A GFOA advisory identifies specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.
Presenting Securities Lending Transactions in Financial Statements (1998) (CAAFR)
Background. Managers of government portfolios often enter into securities lending transactions as a way of increasing earnings on their investments. In securities lending transactions, entities transfer (loan) their securities to broker-dealers and other entities in exchange for collateral -- which may be cash, securities, or letters of credit – and simultaneously agree to return the collateral for the same securities in the future. Income is generated when the government "lender" invests the cash received as collateral and the returns on the invested collateral exceed the "rebate" due to the borrowers of the securities. When securities or letters of credit are the collateral, the borrower typically will pay the lender a loan premium or fee for the securities loan.
The authoritative accounting and financial reporting guidance for securities lending transactions is found in the Governmental Accounting Standards Board’s (GASB) Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions. GASB Statement No. 28 requires that government-lenders report an asset and a liability in connection with securities lending transactions when these transactions are collateralized with cash or with securities that may be pledged or sold without a default by the broker-dealer.
Recommendation. The Government Finance Officers Association (GFOA) believes that assets, liabilities, income and expenses related to securities lending transactions should be reported in the financial statements in the manner that best reflects the true nature of these transactions, consistent with the provisions of GASB Statement No. 28. Specifically, the GFOA recommends the following presentation of securities lending transactions on the statement of position and the statement of activities:
- Cash received as collateral in connection with securities lending transactions should be reported separately from other cash and short-term investments. This treatment avoids creating the potentially misleading impression that a significant percentage of a portfolio’s total assets may not be fully invested.
- Securities lending income and related expenses (i.e., borrower rebates and management fees) should be reported together rather than divided between investment income and investment expense. For pension plans, income and expenses related to securities lending activities should be reported as a separate component of total net investment income, immediately following net income from all other types of investing activities on the statement of changes in plan net assets. An illustration of this approach for pension plans can be found in Exhibit 1, which accompanies this best practice.
- Governmental Accounting, Auditing and Financial Reporting (GAAFR), Stephen J. Gauthier, GFOA.
Approved by the GFOA’s Executive Board, 1998.
Exhibit 1 - Alternative Presentation of Statement of Changes in Plan Net Assets
XYZ Retirement System
Statement of Changes in Plan Net Assets
Year Ended June 30, 20XX
|Additions || |
|Contributions: || |
|State contributions ||137,555,388 |
|Member purchase of service credit ||726,527 |
|State reimbursement of non-funded Benefits ||9,907,505 |
|Employer contributions service transfers ||135,598 |
|Total contributions ||148,325,018 |
|Investment income: || |
|From investment activities || |
|Net appreciation in fair value of investments ||333,040,768 |
|Interest ||67,808,592 |
|Dividends ||44,711,334 |
|Real estate operating income, net ||4,605,881 |
|Venture capital income ||9,045,261 |
| ||459,211,836 |
|Investment activity expenses: || |
|Investment management fees ||(4,518,692) |
|Investment consulting fees ||(150,000) |
|Investment custodial fees ||(441,889) |
|Total investment expenses ||(5,110,581) |
|Net income from investing activities ||454,101,255 |
|From securities lending activities || |
|Securities lending income ||10,047,888 |
|Securities lending expenses: || |
|Borrower rebates || (8,672,110) |
|Management fees ||(399,472) |
|Total securities lending activities expenses ||(9,071,582) |
|Net Income from securities lending activities ||976,306 |
|Total net investment income ||455,077,561 |
|Miscellaneous income ||9,152 |
|Total additions ||603,411,731 |
|Deductions || |
|Benefits ||126,168,796 |
|Service transfer payments ||30,327 |
|Administrative expense ||3,229,541 |
|Legal settlement expense ||23,148,000 |
|Total deductions ||152,576,664 |
|Net increase ||450,835,067 |
|Beginning of year ||2,794,632,453 |
|End of year ||$ 3,245,467,520 |