Evaluating fair value measurements of government assets and liabilities

Authored by Mike Malatt

While the impacts of COVID-19 on the stock market and on daily life have remained the epicenter of the U.S. news cycle, state and local governments must evaluate the impacts of economic deterioration. This assessment reaches beyond decreasing prices on commonly traded stocks, mutual funds and other investment securities. Governments must also consider the ramifications of markets seeing drastic declines in activity on how the change in market volume impacts the value of a government’s assets and liabilities.

The current pandemic has created unique market conditions not previously experienced, which necessitates a re-evaluation of the metrics used by governments to establish the fair value of their assets and liabilities. If a government determines that that market activity for a certain asset or liability has substantially decreased or pricing information is not based on recent information due to limited market activity, the government may need to consider whether the current valuation is accurate or appropriate.

If it is determined that existing valuation techniques do not provide current, accurate pricing, the government has several items to consider, including 1) whether a risk premium should be applied to the pricing of the asset or liability, 2) if a change in valuation technique or use of multiple valuation techniques is appropriate and/or 3) if a transaction is no longer considered to be orderly (i.e. measurable through usual and customary market activity). See the GASB Codification section 3100 paragraphs .142-.148 for further information.

As the markets continue to experience unprecedented volatility, governments should continually evaluate their asset and liability valuations to ensure current pricing methodologies remain appropriate.

For more information on this topic, or to learn how Baker Tilly public sector specialists can help, contact our team.