GASB 53 Quantitative Methods

GASB 53 allows governmental entities to use one of three quantitative methods to calculate hedge effectiveness.  Those methods are the Synthetic Instrument Method, Dollar Offset, and Regression Analysis.  Generally, a governmental entity can use any of these methods from period to period to determine hedge effectiveness.  If a quantitative method fails in a subsequent period, then another method may be used.  In addition, a governmental entity may perform the calculation based on information from the prior reporting period or since inception of the derivative.

MuniMarket Pulse Podcast on GASB 53
To learn more about GASB 53 and the requirements for reporting, MuniMarket Pulse has produced an audio podcast interview with Jim Towne, Senior Vice President of DerivActiv on the subject. Listen Here.

DerivActiv can perform all of the GASB 53 hedge effectiveness tests and determine which one best fits your governmental entity’s needs. Call us at 1-866-200-9012.

GASB 53 Description of Methods Used by Governmental Entities

The Synthetic Instrument Method uses a combination of the historical cash flows on the hedge and the cash flows on the item being hedged.  This method works best for cash flow hedges where the derivative is hedging variable rate bond cash flows.  The Synthetic Instrument Method takes the net total cash flows and compares the cost in terms of the interest rate.  The synthetic rate is calculated by taking the net cash flow of the swap plus the amount paid on the debt and dividing by the amount of the debt or hedge.  If this rate is within a band of 90% to 111% of the fixed rate on the derivative, the hedge is deemed effective under GASB 53.

The Dollar Offset Method divides the changes in fair value or the changes in cash flows of the item being hedged with the changes in fair value or the changes in cash flows of the derivative.  In order to be effective under GASB 53, the ratio must fall within the band of 80% to 125%.  The dollar offset method can be applied to the period covered (the reporting period) or over the life of the derivative.

Regression Analysis is a statistical method to review the relationship between two variables.  In the context of GASB 53, the regression analysis looks at the changes in fair values or cash flows of the derivative in relationship to the changes in fair values or cash flows of the item being hedged.  Specifically, the results of the analysis must pass three tests in order for the hedge to be considered effective:

  • R-squared must be at least .80

  • Regression Coefficient for the slope (x) must be between -1.25 and -.8

  • The F-statistic must indicate that there is statistical significance using a 95% confidence interval.

Using regression analysis requires a fundamental understanding of statistics and the ability to interpret the results of the statistical sampling.

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




GASB 53 Derivatives
GASB 53 Disclosure Requirments
GASB 53 Effective Date
GASB 53 Fair Value
GASB 53 Guidance
GASB 53 Hedging Derivatives
GASB 53 Overview
GASB 53 Quantitative Methods
GASB 53 Reporting
GASB 53 Services
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