The Governmental Accounting Standards Board issued two new standards Wednesday that aim to improve government financial reporting in two timely areas: providing taxpayers and others with information about how past transactions will continue to affect a government’s financial statements in the future, and clarifying the circumstances in which hedge accounting continues to be applied when a swap counterparty, or related credit support provider, is replaced.
The two new standards are Statement No. 63, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position,” and Statement No. 64, “Derivative Instruments: Application of Hedge Accounting Termination Provisions,” which is an amendment of GASB Statement No. 53. Both statements address accounting and financial reporting issues requiring attention due to their effects on other statements currently being implemented by governments.
GASB 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.
GASB 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, “Accounting and Financial Reporting for Derivative Instruments,” 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.
The provisions of Statement 63 are effective for financial statements for periods beginning after Dec. 15, 2011, with earlier application encouraged. Statement 64 is effective for periods beginning after June 15, 2011, again with earlier application encouraged.
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