In a press release Wednesday, GASB said the new guidance, Disclosure Requirements for Derivatives Not Reported at Fair Value on the Statement of Net Assets, is designed to increase the public's understanding of the significance of derivatives to a government's financial position, and will better inform governments of the risks assumed in derivative contracts.

Derivatives are often used by governments as a means to potentially reduce borrowing costs. While derivatives may support financing needs, the lower costs come with additional risks, said GASB. The objectives and terms of derivative contracts, their risks and the fair value of the contracts are generally not specified in financial reports today. 

"Even estimating the notional amounts of outstanding derivatives in this market is difficult based on information that we have today," said GASB project manager Randal J. Finden. "Estimates of notional value range from $200 billion to $400 billion. Under the new guidance issued today by the GASB, state and local governments will now be required to disclose this information."

Finden added that it is often difficult to understand how governments have been accounting for derivatives, and that the new disclosures are designed to remove the mystery that surrounds these transactions.

"We will be able to see what a government has done, why it was done, the fair value of the derivative and the risks they have assumed," he said. "Governments will be required to disclose in their financial statements information about risks that relate to credit, interest rates, basis, termination dates, rollovers and market access."

The new standards will be effective for periods ending after June 15, 2003.