Project Pages

Investment Omnibus

Primary Objective: The objective of this research project is to consider potential revisions to existing standards regarding investment reporting and disclosure requirements that could address significant issues that have been identified in practice since the issuance of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. This project includes five project elements—external investment pools, custodial credit risk of deposits that participate in deposit placement services, unallocated insurance contracts, interest rate risk disclosures for mutual funds, and reporting realized gains and losses.

Status: The Board reviewed a project prospectus at the April 2008 Board meeting and the Investment Omnibus project was added to the Technical Plan as a research project. Research is currently being conducted.

Investment Omnibus—Project Plan

Project Description: This project will consider potential revisions to existing standards regarding investment reporting and disclosure requirements that could address significant issues that have been identified in practice since the issuance of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. This project includes five project elements—external investment pools, custodial credit risk of deposits that participate in deposit placement services, unallocated insurance contracts, interest rate risk disclosures for mutual funds, and reporting realized gains and losses.

Background:

External investment pools

Statement 31 provides guidance on the reporting of external investment pools. This project element is a consideration of the effectiveness of the current external investment pool reporting requirements. Research has commenced to evaluate current practice, especially in regards to pools that do not measure their investments at fair value—“2a7-like” pools. When the investments of an external investment pool meet certain credit quality and maturity requirements, Statement 31 provides that investments may be measured at amortized cost and that participants in the pool also may report their positions at amortized cost. Statement 31 describes these external investment pools as 2a7-like pools. However, important authoritative guidance that clarifies what is a 2a7-like pool is only contained in the Comprehensive Implementation Guide (level “d” in the hierarchy of generally accepted accounting principles [GAAP hierarchy]).

The scope of this project element includes all external investment pools, but chiefly focuses on one type of pool—2a7-like investment pools. As already mentioned, 2a7-like external investment pools do not measure their investments at fair value, measuring them at amortized cost instead. The amortized cost measurement is limited to external investment pools that meet specific requirements of section or rule 2a7 of the 1940 Investment Companies Act. Rule 2a7 requires that in order to be able to use amortized cost, the investments held by a mutual fund must be of very high credit quality and short maturity. The high credit quality requirement is intended to limit the investment portfolio’s credit risk; the short maturity requirement is intended to limit interest rate risk. In Securities and Exchange Commission (SEC) practice, mutual funds that meet the requirements of rule 2a7 are permitted to be labeled as money market funds. The GASB’s intent was that a 2a7-like external investment pool is a governmental external investment pool that, if it was under the supervision (had filed with) the SEC, would meet all requirements for money market funds. This intent was clearly spelled out in the Comprehensive Implementation Guide.

Custodial credit risk of deposits that participate in deposit placement services

This project element addresses whether deposits that participate in deposit placement services are exposed to custodial credit risk. In this case, custodial credit risk is the possibility that a government’s deposits may not be returned by the depository institution. A deposit placement service takes a deposit that exceeds a single depository institution’s Federal Deposit Insurance Corporation (FDIC)-insured limits and distributes the deposit among other institutions. The effect of the distribution is that each individual placement is under each individual institution’s insured limits, providing FDIC insurance for the aggregate deposit.

Unallocated insurance contracts

The objectives of this project element are to address the appropriate measurement of unallocated insurance contracts and to update terminology of the existing literature to unallocated insurance contracts. Unallocated insurance contracts are addressed in the accounting guidance for defined contribution plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and for other postemployment benefit (OPEB) plans in Statement 43.

Interest rate risk disclosures for mutual funds

GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires a disclosure of interest rate risk for mutual funds (paragraph 15). This topic considers whether Statement 40’s interest rate risk disclosure should be limited to bond mutual funds. The scope of this project element is limited to the appropriate interest rate risk disclosure for mutual funds.

Reporting realized gains and losses

The objective of this element of the proposed project is to reexamine the presentation of realized gains and losses on investments. The scope is all investment gains and losses reported in state and local government financial statements.

Major Research Issues:

  1. Are external investment pool investments being measured and reported in a manner consistent with Statement 31?
     
  2. When an external investment pool no longer meets the 2a7-like requirements, what are the implications?
     
  3. Should any of the guidance included in the Comprehensive Implementation Guide regarding external investment pools be included in a Statement issued by the Board raising the guidance in the GAAP hierarchy)?
     
  4. Are deposits that are placed into deposit placement service programs exposed to consumer credit risk?
     
  5. Are unallocated insurance contracts measured appropriately?
     
  6. If the interest rate risk disclosure required by Statement 40 is appropriate only for bond mutual funds, a revision to the existing literature would be suggested.
     
  7. Should realized gains and losses be reported in the flows statements of state and local governments? 

Research Work Plan:

The external investment pool issue will be the most staff- and Board-intensive element in the project. The objective of this research will be to gather information that indicates how external investment pools are applying Statement 31. In addition to information from the media, research will need to focus on directly interacting with external investment pools.

The main effort in the deposit placement services issue will be to provide the Board with information on custodial credit risk and the workings of deposit placement services. Activities related to unallocated insurance contracts and realized gains and losses will include a review of the GASB’s existing literature.

The research project timetable is as follows:

Board meetings   Topics to be considered

September-November 2008:   Complete research on identified elements
 
December 2008:   Present updated prospectus to the Board