Real Effects of Governmental Accounting Standards: Evidence from GASB Statement No. 53 - Accounting and Financial Reporting for Derivative Instruments

40 Pages Posted: 24 Oct 2020

See all articles by Saleha Khumawala

Saleha Khumawala

University of Houston - C.T. Bauer College of Business

Tharindra Ranasinghe

American University

Claire J. Yan

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: September 5, 2020

Abstract

GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, (GASB 53) significantly altered U.S. governmental sector accounting of derivative instruments by mandating the recognition of hitherto off-balance sheet derivative instruments in the government-wide statement of net assets and requiring that ineffective hedges be clearly identified. These requirements have an unfavorable financial statement impact for municipalities with net negative fair value derivative positions and municipalities holding ineffective hedges. Using a hand-collected, comprehensive dataset of municipal derivatives, we examine whether the level of U.S. municipal derivative holdings changed following the adoption of GASB 53. Consistent with GASB 53 affecting municipal officials’ derivative decisions, we find a significant post-GASB 53 reduction in derivative holdings for municipalities with net negative fair value derivative positions and ineffective hedges. Our findings suggest that governmental accounting regulations could affect real decisions of municipal officials and therefore could potentially have public policy implications beyond the provision of information to stakeholders.

Keywords: Governmental Accounting, GASB 53, Derivatives, Hedging, Real Effects of Financial Accounting

JEL Classification: G32, G38, H70, M41, M48

Suggested Citation

Khumawala, Saleha and Ranasinghe, Tharindra and Yan, Claire J., Real Effects of Governmental Accounting Standards: Evidence from GASB Statement No. 53 - Accounting and Financial Reporting for Derivative Instruments (September 5, 2020). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3687108 or http://dx.doi.org/10.2139/ssrn.3687108

Saleha Khumawala

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Tharindra Ranasinghe (Contact Author)

American University ( email )

United States

Claire J. Yan

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

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