Academic journal article Journal of Accountancy

GASB Proposes Change from Cost-Based Accounting

Academic journal article Journal of Accountancy

GASB Proposes Change from Cost-Based Accounting

Article excerpt

The Governmental Accounting Standards Board has proposed that governments, including government external investment pools, report investments at fair value. Comments on Accounting and Financial Reporting for Certain Investments and for External Investment Pools were due by June 14. The GASB scheduled public hearings on the proposed statement for May 22 and June 14.

The proposed statement would establish fair value standards for investments in interest-earning investment contracts, external investment pools and open-end mutual funds, as well as debt and equity securities, option contracts, stock warrants and stock rights for which fair value is readily determined. All investment income, including changes in fair value, would be reported as revenue in the operating statement.

"Fair value is the amount for which a financial instrument could be exchanged between two willing parties," said Randy Finden, GASB project manager. The current standard uses a cost-based method of accounting. Finden said the fair value of the instrument could be substantially less or more than what is currently reported. "If the entity suffers a liquidity crises, it may have to sell its instruments at current prices," said Finden. "If this happens, the paper losses are real losses." He said the fair value gave financial statement users information that could help them assess a government's accountability, the level of services it could provide and its financial position and condition.

"This proposal eliminates the 'hold-to-maturity' classification for investments," said George A. …

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