DerivActiv Interview on GASB 53

MuniMarket Pulse Podcast Interviews Jim Towne of DerivActiv on GASB 53 and How It Applies to Governmental Entities 

MuniMarket Pulse is the most listened-to podcast focused exclusively on the municipal bond market. Begun in 2008, the podcast has posted more than 130 episode interviews with economists, investment bankers, issuers, bond lawyers, portfolio managers, rating agencies and academics on current issues affecting the municipal bond industry.

Minneapolis, MN - January 21, 2010 - MuniMarket Pulse, has recently posted a podcast interview with Jim Towne, Senior Vice President on “Explaining GASB 53 and How it Applies to Governmental Entities.” This podcast is an excellent primer for accounting, auditing and treasury officials on how to meet the June 15, 2010 requirements of GASB 53.

According to Towne, “GASB 53 was created by the Governmental Accounting Standards Board (GASB) to increase transparency in financial reporting due to the large volume of derivative transactions that have occurred by governmental entities during the past ten years. Adoption for this standard is not optional so in other words, governmental entities are going to be required to either determine that their derivatives are effective hedges or are investment derivatives.”

With the increasing demand for greater transparency in financial reporting, public entities are urged to establish a process of evaluating their derivative hedges under GASB 53. These hedges, even though they may have been put in place a number of years ago, will still need to be evaluated.

“In the case of governmental entities, GASB 53 applies to all governmental entities that report their financial condition using governmental accounting standards. Those would be cities, counties, states, state agencies, governmental hospitals, governmental subdivisions, all those types of entities out there using GASB accounting. The statement is effective for financial reports that are issued after June 15, 2010. So the first entities to report under this new GASB 53 statement will be those that have a June 30, 2010 fiscal year end,” said Towne.

This GASB 53 valuation involves more than simple accounting. There are four methods that are used to do a GASB 53 valuation to determine if it is an effective hedge: consistent critical terms, synthetic instrument method, dollar offset, and regression analysis. According to Towne, “One nice feature of GASB is that for each calculation you're allowed to continue to run the tests until one of the tests passes. So for example, an entity can fail three of the four tests but as long as one of the tests is positive, or they pass, that derivative can be declared an effective hedge.”