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What Tribal Governments Need to Know About Fair Value

August 21, 2015

The Governmental Accounting Standards Board (GASB), has recently approved Statement No. 72, Fair Value Measurement and Application, which provides guidance on defining and measuring the fair value for assets and liabilities for tribal governments and other local governments.

Although fair value information is readily available from stock exchanges and other sources, it often requires the use of estimates and professional judgment. Statement 72 brings clarity to areas of uncertainty by defining an investment as "a security or other asset that a government holds primarily for the purpose of income or profit." Statement 72 further states that an investment's "present service capacity is based solely on its ability to generate cash or to be sold to generate cash."

Statement 72 also establishes a hierarchy of inputs used to determine fair value:

  • Level 1: Inputs are quoted prices in active markets for identical assets or liabilities. 
  • Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability. 
  • Level 3: Inputs are unobservable inputs, such as management's assumption of the default rate among underlying mortgages of a mortgage-backed security. 

Finally, the new standard provides guidance on applying fair value to alternative investments, such as hedge and private equity funds and provides enhanced disclosure requirements around these types of investments.

Action Items for Tribal Governments:

1.

Reevaluate Asset Classifications: Statement 72 will require tribal governments to evaluate their income-producing assets to determine if any reclassifications are necessary based on the new definition of an investment. Some tribes hold investments that are not easy to measure at fair value, such as stock in a closely-held or private corporation. These investments will need special attention if they have not been measured at fair value before.

2.

Review New Reporting Methods: The cost method of recording is no longer allowed for common stock held as an investment, although it is still available for other holdings. The equity method or fair value are the only alternatives for measuring common stock held as an investment.

3.

Prepare for Expanded Disclosures: Tribes may also be required to provide expanded disclosures due to the nature of their investment portfolios. Illustrative examples can be found in Appendix C of Statement 72.

4.

Reexamine Derivatives: For tribes that hold derivatives, the shift from an "entry price" to an "exit price" and "market participant" assumptions will also result in measurement changes for instruments that do not trade in active markets, such as swaps.


In anticipation of the fair value changes, it is critical to both understand the new requirements and establish a plan to implement them. Is your tribe prepared? These changes may result in the need to modify information systems, develop new reports, and engage in discussions with professionals relative to the measurement of your tribe's investments. 

For questions or comments please contact Jennifer Parisien at Jennifer@nafoa.org or (202) 558-8040.

About the GASB:

The GASB is an independent organization that establishes and improves standards of accounting and financial reporting for tribal, state, and local governments. It is recognized by the accounting industry and the capital markets as the official source of generally accepted accounting principles (GAAP) for governments.

NAFOA holds a seat on the Governmental Accounting Standards Advisory Council, which is responsible for consulting with the GASB on technical issues on the GASB's agenda, project priorities, matters likely to require the attention of the GASB, and concerns of tribal governments.

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