2011-08-02 The Public Sector Accounting Board Releases New Section 3450 on Financial Instruments

What is the issue?

The Public Sector Accounting Board has released a new public sector accounting standard (PSAS), PS 3450 Financial Instruments which will change significantly the accounting and disclosure related to financial instruments.

The key changes are as follows:

  • Subsequent to initial recognition at fair value, financial instruments are assigned to one of two measurement categories: (1) fair value and (2) cost or amortized cost. The fair value category will include derivatives and portfolio investments in equity instruments quoted in an active market. Under certain conditions, an organization may also designate financial instruments in the fair value category. PS 3450 also contains guidance on the identification of embedded derivatives and conditions requiring bifurcation from their host contract.
  • Changes in fair value that arise prior to derecognition of the related financial instruments are recognized in a new financial statement, the statement of remeasurement gains and losses. In the period of derecognition of the financial instrument, the cumulative amount of remeasurement gain or loss is recycled to the statement of operations.
  • Extensive disclosure requirements including:
    • Carrying amounts of financial assets and financial liabilities by category
    • Gross amounts of remeasurement gains and losses arising during the period and amounts reclassified to the statement of operations
    • Level of fair value hierarchy into which fair value measurements are categorized
    • Nature and extent of risks arising from financial instruments (credit risk, liquidity risk and market risk). These requirements are broadly consistent with those of IFRS 7 Financial Instruments: Disclosures.

Effective date and transition

For government organizations, PS 3450 applies to years beginning on or after April 1, 2012. For governments, PS 3450 applies to fiscal years beginning on or after April 1, 2015. Earlier adoption is permitted. In the fiscal year of adoption, a government organization or a government also adopts Section PS 2601 Foreign Currency Translation.

Specific provisions are provided to facilitate the transition, including "grandfathering" of transactions settled prior to the effective date. It is further noted that when a government organization adopts PSAS for the first time then PS 3450 cannot be applied retrospectively. Rather, comparative amounts are presented in accordance with the accounting policies applied immediately preceding adoption of PSAS.

Am I affected?

The changes will affect public sector organizations with any type of financial instruments, including derivatives and investments in equity instruments.

What do I need to do?

Management should assess the potential impacts of the new guidance and evaluate the possibility of early adoption. Management should also consider any potential impacts on systems and additional processes needed to compile the information required to comply with the new requirements.