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Accounting for Investments

References

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 14, Accounting and Financial Reporting For Certain Investments and For External Investment Pools. Canada: Harcourt Brace & Company, 1998

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 15, Deposit and Investment Portfolio Disclosures and Reverse Repurchase Agreements. Orlando, FL: Harcourt Brace & Company, 1998

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 20, Risk Financing and Related Insurance Issues. Orlando, FL:
Harcourt Brace & Company, 1998

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 24, Capital Projects Funds. Orlando, FL: Harcourt Brace & Company, 1998

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 25, Debt Service Fund. Orlando, FL: Harcourt Brace & Company, 1998

Miller Governmental Generally Accepted Accounting Principles Guide
Chapter 27, Fiduciary Funds. Orlando, FL: Harcourt Brace & Company, 1998

Governmental Accounting and Financial Reporting Standards
Section 150, Investments. Norwalk, CT: Governmental Accounting Standards Board, 1998

Governmental and NonProfit Accounting, Fifth Edition
Chapter 7, Capital Projects Funds Upper Saddle River, NJ: Prentice Hall, 1996

Governmental and NonProfit Accounting, Fifth Edition
Chapter 11, Trust and Agency (Fiduciary) Funds. Upper Saddle River, NJ: Prentice Hall, 1996

Governmental and NonProfit Accounting, Fifth Edition
Chapter 12, Internal Service Funds. Upper Saddle River, NJ: Prentice Hall, 1996

Texas Education Agency. The Texas School Law Bulletin, Government Code. Austin, Texas: West Publishing Company, 2000

Texas Education Agency. Financial Accountability System Resource Guide
Financial Accounting & Reporting Module: Austin, Texas: Texas Education Agency, 1999

Symbro, Inc. Investment Reporting Under GASB 31. Emeryville, CA:
Sympro, Inc, 1997

EXHIBITS
Exhibit 1-Accounting for Short-Term Investments
Reported at Amortized Cost
Exhibit 2 — Accounting for Investments Reported at Fair Value
Market Changes in Investments
Exhibit 3 — Accounting for Repurchase and Reverse Repurchase
Investments
Exhibit 4 — Accounting for Restricted Assets
9.1 Introduction
Districts frequently have cash available for short-, intermediate-, and long-term investment. For example the following funds often have cash available for investing:
  • The general fund may have cash available for a short period of time pending disbursement for operating needs.
  • A capital projects fund or the debt service fund may have cash received from the proceeds of bonds or certificates of indebtedness that are not immediately needed for the purposes for which they were issued.
  • A fiduciary fund may have cash available for long-term investment.

A district’s investment policy establishes the primary investment strategies that are tailored to address the specific characteristics of the fund groups represented in the investment portfolio. Operating funds, (including general, scholarship, special project, and special revenue funds) need to be in investments that ensure anticipated cash flows are matched with adequate investment liquidity. Debt service funds, non-operating funds, need to be in investments that ensure investment liquidity adequate to cover debt service obligations on the required payment date. Capital project investments, non-operating funds, need to generate a dependable revenue stream from securities with a low degree of volatility and still meet the liquidity requirements of capital projects. Trust funds, including scholarship funds, require investment liquidity that matches the timing of annual scholarship awards.

The investments outlined in this summary are allowable investments according to the Public Funds Investment Act. Any restrictions made by grantors or donors regarding trust and agency funds, as well as any restrictions regarding how bond proceeds may be invested must be considered. The district should endeavor to match investments with its cash flows requirements. Ideally districts should develop weekly, monthly, and annual cash flow forecasts by account using a computer-based program. Some depository banks provide computer-based programs that allow the district to view and download current and historical details of cash transactions including deposits, disbursements, ledger balances, collected balances, and float. These computer-based programs allow the district to download data directly into a spreadsheet to use for forecasting, projecting, and trend analysis.

School districts should record interest income using the modified accrual basis of accounting (revenues recognized in the accounting period in which they become available and measurable) for government type funds and expendable trust funds. Districts should record interest income using the full accrual basis of accounting (revenues recognized in the accounting period in which they are earned and become measurable) for proprietary funds and non-expendable trust funds. Interest income is usually recorded when received; however, necessary journal entries are made at the end of the fiscal year, or may be made on the district’s books at more regular intervals, perhaps monthly, to accrue for interest income receivable.

If the district has an internal investment pool, investments must be allocated to the various funds based on the equity interest that each fund holds in the pool. Investment income and losses that the pool incurs must also be allocated to the participating funds based on their respective equity interests (average participation in the pool). The basis of allocation of interest needs to be disclosed in the notes to the financial statements.

Please refer to the Financial Accounting and Reporting module of the Texas Education Agency’s Resource Guide for a discussion of Cash and Investments, Types of Investments (including a discussion of derivative investments) and Financial Statement Presentation and Disclosures.

9.2 Common Investments Purchased by School Districts
The following reporting requirements for investments are in accordance with Governmental Accounting Standards Board [GASB] 31.

9.2.1 Short-term Money Market Investments

  1. U. S Treasury Bills
  2. Federal agency obligations
  3. Commercial paper
  4. Banker’s acceptances

These highly liquid investments mature within one year or less of their acquisition date and are considered to be conservative investments for school districts. Most of these investments are sold at a discount and redeemed at the maturity date for the face value of the note. Interest-bearing commercial paper is also available and could be purchased at a premium or discount depending on the market interest rate. These investments may be reported at amortized cost. [GASB 31, ¶9]

If a district has amounts that do not meet the definition of cash, it must decide whether to account for them as cash equivalents or as other short-term investments. The district’s policy should stipulate if short-term highly liquid investments with original maturities of three months or less are considered cash equivalents, or if they are considered short-term investments. Once established the policy is consistently followed. For non-interest- bearing investments purchased at a discount:

  • Record the investment at face value. The accounting entry is a debit to Temporary Investments for the face value of the investment and a credit to cash for the amount of cash paid for the investment. The difference between the face value amount and the cash paid is credited to a contra asset account, Discount on Temporary Investments.

  • At reporting time, divide the amount of the discount (face value of investment minus the amount paid for the investment) by the number of months the investment has been held. This is the portion of the investment that is amortized, and the amount to report as interest income. The accounting entry is a credit to interest income for the amount amortized and a debit to the contra asset account, Discount on Temporary Investments. The Discount on Temporary Investments is subtracted from the Temporary Investments account for financial statement presentation.

For interest-bearing investments purchased at a discount or premium:

  • Record the investment at face value. The accounting entry is the same as outlined above for the non-interest bearing investment purchased at a discount; however, if the investment is purchased at a premium the difference between the cash paid and the face value of the investment is debited to a Premium on Temporary Investments account.

  • At reporting time, divide the amount of the discount (face value of investment minus the amount paid for the investment) or the premium (amount paid for the investment minus the face value of the investment) by the number of months the investment has been held. This is the portion of the investment that is amortized, and one element of interest income. The accounting entry is a debit to Discount on Temporary Investments or a credit to Premium on Temporary Investments. The balance of the Discount on Temporary Investments account is subtracted from the Temporary Investments account, or added to the Premium on Temporary Investments account for financial statement presentation.

  • The other element of interest income is the amount actually earned on the face value of the interest-bearing instrument.

  • The interest income to report is the interest the district will actually receive based on the face value of the investment plus the amortized discount or minus the amortized premium for the reporting period.

Please refer to Short-term Investments Recorded at Amortized Cost — Exhibit 1.

9.2.2 Certificates of Deposit

  • Certificates of Deposit should be included with cash deposits.

  • Report at cost and accrue interest. [GASB 31, ¶8]

9.2.3 Debt, Equity and Interest-earning Investments

  • Report marketable equity securities (including unit investment trusts and closed-end mutual funds) at fair value. [GASB 31, ¶3]

  • Report debt securities at fair value. [GASB 31, ¶9]

  • Debt securities that are money market investments and that mature within one year or less of acquisition may be reported at amortized cost, assuming the investment is not affected by the financial institution’s credit standing or other relevant factors. [GASB 31, ¶9]

  • Interest earning investment contracts

  • Nonparticipating contracts (for example, certificates of deposits) should be reported at cost. [GASB 31, ¶8]

  • Participating contracts (for example, repurchase agreements) that mature beyond one year of their acquisition date should be reported at fair value. [GASB 31, ¶8]

  • Participating contracts that mature within one year or less of their acquisition date may be reported at amortized cost, assuming that the investment is not affected by the financial institution’s credit standing or other relevant factors. The relevant date for determining the time period to maturity is the date the investment was acquired rather than the date the investment was originally issued. [GASB 31, ¶9]

(The GASB notes that quoted market prices are the most reliable and verifiable sources of measuring investments at fair value. For certain investments, such as debt instruments and participating interest-earning investment contracts; however, the quoted market prices are not available and the district will need to estimate fair value based on techniques such as discounted future cash flows, fundamental analysis and matrix pricing.)

Accounting for debt and equity securities required to be reported at fair value
[GASB 31, Appendix C] This example assumes a year-end reporting period. The district would make quarterly accounting entries for internal reporting purposes.

  1. Record cost of each investment at beginning of Year 1. This is the amount the district paid.
  2. Record fair value of each investment at beginning of Year 1.
  3. Record additional purchases of each investment. On investments purchased during the year, the beginning fair value is the original cost of the purchase.
  4. Record the proceeds of sales from each investment.
  5. Add beginning fair value of each investment and purchase amount of each investment.
  6. From this amount, subtract sales of each investment. This will establish a subtotal amount.
  7. Record the fair value of the investment at the end of Year 1.
  8. Record the change in fair value of each investment at the end of Year 1 by subtracting the subtotal amount (calculated in #1-#6) from the ending fair value of the investment at Year 1 (#7).
  9. This is the amount of increase or decrease in the fair value for each security for the reporting period.
  10. Add the amount of increase in the fair value of all securities and subtract the decrease in fair value of all securities for the reporting period. This is the amount of interest income or loss to record. This is also the amount be to be debited (increase in value) or credited (decrease in value) to the Temporary Investment account for the reporting period.

The fair value for each specific investment at end of Year 1 becomes the beginning fair value for each specific investment in Year 2.

Aggregate Method

  1. Record fair value of all investments at the end-of-year.

  2. Add proceeds of all investments sold during year.

  3. Subtract the cost of all investments purchased in year.

  4. Subtract fair value of all investments at beginning of year.

  5. This is the amount of increase or decrease in the fair value for all securities for the reporting period.

  6. This is the amount of interest income or loss to record. This is also the amount to be debited (increase in value) or credited (decrease in value) to the Temporary Investment account for the reporting period.

The fair value for the aggregate temporary investment account at end of Year 1 becomes the beginning fair value for the aggregate temporary investment account in Year 2

An investment that was originally measured at fair value may be reported at amortized cost if its maturity date is within 90 days of the current balance sheet.

Computing Investment Income for Investments Reported at Fair Value

All investment income, including changes in the fair value of investments, must be reported as revenue on the district’s operating statement or statement of activities. Investment income includes interest and dividend income; realized gains and losses on the sale of investments; and changes in the fair value of investments the district holds. If the district elects to separately identify (in a note to the financial statements) the change in the fair value of its investments, the change should be labeled as net increase (decrease) in the fair value of investments at the beginning of the year and at the end of the year, taking into consideration investment purchases, sales and redemptions.
[GASB 31, ¶13]

Unrealized gains and losses (from the valuation of investments at the end of the period) and realized gains and losses (from the sale of investments during the period) must not be reported separately on the operating statement or statement of activities. Realized gains and losses may be presented separately in a note to the financial statements of the district if such gains and losses are measured as the difference between the sales price of the investment and the original cost of the investment.

Please refer to Accounting for Investments Reported at Fair Value & Market Changes in Investments — Exhibit 2.

9.2.4 Repurchase and Reverse Repurchase Agreements [GASB 3, ¶ 39]

Repurchase agreements — Treated as Buyer-Seller Transaction

  • At purchase date:
    • Debit Cash and Temporary Investments for cash received.
    • Credit Cash in Bank for the same amount.
  • At sales date —
    • Debit Cash in Bank for amount received.
    • Credit the Cash and Temporary Investments for the amount debited to this account on the purchase day.
    • Credit interest income earned for the difference.

Reverse repurchase agreements — Treated as a Buyer-Seller Transaction

  • At borrowing date:
    • Debit Cash in Bank for the amount received from selling the investment.
    • Credit Cash and Temporary Investments for the same amount.
  • At purchase date:
    • Debit Cash and Temporary Investments for the amount originally credited on the sales day.
    • Credit Cash in Bank for the amount the district repays to the financial institution.
    • Debit Accrued Interest Receivable for interest income earned on securities used as collateral in the reverse repurchase agreement
    • At the time of the assumed sale, the district would recognize a gain or loss on the sale when the carrying value and fair value of the securities used as collateral for the short-term loan are not the same.

Securities comprising the repurchase agreements that mature within one year or less of their acquisition date may be reported at amortized cost. If their maturity date is beyond one year, they should be reported at fair value. The term of reverse repurchase agreements may not extend beyond 90 days after the reverse security repurchase agreement is delivered, in accordance with § 2256.011 (c) of the Public Funds Investment Act.

Please refer to Accounting for Repurchase and Reverse Repurchase Agreements Exhibit 3

9.2.5 Pooled Investments

Investments in external investment pools

  • Both investments in governmental and non-governmental pools that are not registered with the Securities and Exchange Commission (SEC) should be reported at fair value based on the fair value per share of the pool’s underlying portfolio. If the district cannot obtain sufficient information from the pool sponsor to determine the fair value of the investment in the pool, the best estimate of its fair value should be made. The basis for the estimate should be disclosed in a note to the financial statements. [GASB-31, ¶11].

  • SEC Rule 2a7 allows SEC registered mutual funds to use amortized cost rather than market value to report net assets to compute share prices if certain conditions are met. This rule also applies to a 2a7-like pool not registered with the Securities and Exchange Commission as an investment company, but that has a policy that it will, and does operate in a manner consistent with the SEC’s Rule 2a7 of the Investment Company Act of 1940. [GASB-31, ¶12].

  • Report the investment for SEC registered pools and 2a7 like pools based on the pool’s share price.

  • Pool sponsor should provide the district relevant financial information related to pool investments.

9.2.6 Mutual Funds

  • For financial reporting, the fund’s share price as of the balance sheet date should be the fair value of the investment. [GASB-31, ¶10].

9.2.7 Guaranteed Investment Contracts

  • These investments are reported at fair value if they mature in more than a year of their acquisition date. [GASB-31, ¶8]

  • These investments are reported at amortized cost if they mature within a year or less of their acquisition date. [GASB-31, ¶9]

  • If permitted by the bond resolution or order, bond proceeds, which are not presently being used for the purpose they were issued, can be invested in guaranteed investment contracts if they adhere to the provisions of § 2256.015 of the Public Funds Investment Act. Bond proceeds representing reserves and funds maintained for debt service purposes may not be invested in a guaranteed investment contract with a term longer than 5 years from the date of issuance.

9.2.8 Restricted Assetss

Usually held by proprietary, trust and agency funds and include the following:

  • Self-funded insurance plans

  • Scholarship funds

  • Agency funds held for other entities

Self-funded Plans

Investments for self-insurance plans are accounted for in an internal service fund that the district establishes.

  • Allowable investments include the ones already discussed and outlined in GASB 31. For additional information refer to GASB 10.

  • Interest that is earned on the fund’s investments is accounted for using the accrual basis of accounting, revenue recognized when both earned and measurable.

Scholarship Funds

Trust funds may be established to pay for post-secondary educational expenses of students.

  • Allowable investments include the ones already discussed and outlined in GASB 31.

  • For expendable trust funds, interest that is earned on the fund’s investments is accounted for using the modified accrual basis of accounting.

  • For non-expendable trust funds, interest earned on the fund’s investment is accounted for using the accrual basis of accounting. Income from investments is accrued in the principal trust fund and transferred to the earnings fund as a closing entry.

  • The treatment of gains and losses on investments for non-expendable trust funds should be covered in the trust instrument.

  • If the treatment of investment gains and losses for a non-expendable trust fund are not covered by the trust instrument, the general rule, according to Governmental and Nonprofit Accounting, Fifth Edition, is to charge gains and losses to trust principal on the sale of investments that were present when the trust was established and not reduce the expendable income. Gains and losses recognized on investments purchased from the earnings fund after being transferred from the principal trust fund are charges to earnings and do reduce expendable income.

Please refer to Accounting for Restricted Assets - Exhibit 4.

Agency Funds

These funds are used to account for activities of student groups and other types of activities requiring clearing accounts. These funds have no equity, assets are equal to liabilities, and do not include revenues and expenditures for general operations of the District. Any interest income made on investments of these funds is deposited to the agency fund. Local policy may specify that unused funds of a graduating class are property of the school district and are transferred to the General Fund.

Please refer to Accounting for Restricted Assets - Exhibit 4.

Exhibits