The Governmental Accounting Standards Board has issued a new standard aimed at improving how state and local governments report information about derivative instruments in their financial statements.

GASB Statement No. 53, "Accounting and Financial Reporting for Derivative Instruments," covers the financial arrangements that governments use to manage specific risks or make investments. Statement 53 requires governments to measure most derivative instruments at fair value in their financial statements that are prepared using the economic resources measurement focus and the accrual basis of accounting.

The guidance also addresses hedge accounting requirements and is effective for financial statements for reporting periods beginning after June 15, 2009, with earlier application encouraged.

"By requiring the fair values of derivative instruments to be reported on the face of financial statements prepared using the accrual basis of accounting, Statement 53 brings additional transparency to those transactions," said GASB chairman Robert Attmore in a statement.

The standard is intended to provide a clearer look into the risks that governments are sometimes exposed to when they enter into derivative transactions and how those risks are managed. The new standard includes specific criteria that governments will use to determine whether a derivative instrument will result in an effective hedge. Changes in fair value for effective hedges that are achieved with derivative instruments will be recognized in the reporting period to which they relate.

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