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Disclosing
Essential Risk Information
Seminar Examines GASB-40 By Dan Horan On Jan. 14, Greg Driscoll, from KPMG LLP, led a seminar that covered reporting requirements for deposits, investments and derivatives. The New York State Society of CPAs’ Government Accounting and Auditing Committee, chaired by David Hasso, hosted the event. “Investments that have fair value that are highly sensitive to changing interest rates require certain disclosures prescribed by GASB-40,” Driscoll said. GASB-40 also addresses common deposits and investment risks related to credit risks, concentration of credit risk, interest rate risk and foreign currency risk. The statement is in effect for periods beginning after June 15, 2004. A member of the Government Accounting and Auditing Committee, Driscoll discussed the grouping of categories of investments. “General disclosure principal, unless otherwise required, should be organized by investment type, such as U.S. Treasuries, corporate bonds or commercial papers,” he said. “Dissimilar investments, such as U.S. Treasury bills and U.S. Treasury strips, should not be aggregated into a single investment type.” According to Driscoll, credit risk is a factor that should be analyzed before undertaking an investment. The government should provide information about the credit risk associated with the investments by disclosing the credit quality ratings of the investments in debt securities, as determined by the rating agencies, as of the date of the financial statements. Generally, obligations of the U.S. government, or obligations specifically guaranteed by the U.S. government, are not considered to have credit risk and do not require disclosure of credit quality, he said. During
the one-hour CPE seminar, Driscoll also defined custodial credit
risk and explained its application to investments. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of the investment or collateral securities that are in the possession of an outside party, he said. Additional risks include interest rate risk, which is the risk that modification in the interest rate will unfavorably impact the fair value of the investment. “The terms and fair value of investment that are considered highly sensitive to interest rate change should be disclosed,” said Driscoll, adding that for foreign currency risk, changes in exchange rates will negatively influence the fair value of an investment or deposit. Dan Horan, managing partner with Horan Martello Morrone P.C., in Hauppauge, N.Y., is a member of the Society’s Government Accounting and Auditing Committee. |
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