Presenting Securities Lending Transactions in Financial Statements

Type: 
Advisory
Approved by GFOA's Executive Board: 
January 1998
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: 

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:

  1. 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.
  2. 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.
Committee: 
Accounting, Auditing, and Financial Reporting
Notes: 

Exhibit 1 - Alternative Presentation of Statement of Changes in Plan Net Assets

XYZ Retirement System
Statement of Changes
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