GASB issues new derivatives guidelines

“Derivatives are often used by governments as a means to potentially reduce borrowing costs,” said GASB, which is based in Norwalk, Connecticut. “While derivatives may support financing needs, the lower costs come with additional risks. The objectives and terms of derivatives contracts, their risks and the fair value of the contracts are generally not specified in financial reports today.”

Under the new GASB guidelines, state and local governments will be required to disclose in their financial statements information about risks that relate to credit, interest rates, basis, termination dates, rollovers and market access, said GASB.

US state and local governments use a range of derivatives to manage their debt and investments, including interest rate swaps and caps, swaptions and basis swaps. GASB said it aims to increase the public’s understanding of the significance of derivatives to a government’s financial position while providing key information on their potential effects on future cashflows.

“Our research indicates that it often has been difficult to understand how governments have been accounting for derivatives,” said Randal Finden, GASB project manager. “Even estimating the notional amounts of outstanding derivatives in this market is difficult based on information that we have today. Estimates of notional value range from $200 billion to $400 billion. Under the new guidance state and local governments will be required to disclose this information,” he said, adding that the new disclosures are designed to “remove the mystery that surrounds these transactions”.

“We will be able to see what a government has done, why it was done, the fair value of the derivative and the risks they have assumed,” he said.

The new guidelines – GASB Technical Bulletin No.2003-1: Disclosure Requirements for Derivatives not Reported at Fair Value on the Statement of Net Assets – are available on the GASB website at www.gasb.org.