The Governmental Accounting Standards Board plans to issue a “preliminary views document” on its closely watched derivatives accounting project this spring to get more input from municipal officials and other market participants before proposing guidance, Randal Finden, the GASB manager for the project, confirmed this week.
GASB’s plans, which were disclosed without any detail by Stephen Gauthier, the director of technical services for the Government Finance Officers Association, at the GFOA debt committee’s winter meeting here last week, drew a huge sigh of relief from state and local officials and other market participants who have feared that GASB might issue guidance without obtaining further information from the market.
The derivatives accounting project, which has been under discussion for several years, is controversial because it may ultimately force many issuers for the first time to account for derivatives transactions on their balance sheets at fair value.
Generally, state and local governments that engage in derivatives disclose the transactions in the notes of their financial statements, but they are not treated as assets or liabilities and do not affect fund balances unless they result in cash payments.
GASB has already decided to propose that derivatives should be reported based on their fair values and that a special kind of accounting should be used for hedging transactions, possibly allowing for deferred gains or losses.
Requiring issuers to report derivatives on their balance sheets at fair value would be a huge change from current practices for most governments. As a result, there is a lot of debate among GASB officials and market participants as to how to account for these transactions, particularly if they are hedging transactions.
The importance of the accounting board’s decision to issue a preliminary views document was highlighted by Gauthier, at the GFOA meeting, and Finden, in a brief interview this week. Both said that for most of its projects, GASB issues an exposure draft, which is not likely to be changed significantly before becoming finalized, regardless of the comments that the board gets.
“Normally, we issue an exposure draft that’s pretty close to the final document,” Finden said.
In this case, GASB is seeking more input on the project before issuing draft guidance and the input could lead to changes in its preliminary views.
“People will have another chance to give us comments on issues where our feelings are fairly tentative,” Finden said.
“They are very much going to be open to major changes,” Gauthier told debt committee members last week.
Market participants this week applauded GASB on its efforts to obtain more views on these issues.
“I think this period of more communication about it is wonderful,” said Debra R. Hinsvark, finance director for Kansas City, Mo. “This is an extremely complicated issue, the economics of which are not exactly clear.”
“We appreciate the Governmental Accounting Standards Board’s willingness to take into account the views of the marketplace on its derivatives hedging project. The Bond Market Association has been working with GASB on this project for over a year and believes that input from market participants will provide valuable insight as GASB determines what the financial reporting and/or disclosure requirements for derivatives and hedging accounting should be,” said Leslie Norwood, TBMA president and assistant general counsel.
One concern of some muni issuers is that they may have to report negative values for derivatives transactions on their balance sheets, giving a skewed view of the transactions if they expect that over the long term, they will produce savings, not losses.
The board hopes to be able to issue its preliminary views document as early as April. It would then review and discuss the comments, with the hope that an exposure draft containing proposed guidance could be issued in early 2007, Finden said.
