WASHINGTON - The Governmental Accounting Standards Board has issued draft guidance that would require state and local governments for the first time to disclose information in their financial statements on the interest rate risks of their investments, particularly those investments that are sensitive to interest rate changes such as inverse floaters.
The Deposit and Investment Risk Disclosures guidance, which was issued by the GASB on Monday, also would require governments to disclose more information on the credit risk of their investments and the ratings that have been assigned by rating agencies.
However, somewhat uncharacteristically for a GASB document, the draft would reduce the custodial credit risk disclosures that governments have to make on their deposits and investments. This would include deposits that are uninsured and uncollateralized as well as investments that are held by a counterparty such as a bank where deposits have been made.
The board has asked the public to submit comments on the draft by Sept. 27.
"Right now we require nothing on interest rate risk and very little on credit risk of state and local investments," said Randy Finden, a GASB project manager.
"All investments carry some form of risk, and those risks must be communicated to the public in financial statements," he said. "Deposit and investment resources often represent the largest assets of governmental and fiduciary funds. Proprietary funds also report significant deposit and investment balances. These resources are critical to delivering governmental services and programs."
The draft would give governments several different options for disclosing interest rate risks on investments, particularly those that are highly sensitive to interest rate changes such as inverse floaters, enhanced variable-rate debt, and certain asset-backed securities.
The disclosures can be based on the weighted-average maturities of the instruments or on their duration, which is similar to maturity but takes discounted cash flows into account. Smaller governments can simply list their investments. More sophisticated governments can use a model to show the sensitivity of their investments to interest rate changes.
Credit risk disclosures would only be required for corporate and state and local debt. "We took off the table U.S. government securities -- Treasuries and agency securities," said Finden.
"We ask what the ratings are, and they can aggregate this information," he said. For example, a government can disclose that 90% of the total dollar value of its investments carry double-A ratings.
