The Governmental Accounting Standards Board has issued two exposure drafts proposing accounting and financial reporting guidance for state and local governments related to external investment pools and how certain component units should be presented in a governmental reporting entity’s financial statements.

The first exposure draft, Accounting and Financial Reporting for Certain External Investment Pools, would permit qualifying external investment pools to measure pool investments at amortized cost for financial reporting purposes. Reporting under the amortized cost basis reflects investment cost and adjustments made for premiums or discounts associated with the purchase price of the underlying investments in the pool.

The other exposure draft, Blending Requirements for Certain Component Units, aims to enhance existing guidance regarding the presentation of the financial reporting entity in governmental financial statements. The proposed standard would establish an additional blending criterion for financial statement presentation of component units of state and local governments.

“These two proposals come in response to requests by stakeholders to resolve important practice issues,” said GASB Chairman David Vaudt in a statement. “The exposure draft on external investment pools should help avoid confusion ahead of forthcoming regulatory rule changes. The exposure draft on blending requirements will clarify reporting entity presentation of certain component units incorporated as not-for-profit corporations.”

External Investment Pools
For governments, external investment pools function much like money market mutual funds do in the private sector, GASB noted. Government investment funds pool the resources of participating governments and invest in various securities permitted under state law. By pooling their cash together, governments can benefit in a variety of ways, including from economies of scale and professional fund management.

Existing standards provide that external investment pools may measure their investments at amortized cost for financial reporting purposes if they follow substantially all of the provisions of the Securities and Exchange Commission’s Rule 2a7 for money market funds.  Likewise, participants in those pools are able to report their position in the pool at amortized cost per share.

The proposal would replace the reference in GASB literature to Rule 2a7 with the GASB’s own set of criteria. This is being done in response to major changes to Rule 2a7 that take effect in 2016. Under the rule changes, many government pools would expect to no longer qualify for amortized cost reporting. This would represent a significant change from current practice for both the pools and their participants.

The proposed standard also would establish additional note disclosure requirements for external investment pools that measure all of their investments at amortized cost for financial reporting purposes and for governments that participate in those pools. These disclosures would include information about limitations or restrictions on participant withdrawals.

Blending Requirements
This exposure draft on blending requirements addresses diversity in practice regarding the presentation of not-for-profit corporations in which the primary government is the sole corporate member. GASB has proposed treating these component units as if they were activities of a primary government through a financial presentation method referred to as blending. The board said it believes the proposed approach would enhance consistency of application among governments reporting these types of component units—which would result in increased comparability across governments.

Both exposure drafts are available on GASB's Web site, www.gasb.org. GASB is encouraging stakeholders to review and provide comments on the exposure draft, Accounting and Financial Reporting for Certain External Investment Pools, by Aug. 31, 2015. It is also encouraging stakeholders to review and provide comments on the exposure draft, Blending Requirements for Certain Component Units, by Oct. 2, 2015.

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