GASB Issues Preliminary Views Document on Derivatives

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April 28, 2006

The Governmental Accounting Standards Board (GASB) has issued a Preliminary Views document intended to improve the accounting and financial reporting of derivatives by governmental organizations such as public colleges and universities. Derivatives are financial arrangements between primary and secondary organizations that can be rooted in more than one type of transaction. Governments might enter into derivatives to generate income, manage cash flows, lower borrowing costs, or hedge financial or interest rate risk. The nature of these complex transactions has resulted in the use of a preliminary view by GASB -- before the issuance of an Exposure Draft -- to help ensure adequate due process.

GASB is proposing that the fair value of derivatives be reported in the financial statements, as well as the change in that fair value from year to year. Additional information about the derivatives would also need to be disclosed in the notes to the financial statements. If, however, a derivative is effectively hedging the risk it was created to address, the annual changes in the derivative's fair value would be deferred and reported in the balance sheet.

GASB has scheduled several public meetings and a user roundtable in association with this project in June and July. The comment deadline is July 28. GASB is making comment forms available on the Internet. NACUBO encourages members to comment in writing to GASB and also plans to comment and would like to hear members' reactions to the preliminary view.

The preliminary view and supplemental communication are available on GASB's Web site.

NACUBO staff contact: Sue Menditto, director, accounting policy.