The Governmental Accounting Standards Board has issued final derivativesdisclosure guidance with an immediate effective date, despite pleas by the GovernmentFinance Officers Association that the effective date be delayed by more than a year.
The technical bulletin, which GASB posted on its Web site late Tuesday, calls for stateand local governments to disclose in the notes of their financial statements detailedinformation about the terms and risks of their derivatives contracts, such as interestrate swaps and swaptions.
"Our research indicates that it often has been difficult to understand how governmentshave been accounting for derivatives," Randal J. Finden, GASB's project manager, saidyesterday. "The new disclosures are designed to remove the mystery that surrounds thesetransactions. We will be able to see what a government has done, why it was done, thefair value of the derivative, and the risks they have assumed," such as credit, interestrate, termination, and market access risks.
The guidance also should give more reliable estimates of the notional amounts ofoutstanding derivatives in this market, which currently range widely between $200billion and $400 billion, Finden said.
The derivatives disclosure guidance takes effect for state and local governments' fiscalyears ending after June 15 and does not differ substantially from the guidance the boardfirst proposed in April, according to GASB officials. Almost all states' fiscal yearsend June 30.
In a letter sent to GASB last month, four GFOA committees urged the board both toreissue the proposed guidance as a formal GASB statement rather than a staff technicalbulletin and to give state and local governments and auditors at least a year to prepareto comply with the guidance.
"There is simply no emergency at present to justify allowing only three months betweenthe first issuance of a proposal of this complexity and its final implementation," thecommittees said.
But Finden said yesterday that the board did not think an extension of the effectivedate was necessary, because the guidance is an interpretation of existing standards.
"The board looked at that and felt that, insofar as it is an elaboration of currentrequirements, we would go with the effective date as proposed," Finden said. The boardcannot mandate the disclosures, but issuers will have to follow it in order to get cleanopinions from their auditors.
The final guidance also contains a section detailing GASB's authority to issue atechnical bulletin for the derivatives disclosure guidance, rather than a formal boardstatement.
Finden also said that the technical bulletin is designed to serve as interim guidanceuntil GASB completes its longer-term project on derivatives accounting and hedging. An"exposure draft" from that project is expected to be released before the end of thisyear, with a final statement to be issued in 2005, he said.
But issuer officials were upset yesterday, claiming GASB simply ignored their comments.
"I think it's way too fast," said Ben Watkins, Florida's bond finance director and amember of GFOA's debt committee. "They're ignoring our comments as usual per GASB 34,"he said, referring to the new financial accounting model the board adopted, over somestrong opposition, for state and local governments a few years ago.
"I am completely supportive of more disclosure of derivatives," Watkins said. "But doingit as an interpretative release and not as a pronouncement ... with a very shorttimeframe [for compliance] and with the technical, incomprehensible language they'veused on methodologies I just don't think is positive."
Watkins pointed out that the technical bulletin, which deals with derivatives on theliability side of the balance sheet, is very different from GASB's existing guidance ondisclosure of derivatives investments and "is all new to those of us who are responsiblefor debt."
GASB did, however, follow The Bond Market Association's recommendation to limit thedefinition of derivatives to freestanding derivatives products - at least for now -because of the complexities of including embedded derivatives, Finden said. "We're notlooking for an embedded derivatives contract in this guidance," he said.
However, the board made clear in the bulletin that the disclosure guidance is intendedto cover swaptions - also called prepaid interest rate swaps - regardless of whether ornot they are considered to be embedded derivatives, Finden said. In addition, GASB plansto address embedded derivatives in its longer-term derivatives accounting and hedgingproject, he said.
TBMA had also urged GASB to allow state and local governments to disclose the aggregateamount of their exposure to derivatives by categories such as interest rates,commodities, or foreign currencies.
Finden said the technical bulletin allows for some aggregation. "You can aggregatesimilar swaps used for similar purposes," he said. "But most governments have the samekind of swap. They issue variable-rate bonds and swap to synthetic fixed-rate bonds."
