Project Pages

External Investment Pools

Project Description: The objective of this project is to improve financial reporting by certain external investment pools and their participants. Improvement will be achieved by establishing specific criteria that permit external investment pools to determine consistently if all of their investments can be measured for financial reporting purposes at amortized cost.

Status:
Status: Statement No. 79, Certain External Investment Pools and Pool Participants, was approved in December 2015.

EXTERNAL INVESTMENT POOLS—PROJECT PLAN

Background: In order to qualify for amortized cost reporting, current GASB literature in Statement 31 links local government investment pools to Securities and Exchange Commission (SEC) Rule 2a7, requiring that pool sponsors follow specific 2a7 criteria. In 2014, the SEC significantly revised its rules affecting money market funds. The pre-agenda research indicated that those rules will affect investment pools to such an extent that few governments will be in a position to adopt the 2014 amendments. Those effects include requiring pool participants to transact at a floating net asset value per share and the potential imposition of liquidity fees or redemption gates. Pre-agenda research indicated that some local government investment pools differ from many SEC-registered money market funds. For example, pool sponsors may have a more complete understanding about cash flow and liquidity needs of pool participants, pool participation may be involuntary, and alternative investment vehicles may be limited.

The pre-agenda research indicated a strong desire on the part of external investment pools that currently report at amortized cost to continue to do so because it aligns financial reporting with operations, as many pools transact with participants based on amortized cost valuations.

Accounting and Financial Reporting Issues: The project will consider the following issues:
  1. If a cost-based measurement for investment pools is developed, what criteria or defining characteristics describe such pools?
  2. For investment pools, what additional note disclosures are essential information for financial statement users?
  3. For pool participants, what additional note disclosures are essential information for financial statement users?
History:
  • Pre-agenda research proposed: August 2014
  • Added to the current technical agenda: December 2014
  • Task force appointed: No
  • Deliberations began: January 2015
  • Exposure Draft issued: June 2015
  • Comment period: June–August 2015
  • Redeliberations began: September 2015
  • Final Statement issued: December 2015


EXTERNAL INVESTMENT POOLS—RECENT MINUTES


Minutes of Teleconference, December 7, 2015

The Board reviewed a ballot draft of Statement No.79, Certain External Investment Pools and Pool Participants. After discussion of the draft and providing clarifying edits, the Board voted unanimously to approve the issuance of the final Statement.

Minutes of Meetings, November 18-20, 2015

The Board reviewed and provided clarifying edits on a preballot draft of the final Statement, Accounting and Financial Reporting for Certain External Investment Pools. The Board then agreed to move forward with a ballot draft of a final Statement.

Minutes of Teleconference, October 26, 2015

The Board continued redeliberations of the External Investment Pools project, taking into consideration comment letters received in the due process.

The first topic discussed was note disclosure requirements for both qualifying external investment pools electing amortized cost measurement for financial reporting purposes and their participants. The Board tentatively decided to carry forward the note disclosure requirements for qualifying external investment pools and their participants, as set forth in the Exposure Draft. The Board also considered stakeholder requests for additional note disclosures, including those related to (1) insignificant noncompliance and (2) restrictions on financial assets other than positions in external investment pools. However, the Board tentatively decided not to include the suggested disclosures in the final Statement.

Next, the Board discussed the proposed effective date and transition provisions. The Board considered comments received from respondents to the Exposure Draft regarding the proposed effective date and tentatively decided to carry forward the effective date provisions as set forth in the Exposure Draft (which would make the requirements in the final Statement effective for reporting periods beginning after June 15, 2015, except for certain criteria regarding credit quality and shadow pricing, which would be effective for reporting periods beginning after December 15, 2015) plus one additional effective date exception for the portfolio quality requirement that would allow the same delayed effective date of December 15, 2015. Additionally, the Board discussed the possibility of allowing special transition provisions for pools that are not in compliance with Rule 2a7 requirements prior to the issuance of the final Statement. The Board tentatively decided not to include special transition provisions for those pools and reaffirmed the transition provisions as set forth in the Exposure Draft.

The Board also discussed concerns raised in the due process associated with the perceived costs and expected benefits of the final standard. The Board reaffirmed its view that the expected benefits of implementing the requirements in the final Statement would outweigh the perceived costs of implementation and compliance.

Finally, the Board discussed the GASB’s scope of authority in prescribing accounting and financial reporting requirements proposed in the final Statement. The Board considered the characteristics of the financial information that would be provided as a result of the proposed standard. In conclusion, the Board reaffirmed its view that the accounting and financial reporting requirements to be included in the final standard are within GASB’s scope of authority and meet all of the characteristics of group 1 information, as classified in the Financial Accounting Foundation’s trustees’ policy regarding governmental financial information.

Minutes of Meetings, October 6-8, 2015

The Board continued redeliberations of the External Investment Pools project, taking into consideration comment letters received during due process.

The Board first discussed the maturity criteria set forth in the Exposure Draft. The Board tentatively agreed to carry forward the weighted average maturity (WAM) limit of 60 days with no exceptions, as set forth in the Exposure Draft. The Board also tentatively decided to clarify the definition of floating interest rate to encompass rates that reset at any frequency. In regard to the provision in the Exposure Draft that defines how to calculate the maturity of a short-term floating rate security for the purpose of determining weighted average life (WAL), the Board tentatively decided not to provide additional edits to this provision in the final standard. The Board also tentatively decided not to expand the definition of maturity of an investment in a money market fund.

The Board then discussed the proposed portfolio quality requirements as set forth in the Exposure Draft. The Board tentatively agreed to carry forward the use of credit ratings as a benchmark for portfolio quality. In addition, the Board tentatively decided not to provide an exemption from the proposed quality requirements for securities of the U.S. government, including its agencies and instrumentalities. The Board then discussed circumstances in which rating categories conflict and tentatively agreed to carry forward the requirements for split ratings as set forth in the Exposure Draft. The Board tentatively agreed, however, to provide additional clarifying guidance to explain that pools are only required to consider ratings of which they are aware, as is consistent with other GASB literature. The Board then tentatively agreed to carry forward the prohibition on acquisition of securities with credit ratings within or below the second-highest rated category as provided by a Nationally Recognized Statistical Rating Organization (NRSRO). The Board also tentatively decided to carry forward the requirement that, at the reporting date, a qualifying external investment pool hold no more than 3 percent of its total assets in securities that have credit ratings within the second-highest category provided by an NRSRO with clarifying edits related to the credit quality of guarantees. Next, the Board discussed quality requirements related to bank deposits and repurchase agreements. The Board tentatively agreed to require that a deposit be either at a first-tier bank or not be exposed to custodial credit risk due to insurance or collateralization. The Board also tentatively decided to allow for non-U.S. government securities to be underlying collateral in a repurchase agreement, provided that such collateral meets the credit quality requirements described in the standard. The Board tentatively decided not to propose that securities underlying repurchase agreements have a fair value of a certain percentage of the principal value of the repurchase agreement.

Next, the Board addressed the proposed portfolio diversification requirements. The Board tentatively agreed that, in circumstances in which an issuer of securities or other investments also is an issuer of credit support, the securities or other investments to which the issuer has pledged credit support should be combined with the securities or other investments of that issuer so that the combined position related to that issuer is limited to 10 percent of the pool’s total assets. The Board also tentatively decided to carry forward from the Exposure Draft the diversification requirements relating to repurchase agreements.

The Board then discussed the provisions in the Exposure Draft related to liquidity requirements. The Board tentatively decided that there should be no timeframe guidance provided on the meaning of reasonably foreseeable; however, the final guidance would provide that the term be applied based on a pool’s knowledge of the cash needs of its participants. The Board also tentatively decided that changes in percentages of illiquid, daily liquid, and weekly liquid assets subsequent to acquisition of an investment should not cause noncompliance with the portfolio liquidity requirements. Additionally, the Board tentatively agreed to carry forward the three specific percentage thresholds as set forth in the Exposure Draft: (1) a pool may not acquire any illiquid security if, immediately after the acquisition, the pool would have invested more than 5 percent of its total assets in illiquid securities; (2) a pool may not acquire any security other than a daily liquid asset if, immediately after acquisition, the pool would have invested less than 10 percent of its total assets in daily assets; and (3) a pool may not acquire any security other than a weekly liquid asset if, immediately after acquisition, the pool would have invested less than 30 percent of its total assets in weekly assets. Also, the Board tentatively decided that the definitions of daily liquid assets and weekly liquid assets should be amended to specify demand deposits. Then, the Board tentatively decided to provide additional guidance to clarify that certificates of deposit that mature within five business days and are held to maturity should not be considered illiquid investments.

Next, the Board deliberated the frequency of calculating shadow prices to qualify for an amortized cost exception. The Board tentatively decided to carry forward the monthly shadow pricing requirement.

The Board then discussed the provisions set forth in the Exposure Draft on noncompliance. The Board tentatively decided that the final standard should not provide additional guidance about what constitutes significant noncompliance. Additionally, the Board tentatively decided that noncompliance with the shadow price requirement should not automatically be considered significant noncompliance that would disqualify a pool from reporting its investments at amortized cost. The Board also tentatively decided that the factors to consider in determining whether significant noncompliance in the prior period was due to exceptional circumstances, provided in paragraphs 7b and 7c of the Exposure Draft, should be retained in the final standard.

Finally, the Board redeliberated the issue of a subsequent change in accounting principle with regard to the pool’s election of the measurement of its investments for financial reporting purposes. The Board tentatively decided that a pool may switch from fair value to amortized cost in subsequent reporting periods, provided that the pool meets the qualifications for amortized cost and that the pool’s particular facts and circumstances are in accordance with the provisions regarding a change in accounting principle found in Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. Additionally, the Board tentatively decided not to include a limit on how frequently a pool may change its election.

Minutes of Teleconference, September 21, 2015

The Board began redeliberations of the External Investment Pools project by considering comment letters received on the Exposure Draft, Accounting and Financial Reporting for Certain External Investment Pools. The focus of the Board’s discussion was on reviewing the due process comments regarding the overall approach for the final Statement.

The Board first reviewed respondent comments on decoupling from Securities and Exchange Commission (SEC) guidance. The Board reaffirmed its view as set forth in the Exposure Draft and tentatively decided to remove the reference to SEC Rule 2a7 in current literature and replace it with independent criteria for an amortized cost exception.

The Board then discussed respondent comments on the proposed prescriptive approach set forth in the Exposure Draft. The Board tentatively decided that the final Statement should carry forward the specific prescriptive requirements approach in establishing the criteria for an amortized cost exception.

Finally, the Board reviewed comments from respondents about operational requirements in SEC Rule 2a7 to qualify for the amortized cost exception and reconsidered whether to include those operational requirements in the final Statement. The Board tentatively decided not to incorporate any additional operational criteria in the final Statement that were not already included in the Exposure Draft.

Minutes of Teleconference, June 22, 2015

The Board reviewed the ballot draft of the Exposure Draft, Accounting and Financial Reporting for Certain External Investment Pools, and provided clarifying edits related to the proposed guidance. The Board voted unanimously to issue the Exposure Draft.

Minutes of Meetings, June 2-4, 2015

The Board continued deliberations on the External Investment Pools project and reviewed a preballot draft of the proposed Exposure Draft. The Board provided clarifying edits and additional clarifying language to the proposed guidance.

Minutes of Teleconference, May 11, 2015

The Board continued deliberations on the External Investment Pools project and reviewed a draft standards section of an Exposure Draft. The Board provided edits and added clarifying language to the proposed guidance.

The Board also discussed cost-benefit considerations and tentatively agreed that the expected benefits of the proposed standard will exceed the perceived costs of implementation and compliance.

Furthermore, the Board discussed the characteristics of the financial information that would be provided as a result of the proposed standard. The Board tentatively agreed that the proposed guidance would produce financial information that meets the needs of users, results from economic or financial events affecting the assessment of the governmental reporting entity, is relevant to reporting objectives, and falls within an appropriate information category in general purpose external financial reports.

Minutes of Meetings, April 21-23, 2015


The Board continued deliberations on the External Investment Pools project. The Board continued its discussion on liquidity fees and redemption gates and discussed potential disclosure requirements for external investment pools reporting at amortized cost and the possible effective date for the Statement.

The Board first considered whether an external investment pool should have the ability to impose liquidity fees and redemption gates in order to qualify for the amortized cost exception. During the March 2015 meeting, the Board requested additional research surrounding these issues, including information about legal prohibitions on pools’ abilities to implement fees and gates, participants’ views on fees and gates, and methods that pools can use to manage participant redemptions.

The Board discussed the research findings presented by the staff and tentatively decided that pools do not need to have the ability to impose liquidity fees and redemption gates in order to achieve amortized cost reporting.

Next, the Board discussed potential disclosure requirements for pools that report at amortized cost. The Board tentatively decided that pools reporting at amortized cost should be required to make the disclosures in Statement No. 72, Fair Value Measurement and Application, with respect to the fair values of investments that are already required to be disclosed by Statement No. 31, Certain Investments and External Investment Pools. Additionally, the Board tentatively decided that pools should be required to disclose any withdrawal restrictions on participants’ investment balances. The Board also tentatively decided that pool participants should be required to disclose any withdrawal restrictions on their investment in the pool.

The Board considered the following potential disclosure requirements but tentatively decided not to propose them:
  • Current and historical percentages of daily and weekly liquid assets
  • Current and historical shadow prices
  • Frequency of performing shadow pricing
  • Weighted average maturity and weighted average life at the reporting date
  • Detailed list of all investment holdings
  • Information regarding how to obtain a detailed list of investments outside of the financial statements
  • Information about significant security downgrades and defaults
  • Frequency of performing stress testing
  • Summary of hypothetical scenarios and results of stress testing
  • Management of the pool
  • Record keeping and document retention policies
  • Procedures to stabilize net asset value per share.
In discussing the potential disclosure requirements, the Board tentatively agreed that the proposed shadow price criterion should be clarified to provide that the shadow price should be calculated monthly within five business days of the month’s end.

The Board discussed the effective date and the transition period of the proposed Statement. The Board tentatively decided that the proposed effective date should be for fiscal periods beginning on or after June 15, 2015, except for the monthly shadowing pricing criterion, which should be effective for fiscal periods beginning on or after December 15, 2015. The Board also tentatively decided that pools do not need to provide retrospective restatement of beginning balances, prior periods, or disclosures. The Board tentatively decided that if a pool has been reporting at fair value, the pool can elect to report at amortized cost only upon the initial effectiveness of the proposed Statement.

The Board discussed the tentative decisions made to date regarding the proposed criteria related to the application of amortized cost and reaffirmed these decisions. The Board discussed the situations and consequences of a pool violating some of the proposed criteria during the year. The Board discussed noncompliance due to external factors outside the control of management and noncompliance within the control of management. The Board tentatively decided that certain instances of noncompliance may not necessarily prevent a pool from reporting using amortized cost for that reporting period or future reporting periods, depending on the circumstances. The Board will continue discussions on this issue at the May teleconference meeting.

Minutes of Teleconference, March 30, 2015

The Board continued deliberations on external investment pools by focusing on the specific criteria for pools to meet in order to qualify for an amortized cost exception.

The Board first considered additional procedural criteria required in SEC Rule 2a7: written procedures, shadow pricing, and stress testing. The Board tentatively decided that having written procedures in place to stabilize the net asset value per share of the pool should not be a proposed criterion for external investment pools seeking to report at amortized cost. The Board also tentatively decided that having a shadow price within a certain acceptable range should be a proposed criterion. With regard to the details of a shadow pricing criterion, the Board tentatively agreed to propose that the shadow price be calculated on a monthly basis and that a deviation at any month of 0.5 percent or more between a pool’s amortized cost share price and its fair value share price should prevent the pool from applying amortized cost for financial reporting purposes for that reporting period. The Board then discussed whether a pool should be required to perform stress testing as a criterion for using amortized cost to value its investments for financial reporting and tentatively decided that stress testing should not be a proposed criterion.

Next, the Board discussed Rule 2a7’s recordkeeping/reporting and website disclosure requirements. The Board tentatively agreed that recordkeeping and reporting requirements should not be a proposed criterion for an amortized cost exception. The Board also tentatively agreed that 2a7 website disclosures should not be a proposed criterion.

After completing initial deliberations on the specific criteria for pools to meet in order to qualify for an amortized cost exception, the Board discussed the overall project direction and various issues related to the project’s scope. The Board tentatively agreed that the project should go forward with proposing an amortized cost exception for measurement of investments if an external investment pool meets the proposed criteria. The Board also tentatively concluded to propose that a pool have the option to measure its investments at fair value, even if it meets all of the proposed criteria to report at amortized cost. The Board tentatively agreed to propose that the scope of the project with respect to recognition and measurement be limited only to those pools that meet the criteria and elect to report investments at amortized cost. With respect to disclosures, the Board tentatively decided to propose that the scope of the project be limited only to those pools that meet the criteria and elect to report investments at amortized cost. The Board also tentatively agreed to propose that the scope of the project with respect to reporting by pool participants be limited only to disclosures for those who participate in external investment pools that report investments at amortized cost.

Minutes of Meetings, March 10-12, 2015

The Board continued deliberations on the External Investment Pools project, focusing on the specific criteria for pools to meet in order to qualify for an amortized cost exception.

The Board first considered the approach in determining the criteria and discussed the fundamental differences between the Securities and Exchange Commission’s Rule 2a7 regulations and the purposes of the GASB developing standards for financial reporting, tentatively deciding that those differences may justify the exclusion of some existing Rule 2a7 regulations from the criteria to be proposed in this project. The Board also tentatively decided that the basis for evaluating potential criteria should be whether the criteria reduces the risk that a pool’s investment portfolio measured on an amortized cost basis does not closely approximate fair value.

The first potential criterion discussed was whether the fund’s board of directors should be required to determine that it is in the best interest of the pool and its participants to use amortized cost for financial reporting. The Board tentatively agreed not to propose that the board of directors be required to make such a determination. The Board also discussed whether a pool should be required to transact with participants at a stable net asset value (NAV) in order to report on an amortized cost basis and tentatively decided to propose that the pool be required to do so. The Board discussed whether a pool should have the capacity to transact at a floating NAV in order to report using amortized cost and tentatively decided that this should not be a proposed requirement.

The Board next discussed portfolio maturity requirements and demand features or guarantees not relied upon. The Board tentatively decided that portfolio maturity limits should be a proposed criterion, and these limitations should (1) prohibit a pool from acquiring any instrument with a remaining maturity of greater than 397 calendar days; (2) limit a pool from maintaining a dollar-weighted average portfolio maturity that exceeds 60 calendar days; and (3) limit a pool from maintaining a dollar-weighted average portfolio maturity, determined without reference to the exceptions regarding interest rate readjustments that exceeds 120 calendar days. The Board also discussed security demand features and guarantees not relied upon and tentatively decided that a criterion should not be included in the proposed Statement, but pools should consider demand features and guarantees not relied upon in determining if the pool meets the prescribed maturity, liquidity, and quality limits.

The Board discussed portfolio quality and downgrade/default procedures. The Board tentatively decided that portfolio quality requirements should be a proposed criterion for an amortized cost exception and that Nationally Recognized Statistical Rating Organizations credit ratings should be used as a benchmark for portfolio quality. The Board also tentatively decided that the proposed portfolio quality requirements should prohibit the acquisition of second-tier securities and that a pool should limit holdings of securities that subsequently drop to second-tier to no more than three percent of total assets as of the reporting date. The Board agreed that the current Rule 2a7 requirements addressing guarantees and conditional demand features should be included in the proposal. The Board discussed whether operational procedures related to downgrades, defaults, and other events should be required to be in place and documented in order to qualify for amortized cost and tentatively decided that these documented procedures should not be a proposed requirement.

Next, the Board deliberated on portfolio diversification requirements and tentatively agreed that diversification requirements should be a proposed criterion. The Board tentatively decided that the requirements should be applied at the acquisition of each security. Further portfolio diversification requirements will be considered in future meetings.

The final potential criteria discussed were portfolio liquidity and liquidity fees and redemption gates. The Board tentatively decided that portfolio liquidity requirements should be a proposed criterion. The proposed criteria would limit a pool from acquiring (1) any illiquid security if, immediately after the acquisition, the pool would have invested more than 5 percent of its total assets in illiquid securities; (2) any security other than a daily liquid asset if, immediately after the acquisition, the pool would have invested less than 10 percent of its total assets in daily liquid assets; and (3) any security other than a weekly liquid asset if, immediately after the acquisition, the pool would have invested less than 30 percent of its total assets in weekly liquid assets. The Board discussed whether a pool’s board of directors should be required to have the ability to impose a liquidity fee or redemption gate in order to report investments at amortized cost. The Board requested additional information from the project staff and will redeliberate these issues at a future meeting.

Minutes of Meetings, January 27-29, 2015

The Board began deliberations on the External Investment Pools project, focusing on the approach for the project.

The Board first discussed whether there should be an exception to fair value for external investment pools (and by extension, their participants) to report their investments at amortized cost. A pool would qualify for the exception if it met certain criteria (to be determined as part of this project) that would minimize the risk that amortized cost would not closely approximate fair value. The Board also discussed the possibility of removing the existing exception allowing for 2a7-like pools to report at amortized cost, therefore requiring all external investment pools to report their investments at fair value. The Board tentatively decided that an amortized cost measurement basis for external investment pools and pool participants should be considered, and the qualification criteria should be further explored in the project.

The Board discussed the general approach for determining the criteria that pools would be required to meet in order to qualify for amortized cost reporting. The Board discussed whether to continue with a reference to outside regulations or to develop specific criteria to be included in the proposed Statement. The Board tentatively decided that if specific criteria can be developed, that criteria should be incorporated directly into the proposed Statement.

The Board also discussed the appropriate level of judgment that should be allowed in determining the criteria. The Board discussed whether the criteria generally should be “bright-lines” (less professional judgment required) or guidelines (more professional judgment required). The Board tentatively decided that the proposed criteria should be developed based on a bright-lines approach.


EXTERNAL INVESTMENT POOLS—TENTATIVE BOARD DECISIONS TO DATE


Statement No. 79, Certain External Investment Pools and Pool Participants, was approved in December 2015.