IMPLEMENTATION GUIDE
Guide to Implementation of
GASB Statement 31 on Accounting and
Financial Reporting for Certain Investments
and for External Investment Pools
Questions and Answers
Governmental Accounting Standards Board
of the Financial Accounting Foundation
GASB IMPLEMENTATION GUIDES
Guide to Implementation of GASB Statement 3 on Deposits with Financial Institutions, Investments (including
Repurchase Agreements), and Reverse Repurchase Agreements: Questions and Answers (GQA03)
Guide to Implementation of GASB Statement 9 on Reporting Cash Flows of Proprietary and Nonexpendable Trust
Funds and Governmental Entities That Use Proprietary Fund Accounting: Questions and Answers (GQA09)
Guide to Implementation of GASB Statement 10 on Accounting and Financial Reporting for Risk Financing and Related
Insurance Issues: Questions and Answers (GQA10)
Guide to Implementation of GASB Statement 14 on the Financial Reporting Entity: Questions and Answers (GQA14)
Guide to Implementation of GASB Statements 25, 26, and 27 on Pension Reporting and Disclosure by State and Local
Government Plans and Employers: Questions and Answers (GQA25-27)
Guide to Implementation of GASB Statement 31 on Accounting and Financial Reporting for Certain Investments and for
External Investment Pools: Questions and Answers (GQA31)
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IMPLEMENTATION GUIDE
Guide to Implementation of
GASB Statement 31 on Accounting and
Financial Reporting for Certain Investments
and for External Investment Pools
Questions and Answers
Governmental Accounting Standards Board
of the Financial Accounting Foundation
401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116
Copyright © 1998 by Governmental Accounting Standards Board. All rights reserved. No part of this publication
may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written permission of the Governmental Accounting Standards Board.
Library of Congress Catalog Card Number: 98-71674
ISBN 0-910065-75-6
FOREWORD
This Implementation Guide was developed to assist financial statement preparers and attestors in the implementation and application of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and
for External Investment Pools.
Since the release of the Statement in March 1997, many questions have been posed to GASB staff regarding the
implementation of the Statement. Although a significant number of these questions addressed initial implementation
and transition issues, most of the questions have ongoing applicability. Because staff responses to individual technical
inquiries reach only a small portion of the GASB’s constituents, the GASB adopted the Implementation Guide concept
to broaden the application of staff guidance.
An Implementation Guide is limited to clarifying, explaining, or elaborating on an underlying standard (usually a
Statement, Interpretation, or Technical Bulletin). The topics addressed may include issues raised by constituents in
due process or as a result of subsequent application of a standard, as well as issues anticipated by the GASB staff.
An Implementation Guide may also address issues related to the application of a standard to specific industries.
Generally, a GASB Statement, Interpretation, or Technical Bulletin would be more appropriate to address new issues
or to amend existing guidance on issues previously addressed.
The GASB’s Implementation Guides are classified as category (d) in the hierarchy of generally accepted accounting
principles (GAAP), as set forth in paragraph 12d of AICPA Statement on Auditing Standards No. 69, The Meaning of
“Present Fairly in Accordance with Generally Accepted Accounting Principles” in the Independent Auditor’s Report
(SAS 69). Category (d) includes “practices or pronouncements that are widely recognized as being generally accepted
because they represent prevalent practice in a particular industry or knowledgeable application to specific circumstances or pronouncements that are generally accepted.” SAS 69 specifically states in the “Application to State and
Local Governmental Entities” section that “category (d) includes implementation guides (Qs and As) published by the
GASB staff. . . .” However, the illustrative examples accompanying the text of this Implementation Guide (that is, the
illustrations from Statement 31 reproduced in Appendix 3 and the governmental external investment pool financial
statements in Appendix 4) are nonauthoritative guidance.
This Implementation Guide is limited to issues arising from implementing Statement 31 and is not a comprehensive
investments accounting document. Other literature, consistent with the hiearchy of GAAP previously described,
should be consulted to resolve other questions.
This Implementation Guide was prepared and published in accordance with the GASB’s Implementation Guide
procedures. These procedures require public announcement of the project, exposure of the proposed Implementation
Guide to the GASB and an advisory committee, and approval of the final Implementation Guide by the director of
research. Moreover, an Implementation Guide will not be published if a majority of GASB members object to its
issuance.
The publication of this Implementation Guide would not have been possible without the concerted efforts of the
GASB staff, the project’s technical consultant, and the advisory committee. Randal J. Finden, GASB project manager,
served as the staff author. Venita M. Wood provided technical assistance during the development and review stages
of the project. Mr. Finden was the project manager on Statement 31 and has fielded technical inquiries on investment
issues since joining the GASB in 1995 from the Washington State Auditor’s Office. Ms. Wood served as the original
project manager on the investments project during her twelve-year tenure with the GASB. She currently is an
independent consultant on governmental accounting and auditing issues.
The application of GASB pronouncements is an ongoing process. A guiding principle in the GASB’s mission
statement addresses the need to review the effects of past decisions and to provide additional guidance when
appropriate. This staff Implementation Guide represents just one of the many methods that the GASB uses to fulfill
this important responsibility.
Norwalk, Connecticut
April 1998
David R. Bean
Director of Research
iii
PREFACE
This Implementation Guide is intended to serve as a reference and an instructional tool. It is designed to help users
apply the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for
External Investment Pools. The questions asked and answered in this book are, for the most part, derived from
technical inquiries received by GASB staff from financial statement preparers, auditors, broker/dealers, banks,
sponsors of external investment pools, and others. Additional questions were submitted by governments that had
implemented the Statement early and by members of the advisory committee. Finally, staff added questions when
needed to cover significant points.
The questions and answers are intended to serve two purposes: (1) They can be used as ready references by users
with similar questions or situations, and (2) they illustrate a basis for resolving issues that users can apply to questions
or situations not specifically addressed in this Implementation Guide.
A fundamental assumption in this Implementation Guide, as in all GASB standards, is that the provisions of
Statement 31 and this Implementation Guide need not be applied to immaterial items.
The Introduction, Standards section, glossary, and illustrations from Statement 31 are reproduced as appendixes
to this Implementation Guide. Readers are also reminded that the Basis for Conclusions of Statement 31, which is
available in the original pronouncement, can be very helpful in understanding the underlying intent of the Statement
and should be used as a basis for applying the Statement to specific situations.
In preparing this Implementation Guide, we had the support of an advisory committee composed of state and local
treasurers, comptrollers, auditors, banks, broker/dealers, external investment pool sponsors, and others knowledgeable about government investment practices. Their comments and suggestions were very helpful and significantly
improved the final Implementation Guide. Members of the advisory committee are listed below:
Name
Affiliation
Steven Albright
Phillip C. Allen
E. Barrett Atwood, Sr.
Walter Dillingham
Roger Ferris
Matthew Fong
Robert Garner
Debra Goodnight
Salli Hartman
Mike Heflin
Al Hrabak
Craig Hustings
Steve Langowski
Jake Lorentz
Kenneth Macias
C. Virgil Moon
Linda Patterson
William Raftery
Robert Reinhart
Kent Rock
Neil Rossi
Janet Rzewnicki
Phoebe Seldon
Doug Smith
G. Robert Smith, Jr.
State of North Carolina
Broward County, Florida
South Florida Water Management District
Standard & Poor’s Corporation
State of Texas
State of California
Orlando, Florida
Public Financial Management, Inc.
Metropolitan Washington Airports Authority
First Tennessee Bank
National Association of State Auditors, Comptrollers and Treasurers
State of Missouri
KPMG Peat Marwick, LLP
Government Finance Officers Association
Macias & Gini, CPAs
Cobb County, Georgia
Patterson & Associates
State of Wisconsin
Bucks County Schools Intermediate Unit No. 22, Pennsylvania
City of Boise, Idaho
San Diego County, California
State of Delaware
City of Chicago, Illinois
City of Aspen, Colorado
Auburn University
v
Name
Affiliation
Neil Sullivan
Norman Turnipseed
Larry Waters
Ellen West
Spokane School District, Washington
The Retirement Systems of Alabama
Resource Allocation Management
American Money Management Associates
The members of the advisory committee do not necessarily approve of or agree with the answers given and are not
responsible for the accuracy of the information provided.
The publication of this Implementation Guide could not have been accomplished without the significant efforts of
Venita M. Wood, who served as a technical consultant in its preparation and review. GASB staff member Ellen Falk
provided editorial assistance and Greta DeAngelis provided administrative support. The author also appreciates the
research assistance given by other individuals and organizations.
Randal J. Finden
vi
IMPLEMENTATION GUIDE
Guide to Implementation of GASB Statement 31 on Accounting and Financial Reporting for
Certain Investments and for External Investment Pools
Questions and Answers
CONTENTS
Page
Number
Foreword ..........................................................................................................................................................
iii
Preface.............................................................................................................................................................
v
Question
Numbers
Questions and Answers
Scope and Applicability ...............................................................................................................................
1–21
Transactions Covered by Statement 31 ................................................................................................
1– 2
Transactions Not Covered by Statement 31 .........................................................................................
3– 7
Pension and Deferred Compensation Plans .........................................................................................
8–10
Fiduciary Activities ..................................................................................................................................
11–13
Governments That Follow FASB or AICPA Guidance...........................................................................
14–17
Public Entity Risk Pools .........................................................................................................................
18
Restricted Assets, Sinking Funds, and Reserve Funds........................................................................
19–20
Investments That Carry Below-Market Yields ......................................................................................
21
Definition of and Determining Fair Value ...................................................................................................
22–28
Valuation of Investments.............................................................................................................................
29–64
Marking-to-Market...................................................................................................................................
37–38
Amortized Cost .......................................................................................................................................
39–41
Specific Investment Instruments ............................................................................................................
42–64
Bonds with Below-Market Yields .......................................................................................................
42
Interest-earning Investment Contracts...............................................................................................
43–46
Money Market Investments ..............................................................................................................
47
Derivatives .........................................................................................................................................
48–50
Real Estate ........................................................................................................................................
51–53
Short Security Positions.....................................................................................................................
54
Positions in External Investment Pools .............................................................................................
55–60
Open-end Mutual Funds ....................................................................................................................
61–62
vii
Question
Numbers
Equity Securities.................................................................................................................................
63
Option Contracts ................................................................................................................................
64
Recognition and Reporting.........................................................................................................................
65– 77
Display in the Statement of Operations.................................................................................................
65– 71
Display in the Statement of Financial Position......................................................................................
72– 73
Display in the Statement of Cash Flows ...............................................................................................
74
Assignment of Interest............................................................................................................................
75– 77
Disclosures ..................................................................................................................................................
78– 87
External Investment Pools ..........................................................................................................................
88–116
Definition of External Investment Pools.................................................................................................
88– 99
Colleges and Universities ..................................................................................................................
93– 94
Joint Ventures.....................................................................................................................................
95
Public Entity Risk Pools .....................................................................................................................
96
Venture Capital Limited Partnerships ................................................................................................
97
2a7-like Pools .....................................................................................................................................
98– 99
Valuation of Governmental External Investment Pool Investments...................................................... 100–102
Reporting Governmental External Investment Pools............................................................................
103–112
Separate or Stand-alone Financial Reports...................................................................................... 103–108
Sponsor Reporting .............................................................................................................................
109–112
Pool Reporting Compared to Pool Management ..................................................................................
113–116
Individual Investment Accounts...................................................................................................................
117–119
Transition Reporting.................................................................................................................................... 120–122
Page
Number
Appendix 1: Glossary ......................................................................................................................................
33
Appendix 2: Introduction and Standards Sections from Statement 31 .........................................................
37
Appendix 3: Illustration of Fair Value Accounting for Investments from Statement 31.................................
43
Appendix 4: Illustrative Governmental External Investment Pool Financial Statements ..............................
47
Topical Index ....................................................................................................................................................
53
viii
The Governmental Accounting Standards Board has authorized its staff to prepare Implementation Guides that
provide timely guidance on issues encountered during the implementation and application of GASB pronouncements. The GASB has reviewed this Implementation Guide and does not object to its issuance.
The information in this Implementation Guide need not be applied to immaterial items.
QUESTIONS AND ANSWERS
Scope and Applicability
Transactions Covered by Statement 31
1.
Q—What types of investments are subject to the provisions of Statement 31?
A—Statement 31 applies to all investments held by governmental external investment pools. Investments
reported in defined benefit pension plans have fair value investment standards in accordance with Statement
No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution
Plans. Statement 31 provides additional valuation guidance for investments in securities subject to purchased
put option contracts and written call option contracts, open-end mutual funds, external investment pools, and
interest-earning investment contracts.
For governmental entities other than external investment pools and defined benefit pension plans, Statement 31
applies to investments in interest-earning investment contracts; external investment pools; open-end mutual
funds; debt securities; and equity securities (including unit investment trusts and closed-end mutual funds),
option contracts, stock warrants, and stock rights that have readily determinable fair values. These types of
investments are defined in the glossary of Statement 31, which is presented in this Implementation Guide as
Appendix 1.
2.
Q—What transactions are covered by the provisions of Statement 31? Specifically, what is meant by an
investment?
A—Statement 31 applies to those transactions that a government enters into primarily for the purpose of
obtaining income or profit for the governmental entity or others. Generally, this includes debt and equity
securities and other instruments that pay money to a government relating to the period over which that
government holds the instrument.
Transactions Not Covered by Statement 31
3.
Q—What types of transactions are not covered by Statement 31?
A—There are situations in which a government holds an instrument that pays money relating to the holding
period that clearly are not intended to be covered by Statement 31. Although it is not feasible to list all
transactions, the following are the more common transactions not covered by Statement 31. This list generally
does not apply to investments reported by governmental external investment pools, defined benefit pension
plans, or Internal Revenue Code (IRC) Section 457 deferred compensation
1
plans. Pools that are 2a7-like report their investments at amortized cost. (See question 98.) All other governmental external investment pools, defined benefit pension plans, and IRC Section 457 deferred compensation
plans generally report their investments using fair value. (See questions 4 and 100 through 102.)
•
•
•
•
•
•
•
•
•
•
•
•
•
•
4.
Seized debt securities that the government holds as evidence or as a potential fine (question 2)
Contractors’ deposits of debt securities (questions 2 and 4)
Real estate held for investment purposes (question 4)
Investments in joint ventures (questions 4, 5, and 95)
Equity securities accounted for under the equity method (question 5)
Long-term securities placed in an irrevocable trust that meets the requirements of a legal or in-substance
defeasance (question 6)
Loans receivable arising from real estate lending activities (question 7)
Securities and other instruments not held for investment purposes (question 11)
Receivables that do not meet the definition of a security (question 12)
Equity securities (including unit investment trusts and closed-end mutual funds), option contracts, stock
warrants, and stock rights that do not have readily determinable fair values (question 36)
Short sales of securities (question 54)
Investments in component units
Restricted stock
Trade accounts receivable arising from sales on credit
Q—Investments such as real estate and venture capital limited partnerships generally are not subject to
Statement 31. How should these kinds of investments be valued?
A—It depends on the type of entity reporting them. If the investments are held by defined benefit pension plans
or IRC Section 457 deferred compensation plans, they should be reported at fair value, as provided in Statement 25 or Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457
Deferred Compensation Plans, respectively. Other than external investment pools, other governmental entities
should report investments not subject to Statement 31 using cost-based measures provided that there has not
been an impairment in that value. (Impairment is discussed in question 30.) (Statement 31 applies to all
investments of governmental external investment pools.)
5.
Q—Does Statement 31 apply to equity securities accounted for under the equity method or to investments in
joint ventures?
A—No. Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments
in Common Stock, and GASB Statement No. 14, The Financial Reporting Entity, should continue to be applied
to those situations (Statement 31, paragraph 5).
6.
Q—How should a government report long-term securities that have been placed in trust to defease the
government’s outstanding bonds?
A—If legal or in-substance defeasance as defined by Statement No. 7, Advance Refundings Resulting in
Defeasance of Debt, or No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by
Proprietary Activities, has been established, the debt and the related assets are not reported in the government’s
financial statements. The securities would not be subject to the provisions of Statement 31. However, if the legal
or in-substance provisions have not been met and the securities are still reported in the government’s financial
statements, Statement 31 would apply.
2
7.
Q—A housing authority issues bonds (mortgage-backed securities) and uses the proceeds to finance first-time
home buyers’ mortgages. Are the mortgage loans considered investments according to Statement 31?
A—No. Housing authorities apply Statement 31 to those investments listed in paragraph 2 of the Statement—
specifically, debt securities. Loan receivables arising from real estate lending activities are not considered debt
securities and are not included in the scope of Statement 31.
Pension and Deferred Compensation Plans
8.
Q—Why does Statement 31 apply to only certain types of investments of defined benefit pension plans?
A—Statement 25 already provides fair value–based financial reporting standards for the investments of defined
benefit pension plans. The fair value standards in that Statement are appropriate within the context of the fair
value standard established in Statement 31. Certain standards established in Statement 31, such as those
concerning how to report the value of positions in external investment pools, enhance the earlier fair value
standards. Therefore, certain provisions of Statement 31 were extended to those defined benefit pension plans.
9.
Q—How is the applicability of Statement 31 to Internal Revenue Code Section 457 deferred compensation
plans affected by Statement 32?
A—When Statement 31 was issued, it applied to certain types of deferred compensation plan investments. As
with the defined benefit pension plans discussed in question 8, another Statement—Statement No. 2, Financial
Reporting of Deferred Compensation Plans Adopted under the Provisions of Internal Revenue Code Section 457—previously had required the investments of those plans generally to be reported at fair value.
Statement 32 rescinds Statement 2 for those plans and continues a fair value investment reporting standard if
those plans are reported in the financial statements. Part of that fair value standard requires those plans to apply
the valuation provisions of Statement 31 to investments in interest-earning investment contracts; external
investment pools; open-end mutual funds; debt securities; and equity securities, option contracts, stock
warrants, and stock rights that have readily determinable fair values—the types of investments that Statement 31 for most governmental entities covers. Statement 32 requires other plan investments to be reported at
fair value.
10.
Q—In what situations does Statement 31 require or allow defined benefit pension plans to report investments
at cost or amortized cost?
A—Defined benefit pension plans should follow the interest-earning investment contract guidance found in
paragraph 8 of Statement 31, which indicates that nonparticipating contracts should be reported using a
cost-based measure. They also can apply the provisions of paragraph 9 that allow for participating interestearning investment contracts that have a remaining maturity at the time of purchase of one year or less to be
reported at amortized cost, provided that the fair value of those investments is not significantly affected by the
impairment of the credit standing of the issuer or by other factors. The paragraph 9 provisions that allow the
reporting of money market investments at amortized cost do not apply to defined benefit pension plans.
3
Fiduciary Activities
11.
Q—Statement 31 does not apply to securities and other instruments if they are not held by the governmental
entity for investment purposes, either for itself or for parties for which it serves as investment manager or other
fiduciary (paragraph 5). What are some examples of such situations?
A—Examples of situations for which a government could be holding investment securities as a fiduciary, but not
for investment purposes, include contractors’ performance deposits, securities held in trust as bank regulator,
and workers’ compensation deposits held as protection against employer defaults. However, if the government
actually manages investments for such deposits—for example, a contractor provides cash as a performance
deposit and the government places that cash into securities—those securities are considered investments that
are subject to the provisions of Statement 31. (See question 12.)
12.
Q—Under the terms of a construction contract, a county government withholds 5 percent of periodic progress
payments due a contractor. This “retainage” is invested for the benefit of the contractor and is released upon
completion of the contract. How should this transaction be reported?
A—The amount due the contractor is a receivable of the contractor and a payable of the county. Because the
county has invested the retainage, the county should value and report that investment in accordance with
Statement 31. The contractor receives investment income. However, that income is not reported as income of
the county; instead, it accumulates as a payable until disbursed to the contractor. If the investment’s value falls
below the county’s liability, the county should evaluate its liability to the contractor in the context of its legal
responsibilities.
13.
Q—A school district acting in a fiduciary capacity holds moneys that were contributed for scholarship purposes.
Are investments of those moneys covered by Statement 31?
A—Yes. The scholarship moneys are being invested for income or profit for the entity for which the district
serves as a fiduciary.
Governments That Follow FASB or AICPA Guidance
14.
Q—Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental
Entities That Use Proprietary Fund Accounting, allows proprietary activities to elect to apply all Financial
Accounting Standards Board (FASB) Statements and Interpretations issued after November 30, 1989, except
those that conflict with or contradict GASB pronouncements. Should an entity that makes this election apply
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities?
A—No. Under FASB Statement 115, unrealized holding gains and losses of available-for-sale securities are
excluded from the operating statement and are reported as a component of other comprehensive income until
realized. In addition, a held-to-maturity cost-based category is established. Because those provisions conflict
with Statement 31, FASB Statement 115 should not be applied. (See question 121 for a discussion of the
transition to Statement 31 for those governments that previously have applied FASB Statement 115.)
15.
Q—How does Statement 31 apply when a regulated governmental entity follows the provisions of FASB
Statement No. 71, Accounting for the Effects of Certain Types of Regulation?
A—Statement 31 applies to regulated entities just as do all other GASB pronouncements. FASB Statement 71
applies to entities that meet that Statement’s paragraph 5 criteria for a regulated enterprise. If the entity’s
regulator concludes that fair value increases and decreases should not affect utility rates, those increases and
4
decreases should be reported as required by Statement 31. They should then be reversed at the end of the
operating statement using a heading such as net costs to be recovered from future billings and should be
reported as deferred charges or credits, as appropriate, on the statement of financial position.
16.
Q—Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental
Entities, allows certain governmental entities to apply the AICPA Not-for-Profit model—the accounting and
financial reporting principles contained in American Institute of Certified Public Accountants (AICPA) SOP 78-10,
Accounting Principles and Reporting Practices for Certain Nonprofit Organizations, or the AICPA Industry Audit
Guide, Audits of Voluntary Health and Welfare Organizations. Can an entity that applies this model apply FASB
Statement No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations?
A—No. Statement 29 indicates that the AICPA Not-for-Profit model is modified by subsequent GASB pronouncements. Entities that apply that model are not permitted to apply FASB pronouncements issued after
November 30, 1989. They should apply Statement 31. The only provision of Statement 31 that is unique to
entities that follow the AICPA Not-for-Profit model is found in paragraph 14. It states that those entities should
continue to follow that model’s provisions for the assignment of interest.
17.
Q—Does Statement 31 apply to public colleges and universities that elect to follow the AICPA College Guide
model, as provided in Statement No. 15, Governmental College and University Accounting and Financial
Reporting Models?
A—Yes. All provisions of Statement 31 apply to those entities, except as specifically provided for in paragraph 14 concerning the assignment of interest. This issue is currently being addressed in the college and
university financial reporting model project.
Public Entity Risk Pools
18.
Q—How does Statement 31 affect the investment valuation standards established in Statement No. 10,
Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, for public entity risk
pools?
A—Statement 31 amends the Statement 10 standards. Statement 10 required public entity risk pools to use
cost-based reporting for debt securities and preferred stocks that by their provisions are required to be
redeemed by the issuer if the entity had the ability and intent to hold the investments to maturity or redemption,
respectively. It also required pools to use fair value reporting of debt securities that would not be held to maturity
and common and nonredeemable preferred stocks, with changes in those values reported as unrealized gains
and losses. Statement 10 required unrealized gains and losses on those investments to be reported at fair value
as a separate component of equity until realized. All of those provisions were amended by the fair value
standards of Statement 31.
Restricted Assets, Sinking Funds, and Reserve Funds
19.
Q—Are investments that are reported as restricted assets or in sinking or reserve funds covered by Statement 31?
A—Yes. Statement 31 applies to restricted assets, sinking funds, and reserve funds that include securities or
other assets acquired for income or profit, even if specifically purchased for a dedicated purpose, such as a debt
service obligation. (See also question 6.)
5
20.
Q—Bonds can be issued carrying covenants that are at variance with Statement 31—for example, by requiring
cash-basis or amortized cost accounting. How should Statement 31 be applied when determining compliance
with those covenants?
A—Statement 31 applies to financial statements prepared in conformity with generally accepted accounting
principles (GAAP). Bond covenants commonly apply to matters such as amounts placed on deposit in reserve
funds or coverage ratios (that is, the level of cash-basis operating revenues as a ratio of debt service payments).
Compliance with those bond covenants should be interpreted with the assistance of bond counsel. When a
specific basis is not prescribed, some preparers and auditors believe that GAAP in existence at the time of
issuance of the bonds determines the appropriate accounting principles for determining compliance with bond
covenants. In any event, those matters should be resolved in light of all relevant circumstances.
In some cases additional schedules or narrative explanations can be necessary to report legal compliance
responsibilities and accountabilities.
Investments That Carry Below-Market Yields
21.
Q—To support economic development, a city purchases tax-exempt bonds of an industrial development
authority that is not a component unit of the city. These bonds carry a lower yield than if they were taxable. The
city is a tax-exempt entity and thus is unable to take advantage of the tax-exempt status of the bonds. Are these
bonds investments for purposes of Statement 31?
A—Yes. Even though the bonds carry a below-market rate of interest, they still meet the definition of an
investment. Statement 31 makes no exception for economically targeted investments. (See questions 33 and 42
for valuation guidance.)
Definition of and Determining Fair Value
22.
Q—What is meant by fair value?
A—Fair value is the amount at which a financial instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale (Statement 31, paragraph 7). If a market price is
available, fair value equals market value. Otherwise, fair values are estimated or calculated. Fair value does not
require that an investment be traded on a market.
23.
Q—When is the fair value of an equity security, option contract, stock warrant, or stock right readily determinable?
A—The fair values of those instruments are readily determinable if the sales prices or bid-and-asked quotations
are currently available (1) on an exchange registered with the Securities and Exchange Commission (SEC),
(2) in an over-the-counter market that is publicly reported by the National Association of Securities Dealers
Automated Quotation (NASDAQ) systems or by the National Quotation Bureau, or (3) in a foreign market that
is of a breadth and scope comparable to the preceding two U.S. markets (Statement 31, paragraph 3).
24.
Q—What are the possible sources of fair value information for investments that are market traded, such as debt
and equity securities, option contracts, stock warrants, and stock rights?
A—Prices of securities are published in the financial press from data provided by the exchanges, the National
Association of Securities Dealers’ National Market System (for NASDAQ securities), and other authoritative
sources. Prices also may be obtained from computerized pricing sources, which get their data from the same
original sources. Securities custodians or third-party investment managers/advisers also may be able to provide
prices.
6
25.
Q—If the fair value of a debt security is not readily determinable or actively traded, should a government attempt
to calculate fair value, or can it use a cost-based method?
A—A thinly traded market should not prevent the government from estimating the fair value of those securities.
Question 33 discusses methods for estimating fair value.
26.
Q—If a government has a significant investment in particular securities and believes that an attempt to sell the
entire investment at one time would significantly affect the security’s market price, should the size of the
investment be considered in determining the fair value of the security?
A—No. Quoted market prices should be used in this situation. The sale of a significant number of securities that
would significantly diminish market prices is considered to be a forced or liquidation sale and is specifically
excluded from the definition of fair value (Statement 31, paragraph 7).
27.
Q—During a trading day, a security trades at different prices. It also trades at different prices in different
exchanges, both domestically and overseas, during the trading day. How does fair value accounting treat these
issues?
A—Statement 31 does not address this specific issue. However, preparers and auditors could consider the
guidance in the AICPA Audit and Accounting Guide, Audits of Investment Companies, paragraph 2.29, which
states:
A security traded on the valuation date generally is valued at the last quoted sales price. A security
listed on more than one national securities exchange should be valued at the last quoted sales price
at the time of valuation on the exchange on which the security is principally traded. If the security was
not sold on that exchange on the valuation date, the security should be valued at the last quoted
sales price on another exchange on which it was sold at the valuation date.
28.
Q—A bid price represents the price a willing buyer will pay; an asked price represents the price the seller would
like to receive. If actual sales prices are not available when determining fair value, should bid or asked prices be
used?
A—Statement 31 does not take a position on this issue. Practice generally is to use bid prices, because they
are the amounts that guarantee transactions will be completed.
Valuation of Investments
29.
Q—What is the “one-year option” for money market investments and participating interest-earning investment
contracts? How does the one-year option affect the valuation of these investments?
A—The “one-year option” (Statement 31, paragraph 9) relates to money market investments and participating
interest-earning investment contracts that have a remaining maturity at time of purchase of one year or less,
provided that the fair value of those investments is not significantly affected by the impairment of the credit
standing of the issuer or by other factors. Statement 31 allows those investments to be reported at amortized
cost. The option is permitted for all entities except governmental external investment pools (question 102) and
defined benefit pension plans (question 10).
7
30.
Q—How does Statement 31 address investments with impaired values? How should these investments be
reported?
A—For investments that are reported at fair value, that valuation already considers potential impairments. For
other investments covered by Statement 31 and that are reported using cost-based measures, valuation should
consider whether the fair value of the investment is significantly affected by the impairment of the credit standing
of the issuer or by other factors. Although Statement 31 implies that the unrealized loss represented by the
impairment should be recognized, it does not specifically require it. In fact, paragraph 76 of the Basis for
Conclusions states that when there is an impairment “the cost-based measure should be reevaluated.”
Therefore, professional judgment should be applied in determining the amount and timing of a write-down. For
investments that are not covered by Statement 31, paragraph 7.15 of the AICPA Audit and Accounting Guide,
Audits of State and Local Governmental Units (ASLGU), provides guidance. It states:
Auditors should consider whether unrealized losses are properly recorded due to decreases in
market value when the market decline is not due to a temporary condition. The liquidity needs of the
governmental unit may require sales of investments at losses subsequent to the balance-sheet date.
In such circumstances, auditors should consider whether this represents objective evidence of a
permanent decline that should be recognized in the current financial statements.
31.
Q—Would a change in one credit quality grade for commercial paper be considered an impairment significant
enough to adjust the cost basis of the investment?
A—Generally not. Routine changes in ratings do not necessarily indicate impairment. However, there may be
situations—for example, a downgrade of a security below investment grade—in which a preparer might consider
one change in credit quality grade to be an impairment significant enough to require an adjustment. For
example, if a government is required by statute to carry securities above a certain grade and a specific security
falls below that grade, that security would be required to be liquidated.
32.
Q—An internal investment pool has investments that mature in less than one year from the date of purchase.
Can these investments be reported at fair value?
A—It depends on the types of investments in the pool. All of the money market investments and participating
interest-earning investment contracts may be reported at fair value. However, nonparticipating interest-earning
investment contracts should be reported using cost-based measures. (See question 45.)
33.
Q—How should an entity determine the fair value of a security when it is thinly traded or quoted market prices
are not available?
A—In this situation, the security’s value should be estimated. As with all estimates, this calculation requires
professional judgment. An entity should estimate fair value by considering market prices for similar securities or
by using other valuation techniques. Examples include the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved, matrix pricing, option-pricing models,
option-adjusted spread models, and fundamental analysis. Matrix pricing estimates a security’s fair value by
considering coupon interest rates, maturity, credit rating, and market indexes as they relate to the security being
valued and to similar issues for which quoted prices are available. Option-pricing models include the Black–
Scholes option-pricing model. This model considers a security’s return, the risk-free interest rate, the time
remaining until the option expires, and the relationship of the underlying security’s price to the strike price of the
option. Option-adjusted spread models measure the spread provided from a security that is an option or includes
an option. Using a benchmarked yield curve, separate cash flows are discounted according to their maturity. The
result is a spread when compared to yields for risk-free investments. Fundamental analysis considers assets,
8
liabilities, operating statement performance, management, and economic environment of the issuer in estimating a fair value. Preparers and auditors should exercise care in accepting an estimate of fair value of a security
from the issuer or broker of that security. They should seek to confirm those values from independent sources.
34.
Q—Treasury bills and commercial paper do not pay interest but instead are purchased at a discount. How does
fair value accounting treat income from non-interest-bearing investments?
A—Fair value accounting limits interest income to an investment’s stated interest or coupon rate. Once such an
investment is fair-valued, the market takes into account accreted discounts. Accordingly, accretion or amortization of discounts1 is not necessary; amortization has already been considered in the net increase (decrease)
in the fair value of investments. Notwithstanding the foregoing, Statement 31 allows many of those investments
to be reported at amortized cost. Amortized cost issues are covered in questions 39 through 41.
35.
Q—When an interest-bearing bond is fair-valued between interest payment dates, how does fair value consider
the accrued interest?
A—Industry practice is not to consider accrued interest in quotations. For example, consider a bond selling at
102 that is purchased between its semiannual interest payment dates. The purchaser would be expected to pay
the counterparty 102, plus the amount of accrued interest the counterparty is entitled to. This purchased interest
will be received by the purchaser of the bond on the next interest payment date.
36.
Q—What is the valuation basis for option contracts, stock warrants, stock rights, and equity securities that do
not have readily determinable fair values?
A—Except for governmental external investment pools, defined benefit pension plans, and IRC Section 457
deferred compensation plans, those types of investments are not reported using fair value. According to the
ASLGU, those option contracts, stock warrants, and stock rights generally are reported at cost, adjusted for
other-than-temporary impairment (paragraph 7.15). Equity securities that do not have readily determinable fair
values and that are not required to be accounted for by the equity method generally are reported at cost,
adjusted for other-than-temporary impairment. APB Opinion 18 describes the cost method and the equity
method of accounting for investments in common stock and specifies the criteria for determining when to use
the equity method.
Governmental external investment pools (except 2a7-like pools), defined benefit pension plans, and IRC Section
457 deferred compensation plans should report those types of investments using fair value. Although those
investments do not have readily determinable values, other estimating procedures are available. The AICPA
investment company Audit and Accounting Guide (paragraph 2.33) states:
In certain circumstances, it may be necessary to estimate the fair value of securities if market
quotations are not available. The objective of the estimating procedures is to state the securities at
the amount the owner could reasonably expect to receive for them in a current sale, though the
owner may not intend to sell them. The SEC’s Codification of Financial Reporting Policies provides
guidance on the factors to be considered, and on the responsibilities for and methods used to value
securities for which market quotations are not readily available.35 The term current sale means
realization in an orderly disposition over a reasonable period. Valuation methods acceptable under
that concept may be based, for example, on a multiple of earnings or on a discount from market, or,
less frequently, on a premium higher than the market price of a similar freely traded security, on a
yield to maturity on debt securities, or on a combination of those and other methods. Investments in
1
The accounting literature uses amortization of discounts and accretion interchangeably. For the purposes of this Implementation Guide, amortization
of discounts is used.
9
several securities of the same issuer, such as investments of SBICs [Small Business Investment
Companies] and venture capital investment companies, may be valued as a package. All relevant
factors should be considered in selecting the method of estimating the fair value of each type of
security or package of securities.
35
SEC, Codification of Financial Reporting Policies, Sections 404.03 and 404.04.
Marking-to-Market
37.
Q—The process of determining the fair value of an investment is known as marking-to-market. How often
should investments be marked-to-market?
A—Statement 31 applies to financial statements prepared in accordance with generally accepted accounting
principles. At a minimum, investments should be marked-to-market as of the date of the statement of financial
position. Depending on a government’s investment horizon, the volatility of the investment portfolio, the size of
the portfolio, and the interests of financial statement users—including management and any investment pool
participants—investments often are marked-to-market more frequently. However, Statement 31 does not require
this. Pools that are 2a7-like have special considerations; valuations should be guided by SEC regulations
concerning the frequency of marking-to-market.
38.
Q—If investments are reported at fair value, can accounting records be kept on the cost (or amortized cost)
basis, with financial statement adjustments for fair value?
A—Yes. There is no requirement to journalize fair value adjustments or to keep accounting records based on fair
value. Cost-based records are acceptable, provided that adjustments to fair value are made when financial
statements are prepared.
Amortized Cost
39.
Q—Statement 31 permits certain investments to be reported using cost-based measures. Examples are
one-year money market and ninety-day debt security investments. Is the display of realized gains and losses,
and amortization of discounts and premiums in the statement of operations, permitted in these cases?
A—Although Statement 31 adopts fair value for reporting many investments, cost-based measures are allowed
for certain types of investments and entities. Paragraph 13 of Statement 31, including footnote 7, describes how
to report fair value changes in the financial statements; realized gains and losses generally should not be
displayed separately from the net increase (decrease) in the fair value of investments. Premiums and discounts
generally should not be amortized. However, those provisions apply only to investments that are reported using
fair value. Paragraph 13 does not modify current reporting practices for investments that are reported using
cost-based measures, including the reporting of realized gains and losses and the amortization of premiums
and discounts. If that presentation for cost-based investment income is retained, the financial statements should
clearly indicate that this presentation applies only to securities reported at amortized cost.
10
40.
Q—Entities other than governmental external investment pools and defined benefit pension plans may report
money market investments or participating interest-earning investment contracts at amortized cost if they have
remaining maturities of one year or less at the time of purchase. If such an investment has a remaining maturity
of one year or less at the statement of position date, can it be reported using amortized cost? (For example, a
money market investment has a remaining maturity at date of purchase of eighteen months, but only three
months at the statement of position date.)
A—No. The option applies only to money market investments and participating interest-earning investment
contracts that have a remaining maturity of one year or less at the time of purchase (Statement 31, paragraph 9). Statement 31 does not provide for entities other than governmental external investment pools to
change the valuation of a money market investment for GAAP financial statement purposes from fair value to
a cost-based measure.
41.
Q—A city’s general fund purchases a money market investment with a remaining maturity at the time of
purchase of less than six months. This is not an interest-bearing investment; instead, it was purchased at a
discount. The city reports this investment using amortized cost. If in the current year the city holds the
investment for three months, should a proportionate amount of income be reported in the current year?
A—Yes. The amortization of the discount should be recognized as revenue ratably over the period from
purchase to maturity.
Specific Investment Instruments
Bonds with Below-Market Yields
42.
Q—How should fair value be estimated for investments that carry a below-market interest rate (for example, an
industrial revenue bond)?
A—The estimate of fair value could consider market prices for similar investments. (See the description of this
type of investment in question 21.) An industrial revenue bond could be fair-valued by comparison to current
values of similar industrial revenue bonds. Another approach could be to use discounted cash flows, using a
current interest rate for comparable bonds.
Interest-earning Investment Contracts
43.
Q—What is an interest-earning investment contract?
A—An interest-earning investment contract is a direct contract, other than a mortgage or other loan, that a
government enters into as a creditor of a financial institution, broker-dealer, investment company, insurance
company, or other financial services company and for which it receives, directly or indirectly, interest payments.
Interest-earning investment contracts include time deposits with financial institutions (such as certificates of
deposit), repurchase agreements, guaranteed and bank investment contracts, and annuity contracts issued by
insurance companies.
44.
Q—Statement 31 provides different valuation standards for participating and nonparticipating interest-earning
investment contracts. What is the difference between these two types of contracts?
A—A participating contract can capture market (interest rate) changes through the investment’s negotiability or
transferability, or through redemption terms that consider market rates. For example, a government may hold
a guaranteed investment contract that has an interest rate that changes based on changes in the federal funds
11
rate or some other index. A nonparticipating contract cannot be negotiated or transferred and its redemption
terms do not consider market rates. A common example would be a term deposit with a bank—a certificate of
deposit—that cannot be withdrawn before maturity without substantial penalty and with an interest rate that does
not change during the term of the deposit.
45.
Q—How should nonparticipating interest-earning investment contracts be valued?
A—All entities should report positions in nonparticipating interest-earning investment contracts using costbased measures, provided that the fair value of those investments is not significantly affected by the impairment
of the credit standing of the issuer or by other factors (Statement 31, paragraph 8). This exception from reporting
at fair value is provided because those contracts are not able to realize market-based increases or decreases
in value under any circumstances (paragraph 43).
46.
Q—Are flex repurchase agreements (repos) considered nonparticipating interest-earning investment contracts?
A—It depends on the terms of the repo. A flex repo is a term repurchase agreement that permits the investor
to sell a portion of the collateral securities back to the counterparty before the final maturity date of the
transaction. Flex repos frequently are used in construction projects when bond proceeds need to be invested
until each portion of construction is required to be paid. A flex repo should be considered nonparticipating (and
reported using cost-based measures) if it is neither negotiable nor transferable, and if redemption terms do not
consider market rates.
Money Market Investments
47.
Q—What are money market investments?
A—Money market investments are short-term, highly liquid debt instruments, including commercial paper,
bankers’ acceptances, and U.S. Treasury and agency obligations. Asset-backed securities, derivatives, and
structured notes are not included in this definition. Investments with call features are discussed in question 49.
Derivatives
48.
Q—What are derivatives and how do Statement 31 and other accounting standards treat their valuation?
A—Derivatives are “contracts whose value depends on, or derives from, the value of an underlying asset,
reference rate, or index.”2 Derivatives generally are understood to include financial instruments such as futures,
forward, swap, and option contracts; contracts that include interest rate caps, collars, or floors; asset-backed
securities including mortgage-backed securities; interest-only and principal-only obligations; and indexed debt
instruments. Derivatives may be present in investment and other asset transactions as well as in debt and other
liability transactions.
The GASB has not comprehensively addressed the accounting and financial reporting for derivatives or for their
use as hedges to reduce exposure to the price or interest rate risk of other financial instruments. For investment
derivatives, depending on the type of derivative and the entity involved, guidance can be found in Statement 31
and TB 94-1. The following summarizes the GASB’s current literature:
• Defined benefit pension plans and governmental external investment pools generally should report investment derivatives at fair value. However, defined benefit pension plans are permitted to use cost-based
measures to report participating interest-earning investment contracts that have a remaining maturity at time
2Technical
Bulletin No. 94-1, Disclosures about Derivatives and Similar Debt and Investment Transactions, footnote 1.
12
•
•
•
•
49.
of purchase of one year or less, even if those contracts have derivative features (Statement 31, paragraphs 2 and 9). Further, paragraph 16 of Statement 31 permits 2a7-like pools to report their investments at
amortized cost and all governmental external investment pools to report debt investments with remaining
maturities of up to ninety days at the date of the financial statements at amortized cost, even if those
investments have derivative features.
Internal Revenue Code Section 457 deferred compensation plans generally report derivative investments at
fair value (Statement 31, paragraph 2; Statement 32, paragraph 5). However, Statement 31 permits those
plans to use cost-based measures to report participating investment contracts that have a remaining maturity
at the time of purchase of one year or less, even if those contracts have derivative features (paragraph 9).
Proprietary funds and other governmental entities that use proprietary fund accounting and that apply
paragraph 7 of Statement 20 should follow the provisions in FASB Statements and Interpretations issued after
November 30, 1989, including those that relate to derivative investments, to the extent that those FASB
pronouncements do not conflict with or contradict GASB pronouncements.
Proprietary entities and nonexpendable trust funds should follow the requirements in FASB Statements
No. 52, Foreign Currency Translation, and No. 80, Accounting for Futures Contracts, for hedging of foreign
currency transactions and futures contracts, respectively (TB 94-1, as reiterated in footnote 6 of Statement 31). However, when investments are reported at fair value, transaction gains and losses that FASB
Statement 52, paragraphs 20 and 21, indicates should be included in other comprehensive income and
should not be followed. Those transaction gains and losses should be included in the net increase (decrease)
in the fair value of investments (or some similar line item) in the statement of operations (or other statement
of activities). (See Guide to Implementation of Statements 25, 26, and 27 on Pension Reporting and
Disclosure by State and Local Government Plans and Employers, question 62.)
For all other entities, derivatives that fall within the scope provisions of paragraph 2 of Statement 31 should
follow the requirements of that Statement. Such derivative investments include (a) interest-earning investment contracts, (b) debt securities, and (c) equity securities, option contracts, stock warrants, and stock rights
that have readily determinable fair values. For example, collateralized mortgage obligations are derivatives
and, as debt securities, are within the scope of Statement 31.
Q—A Federal Home Loan Bank note maturing in two years has an option that makes the note callable in six
months. Does this investment qualify as a money market investment that can be reported at amortized cost?
A—No. The call feature is an embedded option that makes the investment a structured note. Statement 31 does
not consider structured notes to be money market investments, and therefore the one-year option as discussed
in question 29 does not apply to the note.
50.
Q—Some derivatives may represent obligations—for example, written options or various kinds of swaps that
may be in a loss position. How does Statement 31 treat the valuation of these kinds of derivatives?
A—The Statement does not address the accounting for these types of derivatives, except as discussed in
question 64. Paragraph 41 in the Basis for Conclusions of Statement 31 indicates that written option contracts
represent obligations of the writer and are not investments.
13
Real Estate
51.
Q—Should real estate held as an investment be accounted for at cost or fair value?
A—Real estate held as an investment by governmental external investment pools, defined benefit pension
plans, or IRC Section 457 deferred compensation plans should be reported at fair value. Real estate held as an
investment by other entities or funds should be reported at cost, subject to the provisions for other-thantemporary declines in value as described in ASLGU, paragraph 7.15, and discussed in question 36.
52.
Q—How are the fair values of real estate investments determined?
A—The fair value of real estate investments often is determined by a periodic appraisal of the property by a
certified real estate appraiser. Some entities do not have their real estate investments appraised annually. If a
property has not been appraised recently, the government should consider the extent to which changes in the
real estate market may have affected the value of its properties since the last appraisal and adjust the reported
fair value accordingly. Methods other than appraisal also may be used to determine the fair value of real
estate—for example, an estimate of fair value based on the present value of estimated expected future cash
flows.
53.
Q—When investments in real estate are reported at fair value, what income and expense accounts are
recognized?
A—All rental, lease, and other fees are recognized as revenue. In addition, fair value increases and decreases
are recognized in revenue. No depreciation or amortization is recognized on the property. Investment expenses
would include those arising from managing the property.
Short Security Positions
54.
Q—Are short sales of securities covered by Statement 31?
A—No. A short sale is the sale of a security that is not owned by the seller. The seller borrows the security, sells
it, and then buys it at a later time to close the transaction. Short sales represent obligations to deliver securities,
not investments.
Positions in External Investment Pools
55.
Q—How should investment positions in 2a7-like pools be valued?
A—Investment positions in 2a7-like pools, whether sponsored by a governmental or nongovernmental entity,
are determined by the pool’s share price. Because of the constraints provided by Statement 31 on when a pool
is classified as 2a7-like, the fair value of an entity’s position in a 2a7-like pool essentially will be the same as its
share value. (See also question 98.)
56.
Q—How does a government determine whether the non-SEC-registered pools in which it invests are 2a7-like?
A—The government should obtain this information from the pool sponsor. It also could review a recent financial
statement of the pool. If the pool is a governmental entity, Statement 31 requires that it provide information in
its financial statements that would permit governmental entities to determine whether it is 2a7-like. Financial
statements from nongovernmental pool sponsors also can provide information to verify a pool’s representation
about its 2a7-like status.
14
57.
Q—The Office of the Comptroller of the Currency (OCC) prescribes a cost-based money market fund for the
banks that it regulates that is similar to the SEC’s Rule 2a7. Can the OCC’s structure allow pool participants to
value their investment positions in these types of pools using share prices?
A—No. The GASB selected the SEC’s Rule 2a7 as the sole structure for participants to value their positions
using share prices. A pool that complies with the OCC requirements also would need to be 2a7-like for the
participants to value their positions using share prices.
58.
Q—If a pool has a legally binding guarantee to support its shares, can a participating government report its
investment in the pool using share prices even though the pool is not 2a7-like?
A—It depends on the nature and amount of the guarantee. Statement 31 describes legally binding guarantees
(Basis for Conclusions, paragraph 71). One example is an irrevocable bank letter of credit that supports share
value when the fair value of the pool’s investments is affected. An insurance policy would be a similar guarantee.
Also, some pool sponsors may state a guaranteed share value. However, paragraph 71 indicates that to meet
the requirements of Statement 31, the guarantee would have to be a stated legal obligation and be evaluated
in light of the creditworthiness of the pool sponsor. Also, the fair value of the investments in the pool
supplemented by the amount of the guarantee would have to fully support the share price.
59.
Q—A local government invests $100,000 in an external investment pool on January 15, receiving 100,000
shares or units in the pool. The pool is not a 2a7-like pool and does not have a legally binding guarantee for its
share price. However, the pool seeks to maintain a stable $1.00 net asset value as a matter of day-to-day
operations; participants enter and exit the pool using the $1.00 net asset value. On June 30, the end of the local
government’s fiscal year, the pool sponsor reports that pool participants should fair-value their pool position at
$1.05 per share. On October 15, the local government withdraws its investment in the pool, using the $1.00 net
asset value. How does the participant report its investment in the pool at June 30?
A—On January 15, the investment should be valued at $100,000, its fair value on the date acquired. As of
June 30, the investment should be valued at $105,000 in the financial statements. The $5,000 increase should
be included on the participant’s statement of operations in investment income as an increase in the fair value
of investments. On October 15 when the investment is withdrawn, investments are reduced by $105,000. The
change in the fair value of investments is charged $5,000 because the fair value change is reversed.
Journal entries, in addition to any interest paid to the participant, would be as follows:
Debit
January 15
June 30
October 15
Investments
Cash
(To record initial investment in external investment pool)
Investments
Change in the fair value of investments
(To report fair value increase)
Cash
Change in the fair value of investments
Investments
(To record withdrawal from external investment pool)
Credit
$100,000
$100,000
$5,000
$5,000
$100,000
5,000
$105,000
How a governmental external investment pool reports this information, using the above example, is discussed
in question 115.
15
60.
Q—If a government cannot obtain information from a pool sponsor to allow it to determine the fair value of its
investment in a non-2a7-like external investment pool, what information might it use to make its best estimate
of fair value?
A—The participant in such a pool could obtain the latest available financial statements of the pool. If those
statements disclose carrying amount and fair value and the types of investments being held, the participant
could use that information and knowledge about changes in fair values of different types of investments since
the date of the financial statements to project the current fair value of the pool’s investments. However, to the
extent possible, participants should contact pool sponsors to obtain current information about fair value.
Open-end Mutual Funds
61.
Q—What is an open-end mutual fund?
A—An open-end mutual fund is an SEC-registered investment company that issues shares of its stock to
investors, invests in an investment portfolio on the shareholders’ behalf, and stands ready to redeem its shares
for an amount based on its current share price. An open-end mutual fund creates new shares to meet investor
demand. The value of an investment in the fund depends directly on the value of the underlying portfolio.
Open-end mutual funds include governmental external investment pools that are registered as investment
companies with the SEC and that operate as open-end funds.
62.
Q—How are the fair values of positions in open-end mutual funds determined?
A—The fair value of a position in an open-end mutual fund should be based on the fund’s share price (Statement 31, paragraph 10).
Equity Securities
63.
Q—When an equity security is reported at fair value, how are declared dividends recognized for financial
reporting purposes?
A—Dividends receivable and revenue are recognized at the ex-dividend date—that is, the first date on which the
securities trade without the declared dividends attached. Between the date the dividend is declared and the
ex-dividend date, the market price (fair value) of the equity security includes the value of the declared dividends.
Because the equity security is reported at fair value, recognizing the dividends receivable and revenue for
financial reporting purposes before the ex-dividend date would duplicate the transaction.
Option Contracts
64.
Q—Statement 31 provides that if an entity has purchased put option contracts or written call option contracts
on securities and it has those same securities among its investments, it should consider those contracts in
determining the fair value of those securities to the extent that it does not report those contracts at fair value.
How does this provision work?
A—Paragraph 7 provides guidance when a security is reported at fair value and a related purchased put contract
or written call contract is not reported at fair value. If a government writes a call option contract, the government
has an obligation to the counterparty of the contract. At the option of the counterparty the government is
obligated to sell a security to the counterparty at a fixed price—the “strike” price. Therefore, if the value of the
security is above the strike price, it is to the benefit of the counterparty to “call” the security from the government.
If the government does not report the call option contract at fair value and if it owns the security that is subject
to the contract, it should take that contract into account when reporting the fair value of the investment. For
16
example, a government has written a call option contract on a stock and the strike price is $50 a share. If the
market price of the stock rises to $55, the government is obligated to cover the call contract. Its obligation is $5.
Therefore, the government should report the fair value of that stock as $50—the $55 market price of the stock
reduced by the call obligation.
If a government purchases a put option contract, that contract allows the government, at its choice, to sell a
security to the counterparty to the contract at the strike price. If the value of the security is below the strike price,
it is to the government’s benefit to “put” the security to the other party. If the government does not report the put
option contract at fair value and if it owns the investment that is subject to the contract, it should take into account
that contract when reporting the fair value of the security. For example, a government has purchased a put
option contract on a stock and the strike price is $50 a share. If the market price of the stock falls to $45, the
government can still sell it to the counterparty of the put contract at $50. Therefore, the government should
report the fair value of that stock as $50.
Recognition and Reporting
Display in the Statement of Operations
65.
Q—Can the portion of fund balance attributable to fair value changes be designated for net unrealized gains and
losses?
A—National Council on Governmental Accounting Statement 1, Governmental Accounting and Financial
Reporting Principles, provides standards for reporting fund balance designations (paragraph 120). Designations
represent tentative managerial plans or intent. Fund balance may be designated for net unrealized gains—for
example, to report management’s intent not to liquidate investments to realize the reported gains in the following
year. There is no provision for reporting negative designations because management cannot plan to use
negative balances. Therefore, a government should not designate fund balance for net unrealized losses.
66.
Q—Should investment transactions be accounted for based on the trade date (the date the order to buy or sell
the investment is placed) or the settlement date (the date that the cash and investment instrument are
exchanged)?
A—Investment transactions should be accounted for based on the trade date. The trade date is the date on
which the transaction occurred and is the date the government is exposed to (or released from) the rights and
obligations of the ownership of the instrument. This guidance is consistent with paragraph 20 of Statement 25.
67.
Q—Can the change in fair value of investments in the statement of operations of a governmental fund be
reported below the excess of revenues over expenditures?
A—No. Statement 31 requires the change in fair value to be reported as revenue. The GASB considered
allowing the change to be reported in the statement of operations below excess of revenues over expenditures,
but did not believe that the nature of fair value changes is intrinsically different from, or that it should be
separated from, other elements of investment income.
68.
Q—Can a proprietary fund report the change in fair value of investments in the statement of operations as a
nonoperating revenue?
A—Yes. If a proprietary fund distinguishes between operating and nonoperating income, the change in the fair
value of investments should be reported in the same manner as other investment income is reported, which may
be as nonoperating revenue.
17
69.
Q—Except for the separate reports of governmental external investment pools, why does Statement 31 prohibit
the separate display of realized gains and losses on investments that are reported at fair value?
A—The prohibition against the display of realized gains and losses apart from the net increase or decrease in
the fair value of investments was initially provided in Statement 25. In that Statement, the GASB concluded that
separate display mixes two different measurement bases, is inconsistent with reporting assets at fair value, and
can be misleading. This prohibition was continued in Statement 31. Governmental external investment pools are
allowed to report realized gains and losses. (See question 105.)
70.
Q—Can all investment income—interest, dividends, and changes in fair value—be aggregated and reported as
investment income in the statement of operations, or should the elements of investment income be reported
separately?
A—All elements of investment income may be presented as an aggregate amount, even for defined benefit
pension plans, as provided for in footnote 11 of GASB Statement 25. Appendix 4, Illustration 1, of this
Implementation Guide depicts aggregation for a governmental external investment pool. Illustration 3 depicts
separate elements—disaggregation—for such a pool.
71.
Q—If overall investment income for the year is negative, how should that amount be reported on the statement
of operations?
A—Governments should report negative investment income as negative revenue (Statement 31, paragraph 13).
Display in the Statement of Financial Position
72.
Q—In the statement of financial position, can cost-based investment information be presented parenthetically?
A—Yes. Statement 31 neither prohibits nor requires the presentation of cost-based information in this manner.
73.
Q—Currently, a government reports the entire position of its internal investment pool as cash and cash
equivalents in the general fund, with an amount due to other funds for those other funds’ positions in the pool.
The participating funds, then, report an amount due from the general fund. Does Statement 31 affect this
display?
A—Yes. Statement 31 provides that the equity position of each fund or component unit in an internal investment
pool should be reported as assets in those funds and component units (paragraph 14). Therefore, each fund
with a position in the internal investment pool should report its position as, for example, equity in cash
management pool, equity in internal investment pool, cash and cash equivalents, or investments. To report the
entire position of the pool in the general fund, with corresponding interfund receivables and payables for the
other funds’ equity positions, misrepresents the nature of the positions.
18
Display in the Statement of Cash Flows
74.
Q—How should the statement of cash flows display the net increase (decrease) in the fair value of investments?
A—The increase (decrease) in the fair value of investments is not a cash flow. However, changes in fair value
(or amortization) of investments that meet the definition of cash equivalents (Statement 9, paragraph 9) should
be reported as cash flows from investing activities. These changes are readily convertible to known amounts of
cash and are so near their maturity that they present insignificant risk of changes in value because of changes
in interest rates. When the net increase (decrease) in the fair value of investments is reported in the statement
of operations as part of operating income, the change is presented as an element in the reconciliation of
operating income to net cash provided by operating activities.
Assignment of Interest
75.
Q—Statement 31 requires that when investment income is assigned to another fund because of other than legal
or contractual provisions, the income should be recognized in the fund reporting the investments. What is meant
by legal or contractual provisions?
A—Legal or contractual provisions means the assignment of interest by an authority greater than management
decision. An example is a state law that requires all amounts earned by all investing activities of the state
treasurer to be accrued as revenue to the general fund.
76.
Q—A city operates an internal investment pool. Certain grant funds, because of untimely reimbursements,
operate in a deficit cash position. Does Statement 31 require that the allocation of interest income consider
these deficit positions as de facto loans and, accordingly, that an interest charge be assessed?
A—No. Statement 31 neither requires nor prohibits an interest charge. When one fund overdraws its share of
the pool, that fund should report an interfund liability to the fund that management deems to have lent that
amount to the overdrawn fund. Statement 31 requires only investment income to be allocated (paragraph 14).
However, there may be federal, state, local, or contractual requirements that would require such an interest
charge, or management may believe that an interest charge is appropriate.
77.
Q—Investment income from a school trust fund is assigned, per statute, to an educational special revenue fund.
However, the assigned income is calculated on a basis other than fair value. Thus, there are differences
between the trust fund’s fair value investment income and the amount actually assigned to the special revenue
fund. How does the trust report the difference?
A—The trust fund should report the difference as a part of fund balance either as undistributed investment
income or a distribution in excess of investment income, as appropriate.
Disclosures
78.
Q—Statement 31 requires disclosure of involuntary participation in an external investment pool (paragraph 15).
What constitutes involuntary participation?
A—Participation should be considered involuntary if external requirements mandate that participants place
particular moneys with a particular external investment pool or with a particular investment pool sponsor. For
example, if state law designates the county treasurer as the treasurer of all operating funds of school districts
in the county, the participation of the school districts in the county pool should be considered involuntary. This
is the case even though the treasurer may offer the school districts a choice of one of three pools; their
19
participation with the pool sponsor is required by state law. If, instead, a school district invests its operating funds
with the county treasurer based on the requirements of the school district’s governing board or a bond indenture
developed by that board, that participation is not involuntary because it is not externally imposed.
79.
Q—Statement 31 requires disclosure of the methods and significant assumptions used to estimate the fair value
of investments (paragraph 15). What methods can be used to estimate fair value and what kinds of assumptions
would need to be disclosed?
A—Methods used to estimate the fair value of investments include the present value of estimated expected
future cash flows using a discount rate commensurate with the risks involved, matrix pricing, option-pricing
models, option-adjusted spread models, and fundamental analysis. Those methods are more fully discussed in
question 33.
Significant assumptions include discounts or premiums from markets of similar, freely traded securities.
Estimates of fair value for derivatives and other financial instruments are affected by assumptions regarding
current and future interest rates, foreign exchange rates, or equity prices; expected rates of changes in those
factors; and term to maturity.
80.
Q—If a financial newspaper was consulted for fair value information or a quote was received from a market
maker, would these need to be disclosed as sources other than quoted market prices?
A—No disclosure is required. Prices derived from financial newspapers and quotes from market makers are
sources of quoted market prices and are not considered estimates of fair value.
81.
Q—What amortized cost policies are required to be disclosed?
A—A governmental entity should disclose the alternatives it has selected in applying Statement 31. For
example, a city may have elected to report certain money market investments at amortized cost or a
governmental external investment pool may have elected to report certain debt securities at amortized cost.
Further, a government’s election regarding the maturity period for the use of amortized cost (for example, one
year) should be disclosed.
82.
Q—Statement 31 requires disclosure of any income from investments associated with one fund that is assigned
to another fund. Specifically, what kind of disclosure should be made?
A—Income from investments associated with one fund that is assigned to and reported as revenue of another
fund should be disclosed. A statement should be made that interest has been assigned and the amount of the
interest should be disclosed. The total assigned interest may be aggregated for this disclosure; individual funds
and amounts need not be detailed. No specific disclosure is required if an entity reports investment income in
the fund reporting the investment and transfers the income to another fund.
83.
Q—If an entity discloses realized gains and losses, what additional disclosures are required?
A—Statement 31 generally prohibits the separate display of realized gains and losses on the face of the financial
statements, as explained in question 69. However, it permits disclosure in the notes to the financial statements,
provided the nature of those amounts and their relationship to the net change in the fair value of investments
also is disclosed. That additional disclosure, which also is required if realized gains and losses are displayed in
the separate reports of governmental external investment pools, is intended to inform financial statement users
about the differences between measurements made based on the cost basis and those made on the fair value
basis. Paragraph 15 of Statement 31 describes the required disclosures.
20
84.
Q—A city government reports its investments using fair value and wishes to disclose realized gains and losses.
How should realized gains and losses be computed—as the difference between the proceeds of the sale and the
original cost of the investment, or the difference between the proceeds of the sale and the amortized cost of the
investment?
A—Statement 31 requires that fair value realized gains and losses be computed as the difference between the
proceeds of the sale and the original cost of the investments sold (paragraphs 13 and 15). Disclosure of the
amortized cost method of calculating realized gains and losses (calculated as the difference between the
proceeds of the sale and amortized cost) is not required because of concerns about the burden of keeping
additional amortized cost accounting records. Amortized cost–based realized gains and losses may be
presented in addition to, but not instead of, original cost–based realized gains or losses, provided that the
method of determining realized gains and losses is fully disclosed. (See question 83.)
85.
Q—Are there any special disclosure requirements for derivatives?
A—Disclosures for derivatives are provided in Technical Bulletin 94-1 (paragraphs 2–4), which states:
. . . Disclosures should include a discussion of the relevant accounting policies in the summary of
significant accounting policies and any other information necessary to keep the financial statements
from being misleading. Furthermore, . . . disclosures are required if an entity has violated legal,
regulatory, or contractual provisions by using, holding, or writing (selling) certain derivatives. Disclosures are also required for contingencies and for the effects of subsequent events.
Thus, if derivatives have been used, held, or written during the period covered by the financial
statements (regardless of whether the assets or liabilities resulting from these transactions are reported
on the balance sheet), the nature of the transactions and the reasons for entering into them should be
explained. This explanation should include a discussion of the entity’s exposure to credit risk,2 market
risk,3 and legal risk4; however, the discussion of risk should be made only to the extent that these risks
are above and beyond those risks that are apparent in the financial statements or are otherwise
disclosed in the notes to the financial statements. (For example, if an instrument is disclosed as bearing
an interest rate that varies directly with a particular published index or rate, no additional disclosure of
the market risk related to changing interest rates would generally be necessary.)
To the extent that information is available to an entity, the disclosures in paragraphs 2 and 3 are
applicable if the entity is exposed to risk by indirectly using, holding, or writing derivatives, such as
through participation in a mutual fund or investment pool that holds derivatives. If this information is
not available, that fact should be disclosed.
2
Credit risk is the exposure to the default of another party to the transaction (the counterparty).
3
Market risk is the exposure to changes in the market, such as a change in interest rates or a change in the price or principal
value of a security.
4
Legal risk is the exposure to a transaction’s being determined to be prohibited by law, regulation, or contract.
86.
Q—Statement 3 requires the disclosure of information regarding custodial credit risk and market values. How
does Statement 31 affect the provisions of Statement 3?
A—Statement 31 replaces the term market value in Statement 3 with fair value. Further, if all investments are
valued at fair value, separate presentations of the carrying amounts and fair values by type of investment, as
required by Statement 3, would not be necessary. Presentation of fair values by type of investment, with
disclosure that investments are reported at fair value, would satisfy the Statement 3 requirement. The June 30,
1997, edition of Codification Section I50, “Investments,” paragraphs .901 and .902, illustrates Statement 3
disclosures as modified by Statement 31. A portion of one illustration from paragraph .901 is as follows:
21
The City’s investments are categorized to give an indication of the level of risk assumed by the
entity at year-end. Category 1 includes investments that are insured or registered or for which the
securities are held by the City or its agent in the City’s name. Category 2 includes uninsured and
unregistered investments for which the securities are held by the [dealer bank’s] trust department or
agent in the City’s name. Category 3 includes [repurchase agreements with no underlying securities
and] uninsured and unregistered investments for which the securities are held by the [broker-dealer]
or by the [dealer bank].
1
Category
2
3
Reported
Amount*
Fair
Value
Repurchase agreements
$23,207,000 $ 5,004,000 $ 4,997,000 $ 33,208,000 $ 33,208,000
U.S. government securities
6,865,000
—
—
6,865,000
7,158,000
Banker’s acceptances
— 41,800,000 14,880,000
56,680,000
56,706,000
Commercial paper
14,470,000
—
—
14,470,000
14,550,000
Corporate bonds
46,128,000
—
—
46,128,000
46,128,000
$90,670,000 $46,804,000 $19,877,000 157,351,000 157,750,000
Investments held by
broker-dealers under
reverse repurchase
agreements:
U.S. government
securities
41,649,000
41,903,000
U.S. instrumentality
securities
28,929,000
28,929,000
Investment in state treasurer’s investment pool
1,019,000
1,019,000
Total investments
$228,948,000 $229,601,000
[*In this example, the reported amount is a mixture of cost- and fair value–based measures because certain investments meet
the Statement 31 criteria for reporting at amortized cost. If the reported amounts were all at fair value, separate columns for
reported amounts and fair value would not be needed. The accounting policies for investments should be disclosed in the
summary of significant accounting policies.]
87.
Q—According to Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase
Agreements), and Reverse Repurchase Agreements, paragraphs 67 and 68, financial statements disclose
custodial credit risk of deposits and investments. How is a sponsoring government’s disclosure of deposits and
investments under Statement 3 affected by whether the sponsoring government issues a separate report for its
external investment pool?
A—If the sponsoring government issues a separate report for its external investment pool, the Statement 3
disclosure in the sponsoring government’s report could aggregate all deposits and investments into a single
disclosure, including those of the pool. (Such aggregation is subject to the Statement 3 provisions for
disaggregation in certain situations—see paragraphs 65 and 70 of that Statement.) However, disaggregation is
not prohibited.
If the sponsoring government does not issue a separate report for its external investment pool, Statement 31
requires a separate Statement 3 disclosure in the sponsoring government’s report for the deposits and
investments of the pool as a whole. This is the same disclosure as would have been presented if the pool had
issued a separate report (paragraph 19). In this situation, Statement 31 does not specify whether the sponsoring
government’s “general” Statement 3 disclosure should include all, some, or none of the pool’s deposits and
22
investments. Sponsoring governments should select the presentation that they believe best presents the
required information and should disclose what is included in the presentation. Any presentation should consider
the Statement 3 provisions for disaggregation as contained in paragraphs 65 and 70.
External Investment Pools
Definition of External Investment Pools
88.
Q—What is an external investment pool?
A—An external investment pool is an arrangement that commingles (pools) the moneys of more than one legally
separate entity and invests, on the participants’ behalf, in an investment portfolio. An external investment pool
can be sponsored by an individual government, jointly by more than one government, or by a nongovernmental
entity. In a governmental external investment pool, one or more of the participants is not part of the sponsor’s
reporting entity. For purposes of Statement 31, a governmental investment pool that includes participation both
by legally separate entities that are part of the sponsor’s reporting entity and by those that are not is an external
investment pool. If a government-sponsored pool includes only the primary government and its component
units, it is an internal investment pool and is not subject to the provisions of the Statement that apply to external
investment pools.
89.
Q—A local government has an investment account at a local bank. That bank pools moneys from various local
governments in investments that are authorized by state law. Is this an external investment pool?
A—Yes. An external investment pool may be administered by a nongovernmental entity. If the pool is an
SEC-registered open-end mutual fund, participants should value their positions in the pool accordingly. (See
question 62.)
90.
Q—A local government sponsors an investment pool for special purpose governments in its jurisdiction.
Participation is open to legally separate entities that are not component units of the local government. During
the year, non-component-unit entities invested in the pool, but at the reporting date the only participants are
component units. Should the pooling that occurred during the year be reported as an external investment pool?
A—Yes. The pool should be reported as an external investment pool. If non-component-unit entities invested in
the pool during the year, the external activity should be reported in the sponsoring government’s financial
statements in an investment trust fund. This would be the case even though that trust fund would not present
a statement of net assets as of the reporting date.
91.
Q—A county collects property taxes on behalf of special purpose districts within the county. Following the month
of collection, the proceeds are remitted to the appropriate districts. While the county holds the proceeds, the
moneys are invested in the county’s external investment pool. Are the districts participants in a governmental
external investment pool?
A—No. In the view of the districts, the moneys held by the county are a receivable, not an investment.
Receivables are not covered by Statement 31 (paragraph 2 and definition of debt security, paragraph 22).
Whether the districts receive any investment income on their invested balances does not affect this analysis.
The county should report a liability to the districts and should value the investments purchased with the districts’
moneys according to Statment 31. If the values of the investments fall below the county’s liability, the county
should evaluate its liability in the context of its legal responsibilities.
23
92.
Q—A county treasurer, per statute, acts as the official treasurer for special purpose districts within the county.
The districts are not component units of the county. Moneys are pooled and invested by the treasurer. Are the
districts participants in a governmental external investment pool?
A—It depends on which entity benefits from the investment. An external investment pool invests for the benefit
of participants. If the districts participate in the investment income of the pooled investments, they have a
position in a governmental external investment pool. Their positions in the pool should be valued according to
share value after considering any legally binding guarantee by the pool sponsor—the county. Investment
positions in 2a7-like pools should be determined by the pool’s share price (Statement 31, paragraphs 11 and 12).
If the districts do not participate in the investment income (or the possibility of loss) of the pooled investments,
the districts do not have a position in a governmental external investment pool. This could be the case if, for
example, the districts’ moneys are invested for the benefit of the county’s general fund in an assignment of
income and the districts are protected from loss. From the perspective of the districts, this structure more closely
resembles a demand account. The county should follow the assignment-of-income provisions of Statement 31
(paragraphs 14 and 15).
Colleges and Universities
93.
Q—A college invests funds belonging to a foundation by pooling the funds with funds belonging to the college.
The foundation is not part of the college reporting entity. Is this an external investment pool?
A—Yes. The foundation is not part of the college reporting entity—the pool’s sponsoring entity. Therefore, an
external investment pool has been established.
94.
Q—In what fund does a college or university electing to follow the AICPA College Guide model (see Statement 15, paragraph 4a) report an external investment pool or individual investment accounts?
A—These pools and accounts could be reported as agency funds because the College Guide model does not
include a trust fund classification. Further guidance is expected to be provided in the college and university
financial reporting model project.
Joint Ventures
95.
Q—A governmental joint venture is established to construct and operate a sewage treatment plant. In its initial
design and construction phase, the joint venture realizes significant income from the investment of unspent
construction money. Is this joint venture an external investment pool?
A—No. Statement 31 indicates that an external investment pool is organized to commingle the moneys of
participants in an investment portfolio. The joint venture described was not established to operate as an
investment vehicle; the investment function is incidental to the purposes of the organization. The accounting
provisions of Statement 14 should be followed. However, the joint venture should apply the provisions of
Statement 31 when reporting its investments.
Public Entity Risk Pools
96.
Q—A risk management pool is established among local governments to manage liability exposures. The pool
holds substantial investments. Is this risk pool also an external investment pool?
A—No. The risk pool was not organized to be an investment vehicle and should not be considered an external
investment pool. Risk pools should follow the investment requirements of Statement 10, as amended by
Statement 31. (See question 18.)
24
Venture Capital Limited Partnerships
97.
Q—Does Statement 31 consider a venture capital limited partnership to be an external investment pool?
A—No. A venture capital limited partnership is organized to raise capital for start-up companies or those in the
early stages of developing products or services. Statement 31 considers venture capital limited partnerships to
be equity securities that do not have readily determinable fair values. Therefore, except for defined benefit
pension plans, Section 457 deferred compensation plans, and non-2a7-like external investment pools, governmental entities should report venture capital limited partnerships using cost-based measures.
2a7-like Pools
98. Q—Statement 31 provides specific standards for external investment pools that are 2a7-like. What does
2a7-like mean, and how close does such an entity have to be to the 2a7 standards to qualify as a 2a7-like pool?
A—A 2a7-like external investment pool is not registered with the SEC as an investment company, but
nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC’s Rule 2a7 of the
Investment Company Act of 1940 (17 Code of Federal Regulations §270.2a-7), which comprises the rules
governing money market funds. In other words, if the pool were to file with the SEC, it would qualify as a money
market fund because it is in compliance with SEC requirements. For example, among many other provisions
currently required, a 2a7-like pool may not purchase a security with a remaining maturity greater than 397 days.
A 2a7-like pool must also maintain its amortized cost net asset value per share within one-half of 1 percent of
net asset per share computed on a fair value basis. Developing operating, oversight, and reporting procedures
that comply with Rule 2a7 is the responsibility of the pool’s sponsor.
99. Q—Should 2a7-like pools follow regulatory guidance the SEC issues for money market funds?
A—The SEC routinely issues guidance on specific issues for money market funds. External investment pools
that seek to qualify as 2a7-like should follow that guidance whenever appropriate.
Valuation of Governmental External Investment Pool Investments
100. Q—Does a governmental external investment pool that is not 2a7-like report its investments using fair value or
amortized cost?
A—Most investments should be reported using fair value. Nonparticipating interest-earning investment contracts should be reported using cost-based measures. (See question 45.) Debt securities with a remaining
maturity of ninety days or less may be reported at amortized cost.
101. Q—A governmental external investment pool has held a U.S. Treasury bond for several years and has reported
it at fair value. At the pool’s current year-end, that bond has only seventy-five days remaining to maturity, and
the pool reports short-term debt investments with a remaining maturity of ninety days or less at amortized cost.
What is the value of that bond for determining its cost basis at the current reporting date?
A—The fair value of the investment on the date it becomes short term (for example, when it has ninety days
remaining to maturity) becomes its new cost basis. Any difference between that new cost basis and the face
value of the investment is amortized over the remaining ninety days to maturity.
25
102. Q—Statement 31 provides different accounting requirements for money market investments and participating
interest-earning investment contracts that are held by governmental entities other than external investment
pools. If a governmental external investment pool includes internal moneys belonging to the pool’s sponsor,
should the accounting guidance applicable to governmental external investment pools be followed for the entire
pool?
A—Yes. This pool should follow the governmental external investment pool guidance for money market
investments and participating interest-earning investment contracts. Short-term debt investments with remaining maturities of up to ninety days at the date of the financial statements may be reported at amortized cost,
provided that the fair value of those investments is not significantly affected by the impairment of the credit
standing of the issuer or by other factors (Statement 31, paragraph 16). The pool is not permitted to follow the
cost-based standards for money market investments and participating interest-earning investment contracts,
even though a portion of the pool represents internal moneys (Statement 31, footnote 3).
Reporting Governmental External Investment Pools
Separate or Stand-alone Financial Reports
103. Q—Statement 31 provides that all applicable GASB pronouncements should be applied in the separate or
stand-alone financial reports of governmental external investment pools (paragraph 17). What are the other
GASB pronouncements that most likely would be applied?
A—The other GASB pronouncements most likely to apply to governmental external investment pools are:
• Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and
Reverse Repurchase Agreements
• Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions
• Interpretation No. 3, Financial Reporting for Reverse Repurchase Agreements
• Technical Bulletin No. 87-1, Applying Paragraph 68 of GASB Statement 3
• Technical Bulletin No. 94-1, Disclosures about Derivatives and Similar Debt and Investment Transactions
• Technical Bulletin No. 97-1, Classification of Deposits and Investments into Custodial Credit Risk Categories
for Certain Bank Holding Company Transactions
However, there might be other transactions or balances subject to GASB pronouncements. All GASB pronouncements should be reviewed for applicability.
104. Q—Statement 20 indicates that proprietary activities may apply all FASB Statements and Interpretations issued
after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. Are
governmental external investment pools classified as a proprietary activity and able to choose this option?
A—Yes. Governmental external investment pools are accounted for in essentially the same manner as
proprietary funds.
105. Q—Why are the separate reports of governmental external investment pools permitted to display realized gains
and losses?
A—Separate reports of governmental external investment pools are permitted to report realized gains and
losses because the AICPA investment company Audit and Accounting Guide, which many pools apply for
financial reporting purposes, requires the separate display of realized gains and losses and the changes in net
unrealized appreciation (depreciation) of investments (Statement 31, Basis for Conclusions, paragraph 63).
26
106. Q—A governmental external investment pool includes moneys of external entities as well as moneys of the
sponsoring government. For the separate or stand-alone financial reports of the pool, should only those
positions belonging to the external entities be reported?
A—No. The separate or stand-alone financial report should include all assets under management, including
those that represent positions that belong to the sponsoring government.
107. Q—Statement 31 requires governmental external investment pools to disclose information about regulatory
oversight and the frequency of determining the fair value of pool investments. What are examples of this type
of information?
A—Examples are the existence of state agency oversight, the existence of a board of directors, and the
frequency of marking-to-market. Research for this project revealed that the nature of a pool’s operations and
portfolio was not always evident in materials that were distributed to participants, including financial reports.
These disclosures will provide that information to pool participants and other users of pool financial statements,
permitting them to make more informed decisions about the pool.
108. Q—Statement 31 requires governmental external investment pools to disclose, among other information, a
summary of the fair value and carrying amount (if different from fair value) of each major investment classification (paragraph 17). Does this disclosure requirement apply to 2a7-like pools?
A—Yes. Such information is as important for the financial reports of 2a7-like pools as it is for non-2a7-like pools.
Sponsor Reporting
109. Q—A state government sponsors an investment pool for its own moneys and moneys of legally separate entities
that are not component units. What are the requirements for presenting this pool in the state’s annual financial
report?
A—The state should report the external portion of the pool (that is, the portion belonging to the non-componentunit participants) as a separate investment trust fund. That fund is classified as a fiduciary fund and is accounted
for using the economic resources measurement focus and the accrual basis of accounting. The internal portion of
the pool is the portion that belongs to the state and its component units and should be reported in the individual
participating funds and component units of the state. In its financial statements, the state should present for the
investment trust fund a statement of net assets and a statement of changes in net assets. In the combined financial
statements, the statement of changes in net assets should be presented separately or with trust funds that have
a similar financial statement format, such as pension trust funds (Statement 31, paragraph 18).
110. Q—A governmental external investment pool is included in the combined statement of financial position of the
sponsoring government. How should the equity account net assets held in trust for pool participants be
reported?
A—In the combined financial statements, this account should be presented in fund balance as, for example,
reserved for external investment pool participants.
111. Q—What are the disclosure requirements for the financial statements of a government that sponsors an
external investment pool?
A—If a separate financial report is issued for the pool, the financial statements of the sponsoring government
need only disclose how to obtain that report. If a separate report is not issued, the sponsor’s financial statements
should include the disclosures required by Statement 31, paragraph 17, for those separate reports. Those
27
disclosures include the frequency of determining the fair value of investments, the method used to determine the
participants’ share sold and redeemed, and other disclosures. In addition, the sponsoring government’s financial
statements should make the disclosures required by Statements 3 and 28 and other cash and investment
standards separately for the pool. (See question 87.) Finally, the sponsor’s financial statements should disclose
condensed statements of net assets and changes in net assets for the pool. If the pool includes both internal and
external investors (a “mixed pool”), those condensed financial statements should include, in total, the net assets
held in trust for all pool participants, and the equity of participants should distinguish between internal and
external portions. If the government sponsors more than one external investment pool, the disclosures are
required for each pool (Statement 31, paragraph 19).
112. Q—Can individual investment accounts be combined with a governmental external investment pool for
reporting purposes?
A—No. The individual investment accounts should be reported as one or more separate investment trust funds.
Combining individual investment accounts with the investment pool might obscure information that is needed by
users of the pool’s financial statements. (See questions 117 through 119.)
Pool Reporting Compared to Pool Management
113. Q—Does Statement 31 require governmental external investment pools to use the same accounting method for
valuing participant shares as is used for financial reporting?
A—No. Statement 31 addresses external financial reporting. It does not provide standards for the management
of an external investment pool. The valuation of participant shares is the determination of the pool sponsor.
Regardless of the method the pool sponsor uses to value shares, participants should report their positions
either at fair value or, if the pool is a 2a7-like pool, at the pool’s share price.
114. Q—Does Statement 31 mandate the manner, method, or frequency of the distribution of investment income?
A—No. The distribution of investment income is the determination of the pool sponsor in conjunction with pool
participants. Regardless of the distribution of investment income, however, pool participants should value their
position in the pool using fair value. The only exceptions are investment positions in open-end mutual funds and
in 2a7-like pools, which are reported using the fund’s or pool’s share price because that share price is
substantially the same as fair value.
115. Q—A governmental external investment pool distributes investment income on an amortized cost basis.
Amortized discounts and premiums, accrued interest, and realized gains and losses, net of expenses, are paid
in cash to participants on a quarterly basis. The pool is not a 2a7-like pool. How does the pool sponsor report
fair value information and participants’ equity in the pool’s financial statements?
A—Statement 31 applies to the valuation of investments and does not apply to the method the pool uses to
value the participants’ equity. Pool investments should be reported at fair value. Participants’ equity in the pool
is determined by the amount of participant deposits, adjusted for withdrawals and distributed income. Undistributed and unrealized gains and losses can be captioned as such in the equity portion of the statement of
28
position. For example, suppose an external investment pool has a fair value at the end of the year of
$10,500,000 and had managed participant equity on an “amortized cost” basis, resulting in $10,000,000 of
nominal or stated participants’ equity. The condensed pool financial statements could be presented as follows:
Net assets
Net assets consist of:
Participant units outstanding ($1.00 par)
Undistributed and unrealized gains
Net assets
Participant net asset value at fair value price per share
($10,500,000 ÷ 10,000,000 units)
$10,500,000
$10,000,000
500,000
$10,500,000
$1.05
How participants report their positions in an external investment pool, using the above example, is discussed
in question 59.
116. Q—Given the preceding question and answer, what disclosures about the difference between the fair value of
the pool’s investments and the amortized cost share value would be appropriate?
A—Note disclosures should indicate that distributions to participants are made on an amortized cost basis,
which differs from a fair value basis, and that the difference between the two methods is reported in the equity
section on the statement of net assets as undistributed and unrealized gains (losses). For example, a disclosure
for the pool could be as follows:
The pool values participants’ shares on an amortized cost basis. Specifically, the pool distributes income
to participants on a quarterly basis based on their relative participation during the quarter that is calculated
based on (1) realized investment gains and losses calculated on an amortized cost basis, (2) interest
income based on stated rates (both paid and accrued), (3) amortization of discounts and premiums on a
straight-line basis, and (4) investment and administrative expenses. This method differs from the fair value
method used to value investments in these financial statements because the amortized cost method is not
designed to distribute to participants all unrealized gains and losses in the fair values of the pool’s
investments. The total difference between the fair values of the investments in the pool and the values
distributed to the pool participants using the amortized cost method described above is reported in the
equity section of the statement of net assets as undistributed and unrealized gains.
Individual Investment Accounts
117. Q—Statement 31 requires governments to report as separate investment trust funds the individual investment
accounts that they manage for legally separate entities that are not component units (paragraph 20). What are
individual investment accounts?
A—Some governmental entities provide investment services to other entities on other than a pooled basis. For
example, a state treasurer may maintain individual investment accounts for the municipal governments in the
state. Specific investments are acquired for the individual municipalities, and the income from and changes in
the value of those investments affect only the municipality for which they were acquired. Sometimes, such
individual accounts are offered as an alternative to the sponsoring government’s external investment pool; in
other cases, only individual investment accounts are provided.
29
118. Q—Does Statement 31 require separate annual financial reports or special disclosure by governments
sponsoring individual investment accounts?
A—No. An individual investor’s position is not affected by all investments in individual accounts, but only by
those investments in its own account. Therefore, separate reports and disclosures are not required from the
sponsor.
119. Q—A county government provides individual investment accounts to other, legally separate special purpose
governments. Those governments are not part of the county’s reporting entity. In the combining and individual
fund financial statements, can the county aggregate all individual investment accounts for these governments?
A—Yes. In the combining and individual fund financial statements, all individual investment accounts may be
aggregated as a single investment trust fund and be presented as one column.
Transition Reporting
120. Q—How is the transition to Statement 31 reported?
A—Accounting changes adopted to conform to Statement 31 should be applied retroactively, if practical, by
restating financial statements for all prior periods presented. (Note: Memorandum comparative columns as
found in comprehensive annual financial reports do not represent prior years’ financial statements.) If restatement of financial statements for prior periods presented is not practical, the cumulative effect of applying the
Statement, if any, should be reported as a restatement of beginning fund balance or retained earnings, as
appropriate, for the earliest period restated. For many governments, this will be as of the beginning of the current
fiscal year.
For example, a governmental entity has a fiscal year ending June 30 and adopts Statement 31 in the fiscal year
ending June 30, 1998. On June 30, 1997, it previously reported investments at an amortized cost of $100,000
in the general fund. These investments had a fair value of $95,000. The transition adjustment, $5,000, should
be reported as an adjustment to the general fund’s beginning fund balance. Applicable parts of the statement
of revenues, expenditures, and changes in fund balance are as follows:
Revenues and other financing sources over (under) expenditures and other financing uses
Fund balance, June 30, 1997
Cumulative effect of a change in accounting principle
Fund balance, June 30, 1997, as restated
Fund balance, June 30, 1998
$ XXX
XXX
(5,000)
XXX
$ XXX
Proprietary funds would report the transition adjustment in the statement of revenues, expenses, and changes
in retained earnings as follows:
Net income
Retained earnings, June 30, 1997
Cumulative effect of a change in accounting principle
Retained earnings, June 30, 1997, as restated
Retained earnings, June 30, 1998
$ XXX
XXX
(5,000)
XXX
$ XXX
Alternatively, the notes to the financial statements could disclose the nature of the $5,000 reduction of beginning
equity, and the statement of operations would present Fund balance, June 30, 1997, as restated and Retained
earnings, June 30, 1997, as restated, respectively (Statement 31, paragraph 21).
30
121. Q—Under FASB Statement 115, a governmental entity presents certain investments as “available for sale.” If
a proprietary activity previously had applied that Statement, how is the transition to Statement 31 reported?
A—FASB Statement 115 requires unrealized holding gains and losses on available-for-sale securities to be
excluded from the statement of operations and to be reported as a component of other comprehensive income
until realized (paragraph 13). Because it conflicts with Statement 31, this treatment of fair value gains and losses
on “available-for-sale” securities is no longer allowable. In the year of transition to Statement 31, the cumulative
effect of the accounting change would be reported as a restatement of beginning retained earnings. In this case,
the “cumulative effect”—the amount of unrealized holding gains and losses presented in the prior year’s
statement—has already been reported in equity. Accordingly, the effect of the transition is to eliminate the
unrealized holding gains and losses account as of the date of transition and to report that amount as the
cumulative effect of a change in accounting principles either in the face of the statement of revenues, expenses,
and changes and retained earnings or in the notes to the financial statements. After transition, all fair value
increases and decreases will be reported in the statement of operations.
122. Q—At the date of transition, a U.S. Treasury bond—a money market investment—that had been purchased four
years earlier has less than one year remaining to maturity. If the bond is not held by an external investment pool,
can this bond be reported using amortized cost?
A—No. The bond should be reported at fair value at the transition date, as if Statement 31 had been effective
from the purchase date of the bond.
31
Appendix 1
GLOSSARY
This glossary contains definitions of certain terms as they are used in Statement 31 and in this Implementation
Guide; the terms may have different meanings in other contexts. Terms marked with an asterisk (*) have not been
defined in Statement 31.
Amortized cost*
A method of calculating an investment’s value by adjusting its acquisition cost for the amortization of discount
or premium over the period from purchase to maturity.
Asset-backed securities
Assets that are composed of, or collateralized by, loans or receivables. Collateralization can consist of liens on
real property, leases, or credit card debt.
Change in the fair value of investments
The difference between the fair value of investments at the beginning of the period† and at the end of the period,
taking into consideration investment purchases, sales, and redemptions.
Closed-end mutual fund
An SEC-registered investment company that issues a limited number of shares to investors which are then
traded as an equity security on a stock exchange. See also Open-end mutual fund.
Debt security
Any security that represents a creditor relationship with an entity. It also includes (a) preferred stock that either
is required to be redeemed by the issuing entity or is redeemable at the option of the investor and (b) a
collateralized mortgage obligation (CMO) or other instrument that is issued in equity form but is accounted for
as a nonequity instrument. However, it excludes option contracts, financial futures contracts, and forward
contracts.
• Thus, the term debt security includes, among other items, U.S. Treasury securities, U.S. government agency
securities, municipal securities, corporate bonds, convertible debt, commercial paper, negotiable certificates
of deposit, securitized debt instruments (such as collateralized mortgage obligations—CMOs—and real
estate mortgage investment conduits—REMICs—and interest-only and principal-only strips).
• Trade accounts receivable arising from sales on credit and loans receivable arising from real estate lending
activities of proprietary activities are examples of receivables that do not meet the definition of a security; thus,
those receivables are not debt securities. (If, however, they have been securitized, they would then meet the
definition.)
Derivative*
Contracts whose value depends on, or derives from, the value of an underlying asset, reference rate, or index.
Equity security
Any security that represents an ownership interest in an entity, including common, preferred, or other capital
stock; unit investment trusts; and closed-end mutual funds. However, the term equity security does not include
convertible debt or preferred stock that either is required to be redeemed by the issuing entity or is redeemable
at the option of the investor.
†Period
changed from year in Statement 31.
33
External investment pool
An arrangement that commingles (pools) the moneys of more than one legally separate entity and invests, on
the participants’ behalf, in an investment portfolio; one or more of the participants is not part of the sponsor’s
reporting entity. An external investment pool can be sponsored by an individual government, jointly by more than
one government, or by a nongovernmental entity. An investment pool that is sponsored by an individual state or
local government is an external investment pool if it includes participation by a legally separate entity that is not
part of the same reporting entity as the sponsoring government. If a government-sponsored pool includes only
the primary government and its component units, it is an internal investment pool and not an external investment
pool.
Fair value
The amount at which a financial instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
Flex repo*
A term repurchase agreement that permits the investor to sell a portion of the collateral securities back to the
counterparty before the stated, final maturity date of the transaction. (That is, it is “flexible.”)
Impairment*
When an investment is reported using cost-based measures, events or changes in circumstances that indicate
the carrying amount of the investment may not be recoverable. An investment is impaired when a decline in its
fair value below the amortized cost basis is other than temporary.
Individual investment accounts
An investment service provided by a governmental entity for other, legally separate entities that are not part of
the same reporting entity. With individual investment accounts, specific investments are acquired for individual
entities and the income from and changes in the value of those investments affect only the entity for which they
were acquired.
Interest-earning investment contract
A direct contract, other than a mortgage or other loan, that a government enters into as a creditor of a financial
institution, broker-dealer, investment company, insurance company, or other financial services company and for
which it receives, directly or indirectly, interest payments. Interest-earning investment contracts include time
deposits with financial institutions (such as certificates of deposit), repurchase agreements, and guaranteed and
bank investment contracts (GICs and BICs).
Internal investment pool
An arrangement that commingles (pools) the moneys of more than one fund or component unit of a reporting
entity. Investment pools that include participation by legally separate entities that are not part of the same
reporting entity as the pool sponsor are not internal investment pools, but rather are external investment pools.
Investment
A security or other asset acquired primarily for the purpose of obtaining income or profit.
Mixed pool*
An investment pool that commingles moneys of a fund or component unit of a reporting entity, and legally
separate entities that are not part of the same reporting entity.
Money market fund*
An open-end mutual fund that complies with the SEC’s Rule 2a7 of the Investment Company Act of 1940
(17 Code of Federal Regulations §270.2a7).
34
Money market investment
A short-term, highly liquid debt instrument, including commercial paper, banker’s acceptances, and U.S.
Treasury and agency obligations. Asset-backed securities, derivatives, and structured notes are not included in
this term.
Open-end mutual fund
An SEC-registered investment company that issues shares of its stock to investors, invests in an investment
portfolio on the shareholders’ behalf, and stands ready to redeem its shares for an amount based on its current
share price. An open-end mutual fund creates new shares to meet investor demand, and the value of an
investment in the fund depends directly on the value of the underlying portfolio. Open-end mutual funds include
governmental external investment pools that are registered as investment companies with the SEC and that
operate as open-end funds.
Option contract
A contract giving the buyer (owner) the right, but not the obligation, to purchase from (call option) or sell to (put
option) the seller (writer) of the contract a fixed number of items (such as shares of equity securities) at a fixed
or determinable “strike” price on a given date or at any time on or before a given date.
Participation
The ability of an investment to capture market (interest rate) changes through the investment’s negotiability or
transferability, or redemption terms that consider market rates.
Restricted stock
Equity securities whose sale is restricted at acquisition by legal or contractual provisions (other than in
connection with being pledged as collateral) except if that restriction terminates within one year or if the holder
has the power by contract or otherwise to cause the requirement to be met within one year. Any portion of the
security that can reasonably be expected to qualify for sale within one year, such as may be the case under SEC
Rule 144 (17 Code of Federal Regulations §230.144) or similar rules of the SEC, is not considered restricted.
Security
A transferable financial instrument that evidences ownership or creditorship, whether in physical or book entry
form.
Sponsoring government
A governmental entity that provides investment services—whether an investment pool or individual investment
accounts—to other entities and that therefore has a fiduciary responsibility for those investments.
Stock rights
Rights given to existing stockholders to purchase newly issued shares in proportion to their holdings at a specific
date.
Stock warrants
Certificates entitling the holder to acquire shares of stock at a certain price within a stated period. Warrants often
are made part of the issuance of bonds or preferred or common stock.
Structured notes
Debt securities whose cash flow characteristics (coupon, redemption amount, or stated maturity) depend on one
or more indexes, or that have embedded forwards or options.
35
2a7-like pool
An external investment pool that is not registered with the SEC as an investment company, but nevertheless has
a policy that it will, and does, operate in a manner consistent with the SEC’s Rule 2a7 of the Investment
Company Act of 1940 (17 Code of Federal Regulations §270.2a7). Rule 2a7 allows SEC-registered mutual funds
to use amortized cost rather than market value to report net assets to compute share prices if certain conditions
are met. Those conditions include restrictions on the types of investments held, restrictions on the term-tomaturity of individual investments and the dollar-weighted average of the portfolio, requirements for portfolio
diversification, requirements for divestiture considerations in the event of security downgrades and defaults, and
required actions if the market value of the portfolio deviates from amortized cost by a specified amount.
36
Appendix 2
INTRODUCTION AND STANDARDS SECTIONS FROM STATEMENT 31
Introduction
1. The GASB has established investment valuation standards in Statements No. 2, Financial Reporting of Deferred
Compensation Plans Adopted under the Provisions of Internal Revenue Code Section 457; No. 10, Accounting and
Financial Reporting for Risk Financing and Related Insurance Issues; and No. 25, Financial Reporting for Defined
Benefit Pension Plans and Note Disclosures for Defined Contribution Plans. The provisions of certain other GASB
Statements, such as Statement No. 15, Governmental College and University Accounting and Financial Reporting
Models, had permitted certain governmental entities to adopt investment standards promulgated by other standardssetting organizations. However, for most general and special purpose governments, the GASB had not established
valuation standards.
Standards of Governmental Accounting and Financial Reporting
Scope and Applicability of This Statement
2. This Statement establishes accounting and financial reporting standards for all investments1 held by governmental external investment pools. For governmental entities other than external investment pools, defined benefit
pension plans, and Internal Revenue Code Section 457 deferred compensation plans, it establishes accounting and
financial reporting standards for investments in:
a.
b.
c.
d.
e.
Interest-earning investment contracts
External investment pools
Open-end mutual funds
Debt securities
Equity securities (including unit investment trusts and closed-end mutual funds), option contracts, stock
warrants, and stock rights that have readily determinable fair values.
3. The fair value of equity securities, option contracts, stock warrants, and stock rights is readily determinable if sales
prices or bid-and-asked quotations are currently available on a securities exchange registered with the Securities and
Exchange Commission (SEC) or in the over-the-counter market, provided that those prices or quotations for the
over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by the National Quotation Bureau. The fair value of restricted stock is not readily determinable. The
fair value of equity securities, option contracts, stock warrants, and stock rights traded only in a foreign market is
readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred
to in this paragraph.
4. Statements 2 and 25 contain standards for the valuation and reporting of the investments of certain deferred
compensation plans and of defined benefit pension plans, respectively. Those plans should apply the provisions of
paragraphs 7 through 12 to report the fair value of investments in:
a.
b.
c.
d.
Securities subject to purchased put option contracts and written call option contracts
Open-end mutual funds
External investment pools
Interest-earning investment contracts.
1Terms
defined in the glossary are printed in boldface type the first time they are used in this Statement.
37
5. This Statement does not apply to investments in equity securities that are accounted for under the equity method,
as provided for in APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, or to
investments in joint ventures or component units as provided in GASB Statement No. 14, The Financial Reporting
Entity. This Statement also does not apply to securities or other instruments if they are not held by the government
for investment purposes, either for itself or for parties for which it serves as investment manager or other fiduciary.
6. This Statement amends Statement 2 and GASB Statements No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, and No. 28, Accounting and
Financial Reporting for Securities Lending Transactions, by replacing the previously used term market value with the
term fair value. It further amends the Statement 3 glossary by adding the terms in this Statement’s glossary. This
Statement also amends the investment standards for public entity risk pools in paragraphs 40, 41, 44, 46, and 47 of
Statement 102 and, for governmental funds, supersedes paragraphs 64 through 67 of GASB Statement No. 11,
Measurement Focus and Basis of Accounting—Governmental Fund Operating Statements.
Accounting and Financial Reporting for Investments
Valuation
7. Except as provided in paragraphs 8, 9, 12, and 16 of this Statement, governmental entities, including governmental
external investment pools, should report investments at fair value in the balance sheet (or other statement of financial
position). Fair value is the amount at which an investment could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. If a quoted market price is available for an investment, the fair value
to be used in applying this Statement is the total of the number of trading units of the instrument times the market price
per unit. If an entity has purchased put option contracts or written call option contracts on securities and it has those
same securities among its investments, it should consider those contracts in determining the fair value of those
securities to the extent that it does not report those contracts at fair value.
8. Except for the provisions of paragraph 9, investments in participating interest-earning investment contracts should
be reported at fair value. Participating contracts are investments whose value is affected by market (interest rate)
changes. If these contracts are negotiable or transferable, or their redemption value considers market rates, they
should be considered participating. Nonparticipating contracts, such as nonnegotiable certificates of deposit with
redemption terms that do not consider market rates, should be reported using a cost-based measure, provided that
the fair value of those contracts is not significantly affected by the impairment of the credit standing of the issuer or
other factors.
9. Governmental entities other than external investment pools may report at amortized cost money market
investments and participating interest-earning investment contracts3 that have a remaining maturity at time of
purchase of one year or less,4 provided that the fair value of those investments is not significantly affected by the
impairment of the credit standing of the issuer or by other factors. Money market investments are short-term, highly
liquid debt instruments including commercial paper, banker’s acceptances, and U.S. Treasury and agency obligations.
Asset-backed securities, derivatives, and structured notes are not included in this term.
10. For investments in open-end mutual funds, fair value should be determined by the fund’s current share price.
2
All provisions of those paragraphs are amended, except the provisions in paragraph 46 that relate to foreign currency and futures contract hedges,
the accrual of losses on private-placement bonds, and the reporting of investment income as a component of other income; and the provision in
paragraph 47 that concerns impairment losses on investments that are measured using cost-based values.
3
When investments of internal and external pool participants are commingled, money market investments and participating interest-earning
investment contracts should be reported according to the provisions of paragraph 16.
4
For example, a five-year U.S. Treasury bond purchased nine months prior to maturity would meet this definition.
38
11. For investment positions in external investment pools that are not SEC-registered, whether or not sponsored by
a governmental entity,5 fair value should be determined by the fair value per share of the pool’s underlying portfolio,
unless the pool is a 2a7-like pool. Legally binding guarantees provided or obtained by the pool sponsor to support
share value should be considered in determining the fair value of the participants’ investments and should be
evaluated in light of the creditworthiness of the sponsor. If a governmental entity cannot obtain information from a pool
sponsor to allow it to determine the fair value of its investment, it should make its best estimate of the fair value of that
investment and make the disclosures required by paragraph 15e.
12. Investment positions in 2a7-like pools should be determined by the pool’s share price.
Recognition and Reporting
13. All investment income, including changes in the fair value of investments, should be recognized as revenue in the
operating statement (or other statement of activities).6 When identified separately as an element of investment
income, the change in the fair value of investments should be captioned net increase (decrease) in the fair value
of investments.7 Realized gains and losses should not be displayed separately from the net increase (decrease) in the
fair value of investments in the financial statements, except that realized gains and losses may be separately
displayed in the separate reports of governmental external investment pools. (See paragraph 17.)
14. The equity position of each fund or component unit in an internal investment pool should be reported as assets
in those funds and component units. Often, income from investments associated with one fund is assigned to another
fund because of legal or contractual provisions. In that situation, the accounting treatment should be based on the
specific language of the legal or contractual provisions.8 If, however, the investment income is assigned to another
fund for other than legal or contractual reasons—for example, management decision—the income should be
recognized in the fund that reports the investments. The transfer of that income to the recipient fund should be
reported as an operating transfer. Notwithstanding the foregoing provisions of this paragraph, public colleges and
universities that elect to follow the American Institute of Certified Public Accountants (AICPA) College Guide model
as permitted by GASB Statement 15 should follow the provisions of that model for assigning investment income,
including changes in the fair value of investments, to funds. Likewise, state and local governmental entities that apply
the provisions of GASB Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by
Governmental Entities, and that elect to follow the AICPA Not-for-Profit model should follow the provisions of that
model.
Disclosures
15. Governmental entities should make the following disclosures in the notes to the financial statements:
a. The methods and significant assumptions used to estimate the fair value of investments, if that fair value is based
on other than quoted market prices
b. The policy for determining which investments, if any, are reported at amortized cost
5
For example, bank short-term investment funds are nongovernmental pools that are not required to be SEC-registered.
6
GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund
Accounting, paragraph 6, provides that proprietary activities should apply all FASB Statements issued before November 30, 1989, unless those
pronouncements conflict with or contradict GASB pronouncements. Those pronouncements include FASB Statements No. 52, Foreign Currency
Translation, and No. 80, Accounting for Futures Contracts. This Statement does not change the applicability of either of those FASB pronouncements
to proprietary activities of government.
7
Likewise, consistent with reporting investments at their fair value, interest income should be reported at the stated interest rate; any premiums or
discounts on debt securities should not be amortized.
8
That is, if the legal or contractual provisions require a transfer of the investment income to another fund, the income should be reported in the fund
that is associated with the assets, with an operating transfer to the recipient fund. If, however, the legal or contractual provisions require that the
investment income be that of another fund, no transfer of resources should be reported. Instead, the amounts should be recognized as revenue in the
recipient fund.
39
c. For any investments in external investment pools that are not SEC-registered, a brief description of any regulatory
oversight for the pool and whether the fair value of the position in the pool is the same as the value of the pool
shares
d. Any involuntary participation in an external investment pool
e. If an entity cannot obtain information from a pool sponsor to allow it to determine the fair value of its investment
in the pool, the methods used and significant assumptions made in determining that fair value and the reasons for
having had to make such an estimate
f. Any income from investments associated with one fund that is assigned to another fund.
An entity may disclose realized gains and losses in the notes to the financial statements computed as the difference
between the proceeds of the sale and the original cost of the investments sold.9 External investment pools that elect
to report—and other entities that disclose—realized gains and losses should also disclose that:
a. The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of
investments.
b. Realized gains and losses on investments that had been held in more than one fiscal year and sold in the current
year were included as a change in the fair value of investments reported in the prior year(s) and the current year.
Additional Standards for External Investment Pools and for Individual Investment Accounts
16. The accounting and financial reporting standards in paragraphs 7, 8, and 10 through 15 apply to all investments
of governmental external investment pools, except that 2a7-like pools may report their investments at amortized cost.
All external investment pools may report short-term debt investments with remaining maturities of up to ninety days
at the date of the financial statements at amortized cost, provided that the fair value of those investments is not
significantly affected by the impairment of the credit standing of the issuer or by other factors. For an investment that
was originally purchased with a longer maturity, the investment’s fair value on the day it becomes a short-term
investment should be the basis for purposes of applying amortized cost.
Pool Reporting
17. Separate or stand-alone annual financial reports for governmental external investment pools should include a
statement of net assets and a statement of changes in net assets prepared on the economic resources measurement
focus and the accrual basis of accounting. A statement of cash flows is not required to be presented. All applicable
GASB pronouncements should be applied in those reports. In addition, the financial reports of governmental external
investment pools should disclose:
a. A brief description of any regulatory oversight (including whether the pool is registered with the SEC as an
investment company)
b. The frequency of determining the fair value of investments
c. The method used to determine participants’ shares sold and redeemed and whether that method differs from the
method used to report investments
d. Whether the pool sponsor has provided or obtained any legally binding guarantees during the period to support the
value of shares
e. The extent of involuntary participation in the pool, if any10
f. A summary of the fair value, the carrying amount (if different from fair value), the number of shares or the principal
amount, ranges of interest rates, and maturity dates of each major investment classification.
9The disclosure of default losses and recoveries on reverse repurchase agreements and securities lending transactions, as provided by paragraph 80
of Statement 3 and paragraph 15 of Statement 28, respectively, does not constitute a reporting of realized losses that under the provisions of this
Statement would require reporting of all realized gains and losses for the year.
10
Involuntary participants are those that are required by legal provisions to invest in the external investment pool.
40
Further, if the financial report distinguishes among different components of investment income (for example, interest,
dividend, and other income versus the net increase or decrease in the fair value of investments), the pool should
disclose the accounting policy for defining each of the components it reports.
Reporting by Sponsoring Governments
External investment pools
18. In addition to the separate investment pool reports required by paragraph 17, a governmental entity that sponsors
one or more external investment pools (sponsoring government) should report the external portion of each pool as
a separate investment trust fund (a fiduciary fund) that reports transactions and balances using the economic
resources measurement focus and the accrual basis of accounting. (The external portion of an external investment
pool is the portion that belongs to legally separate entities that are not part of the sponsoring government’s financial
reporting entity. The internal portion of each external investment pool is the portion that belongs to the primary
government and its component units and should be reported as provided in paragraph 14 for the equity in internal
investment pools.) In its financial statements, the sponsoring government should present for each investment trust
fund a statement of net assets and a statement of changes in net assets. The difference between the external pool
assets and liabilities should be captioned net assets held in trust for pool participants. In the combined financial
statements, investment trust funds should be presented in the balance sheet with trust and agency funds. A separate
statement of changes in net assets should be presented for the combined investment trust funds, although that
statement may be presented with similar trust funds, such as pension trust funds.
19. If an external investment pool issues a separate report, the annual financial report of the sponsoring government
should describe in the notes to the financial statements how to obtain that report. If an external investment pool does
not issue such a report, the annual financial report of the sponsoring government should include the following in the
notes to the financial statements for each pool:
a. The additional disclosures required in paragraph 17.
b. The disclosures required by Statements 3 and 28 and other cash and investment standards.
c. Condensed statements of net assets and changes in net assets. If a pool includes both internal and external
investors, those condensed financial statements should include, in total, the net assets held in trust for all pool
participants, and the equity of participants should distinguish between internal and external portions.
Individual investment accounts
20. Governmental entities that provide individual investment accounts to other, legally separate entities that are
not part of the same financial reporting entity should report those investments in one or more separate investment
trust funds, using the guidance of paragraph 18 of this Statement.11 The requirements of paragraphs 17 and 19 do
not apply to those funds.
Effective Date and Transition
21. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 1997.
Earlier application is encouraged. Accounting changes adopted to conform to the provisions of this Statement should
be applied retroactively, if practical, by restating financial statements for all prior periods presented. If restatement of
financial statements for prior periods presented is not practical, the cumulative effect of applying this Statement, if any,
11
If individual accounts are offered as an alternative to a pooled position, the individual accounts should be reported in a different investment trust from
the pool.
41
should be reported as a restatement of beginning fund balance or retained earnings, as appropriate, for the earliest
period restated. In the period this Statement is first applied, the financial statements should disclose the nature of any
restatement and its effect. Also, the reason that it was not practical to restate prior periods presented should be
explained.
The provisions of this Statement need
not be applied to immaterial items.
42
Appendix 3
ILLUSTRATION OF FAIR VALUE ACCOUNTING FOR INVESTMENTS FROM STATEMENT 31
This appendix illustrates how to calculate, display, and disclose the increase or decrease in the fair value of
investments as required by Statement 31. The facts assumed in this example are illustrative only and are not intended
to modify or limit the requirements of the Statement or to indicate the GASB’s endorsement of the situations or specific
methods illustrated. Application of the provisions of the Statement may require calculations other than those illustrated
here.
Year 1
Fair Value Analysis of Investment Activity—Specific Identification Method
Fair Value
A
Security
Cost
1
2
3
4
$100
520
200
330
B
C
D
E
F
Change in
Fair Value†
$ 20
(30)
10
(15)
$(15)
Beginning
Fair Value
1/1/X1
Purchases
Sales
Subtotal*
Ending
Fair Value
12/31/X1
$100
540
240
—
$880
—
—
—
$330
$330
—
—
$250
—
$250
$100
540
(10)
330
$960
$120
510
0
315
$945
*Column D = Columns A + B – Column C.
†
Column F = Column E – Column D.
Calculation of the Net Increase in the Fair Value of Investments—Aggregate Method
Fair value at December 31, 19X1
Add: Proceeds of investments sold in 19X1
Less: Cost of investments purchased in 19X1
Less: Fair value at December 31, 19X0
Change in fair value of investments
$ 945
250
(330)
(880)
$ (15)
43
Year 2
Fair Value Analysis of Investment Activity—Specific Identification Method
Fair Value
A
Security
Cost
1
2
4
5
$100
520
330
310
B
C
D
E
F
Change in
Fair Value†
$(10)
40
15
(10)
$ 35
Beginning
Fair Value
1/1/X2
Purchases
Sales
Subtotal*
Ending
Fair Value
12/31/X2
$120
510
315
—
$945
—
—
—
$310
$310
$110
—
330
—
$440
$ 10
510
(15)
310
$815
$ 0
550
0
300
$850
*Column D = Columns A + B – Column C.
†Column
F = Column E – Column D.
Calculation of the Net Increase in the Fair Value of Investments during 19X2—Aggregate Method
Fair value at December 31, 19X2
Add: Proceeds of investments sold in 19X2
Less: Cost of investments purchased in 19X2
Less: Fair value at December 31, 19X1
Change in fair value of investments during 19X2
$ 850
440
(310)
(945)
$ 35
Cost-Based Analysis of Investment Activity*
Security
Beginning
of Year
Purchases
Sales
End of
Year
1
2
4
5
Total
$100
520
330
—
$950
—
—
—
$310
$310
$100
—
330
—
$430
$ 0
520
0
310
$830
*Only information for 19X2 is presented.
44
Calculation of Realized Gain, during 19X2
†Note
Security
Cost
Sale Price
Gain†
1
4
Total
$100
330
$430
$110
330
$440
$10
0
$10
that realized gain is the difference between an investment’s sales price and its acquisition cost.
Calculation of the Unrealized Gain as of December 31, 19X2
Security
Cost
Fair Value
Gain
2
5
Total
$520
310
$830
$550
300
$850
$ 30
(10)
$ 20
Optional Display and Disclosure Illustrations
This Statement permits the optional disclosure of realized gains and losses in the notes to the financial statements
(paragraph 15). The following limited illustration depicts one method of note disclosure. If realized gains and losses
are disclosed, many entities will find that the calculation of those gains and losses will require transaction accounting
that includes cost-based and fair value information.
Optional Partial Operating Statement Display in a Governmental Fund (19X2)
Investment income
Interest
Dividends
Net increase in the fair value of investments
Total investment income
$XXX
XXX
35
XXX
Optional Note Disclosure (19X2)
Note X: Deposits and Investments
During 19X2, the entity realized a net gain of $10 from the sale of investments. The calculation of realized gains is
independent of the calculation of the net increase in the fair value of investments. Realized gains and losses on
investments that had been held in more than one fiscal year and sold in the current year may have been recognized
as an increase or decrease in the fair value of investments reported in the prior year. The net increase in the fair value
of investments during 19X2 was $35. This amount takes into account all changes in fair value (including purchases
and sales) that occurred during the year. The unrealized gain on investments held at year-end was $20.
45
Appendix 4
ILLUSTRATIVE GOVERNMENTAL EXTERNAL INVESTMENT POOL FINANCIAL STATEMENTS
This appendix illustrates various formats and financial statements for governmental external investment pools. The
presentations are illustrative only and are not intended to modify or limit the requirements of Statement 31, or to
indicate an endorsement of the presentations illustrated. Application of the provisions of the Statement may require
presentations other than those illustrated here. For example, a separate statement of operations is not required.
Illustrations were derived from industry practice and the AICPA Industry Audit Guide, Audits of Investment Companies.
Illustration 1: 2a7-like Pool
This illustration depicts an external investment pool that has a policy that it will, and does, operate in a manner
consistent with the SEC’s Rule 2a7 of the Investment Company Act of 1940. Investments and share prices are
reported using amortized cost accounting measures.
Statement of Operations*
Year Ended July 31, 20X1
(in thousands)
Investment income
Expenses:
Administration fee
Management fee
Custodian and transfer agent fees and related expenses
Registration costs
Reports to shareholders
Trustees’ fees and other
Total expenses
Net investment income
$192,368
15,139
6,500
10,751
60
153
58
32,661
$159,707
Statement of Changes in Net Assets
Year Ended July 31, 20X1
(in thousands)
Operations
Net investment income
Dividends to shareholders from net investment income
Capital share transactions (dollar amounts and number of shares are the same)
Shares sold
Less shares redeemed
Increase (decrease) from capital share transactions and total increase (decrease)
in net assets
Net assets
Beginning of year
End of year
*A separate statement of operations is not required and can be combined with the statement of changes in net assets.
47
$
159,707
(159,707)
12,387,551
12,190,770
196,781
3,719,927
$ 3,916,708
Statement of Net Assets
Year Ended July 31, 20X1
(in thousands)
Assets
Investments, at amortized cost
Short-term securities
Repurchase agreements
Cash
Receivable for
Interest
Shares of the portfolio sold
Total assets
Liabilities and net assets
Payable for
Dividends
Shares of the portfolio redeemed
Administration fee
Management fee
Custodian and transfer agent fees and related expenses
Other
Total liabilities
Net assets available to participants
The pricing of shares
Shares outstanding (unlimited shares authorized)
Net asset value, offering and redemption price per share
$3,906,957
8,000
8,792
4,533
164
3,928,446
5,133
3,428
1,252
539
825
561
11,738
$3,916,708
$3,916,708
$1.00
Illustration 2: Fair Value Investment Pool—Fair Value Increases and Decreases; No Display of
Realized Gains and Losses
This illustration depicts an external investment pool that presents fair value increases and decreases with no display
of realized gains and losses.
Statement of Net Assets
Year Ended June 30, 20X1
(in thousands)
Assets
Investment in securities, at fair value
Cash
Accrued interest and other receivables
Total assets
$1,489,044
1,000
5,854
1,495,898
Liabilities
Distributions payable
Accrued expenses
Total liabilities
8,605
62
8,667
Net assets
Net assets consist of:
Participant units outstanding ($1.00 par)
Net assets
Participant net asset value, offering price and redemption
Price per share ($1,487,231 ÷ 1,487,231 units)
48
$1,487,231
$1,487,231
$1,487,231
$1.00
Statement of Operations*
Year Ended June 30, 20X1
(in thousands)
Revenues
Interest income
Fair value increases and decreases
Total revenues
Expenses
Operating expenses
Interest on reverse repurchase agreements
Total expenses
Net investment income
$101,555
326
101,881
479
432
911
$100,970
Statement of Changes in Net Assets
Year Ended June 30, 20X1
(in thousands)
20X1
Net increase in net assets resulting from operations
Distributions to participants
Distributions paid and payable
Share transactions at net asset value of $1.00 per share
Purchase of units
Redemptions of units
Net decrease in net assets and shares resulting from
share transactions
Total decrease in net assets
Net assets
Beginning of period
End of period
$
100,970
(99,608)
9,259,740
(9,461,693)
(201,953)
(200,591)
1,687,822
$ 1,487,231
*A separate statement of operations is not required and can be combined with the statement of changes in net assets.
49
Illustration 3: Fair Value External Investment Pool—Fair Value Increases and Decreases; Display of
Realized Gains and Losses
Statement of Net Assets
Year Ended December 31, 20X1
This illustration depicts an external investment pool that presents fair value increases and decreases. The
presentation also includes realized gains and losses.
Assets
Investments in securities
U.S. government obligations
U.S. Treasury
Other long-term obligations
Total U.S. government obligations (cost $13,490,000)
Short-term notes
Commercial Paper, Inc.
U.S. Treasury bills
Total short-term notes
Repurchase agreement collateralized by U.S. government obligations—
Money Center Bank of Large City
Total investments in securities (cost $19,294,000)
Other assets
Total assets
Liabilities
Demand loans payable to bank
Securities sold short
Other liabilities
Total liabilities
Net assets
Net assets (equivalent to $4.47 per share based on 4,216,000 shares
outstanding)
Principal
Amount
Fair
Value
$10,500,000
3,000,000
$10,490,000
2,985,000
13,475,000
2,645,000
3,100,000
2,646,000
3,100,000
5,746,000
2,500,000
2,500,000
21,721,000
1,904,000
23,625,000
2,000,000
1,673,000
1,090,000
4,763,000
$18,862,000
Statement of Operations*
Year Ended December 31, 20X1
Investment income
Interest income
Net realized gains on investments
Net decrease in fair value of investments
Total investment income
Expenses
Investment advisory fee
Interest
Professional fees
Custodian fees
Trustees’ fees
Total expenses
Net increase in net assets resulting from operations
*A separate statement of operations is not required and can be combined with the statement of changes in net assets.
50
$ 1,001,000
1,089,000
(1,649,000)
441,000
$
90,000
64,000
29,000
16,000
27,000
226,000
215,000
Statement of Changes in Net Assets
Years Ended December 31, 20X1 and 20X0
20X1
Net increase in net assets resulting from operations
Distributions to shareholders from:
Investment income—net
Net realized gain on investments
Capital share transactions
Total increase
Net assets
Beginning of year
End of year (including undistributed investment income of $639,000 and
$380,000, respectively)
51
$
215,000
20X0
$ 3,043,000
(516,000)
(1,350,000)
2,721,000
1,070,000
(344,000)
(1,066,000)
1,749,000
3,382,000
17,792,000
14,410,000
$18,862,000
$17,792,000
TOPICAL INDEX*
Accounting Principles Board Opinion No. 18: 5, 36,
App. 2
Assignment of interest: 17, 75, 77, 82, 92, App. 2
Available-for-sale securities: 14, 121
Accretion: 34
Bank investment contracts: 43
Accrued interest: 35, 115
Below-market interest rates: 21, 42
Agency funds: 94, App. 2
Bid prices: 28
American Institute of Certified Public Accountants
(AICPA)
Industry Audit Guides
Audits of Colleges and Universities: 17, 94
Audits of Investment Companies: 27, 36, 105,
App. 4
Audits of State and Local Governmental Units: 30,
36, 51
Audits of Voluntary Health and Welfare
Organizations: 16
Statement of Position 78-10: 16
Black–Scholes option-pricing model: 33
Bond covenants: 20
Bond indenture: 78
Call feature: 49
Call options. See Options
Carrying amount: 60, 86, 108, App. 2
Amortization: 34, 53
Of discounts: 34, 39, 41, 116
Of premiums: 39
Cash equivalents: 73
Changes in net assets: 109, 111, App. 2
Amortized costs: 3, 38–41, 84, 102, App. 2, App. 4
Bond covenants: 20
Callable bonds: 49
Custodial credit risks: 86
Derivatives: 48
Disclosures: 81, 84
Governmental external investment pools:
100–101, 115–116
Non-interest-bearing investments: 34
One-year option: 29
Pension plans: 10
Transition: 120, 122
2a7-like pools: 98
Colleges and universities: 17, 94, App. 2
Commercial paper: 31, 34, 47, App. 2
Common stock: 36
Component units: 3, 21, 73, 88, 90, 92, 109, 117,
App. 2
Contingencies: 85
Contractors’ deposits: 2–3, 11
Annuity contracts: 43
Cost-based measure: 10, 30, 32, 39–40, 45–46, 48,
97, 100, App. 2
Ask prices: 28
Credit quality grade: 31
Asset-backed securities: 47, App. 2
Credit risk: 85
*Unless otherwise noted, the topics in this index are referenced to questions and answers.
53
Custodial credit risk: 86–87
Foreign currency transactions: 48
Debt securities: 1–3, 7, 9, 18, 25, 36, 48, 81, 100,
App. 2
Forward contracts: 48
Foundations: 93
Decrease in the fair value of investments: 59, App. 3
Fundamental analysis: 33, 79
Defeasance: 3, 6
Fund balance designations: 65
Deficit cash positions: 76
Fund balances: 65, 77, 110, 120
Deferred compensation plans. See Internal Revenue
Code, Section 457 deferred compensation plans
Futures: 48, App. 2
Gains and losses
Realized: 18, 39, 65, 69, 83–84, 105, 115–116,
App. 2–4
Unrealized: 14, 18, 30, 65, 116, 121
Defined benefit pension plans. See Pension plans
Demand accounts: 92
Derivatives: 47–48, 50, 79, 85, App. 2
Governmental Accounting Standards Board (GASB)
Codification of Governmental Accounting and
Financial Reporting Standards, Section I50: 87
Interpretation No. 3: 103
Statements
No. 2: 9, App. 2
No. 3: 86–87, 103, 111, App. 2
No. 7: 6
No. 10: 18, 96, App. 2
No. 11: App. 2
No. 14: 5, 95, App. 2
No. 15: 17, App. 2
No. 20: 48
No. 23: 6
No. 25: 1, 4, 8, 48, 66, 69–70
No. 26: 48
No. 27: 48
No. 28: 103, 111, App. 2
No. 29: 16, App. 2
No. 31
Footnote 3: 102
Paragraph 2: 48
Paragraph 3: 23
Paragraph 5: 5, 11, 15
Paragraph 7: 22, 26–27, 64, App. 2
Paragraph 8: 10, 45, App. 2
Paragraph 9: 10, 29, 40, 48, App. 2
Paragraph 10: 62, App. 2
Disclosure: 78–80, 82–87, 107–108, 111, 116, 118,
App. 2–3
Discounted cash flows: 42
Discount rate: 33, 79
Dividends: 63, 70
Equity method: 3, 5, 36, App. 2
Equity securities: 1–3, 5, 9, 23–24, 36, 48, 63, 97,
App. 2
External investment pools. See Pools
Fiduciary: 11–13, 109, App. 2
Financial Accounting Standards Board (FASB)
Statements
No. 52: 48, App. 2
No. 71: 15
No. 80: 48, App. 2
No. 115: 14, 121
No. 124: 16
Forced or liquidation sale: 22, 26, App. 2
54
Interest income: 34, 76, 92, 116
Paragraph 11: App. 2
Paragraph 12: App. 2
Paragraph 13: 39, 71, 84, App. 2
Paragraph 14: 16–17, 73, 76, App. 2
Paragraph 15: 78–79, 83–84, 92, App. 2–3
Paragraph 16: 48, 102, App. 2
Paragraph 17: 103, 108, 111, App. 2
Paragraph 18: 109, App. 2
Paragraph 19: 87, 111, App. 2
Paragraph 20: 66, 117
Paragraph 21: 120
Paragraph 40: 2
Paragraph 41: 50
Paragraph 43: 45
Paragraph 63: 105
Paragraph 71: 58
Paragraph 76: 30
No. 32: 4, 9, 48
Technical Bulletins
No. 87-1: 103
No. 94-1: 48, 85, 103
No. 97-1: 103
Interest payment dates: 35
Interest rate: 33, 42, 44, 48, 79, 85, App. 2
Internal investment pools. See Pools
Internal Revenue Code, Section 457 Deferred
Compensation Plans: 3–4, 9, 36, 48, 51, 97, App. 2
Investment income: 39, 59, 67–68, 70–71, 75–77,
114–115, App. 2–4
Investment pools. See Pools
Investment trust fund: 90, 109, 112, 117, 119, App. 2
Involuntary participation: 78, App. 2
Joint ventures: 3, 5, 95, App. 2
Legally binding guarantees: 58
Hedging: 48
Liquidation sale: App. 2
Held-to-maturity: 14
Mark-to-market: 37, 107
Impairment: 4, 10, 29–31, 36, 45, 102, App. 2
Matrix pricing: 33, 79
Increase in the fair value of investments: 59, App. 3
Money market funds: 98–99
Individual investment accounts: 94, 112, 117, 119
Money market investments: 25, 32, 40–41, 47, App. 2
Callable notes or bonds: 49
Defined benefit pension plans: 10
Disclosure: 81
Investment pools: 102
One-year option: 29
Transition: 122
Industrial revenue bond: 42
Insurance companies: 43
Interest-earning investment contracts: 1, 9–10, 43, 48
Certificates of deposit: 43–44, App. 2
Guaranteed investment contracts: 43–44
Nonparticipating interest-earning investment
contracts: 10, 32, 44–46, 100, App. 2
Participating interest-earning investment contracts:
10, 29, 32, 40, 44, 48, 102, App. 2
Repurchase agreements: 43, 46, 86, App. 4
Mortgage-backed securities: 7, 48
Mortgages: 7, 43
55
Disclosure: 78
Pension plans: 8
Governmental external investment pools: 1, 3–4,
29, 36, 40, 48, 51, 59–61, 69–70, 81, 87, 90,
100–108, 110–111, 113, 115, 117, App. 2, App. 4
Internal investment pools: 32, 73, 76, 88, App. 2
Investment pools: 37, 85, 90, 109, 112, App. 2
Mixed pools: 111
Net assets held in trust for pool participants: 110,
App. 2
Net asset value: 59, 98, 115, App. 4
Participants: 57, 59, 107, 110–111, 114, App. 2
Risk pools: 18, 96, App. 2
Share price: 55, 57–59, 61–62, 113–114, App. 2,
App. 4
Share value: 55, 58, 116, App. 2
Sponsors: 56, 58–60, 78, 87–88, 90, 106,
109–111, 113–115, 117, App. 2
2a7-like: 3, 36–37, 55–60, 98–100, 108, App. 2
Derivatives: 48
Pool management: 113–115
Venture capital limited partnerships: 97
Mutual funds: 85
Closed-end: 1, 3, App. 2
Open-end: 1, 9, 61–62, 89, 114, App. 2
National Association of Securities Dealers Automated
Quotation (NASDAQ): 23
National Association of Securities Dealers’ National
Market System: 24
National Council on Governmental Accounting
Statement 1: 65
National Quotation Bureau: 23, App. 2
Negative designations: 65
Negative investment income: 71
Negative revenue: 71
Net asset value. See Pools
Office of the Comptroller of the Currency (OCC): 57
Preferred stocks: 18
One-year option: 29
Present value: 33, 52, 79
Option-pricing models: 33, 79
Principal-only obligations: 48
Options: 1, 3, 9, 23–24, 36, 48, 50, App. 2
Call: 1, 64, App. 2
Embedded: 49
Put: 1, 64, App. 2
Written: 50
Proprietary funds: 14, 48, 68, 104, 120
Put options. See Options
Quoted market prices: 33, 80, App. 2
Participants’ share: 111, 116, App. 2
Ratings downgrade: 31
Pension plans: 1, 3–4, 8–10, 29, 36, 40, 48, 70, 97,
App. 2
Readily determinable: 1, 3, 9, 23, 25, 36, 48, 97,
App. 2
Pension trust funds: 109, App. 2
Real estate: 3, 7, 51–53
Pools
Distributions: 114, 116
External investment pools: 1, 88–89, 91–99,
112–113, 115, 122, App. 2
Deferred compensation plans: 9
Receivables: 3, 91
Loans: 3, 7
Regulated governmental entity: 15
56
Regulatory oversight: 107, App. 2
Statement of changes in net assets: 109, App. 2,
App. 4
Reporting entity: 88, 93, 119, App. 2
Statement of financial position: 110
Repurchase agreements: App. 2
Statement of net assets: 90, 109, 111, 116, App. 2,
App. 4
Reserve funds: 19, 20
Restatement of financial statements: 120
Statement of operations: 39, 48, 59, 67–68, 70–71,
74, 120–121, App. 4
Restricted assets: 19
Statement of Position (SOP) 78-10: 40
Restricted stock: 3, App. 2
Stock rights: 1, 3, 9, 23–24, 36, 48, App. 2
Retainage: 12
Stock warrants: 1, 3, 9, 23–24, 36, 48, App. 2
Retained earnings: 120–121
Structured notes: 47, 49, App. 2
Small business investment companies: 36
Swap: 48, 50
Securities and Exchange Commission (SEC): 23, 61,
98–99, App. 2, App. 4
Codification of Financial Reporting Policies: 36–37,
56–57, 89, App. 2
Thinly traded securities: 33
Trade date: 66
Seized debt securities: 3
Transition: 120
Settlement date: 66
Treasury bills: 34, App. 4
Share price. See Pools
Trust fund classification: 94
Shares: 58–59, 61, 113, App. 2, App. 4
Trust funds: 48, 109, App. 2
Short sales: 3, 54
Unit investment trusts: 1, 3, App. 2
Short-term debt investments: 101–102, App. 2
Venture capital investment companies: 36
Sinking funds: 19
Venture capital limited partnerships: 4, 97
Special purpose governments: 90, 92, 119, App. 2
Workers’ compensation deposits: 11
Start-up companies: 97
57