Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 7 – Derivative Instruments
Other Required Disclosures

Per GASB 99, derivative instruments that are within the scope of GASB 53, but do not meet the definition of an investment derivative instrument or the definition of a hedging derivative instrument are considered other derivative instruments.

Other Derivative Instruments

Changes in fair value of a derivative that is neither an investment nor hedging derivative instrument should be reported separately from investment revenue on the resource flow statements (the statement of activities; the statement of revenues, expenses, and changes in fund net position; and the statement of changes in fiduciary net position) and segregated in the notes to the financial statements.

The disclosures required by GASB 99 are as follows:

• Changes in fair value of other derivative instruments should be reported on the resource flows statement separately from the investment revenue classification.
• Information disclosed in notes to financial statements about other derivative instruments should be distinguished from information about hedging derivative instruments and investment derivative instruments.
• Governments should disclose the fair values of derivative instruments that were reclassified from hedging derivative instruments to other derivative instruments.

Derivative Instruments with Contingent Features

Agencies must disclose any contingent features included in their derivative instruments (such as a requirement for an agency to post collateral if its credit rating declines). Details about derivative instruments with contingent features must be disclosed in Note 15 and referenced as such in Note 7.

Synthetic Guaranteed Investment Contracts

If a derivative instrument is a synthetic guaranteed investment contract that is fully benefit-responsive, disclose the following information:

• Description of the nature of the contract
• Fair value (including separate disclosure of the fair value of the corresponding underlying investments)

Hybrid Instruments

A hybrid instrument is composed of an embedded derivative instrument and a companion instrument. A companion instrument (such as a debt instrument, lease, insurance contract or sale or purchase contract) is recognized and measured in accordance with applicable reporting requirements. The derivative instrument that is a component of a hybrid instrument is recognized and measured in accordance with GASB 53. A hybrid instrument exists when the instrument meets all of the following criteria:

• The companion instrument is not measured on the statement of net position at fair value.
• A separate instrument with the same terms as the derivative instrument would meet the definition of a derivative instrument.
  –AND–
• The economic characteristics and risks of the derivative instrument are not closely related to the economic characteristics and risks of the companion instrument. This would be the case in any of the following circumstances:
  • Up-front payment with off-market terms
    An up-front payment is received as a result of a derivative instrument that has off-market terms. For example, an agency enters into a pay-fixed, receive-variable interest rate swap that has an above-market fixed payment, resulting in an up-front payment to the agency.
  • Written option that is in-the-money
    An agency that writes or sells such an option to a counterparty receives an up-front payment, resulting in a borrowing for financial reporting purposes.
  • Inconsistent reference rate
    The derivative instrument has a reference rate that is inconsistent with the market of the companion instrument.
  • Potential negative yield
    A hybrid instrument could be settled in such a way that an investor would not recover substantially all of its investment.
    –OR–
  • Leveraged yield
    The yield of the companion instrument is leveraged. A leveraged yield occurs if the embedded derivative instrument meets both of the following criteria:
    • The holder’s initial rate of return in the companion instrument is at least doubled.
      –AND–
    • The rate of return is at least twice the market return for an instrument with the same terms as the companion instrument.

If an agency reports a hybrid instrument, disclosures of the companion instrument must be consistent with disclosures required of similar transactions (such as disclosures of debt instruments). In that case, the existence of an embedded derivative instrument with the companion instrument is indicated in the disclosures of the companion instrument.