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Fair Value Measurement—Project Plan

Project Description: The objective of this research project is to review and consider alternatives for the further development of the definition of fair value, the methods used to measure fair value, and potential disclosures about fair value measurements. Within this review, specific issues including fair value measurement of alternative investments, such as private placements and hedge funds, real estate investment trusts, state land trusts, and partnership interests are to be addressed.

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.

Major Research Issues:

1. What is the objective of fair value measurements in financial reporting?
2. Depending on the outcome of the Recognition and Measurement Attributes conceptual framework project, should investments, derivatives, or other financial instruments be measured at fair value in the governmental funds?
3. What guidance should be provided for appropriate methods and inputs for the development of fair values?
4. Should a standard indicate a hierarchy of inputs, such as between market-observed prices and model-based information, for the development of fair values?
5. When land is held as an investment and measured at fair value, how should fair values be estimated?

Research Work Plan: The chief activity during the research period will be the accumulation of additional, more detailed issues that the project should address. This activity will be conducted in conjunction with the Derivatives Project and the Investment Omnibus Project.

Fair Value Measurement—Relevant Links