Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 6 – Bonded Indebtedness
Derivative Instruments

Certain bonded indebtedness of the state is associated with derivative instruments, primarily interest rate swaps and similar agreements, that are entered into as part of the state’s overall debt management strategy. These instruments are used to manage exposure to changes in interest rates and to achieve desired debt service cost structures, such as synthetically converting variable-rate debt to fixed-rate obligations or stabilizing cash flows.

Derivative instruments included in Note 6 are directly related to specific bond issuances and are considered in evaluating the structure and risks of the state’s outstanding debt. As a result, these arrangements may affect the timing and amount of future debt service payments and the overall cost of borrowing.

Accounting and financial reporting for derivative instruments are governed by GASB 53, which addresses the recognition, measurement, and disclosure of derivative instruments and incorporates disclosure concepts from GASB Technical Bulletin No. 2003-1, as well as modifying certain GASB 40 provisions. Under this framework, agencies are required to measure derivative instruments at fair value in financial statements prepared using the economic resources measurement focus, and to evaluate whether such instruments qualify for hedge accounting.

Detailed information regarding the accounting treatment, valuation, hedge accounting determinations, and related risk disclosures for derivative instruments is presented in Note 7 – Derivative Instruments. This includes disclosures of fair value, deferred inflows and outflows of resources, and any violations of legal, regulatory, or contractual provisions associated with derivative instruments.