GOVERNMENT FINANCE OFFICERS ASSOCIATION
OF THE WASHINGTON METROPOLITAN AREA
GASB UPDATE 2009
November 20, 2009
PRESENTED BY:
BERT SMITH & CO.
GASB STATEMENT NUMBER 53
ACCOUNTING AND FINANCIAL REPORTING FOR DERIVITAVE INSTRUMENTS
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Executive Summary

Defines derivatives and exclusions.

Presents requirements for recognition, measurement and disclosure of
derivatives.

Describes hedge accounting, and effective and ineffective hedge accounting.

Contains a full set of examples and note disclosures, as well as transition
guidance.

Effective for periods beginning after June 15, 2009.
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Derivative Instruments

Derivative instruments are complex financial arrangements used by
governments to manage specific risks or to make investments (swaps, options,
futures contracts).

Governments enter into derivative instruments with other parties (privatesector financial firms) to receive and make payments based on market prices
without actually entering into the related financial or commodity transactions.

The fair values and cash flows of derivative instruments are derived from or
determined by other data such as bond or commodity prices or indexes based
on those prices.

Changing financial and commodity prices may expose governments to
changes in cash flows and fair values that can be effectively managed by
using derivative instruments but the derivative instruments can also expose
governments to significant risks and liabilities.
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Derivative Instrument Characteristics

A derivative instrument is a financial instrument of other contract that has all
of the following characteristics:
Settlement Factors – Has one or more reference rates (SIFMA, LIBOR, AAA
general obligations index) and one or more notional amounts or payment
provisions.
Reference rate is a specified interest rate, security price, commodity
price, foreign currency rates, index of prices or rates that may be the
price or rate of the asset or liability, but is not the asset or liability
itself.
Notional amount is the face amount of the contract such as the number
of currency units, shares, bushels, pounds or other units specified in
the derivative instrument.
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Derivative Instrument Characteristics (Continued)
Leverage – Requires no initial net investment or net investment much smaller than
would normally be required but allows for the derivative instrument to have changing
cash flows or fair values that replicate an instrument that would require a much larger
investment.
Net Settlement – Terms require or permit net settlement which is when a clause exists
that that allows the parties to settle the contract without delivering the underlying
commodity. Must satisfy one of these:
No party is required to deliver an asset that is associated with the reference rate and that has
a principal amount, stated amount, face value, number of shares or other denomination that
is equal to the notional amount.
One of the parties is required to deliver an asset described above but there is a market
mechanism that facilitates net settlement (i.e., a futures exchange that offers a ready
opportunity to enter into an offsetting contract).
One of the parties is required to deliver an asset described above but the asset is readily
convertible to cash or is itself a derivative instrument (i.e., a forward contract that requires
delivery of a bond).
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Recognition and Measurement

Derivative instruments are reported on the statement of net assets as assets or
liabilities and measured at fair value.
Fair value should be measured by market price if active market available
for the derivative instrument. If not, use forecast of expected cash flows
that is discounted.

Changes in fair values of investment derivative instruments reported within the
investment revenue classification on the flow of resources statement.

Changes in fair values of hedging derivative instruments are recognized using
hedge accounting and reported as deferred inflows or outflows in the statement
of net assets.
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Recognition and Measurement (Continued)

Hedge accounting should cease to apply if:
The hedging derivative instrument is no longer effective;
The likelihood that a hedged expected transaction will no longer probable;
The hedged asset or liability is sold or retired but not reported as current
refunding or advanced refunding resulting in a defeasance of debt;
The hedging derivative instrument is terminated; and
A current refunding or advanced refunding resulting in a defeasance of
hedged debt is executed.

If termination event due to first four reasons the balance in the deferral account
should be reported in the flow of resources statement within the investment
revenue classification.

If termination event because of refunding resulting in defeasance of debt the
balance of the deferral account should be included in the net carrying amount
of the old debt.
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Hedging Derivative Instruments

There are a number of assets, liabilities and expected transactions that expose a
government to risk of adverse changes in cash flows and fair values
(hedgeable items). Hedging is used to reduce the identified financial risks by
offsetting changes in cash flows and fair values of the associated item.

A hedging derivative is established if:
The derivative instrument is associated with a hedgeable item (i.e., the
notional amount is consistent with the principal amount or quantity of the
hedgeable item, the derivative instrument will be reported in the same
fund, and the term or time period of the derivative instrument is consistent
with the term or time period of the hedgeable item); and
The potential hedging derivative instrument is effective in significantly
reducing the identified financial risk (i.e., the changes in cash flows or fair
values of the potential hedging derivative instrument substantially offset
the changes in cash flows or fair values of the hedgeable item).
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Hedgeable Items

Assets and liabilities that are measured at fair value, such as investments in
many debt securities, do not qualify as hedgeable items.

For an expected transaction to be a hedgeable item, the occurrence of the
expected transaction should be probable and supported by observable facts
(frequency, volume and amount of past transactions, the ability of the
government to carry out the transaction, the budget or other planning
documents).

If an expected transaction is a hedgeable item, the evaluation of the
effectiveness should consider the probable terms of the expected transactions
compared to the terms of the potential hedging derivative instrument.

A transaction between a primary government and a discretely presented
component unit can be a hedgeable item but a transaction, wholly within a
primary government, cannot be a hedgeable item.
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Methods of Evaluating Effectiveness
Consistent Critical Terms Method

Evaluates effectiveness by qualitative
consideration of the critical terms of
the hedgeable item and the potential
hedging derivative instrument. If the
critical terms same or similar the
changes in cash flows and fair values
of the potential hedging derivative
instrument will substantially offset
the changes in cash flows and fair
values of the hedgeable item.
Interest Rate Swaps – Cash Flow Hedge





Notional amount of interest rate swap same
as principal amount of hedgeable item;
Upon association with the hedgeable item the
interest rate swap has a zero fair value;
Formula for computing net settlements same
for each net settlement (fixed rate is constant
throughout term and variable payment based
on same variable such as the reference rate or
index);
Reference rate of swap variable payment is
consistent with reference rate or payment of
hedgeable item or a benchmark interest rate
(SIFMA or LIBOR) if interest rate risk is the
hedged risk;
The periodic interest rate swap payments are
within 15 days of periodic payments of the
hedgeable item.
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Methods of Evaluating Effectiveness (Continued)
Synthetic Instrument Method

Under this quantitative method, a
potential hedging derivative instrument
is effective if the actual synthetic rate is
substantially fixed. The actual synthetic
rate represents the aggregate payment
experience of the variable rate asset or
liability and the potential hedging
derivative instrument. The actual
synthetic rate (total annual payments as
a percentage of notional amount)
should be within a range of 90 to 111
percent of the fixed rate of the potential
hedging derivative instrument to be
substantially fixed.
Dollar-offset Method

This quantitative method evaluates
effectiveness by comparing the changes
in expected cash flows or fair values of
the potential hedging derivative
instrument with the changes in expected
cash flows or fair values of the hedgeable
item. If the changes of either the
hedgeable item or the potential hedging
derivative instrument are divided by the
other and the result is within a range of
80 to 125 percent in absolute terms these
changes substantially offset and the
potential hedging derivative instrument
is effective.
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Methods of Evaluating Effectiveness (Continued)
Regression Analysis Method

This quantitative method evaluates effectiveness by considering the statistical
relationship between cash flows or fair values of the potential hedging derivative
instrument and the hedgeable item. The changes in cash flows or fair values of the
potential hedging derivative instrument substantially offset the changes in cash flows or
fair values of the hedgeable items if all of the following happens:
The r-squared of the regression analysis is at least 0.80;
The f-statistic calculated for the regression model demonstrates that the model is
significant using a 95 percent confidence level;
The regression coefficient for the slope is between -1.25 and -0.80.
Potential hedging derivative instruments should be evaluated for effectiveness as of the end
of each reporting period.
All potential hedging derivative instruments that were determined to be hedging derivative
instruments in the prior reporting period should be re-evaluated as of the end of the current
reporting period using the same method applied in the prior reporting period.
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Notes to the Financial Statements
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All Derivatives

Provide summary of
derivative instrument
activity during the
reporting period and the
balances at the end of the
reporting period by
governmental activities,
business-type activities,
and fiduciary funds.

Information divided into
hedging derivative
instruments (by cash flow
and fair value types) and
investment derivative
instruments and within each
category of derivative
instruments should be
aggregated by type.

Information presented should include:
Notional amount;
Changes in fair value during reporting
period and classification in financial
statements where those changes in fair
value are reported;
Fair values at the end of the reporting
period and the classification in the
financial statements where those fair
values are reported and if other than
quoted market prices the methods and
assumptions used;
Fair values of derivative instruments
reclassified from a hedging derivative
instrument to an investment derivative
instrument and deferral amount reported
within investment revenue upon
reclassification .
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Hedging Derivative Instruments

Objectives, Context, Strategies and Types

Significant Terms
Notional amount
Reference rates, such as indexes or interest rates
Embedded options such as caps, floors or collars
Date entered into and terminate or maturity date
Amount of cash paid or received, if any

Risks
Credit risk
Interest rate risk
Termination risk
Rollover risk
Market access risk
Foreign currency risk

Hedged Debt

Other Quantitative Method of Evaluating Effectiveness
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Investment Derivative Instruments
Credit
Risk
Interest Rate
Risk
Foreign Currency
Risk
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GASB STATEMENT NUMBER 54
FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE DEFINITIONS
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Government Fund Type Definitions
EFFECTIVE
DATE
SCOPE
Changes how
Fund Balance
is Presented.
Fiscal Period Ending
June 30, 2011
Clarifies Use of
Government Fund
Types.
Prospectively, but
Retrospective
Application
is encouraged in
Statistical Section.
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Components of Fund Balance
Non-Spendable
Restricted
Assigned
Committed
Unassigned
All categories will not always be present.
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Non-Spendable Fund Balance

Not in spendable form (includes items not expected to be converted to cash).
Cannot ever be spent (e.g., supplies, inventories and prepaid items).
Cannot currently be spent (e.g., long-term portion of loans receivable
and non-financial assets held for sale).
Clarification:
If constraints on the purpose for which the proceeds can be used,
classify based on the constraint.

Legally or contractually required to be maintained intact (principal of an
endowment or revolving loan fund).
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Categories Representing Spending Constraints
Restricted Fund Balance
Committed Fund Balance
Assigned Fund Balance
No requirement that constraint be narrower than the purpose of the fund.
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Restricted Fund Balance

Amounts subject to externally enforceable legal restrictions.
Externally imposed by creditors, grantors, contributors, or laws or
regulations of other governments.
Imposed by law through constitutional provisions or enabling
legislation.

Enabling legislation authorizes the government to assess, levy, charge or
otherwise mandate payment of resources from external resource providers.

Legal enforceability means that government can be compelled by external
party to use resources created by enabling legislation only for the specified
services in the legislation.
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Committed Fund Balance

Amounts whose use is constrained by limitations that the government has
imposed upon itself:
Imposed by formal action of the highest level of decision-making
authority (with consent of both the legislative and the executive branch,
if applicable).
Cannot be used for any other purpose unless government changes the
specified use by taking same type of action it employed to previously
commit those amounts.
Should occur prior to the end of the reporting period but the amount, if
any, may be determined in the subsequent period.
Clarification:
Constraints imposed on the use of committed funds by the
government are imposed separate from the authority to raise the
underlying revenue. Therefore, constraints to commit amounts to
specific purposes in not considered legally enforceable.
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Assigned Fund Balance

Amounts are constrained by government’s intent to be used for specific
purposes that are not restricted or committed:
Established by the governing body itself, or
Established by a body or an official that the body has delegated the
authority to assign amounts.

Assigned fund balance includes:
All remaining amounts that are reported in governmental funds, other
than the general fund, that are not classified as non-spendable and are
neither restricted or committed, and
Amounts in the general fund that meets the intent constraint for
specified use but should not report an assignment for a specific purpose
if it would result in a deficit in unassigned fund balance.
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Unassigned Fund Balance

Residual classification for the general fund:
Represents fund balance that has not been assigned to other funds
and is not restricted, committed or assigned to specific purposes
within the general fund.
General Fund is the only fund that reports a positive unassigned
fund balance amount.
In other governmental funds if expenditures exceed restricted,
committed and assigned may be necessary to report negative
unassigned fund balance. Efforts should first be made to
reduce/eliminate the deficit by reducing assigned amounts in the
respective fund.
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Stabilization Arrangements

Formal arrangements to maintain amounts for budget or revenue
stabilization, working capital needs, contingencies, or emergencies.

Authority comes from statute, ordinance, resolution, charter or constitution.

May be expended only when certain specific circumstances exist and not
expected to occur routinely.

Considered a specific purpose and should be reported in the general fund as
restricted or committed based on the source of constraint on their use never
assigned.

If stabilization funds do not meet the restricted or committed criteria should
be reported as unassigned in the general fund.
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Government Fund Types
SPECIAL REVENUE FUND
• Special Revenue Funds are used to account for and report the proceeds of specific revenue sources
that are restricted or committed to expenditure for specified purposes other than debt service or
capital projects. The term proceeds of specific revenue sources establishes that one or more
specific restricted or committed revenues should be the foundation for the special revenue fund:
• Report specific revenue sources restricted or committed to specified purposes other than debt
service or capital outlay.
• Restricted or committed specific revenue sources should comprise a substantial portion of the
fund’s resources but fund but other resources may also be included if they restricted,
committed or assigned to the specific purpose of the fund.
• Revenues received initially in other funds should not be reported as revenues in the fund
receiving them instead, they should be recognized in the special revenue fund where they will
be spent.
• Proceeds from special revenue sources should continue to comprise a substantial portion of
inflows.
• If substantial portion of revenues will no longer be derived from restricted revenue source then
discontinue reporting as special revenue fund and report in general fund.
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Government Fund Types (Continued)
CAPITAL PROJECTS
FUNDS
• Capital projects funds are
used to account for and
report financial resources
that are restricted,
committed, or assigned to
expenditure for capital
outlays, including the
acquisition or construction
of capital facilities and
other capital assets. Capital
projects funds exclude
those types of capital
related outflows financed
by proprietary funds or for
assets that will be held in
trust for individuals, private
organizations, or other
governments.
PERMANENT FUND
• Permanent funds should be
used to account for and
report resources that are
restricted to the extent that
only earnings, and not
principal, may be used for
purposes that support the
government’s programs or
its citizenry.
DEBT SERVICE FUND
• Debt service funds are used
to account for and report
financial resources that are
restricted, committed, or
assigned to expenditure for
principal and interest.
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Fund Balance Disclosures
Classification Policies and Procedures



Disclosure of highest level of decision-making authority and formal action required to be
taken to establish a fund balance commitment.
Disclosure of the body or official authorized to assign amounts to a specific purpose and
the policy established by that body.
Disclosure of the government’s order of spending of (a) restricted and unrestricted fund
balance and (b) committed, assigned and unassigned.
Reporting Encumbrances


Encumbering amounts for specific purposes for which resources have already been
restricted, committed or assigned should not be displayed in the classifications.
Significant encumbrances should be disclosed in notes by major funds and non-major
funds in the aggregate in conjunction with other significant commitments.
Stabilization Arrangements





Disclose the authority for establishing stabilization arrangements.
Disclose the requirements for additions to the stabilization amount.
The conditions under which stabilization amounts may be spent.
The stabilization balance, if not apparent on the face of the financial statements
Minimum Fund Balance Policies if formally adopted.
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GASB STATEMENT NUMBER 55
31
The Hierarchy of GAAP for
State and Local Governments

The Governmental Accounting Standards Board (GASB) is responsible for
establishing Generally Accepted Accounting Principles (GAAP) for state and
local governments. The current GAAP hierarchy is in the AICPA’s SAS 69
rather than in the authoritative literature of GASB.

The objective of this Statement is to incorporate the hierarchy of GAAP for
state and local governments into GASB’s authoritative literature.

This Statement will improve financial reporting by contributing to the
GASB’s efforts to codify all GAAP for state and local governments so that
they derive from a single source.

GASB chose to adopt SAS 69 hierarchy instead of re-examining the hierarchy
levels so there will be no change in current practice
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GASB STATEMENT NUMBER 56
33
Codification of Accounting and Financial Reporting
Guidance contained in the AICPA SASs

The objective is to incorporate into the GASB’s authoritative literature certain
accounting and financial reporting guidance presented in the AICPA’s
Statement on Auditing Standards.

This Statement establishes accounting and financial reporting standards for:
Related Party Transactions (substance over form)
Subsequent Events (recognized events and unrecognized events)
Going Concern Consideration (continue for next 12 months)
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