Statement No. 72 Fair Value Measurement and Application

For colleges and universities that follow governmental accounting standards (GAS) the definition of fair value has changed. In February 2015, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 72 (GASB 72), Fair Value Measurement and Application, which addresses accounting and financial reporting issues related to fair value measurement. The standard provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements.

GASB’s objective is to improve the financial reporting by clarifying the definition of fair value. The new standard aligns the GASB’s fair value definition and principles with those of the Financial Accounting Standards Board (FASB). However, some differences remain.

GASB defines 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”. When measuring fair value, the assumption is that the transaction would occur in the principal (or most advantageous) market.

Generally, all investments will be measured at fair value. However, GASB 72 maintains existing GASB standards with a number of exceptions for some investments that should be valued differently, including money market investments, 2a-7-like external investment pools, unallocated insurance contracts, non-participating interest-earning investment contracts and synthetic guaranteed investment contracts.

Valuation Techniques

Fair value is determined using one of three valuation techniques:

a. Market Approach – uses prices generated by market transactions involving identical or comparable assets or liabilities;
b. Cost Approach – uses the amount that would be required to replace the present asset; or
c. Income Approach – discounts the cash flows or income and expenses to the present value at the measurement date.

All these techniques should maximize relevant observable input and be consistently applied.

Disclosures

For most colleges and universities, GASB 72 will have the most significant impact on the footnote disclosures. Fair value measurements will be organized into a hierarchy, using the same three levels typically seen in financial statements that follow FASB standards, based on the reliability of the inputs. The levels are:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Based on other observable inputs (not quoted in the market)
Level 3 – Based on unobservable inputs
In addition to disclosing investments by level as described above, disclosures required by GASB 72 should be organized by type of asset or liability and include consideration of:

a. Nature, characteristics and risks. Assets or liabilities that share the same nature, characteristics or risks may be aggregated.
b. Level of asset or liability in the fair value hierarchy. Level 3 fair value measurements may need greater disaggregation.
c. Whether generally accepted accounting principles (GAAP) require disaggregation. Disclosures about derivative instruments should distinguish between hedging derivative instruments and investment derivative instruments.
d. The relative significance of the assets and liabilities measured at fair value to total assets and liabilities.
e. Line items presented in the statement of net position. A type of asset or liability will often require greater disaggregation than the line item presented in the statement of net position.

Additional disclosures are required for alternative investments that are measured using the Net Asset Value (NAV) per share. The disclosures for alternative investments should include the fair value, the investee’s significant investment strategies and other factors that affect liquidity.

Effective Date

The requirements of GASB 72 are effective for financial statement reporting periods beginning after June 15, 2015. Earlier application is encouraged. The implementation of this standard will require restatement of the prior periods presented