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New GASB Guidance Targets Investment Pools and Component Units

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Jul 6th 2015
Staff Writer and Editor AccountingWEB
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The Governmental Accounting Standards Board (GASB) proposed accounting and financial reporting guidance on June 30 related to external investment pools, which officials hope will alleviate confusion ahead of upcoming changes to regulatory rules.

The standard-setting board also proposed guidance on how certain component units should be presented in a state or local government's financial statements.

The first proposal, Accounting and Financial Reporting for Certain External Investment Pools, would permit qualifying external investment pools to measure pool investments at amortized cost for financial reporting purposes.

Reporting under the amortized cost basis reflects investment cost and adjustments made for premiums or discounts associated with the purchase price of the underlying investments in the pool.

Government investment funds pool the resources of participating governments and invest in various securities permitted under state law, according to the GASB. By pooling their cash together, governments can 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 the US Securities and Exchange Commission's Rule 2a7 for money market funds. Participants in these pools are able to report their position in the pool at amortized cost per share.

In response to major changes to Rule 2a7 that will take effect in 2016, the proposal would replace the reference in GASB literature to Rule 2a7 with the GASB's own set of criteria. Under the rule changes, many government pools would no longer qualify for amortized cost reporting. This would represent a significant change from current practice for both the pools and their participants, according to the GASB.

The proposal also would establish additional note disclosure requirements for external investment pools that measure all of their investments at amortized cost for financial reporting purposes and for governments that participate in those pools. These disclosures would include information about limitations or restrictions on participant withdrawals.

The deadline for submitting comments about the investment pools proposal is Aug. 31. Comments can be emailed to [email protected].

The second proposal, Blending Requirements for Certain Component Units, would enhance existing guidance regarding the presentation of the financial reporting entity in governmental financial statements. It would also establish an additional blending criterion for financial statement presentation of component units of state and local governments.

According to the GASB, the proposal addresses diversity in practice regarding the presentation of not-for-profit corporations in which the primary government is the sole corporate member. The board is proposing treating these component units as if they were activities of a primary government through a financial presentation method referred to as “blending.”

This approach would enhance consistency of application among governments reporting these types of component units and result in increased comparability across governments, the GASB said.

The deadline for submitting comments about the component units proposal is Oct. 2. Comments can be emailed to [email protected].

“These two proposals come in response to requests by stakeholders to resolve important practice issues,” GASB Chairman David Vaudt said in a written statement. The exposure draft on external investment pools should help avoid confusion ahead of forthcoming regulatory rule changes. The exposure draft on blending requirements will clarify reporting entity presentation of certain component units incorporated as not-for-profit corporations.”

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