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GASB Lays Out New Rules for External Investment Pools

Dec 24th 2015
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A new standard issued by the Governmental Accounting Standards Board (GASB) on Dec. 23 permits qualifying state and local government external investments pools – and participants in those pools – to measure their investments at amortized cost for financial reporting purposes.

The new GASB guidance is in response to changes in a US Securities and Exchange Commission (SEC) rule, which is expected to take effect in April 2016.

GASB Statement No. 79, Certain External Investment Pools and Pool Participants, provides guidance that will allow many pools to continue to qualify for amortized cost accounting.

External investment pools function much like money-market funds do in the private sector. Government investment funds pool the resources of participating governments and invest in short-term, high-quality securities permitted under state law. By pooling their cash together, governments benefit in a variety of ways, including from economies of scale and professional fund management.

Under existing standards, external investment pools can measure their investments at amortized cost for financial reporting purposes if they follow substantially all of the provisions of SEC Rule 2a7 for money-market funds. Likewise, participants in these pools are able to report their investments in the pool at amortized cost per share.

Reporting at amortized cost reflects the operations of external investment pools when they transact with participants at a stable net asset value per share. Not having the option to report under amortized cost would represent a significant change from current practice for both pools and pool participants, according to the GASB.

Statement 79 replaces the reference in existing GASB literature to Rule 2a7 with criteria that are similar in many respects to those included in the SEC rule. Although the GASB considers those criteria to be relevant, it also believes that external investment pool accounting and financial reporting standards should not be subject to regulatory changes that might be made in the future when those changes were not originally intended to be applied to those pools.

The guidance also establishes additional note disclosure requirements for qualifying pools and for governments that participate in those pools. These required disclosures include information about limitations or restrictions on participant withdrawals.

“The new guidance for qualifying external investment pools and participants in external investment pools will help them to avoid confusion when the regulatory rule changes become effective,” GASB Chairman David Vaudt said in a written statement. “Statement 79 will allow those pools the option of continuing to measure and report their investments at amortized cost.”

The standard goes into effect for reporting periods beginning after June 15, 2015, except for certain provisions on portfolio quality, custodial credit risk, and shadow pricing. Those provisions are effective for reporting periods beginning after Dec. 15, 2015. The GASB encourages early adoption.

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