GASB 40 Implementation Audit Issues

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

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

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

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

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

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

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

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

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

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