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GASB 40 Implementation

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					GASB 40 Implementation
Audit Issues
General Disclosure Principles

• Investments disclosures required to be organized
  by investment type
  – Apply professional judgment and select investment
    types that fit the facts and circumstances
  – Investments with significantly different risk profiles
    should not be aggregated into a single investment type
  – A ten year US Treasury bond and a US Treasury
    interest only strip are not the same investment type due
    to significantly different risk characteristics
General Disclosure Principles

• Sizable portions of an investment portfolio should
  not be described as “other” or “miscellaneous”
  unless narrative describes the composition
• Investments of an internal investment pool require
  all applicable disclosures
Level of Detail

• Disclosures should generally be made for the pri-
  mary government including its blended component
  units with additional risk disclosures as necessary
• Disclosures may be aggregated by portfolio
• For example state holding separate portfolio for an
  individual major fund or fiduciary fund type should
  disclose risks of those portfolios when the risk
  exposures are significantly greater than the deposit
  and investment risks of the primary government
Level of Detail

• A single non major fund can cause the reported
  non major funds in the aggregate to have interest
  rate risks that are greater than that of the primary
  governments
• Use professional judgment to determine which
  component unit disclosures are necessary
Deposit and Investment Policies

• An investment policy is considered to be a formally
  adopted policy that sets forth a governments allowable
  deposits or investments
• May be formally adopted through or legal or
  contractual provisions or by other means
• Informal policies are not a required disclosure
• Statutory policies where different from internal
  investment policies still must be disclosed
• Bond issues with specific covenants related to
  investment of proceeds should be considered an
  investment policy
Credit Risk

• When multiple credit ratings exist, at a minimum the
  rating indicative of the greatest degree of risk should
  be presented
• Government sponsored enterprise investments are
  subject to credit risk disclosures (implicit guarantee of
  the federal government as opposed to full faith and
  credit)
• Credit quality ratings required for bankers
  acceptances and mutual funds whose investments are
  restricted to US government and agency obligations
  that are explicitly guaranteed
Interest Rate Risk

• If using the specific identification method must
  separately disclose a call option
• May use one interest rate risk method for short-
  term investments and another for long term
  investments
• Analyze the effects of caps, collars and floors on
  fair value of investments when determining
  interest rate risk
Interest Rate Risk

• Weighted average maturity requires assumptions
  as to maturity of callable investments which
  should be disclosed
• Simulation model should include the effects of
  interest rate decreases when a decrease would
  adversely affect the instrument or portfolios fair
  value
Highly Sensitive Investments

• Asset backed securities
  – Fannie Mae
  – Ginnie Mae
  – Freddie Mac
• Structured notes
  –   Range notes and index amortizing notes
  –   Step up notes and bonds
  –   Variable rate investments with coupon multipliers
  –   Coupons that vary inversely with a benchmark index
Highly Sensitive Investments

 – Collateralized mortgage securities with certain types of
   tranches
 – Interest only tranches
 – Principal only tranches
 – Investments that contain interest rate floors, caps or
   collars may be highly sensitive
 – May aggregate its highly sensitive investments as
   percentages of the total portfolio

				
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