Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 3 – Deposits, Investments and Repurchase Agreements
Sample (Illustrative, may not tie to exhibits)

Sample Agency is authorized by statute to make investments following the “prudent person rule.” There were no significant violations of legal provisions during the period.

Deposits of Cash in Bank

As of Aug. 31, 20CY, the carrying amount of deposits was $200.00 as presented below.

Governmental and Business-Type Activities

Fiduciary Funds

Discrete Component Unit

These amounts consist of all cash in local banks and a portion of short-term investments. These amounts are included on the combined statement of net position as part of the “cash and cash equivalents” and “securities lending collateral” accounts.

As of Aug. 31, 20CY, the total bank balance was as follows:

Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, the agency will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The agency does not have a deposit policy for custodial credit risk. The bank balances that were exposed to custodial credit risks are:

Note: If the agency has bank balances subject to custodial credit risk, provide a brief description of its deposit policies related to deposit custodial credit risk or state that it does not have a deposit policy for custodial credit risk. Disclose only that portion of the total bank balance that was subject to deposit custodial credit risk. If no bank balance was subject to deposit custodial credit risk, do not include a discussion of deposit custodial credit risk in Note 3.

Foreign currency risk for deposits is the risk that changes in exchange rates will adversely affect the deposit. The agency’s policy is to limit deposits subject to foreign currency risk to 5 percent of total deposits. The exposure to foreign currency risk for deposits as of Aug. 31, 20CY is as follows:

(This table is not all inclusive)

Note: If the agency has balances subject to foreign currency risk, provide a brief description of its policies that are related to foreign currency risk or state that it does not have a policy for foreign currency risk. Disclose only if the agency has deposits denominated in foreign currency. Disclose the U.S. dollar balances of such deposits organized by currency denomination. If there are no deposits denominated in foreign currency, do not include a discussion of foreign currency risk for balances in Note 3.

Investments

As of Aug. 31, 20CY, the fair value of investments were:

Governmental and Business-Type Activities

Fiduciary Funds

Discrete Component Unit

U.S. Government Securities reported in Level 1 of the fair value hierarchy were valued using quoted prices in active markets.

As of Aug. 31, 20CY, the fair value of invested securities lending cash collateral by investment type were:

Governmental and Business-Type Activities

Investments Reported at NAV

Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the agency will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The agency’s investment policy limits holding of securities by counterparties to those involved with securities lending. As of Aug. 31, 20CY, the agency’s investments were exposed to custodial credit risks as follows:

Note: If the agency has investments subject to custodial credit risk, provide a brief description of its policies that are related to investment custodial credit risk or state that it does not have a policy for custodial credit risk. Disclose only that portion of investments that was subject to investment custodial credit risk. If no investments were subject to investment custodial credit risk, do not include a discussion of investment custodial credit risk in Note 3.

Foreign currency risk for investments is the risk that changes in exchange rates will adversely affect the investment. The agency’s policy is to limit investments subject to foreign currency risk to 5 percent of total investments. The exposure to foreign currency risk as of Aug. 31, 20CY was:

(This table is not all inclusive)

Note: If the agency has investments subject to foreign currency risk, provide a brief description of its policies that are related to investment foreign currency risk or state that it does not have a policy for investment foreign currency risk. Disclose only if the agency has investments denominated in foreign currency. Disclose the U.S. dollar balances of such investments organized by currency denomination. If no investments are denominated in foreign currency, do not include a discussion of foreign currency risk in Note 3.

Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The general investment policy of the agency limits investments in debt securities that are not in the top three investment grade ratings issued by nationally recognized statistical rating organizations to 5 percent of total investments. As of Aug. 31, 20CY, the agency’s credit quality distribution for securities with credit risk exposure was:

(This table is not all inclusive of ratings)

Standard & Poor’s

Note: If the agency has debt securities, provide a brief description of its policies that are related to credit risk or state that it does not have a policy. Agencies are required to provide Standard & Poor’s credit ratings.

Concentration of credit risk is the risk of loss attributable to the magnitude of investment in a single issuer. As of Aug. 31, 20CY, the agency’s concentration of credit risk was:

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Through its investment policy, the agency manages its exposure to fair value losses arising from increasing interest rates by limiting the modified duration of its investment portfolio to less than one year as follows:

Reverse Repurchase Agreements

By statute, Sample Agency is authorized to enter into reverse repurchase agreements. A reverse repurchase agreement is a transaction in which a broker-dealer or financial institution transfers cash to the agency and the agency transfers securities to the broker-dealer and promises to repay the cash plus interest in exchange for the same or similar securities. Credit risk exposure for the agency arises when a broker-dealer does not return the securities or their value at the conclusion of the reverse repurchase agreement. There were no significant violations of legal or contractual provisions during the year.

Securities Lending

Sample Agency participates in a security-lending program. The agency began the program in February 1999 and had $ 3,400,000 of securities out on loan to brokers/dealers at Aug. 31, 20CY. These securities on loan are presented as uncategorized in the preceding schedule of custodial risk.

In securities lending transactions, the agency transfers its securities to broker-dealers and other entities for collateral – which may be cash or securities – and simultaneously agrees to return the collateral for cash or the same securities in the future. The agency invests the cash received as collateral and, if the returns on those investments exceed the “rebate” paid to the borrowers of the securities, the securities lending transactions generate income for the agency. Part of the payment to the borrower comes from the agency’s resources if the investment of the cash collateral does not provide a return exceeding the rebate or if the investment incurs a loss on principal. The borrower pays a “loan premium or fee” for the securities loan, thus generating income for the agency.

Securities lending is authorized by state statutes. The agency is authorized to lend its U.S. government and agency securities. Collateral is either cash or U.S. government or agency securities at a value of 102 percent of the value of the securities lent. The securities lending contracts allow the agency to pledge or sell collateral securities without borrower default. At fiscal year-end, the agency has no credit risk exposure to borrowers because the amounts the agency owes to borrowers exceed the amounts the borrowers owe the agency. Contracts with the lending agents require them to indemnify the agency if the borrowers fail to return the securities. The policy is to match the maturities of the collateral investments and the securities loans. There were no significant violations of legal or contractual provisions, any borrower or lending agent default losses and no recoveries of prior-period losses during the year.

*Non-cash collateral received for securities lending activities are not recorded as assets because underlying investments remain under the control of the borrower, except in the event of default.

Foreign currency risk for investments is the risk that changes in exchange rates will adversely affect the investment. Sample Agency’s policy is to limit investments subject to foreign currency risk to 5 percent of total investments. The exposure to foreign currency risk as of Aug. 31, 20CY was:

(This table is not all inclusive)

Note: If your agency has investments subject to foreign currency risk, provide a brief description of the policies related to investment foreign currency risk or state that your agency does not have a policy for investment foreign currency risk. Disclose only if your agency has investments denominated in foreign currency. Disclose the U.S. dollar balances of such investments organized by currency denomination. If no investments are denominated in foreign currency, do not include a discussion of foreign currency risk in Note 3.

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Sample Agency had investments with the following maturities: