GASB No. 72: Fair Value Measurement GASB No. 79: Certain Investment Pools and Pool Participants. Jon Tilelli and Samantha Nicola

Transcription

1 GASB No. 72: Fair Value Measurement GASB No. 79: Certain Investment Pools and Pool Participants Jon Tilelli and Samantha Nicola

2 GASB 72: Overview Intended to improve the comparability of financial statements by providing a more detailed definition of fair value as well as additional guidance for consistent valuation techniques. The disclosures required related to the valuation methods are intended to provide enhanced information to users. Effective for calendar and fiscal year

3 GASB 72: Scope and Applicability All state and local governments, including primary governments, pension plans, OPEB plans, investment pools, etc. Applies to assets and liabilities that are measured at fair value, which in most cases are investments or hedging derivatives. 3

4 GASB 72: Scope and Applicability Excludes the following investment types: Investments in nonparticipating, interest-earning investment contracts Investments in unallocated insurance contracts Money markets investments and participating interest-earning investment contracts that have a remaining maturity of one year or less. Investments in qualifying external investment pools. Synthetic GICs that are fully benefit responsive. Investments in life insurance contracts. 4

5 GASB 72: Definitions Fair Value 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. Investment The price or other asset that A) a government holds primarily for the purpose of income or profit B) has present service capacity based solely on its ability to generate cash or be sold to generate cash. Unit of account Level to which an asset or liability is aggregated or disaggregated. 5

6 GASB 72: Valuation Techniques Market approach Uses prices or other information from market transactions involving identical or similar assets Cost approach The current cost to replace the present service capacity or to acquire or construct a replacement asset, adjusted for obsolescence. Income approach Converting future cash flows or revenues net of expenses to single current amount. 6

7 GASB 72: Valuation Inputs Hierarchy of Inputs Level 1: Quoted market prices for identical assets or liabilities in active markets that a government can access at the measurement date. Price of stock or mutual funds Level 2: Observable inputs other than those meeting level 1. Bond matrix pricing LIBOR swap rate (for pay-fixed, receive-variable interest swap based on LIBOR swap rate) Level 3: Unobservable inputs Commercial real estate - financial forecast using a government s own data. Investments valued using NAV as a practical expedient are excluded from hierarchy. Pooled separate account Fund of a fund Common collective trust 7

8 GASB 72: Disclosures Organized by type of asset or liability Disaggregated based as appropriate based on: Nature, characteristics, and risks of asset or liability Level of the fair value hierarchy Objective of government (ex: external investment pool) Character of government Whether separately issued financial statements are available For recurring and nonrecurring fair value measurements, must describe value techniques used or changes in techniques. For nonrecurring measurements, must disclose the reason for the measurement. 8

9 GASB 72: NAV Disclosures Fair value for each type of investment as of the measurement date Fair value Description of significant investment strategies For investments that can never be redeemed but that a government receives through distributions, an estimate of the period over which its interest in the investment is expected to be liquidated Unfunded commitments Description of terms and conditions of redemption Circumstances in which a redeemable investment type might not be redeemable Restrictions on sales 9

10 GASB 72: Footnote Disclosure Example The Entity categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. 10

11 GASB 72: Footnote Disclosure Example (Continued) The Entity has the following recurring fair value measurements as of June 30, 2016: Mutual funds Valued at the daily closing price as reported by the fund. Mutual funds held by the Entity are open-end mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value (NAV) and to transact at that price. The mutual funds held by the Entity are deemed to be actively traded. Fixed income funds Valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yield currently available on comparable securities of issuers with similar credit ratings. Equity funds Valued at market prices for similar assets in active markets. Common stock Valued at quoted market prices for identical assets in active markets. Hedge funds and private investments Valued at NAV of units held, as reported by the fund advisor or general partner. The Entity reviews and evaluates the values and assesses the valuation methods and assumptions used in determining the fair value of these alternative investments. Because alternative investments are not readily marketable, NAV is used as a practical expedient, and their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a readily available market for such investments existed, and differences could be material. Derivative liabilities Valued based on the interest rate swap agreement s valuation models and assumptions and available market data, some of which may be internally developed. Split-interest obligations Valued annually using appropriate discount rates and actuarially determined life expectancies. 11

12 GASB 72: Footnote Disclosure Example (Continued) The following table summarizes the assets and liabilities of the Entity for which fair values are determined on a recurring basis as of June 30, 2016: *In accordance with GASB 72, certain investments that were measured at NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statement of net position. 12

13 GASB 72: Footnote Disclosure Example (Continued) The following table discloses the nature and risk of investments for which fair value has been estimated using the net asset value per share (NAV) of the investments as a practical expedient as of June 30, 2016: 13

14 GASB 72: Footnote Disclosure Example (Continued) (a) Fund of funds This category includes investments in hedge funds that invest in a portfolio of other hedge funds. (b) Long/short equity This category includes investments in hedge funds that invest domestically and globally in both long and short common stocks across all market capitalizations. These investments offer a low correlation to traditional long-only equity benchmarks in order to achieve absolute return. Management of the hedge funds may opportunistically shift investments across sectors, geographies, and net market exposures. (c) Global macro This category includes investments in hedge funds that invest in global macro strategies including long and short equities, currencies, commodities, etc., based on evaluation of macroeconomic trends. (d) Private equity This category includes investments in several limited partnership funds that invest in equity securities and debt of private companies or conduct buyouts of public companies the result in a delisting of public equity. The nature of the investment in this category prohibits redemptions through the duration of the partnership, which ranges between 10 to 15 years. Distributions are received through the liquidation of underlying assets of the funds. (e) Venture capital This category includes investments in several limited partnership funds that invest in early-stage, high-potential startup companies or small businesses that do not have access to public funding. The nature of the investment in this category prohibits redemptions through the duration of the partnership, which ranges between 10 to 15 years. Distributions are received when underlying companies are exited via acquisition or IPO. 14

15 GASB 72 Q&A Question: Are the requirements of Statements 3 and 40, as amended, and Statement No. 72, Fair Value Measurement and Application, applicable to all of the reporting entity s deposits and investments? 15

16 GASB 72 Q&A Answer: Except for certain component unit presentations subject to Statement No. 14, The Financial Reporting Entity, as amended, Statements 3 and 40, as amended, apply to all deposits with financial institutions and investments that are reported on the face of a governmental reporting entity s financial statements. Statement 72 applies to all deposits and investments that should be reported at fair value. In addition, paragraph 69 of Statement 72 provides for measurement of certain investments at other than fair value. Therefore, the Statements apply to deposit and investment transactions of all funds, including those for which the reporting entity is a custodian and that are reported in an agency, trust, or other fund such as deferred compensation plan assets and pooled amounts invested by a state treasurer on behalf of local governments. 16

17 GASB 72 Q&A Answer (continued) Many of the deposits and investments that are subject to the disclosure requirements of Statements 3 and 40, as amended, and Statement 72 may be reported in the statement of net position/balance sheet using different titles. For example, some deposits and investments may be reported in the statement of net position/balance sheet as cash and cash equivalents. Others may be reported in the statement of net position/balance sheet using titles that do not identify their nature as deposits and investments. For example, securities held as escheats or other unclaimed property may be reported in an agency fund or private-purpose trust fund without specific identification of the nature of the item. Despite the statement of fiduciary net position presentation, those securities are subject to the disclosure requirements of Statements 3 and 40, as amended, and Statement 72 for investments. 17

18 GASB 72 Q&A Answer (continued) Statements 3 and 40, as amended, and Statement 72 also apply to deposits and investments of component units included in a reporting entity s financial statements, although the manner in which they are applied should consider the requirements of Statement 14, as amended. Specifically, Statement 14 requires that disclosures for discretely presented component units be made separately from disclosures for the primary government and its blended component units. Applying the requirements of Statement 14 also may result in not presenting disclosures required by Statements 3 and 40, as amended, and Statement 72 for some discretely presented component units. 18

19 GASB 72 Q&A Answer (continued) Disclosure requirements do not apply to deposits and investments that are not reported in the statement of net position/balance sheet for example, amounts held by escrow agents on debt that is reported as defeased in substance in accordance with Statements No. 7, Advance Refundings Resulting in Defeasance of Debt, and No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, as amended. 19

20 GASB 72 Q&A Question: Are cash equivalents subject to the fair value disclosure requirements of Statement 72? 20

21 GASB 72 Q&A Answer: Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, cash equivalents are measured at other than fair value (including amortized cost) and, consequently, are not subject to the fair value disclosure requirements of Statement 72. Specific exceptions to fair value measurement for some investments are described in paragraph 69 of Statement 72. Examples of such investments include certain money market investments and nonparticipating interest-earning investment contracts, such as certain nonnegotiable certificates of deposit (CDs). If a cash equivalent is measured at fair value, the fair value disclosure requirements of Statement 72 apply. 21

22 GASB 72 Q&A Question Donated capital assets should initially be reported at their acquisition value, according to paragraph 79 of Statement 72. How may acquisition value be calculated? 22

23 GASB 72 Q&A Answer: Acquisition value is the price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the acquisition date. Acquisition value is a market-based entry price. Acquisition value may be calculated from manufacturers catalogs or price quotes in periodicals, recent sales of comparable assets, or other reliable information. Professional assistance may be helpful but is not required. 23

24 GASB 72 Q&A Question: A city requires developers of new residential neighborhoods to build the infrastructure and then donate it to the city at the completion of the project. How should the city determine the cost of those assets? 24

25 GASB 72 Q&A Answer: Paragraph 79 of Statement 72 requires that donated capital assets be reported at acquisition value, which is determined as of the date of donation. In the example addressed in this question, the developer s cost for the infrastructure in new residential neighborhoods would be an acceptable method that could be used to determine acquisition value, but other methods for example, an estimate of the cost associated with the construction of the infrastructure made by the city s public works department also may be acceptable. 25

26 GASB 72 Q&A Question: A city purchased land from another government for the sum of $1. How should the city report this acquisition? 26

27 GASB 72 Q&A Answer: The purchase price of $1 does not meet the definition of an exchange transaction as defined in paragraph 1 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. An exchange transaction is one in which each party receives and gives up essentially equal values. The substance of the transaction is that the city received a donation of land (a nonexchange transaction), and the city should report the land at acquisition value as required by paragraph 79 of Statement

28 GASB 72 Q&A Question: A historical treasure donated 10 years ago was not recorded. Its acquisition value, determined as of the date of the donation, was $500,000. If the treasure instead had been donated in the current year, it is estimated that its acquisition value would be $1,500,000. When this asset is initially reported in the current year as a correction of an error, should it be reported at $500,000 or $1,500,000? 28

29 GASB 72 Q&A Answer: Donated assets should be reported at acquisition value, which is determined as of the date of donation, as stated in paragraph 72 of Statement 72. The value of $500,000 is the appropriate amount at which to report the donated historical treasure in the current year. 29

30 GASB 79: Overview Establishes accounting and financial reporting standards for qualifying external investment pools that measure investments at amortized cost for financial reporting purposes. Establishes accounting and financial reporting standards for qualifying external investment pool participants. Effective for calendar and fiscal year

31 GASB 79: Pool Quality Criteria External Investment pools must meet certain criteria to elect to measure investments at amortized cost: Transacts with its participants at a stable net asset value per share. Shadow pricing requirements Maturity requirements Quality requirements Diversification requirements Liquidity requirements 31

32 GASB 79: Pool Quality Criteria (Continued) Portfolio Maturity Investments with shorter maturities are less prone to market interest rate fluctuations, so all the following portfolio maturity limits should be met: Acquired investments should have a remaining maturity of 397 or fewer calendar days The portfolio s weighted average maturity should be 60 or fewer days (Weighted average maturity expresses investment time horizons, or the time when an investment becomes due and payable) The portfolio s weighted average life should be 120 or fewer days (Weighted average life expresses the average length of time each dollar of principal remains unpaid) 32

33 GASB 79: Pool Quality Criteria (Continued) Portfolio Quality External investment pools with higher-quality investments will be subject to less credit risk and, in general, less price volatility. Only U.S. dollar-denominated securities with minimal credit risk should be acquired by qualifying external investment pools. A government can use nationally recognized statistical rating organization (NRSRO) credit ratings or its own analysis for unrated securities to benchmark portfolio quality. In addition, the following guidelines should be in place: A pool should only acquire securities with the highest category of short-term ratings, its long-term equivalent or pool s comparable analysis (see table below) As of the reporting date, a pool should not hold more than 3 percent of its total assets in securities that subsequently drop to second-tier (second-highest category of short-term credit ratings or long-term equivalent) after acquisition Securities below the second tier, i.e., non-investment grade securities, may not be held at reporting date 33

34 GASB 79: Pool Quality Criteria (Continued) 34

35 GASB 79: Pool Quality Criteria (Continued) Portfolio Diversification The following requirements would be applied at each security s acquisition (These criteria would apply to repurchase agreements, but U.S. government and agency securities are excluded from this calculation) A pool should acquire a security or other investment only if, after acquisition, the pool would have no more than 5 percent of its total assets in investments of any one issuer of securities. A pool should acquire a security or other investment with a demand feature or guarantee only if, after acquisition, the pool would have no more than 10 percent of its total assets with any one issuer of demand features or guarantees. This limit would combine exposure to individual issuers and guarantors. Securities of any one issuer held in the second-highest credit rating category should be limited to 0.5 percent of total assets of the pool. If these securities have a demand feature or guarantee, the limit is 2.5 percent of total pool assets for a single demand provider or guarantor. 35

36 GASB 79: Pool Quality Criteria (Continued) Portfolio Liquidity the following portfolio liquidity limits are required: A pool may not acquire any illiquid investment if, immediately after the acquisition, the pool would have invested more than 5 percent of its total assets in illiquid investments. A pool may not acquire any security or other investment other than a daily liquid asset if, immediately after the acquisition, the pool would have invested less than 10 percent of its total assets in daily liquid assets. A pool may not acquire any security or other investment other than a weekly liquid asset if, immediately after the acquisition, the pool would have invested less than 30 percent of its total assets in weekly liquid assets. 36

37 GASB 79: Pool Quality Criteria (Continued) Portfolio Liquidity (continued) 37

38 GASB 79: Participant Reporting In the footnotes, must disclose any limitations or restrictions on withdrawals, such as redemption notice periods, maximum transaction amounts, and the pool s authority to impose liquidity fees or redemption gates. Example: The Authority can withdraw funds from INVEST without limitations or fees. 38

39 GASB 79: PLGIT 39

40 GASB 79: PA Invest 40

41 Sources GASB Statements No. 72 and 79 GASB Implementation Guide No , Implementation Guidance Update 2016 GASB Statement No. 72 Fair Value Measurement and Application Ken Kurdziel, CPA New Amortized Cost Guidance for Investment Pools Anne Coughlan 41

42 Contact Information Jon Tilelli Samantha Nicola