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Accounting for Derivatives by Local Administrations


Introduction
The spread of derivatives among local authorities is a recent phenomenon, and it forms part of their financial strategies in order to guarantee them from the financial risks associated with their activities or make an active management of debt.
The context in which local authorities operate presents some particular characteristics. Unlike private entities, in which derivatives have hedge function on several areas of risk, on the assets, on the liabilities, on future operations, on the risk of interest rate, on the exchange rate risk, on the credit risk, on commodities and so on, in local authorities the derivatives are closely related to debt. Another peculiarity of the sector is that the regulation on the use of derivatives in local authorities has introduced different regulatory regimes over time.
National legislation does not provide any indication regarding accounting for derivatives. As part of national accounting practice, both for local authorities and for the industrial and service sectors, there is not a comprehensive regulation on accounting treatment of derivatives.
The purpose of the project is to develop a document that provides guidance on best practices regarding the accounting treatment of derivatives and disclosures in the annual budget and accounts of local authorities. Therefore, the project is not addressed to the issuance of a national accounting standard.
More specifically, the document aims to provide guidance on the accounting treatment both of derivatives for hedging and for the derivatives which, although initially signed with this objective, are subsequently utilized, either totally or partially, no longer for. The information provided shall apply to financial accounting reports (annual budget and accounts) and economic accounting reports (statement of equity and statement of income).
For the purpose of the document, local authorities include the local municipalities, provinces, metropolitan cities, mountain communities, island communities and unions of municipalities, consortia between institutions as per art. 2 of the Decree 18 August 2000, No 267 “Consolidation Act of laws on local authorities.”

Content
The document should address in particular:
— the definition of derivative;
— the definition of the concept of hedging;
— the classification and use of cash flows;
— the accounting for the early repayment transactions and restructuring of a derivative;
— disclosure to be provided in the notes.

Status of the project
The draft document is being prepared for public consultation.  

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