GASB Issues Statement 64

Statement 64 will improve financial reporting by state and local governments by clarifying the circumstances in which hedge accounting continues to be applied when a swap counterparty, or a swap counterparty’s credit support provider, is replaced.

Statement 64 clarifies that when certain conditions are met, the use of hedge accounting should not be terminated. Those conditions are: (1) the collectability of swap payments is considered to be probable, (2) the replacement of the counterparty or credit support provider meets the criteria of an assignment or in-substance assignment as described in the Statement, and (3) the counterparty or counterparty credit support provider (and not the government) has committed the act of default or termination event. When all of these conditions exist, the GASB believes that the hedging relationship continues and hedge accounting should continue to be applied.

GASB Statement No. 53 provides for the use of hedge accounting for derivatives that are effective hedges. Hedge accounting entails reporting fair value changes of a hedging derivative as either deferred outflows of resources or deferred inflows of resources, rather than recognizing those changes in investment income. When a hedging derivative is terminated, Statement 53 requires that hedge accounting cease and all accumulated deferred amounts be reported in investment income.

As Statement 53 was being implemented, questions had arisen regarding situations in which a government has entered into a hedging interest rate swap or a hedging commodity swap and the swap counterparty (or the swap counterparty’s credit support provider) commits or experiences an act of default or a termination event under the swap agreement through no fault of the government. When a swap counterparty (or a swap counterparty’s credit support provider) is replaced through an assignment or an in-substance assignment, the GASB concluded that the government’s financial position remains unchanged.

Statement 64 is effective for periods beginning after June 15, 2011, again with earlier application encouraged.

GASB Issues Statement 63

Statement 63 is intended to improve financial reporting by providing citizens and other users of state and local government financial reports with information about how past transactions will continue to impact a government’s financial statements in the future.

Statement 63 provides a new statement of net position format to report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position (which is the net residual amount of the other elements). The Statement requires that deferred outflows of resources and deferred inflows of resources be reported separately from assets and liabilities.

A deferred outflow of resources is a consumption of net assets that is applicable to a future reporting period. An example of a deferred outflow of resources is a government’s hedging interest rate swap agreement in which the fair value becomes negative. If the hedge is determined to be effectively offsetting the changes in fair value of the debt, the decrease in the fair value of the derivative instrument would be reported as a liability with a corresponding deferred outflow of resources to reflect the fact that this decrease is not expected to be recognized in investment income in future periods.

A deferred inflow of resources is an acquisition of net assets that is applicable to a future reporting period. An example of a deferred inflow of resources is a service concession arrangement that involves a public toll road. If the government receives an up-front payment from an operator, the revenue associated with that payment will be recognized in future years because the arrangement that generated the up-front payment relates to those periods.

Statement 63 also amends certain provisions of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, and related pronouncements to reflect the residual measure in the statement of financial position as net position, rather than net assets.

The provisions of Statement 63 are effective for financial statements for periods beginning after December 15, 2011, with earlier application encouraged.

GASB Proposes Major Improvements for Pension Reporting

Norwalk, CT, July 8, 2011—The Governmental Accounting Standards Board (GASB) has issued two Exposure Drafts proposing improvements to financial reporting of pensions by state and local governments: Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans. The documents would propose amendments to the existing pension standards to improve how the costs and obligations associated with the pensions that governments provide to their employees are calculated and reported.

The first Exposure Draft, Accounting and Financial Reporting for Pensions (Pension Exposure Draft), primarily relates to reporting by governments that provide pensions to their employees. A second related Exposure Draft, Financial Reporting for Pension Plans, (Pension Plan Exposure Draft), addresses the reporting by the pension plans that administer those benefits.

The Exposure Drafts, including instructions on how to submit written comments, are available for download at www.gasb.org. The deadline for submitting written comments is September 30, 2011.

In addition, the GASB has released a comprehensive plain-language supplement to assist non-accountant users of financial statements in commenting on the Pension Exposure Draft. The supplement is also available for download at www.gasb.org.

The GASB will host public hearings on the Exposure Drafts on October 3, October 13, and October 20, 2011, and user discussion forums on October 4, 14, and 21. Locations and other details, including instructions for registering to participate, are explained in the Exposure Drafts.

GASB Issues Preliminary Views on Recognition and Measurement of Elements of Financial Statements

Norwalk, CT, July 11, 2011—The GASB today issued a Preliminary Views on concepts related to recognition of elements of financial statements and measurement approaches. The Preliminary Views, Recognition of Elements of Financial Statements and Measurement Approaches, is intended to set forth and seek comments on the Board’s early views on how and when an item should be reported (recognition) on state and local government financial statements and how the amount of the item reported on those statements should be determined (measurement approach).

Constituents are urged to review the Preliminary Views and provide comments by September 30, 2011. Copies of the document may be downloaded free of charge from www.gasb.org.

GASB is Seeking Volunteers

The GASB is seeking volunteers to participate in a field test of its proposed pension accounting and financial reporting standards. The proposals are contained in two Exposure Drafts that will be available to download from the GASB website, www.gasb.org, beginning on July 8, 2011.

Field tests are a part of the GASB’s due process activities and help the GASB to establish effective standards. You can find more information about field tests in general at the GASB’s website by clicking the following link: Field Test

This field test will help the GASB to discover issues you as a practitioner might have in applying the proposed standards, and to weigh the costs associated with implementation and ongoing application of the proposed standards against the benefits of the information they provide.

In addition, by volunteering you will be able to go through the exercise of “implementing” the proposed standards as if they were in place, while working directly with the GASB staff and providing feedback directly to the GASB regarding that process. This information will be considered by the Board in development of the final standards. The input provided could also be used in a question-and-answer Implementation Guide.

If you are interested in participating in the pension field test, or would like additional information, please contact me either by email at DMMEAD@gasb.org or by telephone at (203) 956-5294.

We look forward to working with you on this important project!

Two Exposure Drafts Approved

The GASB has approved two Exposure Drafts that would significantly change how governments account for and report on the pensions they provide to their employees. The Exposure Drafts are:

• Accounting and Financial Reporting for Pensions


• Financial Reporting for Pension Plans

The documents will be available on the GASB website on July 8.