Isda and BMA respond to GASB views on derivatives

The International Swaps and Derivatives Association and the Bond Market Association (TBMA) have responded to the US’s Government Accounting Standards Board's (GASB) views on accounting and disclosure of derivatives and hedging activities by governmental entities.

In a comment letter to the GASB, the trade associations highlight the importance of issuing standards that improve the usefulness of financial reports based on the needs of the report users, as well as the need to balance costs and benefits of new standards.

“We commend the GASB's efforts to improve the accounting for and disclosure of derivatives and hedging activities by governmental entities," said Leslie Norwood, vice-president and assistant general counsel at TBMA.

“We have worked with GASB and other market participants on accounting for municipal derivatives for several years, and it is our goal to provide constructive comments that will make the proposal workable in the market-place, especially in light of the differences between the municipal and corporate markets and the impact of the implementation of the analogous corporate rule, Financial Accounting Standards Board Statement No. 133.”

TBMA's view is that when accounting for derivatives, a disclosure model is a more appropriate model to use than a recognition model, given the unique aspect of governmental entities, including the fact that they do not report earnings.

Both associations also use the letter to offer comments and suggestions on implementing fair-value reporting of derivatives, including measures of hedge effectiveness, termination and change of intent, accounting for hybrid instruments, written options in a synthetic refunding, and transition requirements.

The GASB announced in May that it would overhaul the rules on US public finance entities' accounting of derivatives, requiring trades to be reflected on balance sheet (see: GASB begins muni derivatives overhaul).