Norwalk, CT, June 29, 2007—The Governmental Accounting Standards Board (GASB) today proposed new standards for how state and local governments should report their involvement in often complex transactions known as derivative instruments. The proposal is contained in an Exposure Draft, Accounting and Financial Reporting for Derivative Instruments.
There has been a substantial increase in both the number and dollar amounts of governmental derivative contracts. The Board believes the public needs access to additional information that better reveals the risks these transactions pose and the impact they could have on a government’s finances.
The proposal would require that the fair value of all derivatives be reported as assets or liabilities in the financial statements. If a derivative effectively hedges (significantly reduces) a potential risk of adverse changes in cash flows or fair values of associated items, then its annual fair value changes would be deferred until the derivative ends or becomes ineffective, at which time the accumulated changes, if any, generally would be reported in the government’s change statement. The annual change in the fair value of all other derivatives would be reported each reporting period in the change statement.
"Governments engage in derivatives transactions primarily to minimize identified financial risks they face, but those derivatives may themselves expose governments to other risks," said Robert Attmore, chairman of the GASB. "To understand the inherent risks that derivatives pose to the financial health of governments, the public needs the improved information this proposal would require."
The GASB also is proposing that additional information about derivatives be disclosed in the notes to the financial statements, including identification of the risks to which hedging derivatives expose a government, the fair values and notional amounts of derivative instruments, and contingent liabilities contained within derivatives.
The proposed standards incorporate feedback the GASB received in response to a Preliminary Views it published in April 2006. The Board considered feedback obtained through comment letters, public hearings, constituent panel discussions, and a financial statement user roundtable and made a number of significant changes based on that input. The note disclosure requirements, for instance, have been substantially simplified and would require that disclosures of investment derivatives follow the provisions of the GASB’s investment standards. The Exposure Draft also would allow governments to use other methods for evaluating whether derivatives hedge risk effectively.
The Exposure Draft is available to download for free from the GASB website at www.gasb.org. It is accompanied by a plain-language supplement that summarizes the proposed standards for financial statement users and others without an accounting background. The deadline for commenting on the GASB’s proposal is October 26, 2007.
About the Governmental Accounting Standards Board
The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board's diverse constituency, including preparers and auditors of government financial statements, users of those statements, and members of the academic community. More information about the GASB can be found at its website.