Fair Value Measurement and Application
Minutes of Meeting, April 18-20, 2012
The Board discussed the FASB and IASB literature that pertains to the cost approach in measuring fair value and some of the current uses for this specific approach. That literature describes the cost approach as the amount that would be required currently to replace the service capacity of an asset, usually through acquisition or construction of a substitute asset. As it pertains to governments, the cost approach is most notably used by pension plans and endowments that use alternative investments. Those investments may report business combinations or property, plant, and equipment that do not have market prices or identifiable cash flows. Given the FASB guidance on fair value as a starting point for the GASB’s project, the Board tentatively agreed that a fair value standard should include a cost technique as substantively presented in FASB Accounting Standards Codification, paragraphs 820-10-55-3D and 55-3E. In order to alleviate confusion over terminology in the GASB literature, references to replacement cost
would be deleted.
After discussing the potential for a present value project, the Board tentatively agreed that this issue warrants its own project and that it should not be fully incorporated within the scope of the fair value measurement and application project. Present value topics should only be included to the extent that they are used in a fair value measurement. The Board discussed the present value material presented in FASB Topic 820, Fair Value Measurement, and tentatively decided to include the substance of the “general principles” of paragraphs 820-10-55-5 and 55-6 as part of the standard. The remaining portions of Topic 820 will be considered for inclusion in an Implementation Guide.
The Board also initiated a discussion on fair value disclosures, again using the FASB and IASB literature as a starting point. Rather than focusing exclusively on fair value disclosure issues for discussion at the upcoming May meeting, the Board tentatively agreed to move toward preparation of a draft standard that will reflect the tentative decisions made to date.
Minutes of Meeting, March 6-8, 2012
The Board continued deliberations for the fair value measurement and application project with specific focus on valuation techniques and measurement inputs.
The Board discussed FASB and IASB literature as it pertains to the market and income valuation techniques and tentatively agreed that governments should apply these techniques. The Board also discussed the current replacement cost valuation technique and will consider its implications for governmental entities in more detail at future deliberations. After a discussion of various valuation techniques, the Board tentatively agreed to propose that multiple valuation techniques may be applied. The valuation technique that should be applied is the technique that in the practitioner’s professional judgment best represents fair value. The Board considered FASB and IASB guidance that establishes a hierarchy of inputs for fair value measurements and tentatively agreed to propose a similar methodology, requiring practitioners to apply Levels 1, 2, and 3 inputs.
The Board tentatively agreed to propose that adjustments to the inputs in a fair value measurement for a blockage factor should be prohibited, regardless of an input’s categorization within the fair value hierarchy. Level 1 inputs should be utilized when available and not adjusted for premiums or discounts. Level 2 and 3 inputs may incorporate discounts and premiums to the extent that these characteristics would be considered by market participants when pricing the asset or liability.
The Board considered FASB and IASB guidance, and existing GASB guidance on the use of bid and ask spreads for the purpose of determining fair value. The Board tentatively decided to gather more information from the Fair Value Measurement and Application Task Force before reaching a tentative decision.
The fair value measurement and application project has been divided into two parts. The first part addresses fair value as a general proposition, and the second part addresses application issues. Given this approach, the Board tentatively decided to have staff prepare a draft of the standard that reflects the major tentative decisions to date. The Board then discussed the inclusion of a discussion of present value techniques and concluded that the staff should reframe the question and related materials so that they may be considered at the April meeting.
Minutes of Meeting, January 24-26, 2012
An educational session was held to provide an opportunity for the Board and the project staff to obtain insights as to the issues faced by the FASB and IASB in developing fair value accounting standards in the private sector. A member of the FASB staff presented information to the Board and then answered questions related to the topic. No Board deliberations occurred and no decisions were reached.
Minutes of Teleconference, January 4, 2012
The Board reviewed the findings of two, separate constituent outreach surveys related to fair value information. These surveys were developed by the GASB staff and administered separately to financial statement users and financial statement preparers, with an objective of developing information to assist the Board in its consideration of fair value measurement and application issues. No tentative decisions were made in relation to this constituent outreach.
The Board also continued deliberations on the principles associated with the development of the fair value definition. The Board tentatively agreed that the following principles would apply to a comprehensive fair value definition for both financial and nonfinancial assets and liabilities:
- Fair value is a market-based measurement.
- A fair value measurement should be based on a government’s principal market or, in the absence of a principal market, on a government’s most advantageous market.
- A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants at the measurement date.
- A fair value measurement represents an exit price.
The Board only addressed the principles described above in relation to the development of a comprehensive definition. The Board did not address or make any tentative decisions regarding the application issues of fair value, as the Board expects to address these issues in a later phase of the project.
Specifically related to nonfinancial assets, the Board reviewed the principles of highest and best use and the related valuation premise as defined by the FASB and IASB. The related valuation premise would address whether a nonfinancial asset should be evaluated in combination with other assets and liabilities or on a stand-alone basis. The Board tentatively agreed that, consistent with the FASB and IASB guidance, the fair value of a nonfinancial asset should represent the asset at its highest and best use as determined by market participants and should be measured according to the related valuation premise. As with the previous discussions and tentative decisions associated with this project, the Board only addressed the principles of highest and best use and the valuation premise and did not address or make any tentative decisions regarding the application of these principles to specific financial statement items.
Minutes of Meeting, December 13-15, 2011
The Board continued deliberations for the fair value measurement and application project with specific focus on the concept of entry and exit prices as applied to financial assets and liabilities.
The Board discussed FASB and IASB literature, which indicates circumstances in which a transaction price may not equal fair value, and plans to discuss the concepts and applicability to governments of these situations in more detail at future deliberations. The Board tentatively agreed that a fair value measurement for financial assets should represent an exit price. The Board considered FASB guidance that allows a practicability exception to the required use of an exit price, and tentatively agreed that, at this time, a fair value standard for governments should not contain a practicability exception.
The Board tentatively agreed that the fair value of a liability should be measured from the perspective of market participants and that the definition of fair value should refer to a liability’s transfer price. Consistent with the notion of measuring the fair value of a liability from the perspective of market participants, the Board also tentatively agreed that a government’s credit standing should be considered in an estimate of the debt of that government.
Minutes of Meeting, November 8-10, 2011
The Board continued deliberations for the fair value measurement and application project with specific focus on markets and orderly transactions.
In relation to markets, the Board tentatively affirmed to propose that fair value is a market-based measurement, rather than an entity-specific measurement. The Board also tentatively agreed to propose that fair values should be based on a government’s principal market or when there is not a principal market, on the government’s most advantageous market. Using the FASB and IASB definition of fair value as a basis for the development of a comprehensive fair value definition, the Board tentatively agreed to propose that a revised definition should no longer refer to willing parties but be revised to market participants.
In relation to orderly transactions, the Board tentatively agreed to propose that a revised definition of fair value should refer to orderly transactions as defined by the FASB and IASB. Further, the Board tentatively concluded to propose that in order to address adverse market circumstances adequately, a fair value standard should include how a fair value measurement should consider the effect of a decrease in volume or level of activity, what factors might suggest a decline in activity, and how a market or quoted price may be adjusted if that price does not represent fair value.
Minutes of Meeting, October 3-5, 2011
The Board began deliberations by reviewing background material on fair value definitions in current GASB literature and the literature of other accounting standards setters.
The Board reaffirmed its tentative decision reached during deliberations of the Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches,
that a fair value definition should not be limited to only financial instruments but expanded to potentially include other assets and liabilities.
The Board tentatively agreed that discussions of a definition of fair value should begin with FASB ASC 820, Fair Value Measurements and Disclosures.