Magazine article Government Finance Review

GASB Proposes New Guidance on Measurement

Magazine article Government Finance Review

GASB Proposes New Guidance on Measurement

Article excerpt

In June, the Governmental Accounting Standards Board released two documents proposing guidance on the measurement of assets and liabilities in state or local government financial statements. One of the documents is an exposure draft of a proposed Concepts Statement on Measurement of Elements of Financial Statements. The other presents the board's Preliminary Views on Fair Value Measurement and Application.


The GASB's ED of a proposed new GASB Concepts Statement on Measurement of Elements of Financial Statements focuses on the measurement of assets and liabilities. The ED identifies two basic measurement approaches. One approach is to report a value based on an initial amount (when the asset was acquired or the liability was incurred), subject to subsequent adjustments (depreciation or amortization). The other approach is to report an asset or liability at a re-measurement amount (a value that is updated annually as of the reporting date).

The ED also identifies four specific measurement attributes to which the two measurement approaches just described could be applied: historical cost, fair value, replacement cost, and settlement amount.

The ED takes the position that generally re-measured amounts provide better information regarding service potential, whereas initial amounts normally provide better cost-of-services information. Accordingly, "trade-offs" sometimes must be made. The board concludes in the ED that:

      In these circumstances, the cost-of-services
   information has greater
   relevance in the governmental
   environment than the service-potential
   information because of
   the importance of providing information
   they can be used to assess
   inter-period equity.


The PV on Fair Value Measurement and Application: 1) defines the term fair value; 2) addresses how fair value should be measured; and 3) identifies situations where the GASB believes fair value should be used as the measure of a given asset or liability.

Definition. The PV proposes to define 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." Two specific aspects of this definition are especially noteworthy. First, the proposed definition of fair value focuses on an exit price (to sell/transfer) rather than on an entry price (to acquire). Second, the proposed definition is market-related.

The term market, as used in this definition, is intended to apply to the principal market for a given asset or liability (that is, the market with the greatest volume and level of activity for a given asset or liability). In the absence of a principal market, the appropriate focus for measurement would be the most advantageous market. The fair value of a non-financial asset would be its value at its highest and best use, taking into consideration what is physically possible, legally permissible, and financially feasible, in the circumstances.

In the case of investments, the PV takes the position that transaction costs should be reported as expense in the period in which the transaction occurs, rather than as an adjustment to fair value.

Measurement. The PV identifies three approaches to measuring fair value:

* Market Approach. Determine fair value based on market transactions involving identical or comparable assets and liabilities. …

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