GASB 53 Fair Value

The Governmental Accounting Standards Board (GASB) issued GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This Statement was created to improve how governmental entities report information about derivative instruments in their financial statements. Specifically, GASB 53 requires governments to measure most derivative instruments at fair value in their financial statements. GASB 53 is effective for financial statements for reporting periods beginning after June 15, 2009.

For more information on GASB 53, contact a DerivActiv representative to discuss your particular requirements at 866-200-9012.

A governmental entity must record derivative instruments at fair value in its statement of net assets. Changes in the fair value of a derivative instrument that does not meet the hedging requirements outlined in GASB 53 are reported as investment revenue. These changes in the fair value of a hedging derivative are reported as either as an increase or decrease in the statement of net assets.

The fair value of a derivative should be measured on the basis of its market price if there is an active market. In the absence of a market price, discounted future cash flows or another formula-based method or mathematical model may be used to determine fair value.

When determining fair value, a government should use the method that was applied in the prior reporting period to reevaluate the effectiveness of a hedging derivative at the end of each subsequent reporting period. If that method indicates that the derivative is no longer an effective hedging instrument, the government is permitted to use one of four methods of assessing hedge effectiveness before concluding that the hedging derivative is ineffective. These methods are: consistent critical terms method, synthetic instrument method, dollar offset method or the regression analysis method.

Hedge accounting for a derivative must be terminated if one of the following occurs: the hedging derivative instrument is no longer effective, it is no longer probable that the hedged transaction will occur, the hedged item is sold or retired, the hedging derivative instrument is terminated, a refunding or advanced refunding results in defeasance of the hedged debt, or the hedged expected transaction occurs.

DerivActiv performs valuations on all types of derivatives, including interest rate swaps, foreign exchange (FX), fixed income and equities. In addition, we perform all of the GASB 53 calculations and provide a report to the governmental entity that can be used to prove the hedging relationship to the auditors.

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