GASB Endowments Rule Requires Fair Value Reporting

By Melissa Hoffmann Lajara

The Governmental Accounting Standards Board (GASB) is touting a new endowment rule as an “improvement to the quality of financial reporting.”

The new rule requires endowments to report land and other real estate investments at fair value, the Board announced in late November.

Previously, those holdings by state and local governments were recorded at historical cost, the value of the investments in the year they were sold.

“Reporting those investments at fair value provides more decision-useful information about their composition, current value and recent changes in value,” the governmental standards setter said in a press release.

GASB Statement No. 52 will also require governments to report the changes in fair value as investment income in order to help users of financial statements better evaluate an endowment’s investment decisions and overall performance, the agency said. In addition, it will require that the governmental bodies disclose the methods and significant assumptions employed to determine fair value.

The new requirement goes into effect June 15, 2008.

Fair value, also referred to as fair price, is a rational and unbiased estimate of the potential market price of an asset, taking into account such factors as relative scarcity, perceived utility, risk characteristics, replacement costs and production or distribution costs.

The new rule will bring reporting requirements for endowments in line with those for other entities that perform investment functions similar to endowments, such as pension plans, other post-employment benefit plans, external investment pools, and some deferred compensation plans. Those entities are currently required to report land and real estate investments at fair value.

Fair Value vs. Historical Cost

Creating consistency in reporting is the goal of the statement, the agency said.

“It’s a more realistic approach, because it allows you to value an asset at any point in time, instead of at historical cost,” said CPA Alma D. Fana, a member of the NYSSCPA’s Government Accounting and Auditing Committee, noting that historical cost “does not reflect the real value of the asset.”

Fana said she thinks using current values across the board will simplify reporting and allow for better comparisons. “No one has an endowment just because it looks good—there must be a value attached to it,” she said. But in using historical cost, “you are recording something on your books with a value that makes no sense. You cannot make a trained analysis.”

Thomas J. Goodfellow, chair of the Society’s Government Accounting and Auditing Committee, said he expects the latest GASB statement to receive widespread support. “I don’t think this issue will be very controversial,” he said.

But some objection could come from the state and local governmental bodies that will soon need to provide updated values for endowment assets.

GASB, a nonprofit organization that establishes and improves standards of financial accounting and reporting for the nation’s state and local governments, does not have the authority to force governments to comply with its rules. It is not a federal agency.

But its standards “help government officials demonstrate accountability to constituents,” according to the agency, and ensure that those who finance government have access to relevant, reliable and understandable information that assists them to make informed decisions.

GASB Statement No. 52 amends a portion of its 1999 Statement No. 34, which, among other things, changed the generally accepted accounting standards for state and local governments by requiring they state, in their yearly financial reports, the value of the assets they manage.

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Melissa Hoffmann Lajara, Associate Editor, can be reached at mlajara@nysscpa.org.