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Business and Policy Areas
Business and Policy Areas

Project No. 26E

September 24, 2002

Mr. David Bean
Director of Research
Governmental Accounting Standards Board
401 Merritt 7
P. O. Box 5116
Norwalk, Connecticut 06856-5116

Re: Project No. 26E

Dear David:

Thank you for the opportunity to provide input to the Board's project on Deposit and Investment Risk Disclosures, an amendment of GASB Statement No. 3. We appreciate the considerable effort that the Board and the staff have invested in this project as well as the consideration you give to NACUBO’s input. Our reaction to the ED generally is favorable, although we are offering one suggestion for a change.

The information in our response results from analysis conducted by staff as well as NACUBO’sAccounting Principles Council. Our comments in response to the Exposure Draft (ED),organized by the issues raised in the ED, follow.

Issue 1: Allowing colleges and universities to select one of five methods for the disclosure of interest rate risk.

NACUBO supports the Board’s decision on this issue. Unlike some display issues wherecomparability is of utmost importance, we believe that matters related to disclosures do notrequire the same level of comparability that may be required for display issues. The fact thatmultiple methods are commonly used in practice suggests that there is a lack of agreement on a single, or preferred, method for assessing interest rate risk. It would not be appropriate for theBoard to artificially establish a standard in this situation. Further, given that the Board has allowed significant flexibility in other measurement matters that affect display (e.g., calculation of depreciation, bad debts, etc.), it seems reasonable that the Board allow colleges and universities to provide the disclosure using the method deemed most appropriate by them.

Issue 2: Clarity of investments that are highly sensitive to interest rate changes.

With the one exception addressed below, it appears that the guidance provided in paragraph 16of the ED is sufficient to enable a college or university to make a determination about thesensitivity of instruments to interest rate changes. The specific examples are helpful and should enable a college or university to understand which elements must be disclosed for these investments.

The problem with the approach taken in the ED is the use of the phrase "highly sensitive." As has been the case with other standards issued recently, the Board has selected a fairly subjectiveterm for this issue. What is highly sensitive in one situation may not be deemed to be highly sensitive in another. It would be helpful if the Board could provide some type of quantitative measure to eliminate the potential confusion that will be created by the use of such vague terminology.

Issue 3: Revision to requirement for classification of custodial credit risk.

NACUBO supports the change to the requirements for several reasons. First, since GASB Statement No. 3 was issued in 1986, governments—especially colleges and universities—have made significant efforts to change their investment practices to reduce or eliminate reliance on arrangements that would result in the classification of deposits and investments in categories other than category 1. Occasionally campuses have investments classified in category 2 but even this has become quite rare. It is appropriate at this time to reduce the required disclosures by eliminating the need to report amounts classified in categories 1 and 2. In addition to the obvious benefit achieved whenever the quantity of required disclosures can be reduced, this change will draw appropriate attention to the exceptions (i.e., category 3 deposits and investments).

Issue 4: Disclosures of mid-year practices that may not exist at year-end.

We find the Board’s rationale for eliminating the disclosures related to mid-year activities compelling. As indicated in paragraph 52, the purpose of the disclosures is to predict potential future impacts. The fact that a college or university incurred greater risk during the year than at year-end is not predictive of future events. It is not clear that similar actions will occur in the future and, even should they occur, there is no reason to think that the risk will be realized.

Therefore, we support the decision to further reduce the required disclosures by eliminating the requirement to describe mid-year practices that are different from those at year-end. In closing, we wish to express our appreciation for the opportunity to comment on this ED. We look forward to answering any questions the Board or the staff may have about our response.

Please direct your questions to Larry Goldstein at 540-942-9146 or


Mark A. Olson
Senior Vice President

Larry Goldstein
Senior Fellow