FY2016 CCDOA Financial Report as of 6302016.pdf - page 27

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Governmental Accounting Standards Board ("GASB") recently issued GASB Statement No 72,
Fair Value
Measurement and Application
("GASB 72"), effective for fiscal years beginning after June 15, 2015, and retroactive
for all fiscal periods presented. GASB 72 addresses accounting and financial reporting issues related to fair value
measurements and defines fair value as "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." GASB 72 impacts the fair
value measurement of financial instruments. The determination of fair value is established by valuation techniques
which should be applied consistently using one or more of three approaches: (1) the market approach, (2) the cost
approach, and (3) the income approach. The market approach measures fair value using prices and other
relevant information generated by market transactions involving similar assets or liabilities. Quoted market price is
consistent with this technique. The cost approach reflects the amount required to replace the asset. The income
approach converts future cash flows to a current valuation using a discounted present value technique. When
using one or more of the valuation techniques to determine the fair value of the asset or liability, the desire is to
maximize the use of relevant observable inputs and minimize the use of unobservable inputs. GASB 72 provides
three levels of inputs. Level 1 inputs are observable for assets and liabilities using quoted prices (unadjusted) in
active markets. Level 2 inputs are observable for an asset or liability, either directly or indirectly. These inputs include
quoted prices for similar assets or liabilities in active markets or identical or similar assets or liabilities not in active
markets, inputs other than quoted prices such as interest rates or yield curves observable at commonly quoted
intervals, or market-corroborated inputs. Level 3 inputs are unobservable inputs for assets and liabilities.
The Department maintains various instruments that are impacted by GASB 72. These include investment instruments
held in the investment pool of the Clark County Treasurer, investment instruments held with Bank of New York Mellon
("Trustee"), and derivative instruments. The majority of the investments instruments with the Clark County Treasurer
and the Trustee are valued using the market approach. These instruments are categorized as Level 1 and Level 2.
Some investments with the Trustee are valued using unobservable inputs classified as Level 3 inputs. The valuation
techniques for the investments with the Clark County Treasurer and Trustee have been consistent throughout the life
of these investments with the Trustee, and, therefore, the Department’s Net Position has not been restated for the
implementation of GASB 72. Refer to Note 2, "Cash and Investments" for further details.
The fair values of the interest rate swap derivative instruments were estimated using an independent pricing service.
The valuations provided were derived from proprietary models based upon well-recognized principles and
estimates about relevant future market conditions. The instruments' expected cash flows are calculated using the
zero-coupon discount method, which takes into consideration the prevailing benchmark interest rate environment
as well as the specific terms and conditions of a given transaction and which assumes that the current forward
rates implied by the benchmark yield curve are the market’s best estimate of future spot interest rates. The income
approach is then used to obtain the fair value of the instruments by discounting future expected cash flows to a
single valuation using a rate of return that takes into account the relative risk of nonperformance associated with
the cash flows and the time value of money. This valuation technique is applied consistently across all instruments.
Given the observability of inputs that are significant to the entire sets of measurements, the fair values of the
instruments are based on inputs categorized as Level 2. Refer to Note 10, "Derivative Instruments – Interest Rate
Swaps," for further details.
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