Final GASB guidance on investment valuation.

• Author: Gautheir, Stephen
• Position: Governmental Accounting Standards Board

The Governmental Accounting Standards Board (GASB) recently released Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, which will substantially alter how governments report investments in their financial statements.

Background

Traditionally, state and local governments have reported their investments at cost or at amortized cost (i.e., cost adjusted for discounts or premiums), while private-sector entities have reported investments at the lower of their cost or market value. In recent years, however, the private sector has moved toward "fair-value" accounting for investments. First, the Financial Accounting Standards Board (FASB), the GASB's private-sector counterpart, issued Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, which prescribed the use of fair-value accounting for all but a strictly limited category of investments (i.e., debt securities that the entity has the demonstrated intent and ability to hold to maturity). Later, the FASB extended the use of fair-value to substantially all investments of not-for-profit organizations.

In July 1995, the GASB elected to add to its technical agenda the matter of the proper valuation of investments by public-sector entities. The result was an exposure draft (ED) that was issued by the board in March 1996. The GASB's newest pronouncement essentially incorporates the proposals contained in the ED with certain limited but significant modifications.

Guidance for Most Entities

GASB Statement No. 31 requires that public-sector entities other than governmental external investment pools value each of the following categories of investments at fair value:

* interest-earning investment contracts that "participate in" (i.e., are affected by) market fluctuations (e.g., negotiable or transferable contracts, contracts whose redemption value considers market rates); nonparticipating contracts will be reported at amortized cost;

* positions in governmental external investment pools;

* positions in open-end mutual funds;

* debt securities; and

* equity securities, option contracts, stock warrants, and stock rights (if such items have readily determinable fair values).

GASB Statement No. 31 will allow governments to value short-term, highly liquid debt instruments (i.e., money market investments) at amortized cost if those investments have a remaining maturity of one year or less at the time they are acquired...