The following terminology is used extensively within the requirements of GASB 53, as amended by GASB 64 and GASB 99.

A derivative instrument’s variable payment is linked to a rate known as the reference rate. Common reference rates are SOFR, the SIFMA swap index, the AAA general obligations index and the pricing point of a commodity.

A notional amount is a number of currency units, shares, bushels, pounds or other units specified in the contract. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying.

A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner.

An investment derivative instrument is a derivative instrument entered into primarily for the purpose of obtaining income or profit, or a derivative instrument that does not meet the criteria of a hedging derivative instrument.

A hedging derivative instrument is a derivative instrument associated with a hedgeable item and is effective in significantly reducing an identified financial risk by substantially offsetting changes in cash flows or fair values of the hedgeable item. Hedgeable items can be all or a specific portion of a single asset or liability, groups of similar assets or liabilities or an expected transaction. Assets and liabilities measured at fair value (such as investments in many debt securities) do not qualify as hedgeable items. A transaction wholly within a primary government cannot be a hedgeable item. For more information, see Hedging Derivative Instruments — Evaluating Effectiveness.

Other derivative instruments are derivative instruments that were intended to be hedgeable but do not meet the definition of an investment derivative instrument or the definition of a hedging derivative instrument.

A cash flow hedge protects against the risk of either changes in total variable cash flows or adverse changes in cash flows caused by variable prices, costs, rates or terms that cause future prices to be uncertain.

A fair value hedge protects against the risk of either total changes in fair value or adverse changes in fair value caused by fixed terms, rates or prices.

An assignment occurs when a swap agreement is amended to replace the original swap counterparty, or the counterparty’s credit support provider. All of the other terms of the swap agreement remain unchanged.

An in-substance assignment occurs when all of the following criteria are met:

• The original swap counterparty or the counterparty’s credit support provider is replaced.
• The original swap agreement is ended and the replacement swap agreement is entered into on the same date.
• The terms that affect changes in fair value and cash flows in the original and replacement swap agreements are identical.
  –AND–
• Any difference between the original swap agreement’s exit price and the replacement swap’s entry price is attributable to the original swap agreement’s exit price being based on a computation specifically permitted under the original swap agreement.

Under GASB 53 requirements, derivative instruments are broken into two categories: investment and hedging. Per GASB 99, if a derivative instrument does not meet the criteria for investment or hedging classification, it is considered an other derivative instrument.

Derivative instruments are reported on the statement of net position. The classification of derivative instruments depends on whether they represent an asset or a liability.

Note: For GASB 53 purposes, the term statement of net position includes the government-wide statements, proprietary fund statements of net position and the statement of fiduciary net position.

Investment derivative instruments are recognized as investments even if their fair value is negative. Changes in fair values of investment derivative instruments are reported within the investment revenue classification in the flow of resources statement.

Note: For GASB 53 purposes, the term flow of resources statement includes the statement of activities, the statement of revenues, expenses and changes in net position, and the statement of changes in fiduciary net position.

Hedging derivative instruments are reported as assets or liabilities — depending on their fair value. Changes in fair values of hedging derivative instruments are reported as deferred inflows or deferred outflows in the statement of net position. For example, the increase in fair value of an interest rate swap that is a hedging derivative instrument is reported as deferred inflows in the statement of net position. In proprietary and fiduciary fund financial statements, the fund that reports or is expected to report the hedged item must report the hedging derivative instrument.

GASB 72 requires investments to be measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Hedge accounting termination occurs upon any one of the following events:

• Ineffectiveness
• Likelihood that a hedged expected transaction will occur is no longer probable
• Hedged asset or liability is sold or retired
• The hedging derivative instrument is terminated
• A current refunding or advanced refunding resulting in the defeasance of the hedge debt
  –OR–
• The hedged expected transaction occurs (sale of bonds or purchase of commodity)

If the termination event is the occurrence of the hedged expected transaction, the disposition of the deferral balance depends on whether the hedged expected transaction results in a financial instrument or a commodity.

If a termination event occurs, hedge accounting is not applied and the balance in the deferred account is reported within the investment revenue classification in the statement of revenues, expenses and changes in net position.

The termination of hedge accounting occurs upon one of the following events:

1. The hedging derivative instrument is no longer effective.
2. The likelihood that a hedged expected transaction will occur is no longer probable.
3. The hedged asset or liability is sold or retired but not reported as a current refunding or advanced refunding resulting in the defeasance of debt.
4. The hedging derivative instrument is terminated unless an effective hedging relationship continues.
5. A current refunding or advanced refunding results in the defeasance of the hedge debt.
   –OR–
6. The hedged expected transaction occurs (sale of bonds or purchase of commodity).

Events A through D

If any event described in A through D above occurs, report the balance in the deferred account in the investment revenue section of the statement of revenues, expenses and changes in net position and captioned increase/decrease upon hedge termination.

Event D

If an event described in D occurs, an effective hedging relationship continues if all of the following criteria are met:

• The collectability of swap payments is considered probable.
• The counterparty or the counterparty’s credit support provider of the swap agreement is replaced with assignment or in-substance assignment.
  –AND–
• The government enters into assignment or in-substance assignment in response to a default or termination event by the counterparty or counterparty’s credit support provider.

Event E

If an event described in E occurs, include the deferral balance related to the hedging derivative instrument in:

• The computation of the difference between the reacquisition price and the net carrying amount of the old debt in accordance with GASB 23.
• The computation of the difference between the cash flows required to service the old debt and the cash flows required to service the new debt and complete the refunding.
• The computation of economic gain or loss from the transaction as required by GASB 7.

Event F

If an event described in F occurs, the disposition of the deferral balance depends on whether the hedged expected transaction results in a financial instrument or a commodity.

1. If the hedged expected transaction results in a financial instrument, the accounting treatment depends on whether the agency is re-exposed to hedged risk:
   • The agency is re-exposed to hedged risk — Recognize the deferral balance in the investment revenue section of the statement of revenues, expenses and changes in net position.
   • The agency is not re-exposed to hedged risk — Report the deferral balance in the statement of revenues, expenses and changes in net position in a manner consistent with the accounting treatment of the hedged item.
2. If the hedged expected transaction results in a commodity, report the deferral balance related to the hedging derivative instrument as an adjustment to the cost of the commodity.