GASB Issues Implementation Guide on Derivative Instruments
April 23, 2009
The Governmental Accounting Standards Board (GASB) has issued its long awaited Guide to Implementation of Statement 53 on Derivative Instruments. The purpose of the guide is to assist preparers in implementing the GASB’s recently issued standard on accounting and financial reporting for derivative instruments. The derivative standard is effective next fiscal year for public institutions.
The guide provides answers to more than 100 questions on topics relating to the implementation of Statement 53, including:
- Scope and applicability of Statement 53 with special emphasis on the normal purchases and normal sales scope exception;
- Definition of derivative instruments focusing on the distinguishing characteristics of a derivative instrument - settlement factors, leverage, and net settlement;
- Embedded derivative instruments, and when an embedded derivative instrument results in a hybrid instrument;
- Hedge effectiveness criteria, and how to apply the methods of evaluating effectiveness - the consistent critical terms, the synthetic instrument, the dollar-offset, and the regression analysis methods;
- Disclosures; and
- Effective date and transition.
In addition to the illustrations that were included in Statement 53, the journal entries that support the transactions in the illustrations have now been added. The GASB Guide to Implementation of Statement 53 on Derivative Instruments is available for order by logging on to www.gasb.org.
Derivative instruments are financial contracts, the values of which are based on the relative worth of their underlying assets. Some common examples of underlying assets are commodities, stocks, commercial real estate loans, residential mortgages, bonds, interest rates, and exchange rates. Derivatives are often used as hedges to reduce financial risks. For example, instruments such as futures, forwards, options and swaps are used to reduce financial risks related to asset and liability values, cash flows (such as interest payments), commodity market fluctuations, or foreign currency vacillation.
In June 2008, the GASB issued GASB Statement No. 53, "Accounting and Financial Reporting for Derivative Instruments" (SGAS 53). The standard requires derivatives to be measured at fair value. If derivatives qualify for hedge accounting, fair value changes are deferred until termination events specified in the standard are met. Public institutions can use hedge accounting when the derivative instrument effectively reduces the intended risk. There is a requirement to assess the hedge’s effectiveness using methods prescribed in the standard. The standard establishes disclosure requirements such as a derivative summary, information about hedge effectiveness, fair value, management’s objectives, significant terms, and risks.
Because derivatives and hedges have become common, public institutions must pay attention to the standard’s transition and effective dates. Although the standard is effective in FY10, institutions must evaluate their derivative instruments at the end of FY09; the standard would be retroactively applied for hedges deemed effective. Ineffective instruments in FY09 would be subject to a transition adjustment and reported as a restatement of beginning net assets.
Staff Resource: Sue Menditto, director, accounting policy
- NACUBO Responds to White House College Affordability Plans
- Recommendations for Completing Form 1098-T
- Preliminary Results Show that College and University Endowments Returned 11.7 Percent in FY13
- 2014 Intermediate Accounting and Reporting - Winter
January 27-28, 2014
- 2014 Endowment and Debt Management Forum
February 5-7, 2014
- 2014 Facilities and Administrative Rates - Long Form
March 3-5, 2014
- WEBCAST: Developing a Market-Informed Approach to Tuition Pricing
Thursday, December 12, 2013 1:00 PM ET
- WEBCAST: How Behavioral Changes Helped Cut Energy Usage in Half
Wednesday, December 18, 2013 1:00 PM ET
- ON-DEMAND: Responsibility Center Management: The Process Necessary to Complete a Successful Implementation
- ON-DEMAND: OD: Responsibility Center Management: How Innovations Have Changed the Nature of RCM
- A Guide to College and University Budgeting: Foundations for Institutional Effectiveness, 4th ed. - by Larry Goldstein
- NACUBO's Guide to Unitizing Investment Pools - by Mary S. Wheeler
- Managing and Collecting Student Accounts and Loans - by David R. Glezerman and Dennis DeSantis