Presentation Transcript

1. Government Finance Officers Associationof the Washington metropolitan area

   Presented By: Bert Smith & Co. GASB UPDATE 2009 November 20, 2009
2. GASB STATEMENT NUMBER 53ACCOUNTING AND FINANCIAL REPORTING FOR DERIVITAVE INSTRUMENTS
3. 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.
4. 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 (private-sector 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.
5. 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.
6. 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).
7. 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.
8. 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.
9. 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).
10. 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 effectivenessshould 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.
11. Methods of Evaluating Effectiveness
12. Methods of Evaluating Effectiveness (Continued)
13. Methods of Evaluating Effectiveness (Continued) 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.
14. Notes to the Financial Statements
15. 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 .
16. 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
17. Investment Derivative Instruments Credit Risk Interest Rate Risk Foreign Currency Risk
18. GASB STATEMENT NUMBER 54FUND BALANCE REPORTING AND GOVERNMENTAL FUND TYPE DEFINITIONS
19. Government Fund Type Definitions
20. Components of Fund Balance All categories will not always be present.
21. 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).
22. Categories Representing Spending Constraints No requirement that constraint be narrower than the purpose of the fund.
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. Government Fund Types
29. Government Fund Types (Continued)
30. 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.
31. GASB STATEMENT NUMBER 55
32. 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
33. GASB STATEMENT NUMBER 56
34. 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)