GASB 53 Overview

GASB 53 requires that all derivatives used by a governmental entity be reported in the entity’s financial statements.  If the derivative being measured effectively hedges the risk that is identified by the governmental entity, the fair value changes will be deferred; otherwise, fair value changes will be immediately reported as investment income or loss. 

GASB 53 provides criteria and methods of calculation that a governmental entity can use to determine whether a derivative instrument that it uses creates an effective hedge or not.  There are several alternatives that a governmental entity can use including consistent critical terms method, synthetic instrument method, dollar offset method, and regression analysis.  All of these calculation methods require expertise in the valuation of derivative instruments, and some (regression analysis) require an understanding of statistics. 

GASB 53 allows the governmental entity to use any of the methods of calculation for determining hedge effectiveness.  If any method passes the test, the potential hedging instrument is deemed to pass the test and the hedge will be considered effective (changes in fair value are deferred) for that period.  Each financial reporting period requires a new test, and the governmental entity can again use any of the available tests to measure effectiveness.  The entity does not have to use the same test each period. 

If you are interested in learning more about GASB 53 reporting, you can download a GASB 53 white paper here.