reaffirmed its preliminary view that investments should be measured at fair value, unless specifically excluded from a fair value measurement. In response to due process comments regarding volatility, the Board tentatively agreed that the volatility fair value introduces is a faithful representation of the resources a government has to finance its operations.

In response to due process comments, the Board tentatively decided that a held-to-maturity classification should not be provided and that fair value is the appropriate measure for restricted investment assets.

The Board tentatively reaffirmed its preliminary view that life settlement contracts should be measured at fair value. In response to a due process comment requesting clarification, the Board tentatively agreed to propose that in a life settlement contract, the government be the contract or policy holder.

After considering due process feedback, the Board tentatively reaffirmed its preliminary view that the notion of a matched position or matched maturities should not be a basis for an exception to fair value. The Board also tentatively agreed that structured payouts are adequately addressed in the existing authoritative literature.

In response to due process comments regarding limitations to the use of the equity method, the Board tentatively agreed to propose that the equity method generally be applied by any governments other than the types of governments specifically excluded.

The Board tentatively reaffirmed its preliminary view that fair value should be replaced by acquisition value for the measurement of assets in certain transactions. In response to due process comments regarding the cost-benefit associated with acquisition value, the Board tentatively agreed that the cost of reporting acquisition values is similar to necessary efforts to estimate fair values.

In response to a comment requesting guidance for split-interest agreements to be included within the project, the Board tentatively agreed split-interest agreements should not be addressed in the Fair Value Measurement and Application project due to the pre-agenda research on irrevocable charitable trusts.

Minutes of Meetings, December 10-12, 2013

The Board began its redeliberations of issues addressed in the Preliminary Views (PV), Fair Value Measurement and Application, concentrating on fair value measurement, Chapter 2 of the document. Redeliberations included consideration of comments and testimony received on the Board’s proposals in that chapter.

The Board considered the comments and testimony received on its preliminary views in the following areas and made tentative decisions as discussed below:
  • Definition of fair value. The Board tentatively reaffirmed its preliminary view that the proposed definition of fair value should be 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. In response to due process comments, the Board tentatively decided that the measurement date can be other than the reporting date and that a proposed Statement should not indicate that fair value determinations be based solely on assumptions that market participants would use when pricing an asset or a liability.
  • Qualitative characteristics. The Board tentatively reaffirmed its preliminary view that fair value information meets the qualitative characteristics of financial information. In response to due process comments, the Board tentatively agreed that fair value is a measurement at a point in time (measurement date) that provides useful information to financial statement users regarding the resources available to finance a government’s operations, even though a future fair value may be significantly higher or lower.
  • The asset or liability. The Board tentatively reaffirmed its preliminary view that the proposed fair value measurements should be based on how market participants would evaluate an asset or liability.
  • Unit of account. The Board tentatively reaffirmed its preliminary view that a government should consider the unit of account at which a fair value measurement is made.
  • Principal or most advantageous market. The Board tentatively reaffirmed its preliminary view that a proposed Statement should address principal and most advantageous markets in terms of a government’s access to those markets. In response to due process comments, the Board tentatively decided that fair values impound future market expectations to the extent that market participants would consider those expectations.
  • Market participants. The Board tentatively reaffirmed its preliminary view that the definition of fair value should refer to market participants in the proposed Statement. In response to due process comments, the Board tentatively decided that market participants can be either governmental or nongovernmental entities.
  • Transaction costs. The Board tentatively reaffirmed its preliminary view that the proposed price used in a fair value measurement should not be adjusted for transaction costs. In response to due process comments, the Board tentatively agreed that a market participant should take into account transaction costs in determining its principal or most advantageous market and that the basis for conclusions of the proposed Statement should include a discussion of why transaction costs that arise from disposing of an investment (an exit-price notion) are generally not treated the same as the costs to acquire an investment (an entry-price notion).
  • Transactions that are not orderly. The Board tentatively reaffirmed its preliminary view that transactions that are not orderly should be addressed in a proposed Statement. In response to due process comments, the Board tentatively agreed that the general notion of hypothetical transactions and whether specific transactions (using examples) are orderly should be addressed in the text of a proposed Statement.
  • Active and inactive markets. The Board tentatively reaffirmed its preliminary view that the proposed Statement should address active and inactive markets.
  • Valuation approaches and techniques. The Board tentatively reaffirmed its preliminary view that the proposed fair value measurements should be based on three approaches: market, cost, and income, and that the valuation techniques chosen should be consistent with these three approaches. In response to due process comments, the Board tentatively decided that a proposed Statement should not limit application of valuation techniques or methods for real estate to real estate appraisers.
  • Fair value hierarchy of inputs. The Board tentatively reaffirmed its preliminary view that assets and liabilities measured at fair value should be organized into a hierarchy based on the levels of inputs used to measure fair value. In response to due process comments, the Board tentatively agreed that a proposed Statement should provide further explanations for the terms “observable inputs” and “unobservable inputs,” include specific examples of Level 3 inputs, and clarify that a level 2 input may need to be adjusted using level 3 input in certain circumstances if it is concluded that the level 2 input is not representative of the fair value.
  • Quoted prices provided by third parties. The Board tentatively reaffirmed its preliminary view that quoted prices provided by third parties should be acceptable ways to measure fair value, as long as a government has determined that those prices have been developed in accordance with fair value accounting standard. In response to due process comments, the Board tentatively decided that a proposed Statement should not specify the input level of values provided by a pricing service, and that such values should be classified according to the input hierarchy.
  • Blockage factor. The Board tentatively reaffirmed its preliminary view that a blockage factor, defined as “a premium or discount for the size of a government’s holding of an asset,” should not be proposed as an input in pricing an asset.
  • Inputs based on bid and ask prices. The Board tentatively reaffirmed its preliminary view that the use of a bid price for an asset and an ask price for a liability should be permitted but not required in a proposed Statement.
  • Measurement of nonfinancial assets—highest and best use. The Board tentatively reaffirmed its preliminary view that “highest and best use” should be described as a market participant’s ability to generate economic benefits by using the asset according to its highest and best use or by selling it to another market participant who would use the asset according to its highest and best use. In response to due process comments, the Board tentatively agreed that hypothetical transactions are properly addressed by the hierarchy of inputs and that the proposed Statement should indicate that a government should consider the assumptions of market participants, using acceptable market data as of the measurement date.
  • Measuring the fair value of investments in certain entities that calculate net asset value (NAV) per share. The Board tentatively reaffirmed its preliminary view that governments should be permitted to calculate the fair value of investments that do not have a readily determinable fair value using a practical expedient: that is, the fair value of such investments would be measured according to the NAV per share (or its equivalent, such as member units or ownership interest in partners’ capital). In response to due process comments, the Board tentatively agreed upon the following:
    • Under the practical expedient, the calculation of NAV per share guidance should provide that such measurements should be consistent with the measurement principles for investment companies
    • The issues that arise when there is a difference between the NAV determination date and the reporting date should be addressed in an implementation guide
    • An investment that will not be redeemed at its NAV per share should be addressed in the Board’s redeliberations on disclosures at a later date.
  • Measurement of liabilities. The Board tentatively reaffirmed its preliminary view that a fair value measurement of a liability assumes that the liability is transferred to another party at the measurement date. In response to due process comments, the Board also tentatively agreed that the fair values of liabilities should be based on a transfer price notion, not on a settlement basis. Lastly, the Board tentatively decided that a transfer restriction is not a barrier to evaluating a liability on a fair value basis.
Minutes of Meetings, October 29-31, 2013

The Board reviewed a paper that summarized comments received on the Preliminary Views, Fair Value Measurement and Application, and tentatively agreed to proceed with the project plan as presented in the latest technical plan.


FAIR VALUE MEASUREMENT AND APPLICATION—TENTATIVE BOARD DECISIONS TO DATE


These tentative decisions have been made since the issuance of the Exposure Draft document and in anticipation of a final Statement. The Board tentatively agreed to the following:
  • The definition of fair value should be “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 definition of measurement date should be “the point in time when the fair value of an asset or liability is determined.”

Fair Value Measurement and Application—Relevant Links