GAAP and IFRS

Government Fair-Value Rule Issued

The fair-value standard applies to real estate investments.
Marie LeoneNovember 21, 2007

State and local government endowment funds that hold land and other real estate as investments must report the asset or liability at fair value beginning next year, according to a new rule issued by the Government Accounting Standards Board. Currently governments report such assets and liabilities at historical cost.

The rule, Statement 52, was issued on Wednesday and is effective for financial-statement periods beginning after June 15, 2008. But governments can choose to adopt the standard before then, the GASB says. The new mandate mostly affects public colleges and universities, as well as other entities that carry land and other real property as part of their endowment investments.

By reporting the endowed real estate at historical cost, governments provide investment results only in the year the holdings are sold. But by using the fair-value method, governments provide “more decision-useful information about their composition, current value, and recent changes in value,” noted the GASB in a press statement.

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“The thinking behind fair-value accounting is that it gives better information to investors,” GASB spokesperson Christine Klimek told CFO.com. The rule mandates that governments report changes in fair value as investment income and requires them to disclose the methods and significant assumptions used to determine that market value. Also, governments must provide investors with information about other investments booked at fair value.

This isn’t the first time the GASB has required governments to record assets and liabilities at fair value. For example, in 1998 the standard setter issued Statement 31, which required some investments — such as external investment pools, open-end mutual funds, debt securities, and options contracts — to be reported at fair value. And in July, the GASB proposed that derivatives be booked using the method. Currently pension plans, other postemployment benefit plans, and some deferred compensation plans are also carried at fair value.

The switch to fair value aligns with efforts by the Financial Accounting Standards Board, the GASB’s private-sector sister organization. In one of its most far-reaching moves, for example, FASB issued fresh guidance in 2006 to help corporations and accounting firms measure assets and liabilities using fair value. That rule, known as FAS 157, affected more than 40 existing FASB standards, including those used to value stock options and derivatives used by corporations. Nevertheless, FASB has always been quick to point out that FAS 157 did not expand the use of fair value to any new circumstances.