Norwalk, CT, June 25, 2003—In an effort to improve disclosures associated with derivative contracts, the Governmental Accounting Standards Board (GASB) has issued critical accounting guidance that will provide more comprehensive reporting by state and local governments. Under the new guidance, users of financial statements will be better informed about the risks assumed in derivative contracts. Derivatives are often used by governments as a means to potentially reduce borrowing costs. While derivatives may support financing needs, the lower costs come with additional risks. The objectives and terms of derivative contracts, their risks and the fair value of the contracts are generally not specified in financial reports today.
The GASB’s Technical Bulletin, Disclosure Requirements for Derivatives Not Reported at Fair Value on the Statement of Net Assets, is designed to increase the public’s understanding of the significance of derivatives to a government’s financial position and would provide key information about their potential effects on future cash flows.
GASB Project Manager, Randal J. Finden, remarked, “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 issued today by the GASB, state and local governments will now be required to disclose this information.”
Mr. Finden further commented, “Our research indicates that it often has been difficult to understand how governments have been accounting for derivatives. 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.” 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.
This Technical Bulletin will be effective for periods ending after June 15, 2003. The Bulletin may be obtained through the GASB Order Department at 800-748-0659 or by placing an order on-line at the GASB’s website. The document may be accessed from the website until a print version is available.
About the Governmental Accounting Standards Board
The GASB is the independent, not-for-profit organization formed in 1984 that establishes and improves financial accounting and reporting standards for state and local governments. Its seven members are drawn from the Board's diverse constituency, including preparers and auditors of government financial statements, users of those statements and members of the academic community. More information about the GASB can be found at its website www.gasb.org.
Governmental Accounting Standards Board
Improving governmental accountability through better financial reporting