2010   Financial Report of the United States Government

Notes to the Financial Statements

Note 10. Derivatives

Derivatives are financial instruments that entities use to hedge their particular exposure to some sort of financial risk. These financial risks include interest rate risk, market price risk, credit risk, foreign exchange risk and commodity risk. As FASAB (which determines GAAP for Federal entities) is silent on this issue, the accounting for derivative instruments are governed by FASB Accounting Standards Codification (ASC) 815 Derivatives and Hedging (formerly SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and amended by SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities), which aims to highlight to financial statement users additional disclosures on an entitys objectives in its use of derivatives and the method of accounting for such financial instruments. Derivatives are accounted for at market value in accordance with this standard. Derivatives are marked to market with changes in value reported within financial income. The hedge strategy (i.e., fair value, cashflow or foreign currency) employed determines the financial statement impact on their statement of operations and net position. Per ASC 815, the fair value of derivative instruments shall be presented on a gross basis when they are subject to master netting agreements. Neither PBGC nor TVA, the only federal entities with derivative instruments, have such agreements.

PBGC uses derivatives to mitigate investment risks, enhance investment returns (derivatives are not used to leverage investment portfolios) and as a liquid and cost efficient substitute for positions in physical securities. PBGC utilizes a no hedging designation which results in the gain or loss on a derivative instrument being recognized currently in earnings. As of September 30, 2010, and 2009 respectively, PBGC had $(0.02) billion and $2.8 billion worth of derivatives in an asset position (now recorded in other assets) and $(0.01) billion and $2.9 billion worth of derivatives in a liability position (recorded in other liabilities).

In fiscal year 2010, PBGC reported its derivative amounts differently than in fiscal year 2009. The large differences between the amounts reflected in the current fiscal year from the fiscal year 2009 amounts is that in fiscal year 2010 PBGC added investments in derivatives to its derivative asset amounts but also recorded interest rate and credit default swaps, which were previously reported gross of receivables and payables, at their net amounts, resulting in a reduction in derivative assets and derivative liabilities of substantially equal amounts that entirely negated the increase due to derivative investments.

For presentation purposes, PBGCs fiscal year 2009 derivative assets of $2.8 billion, which were originally recorded in fiscal year 2009 accounts receivable, were reclassified to fiscal year 2009 other assets to increase comparability between all derivative assets as TVA records its derivative assets as other assets in the balance sheet.

Other than certain derivative instruments in investment funds, TVA uses derivatives purely for hedging purposes and not for speculative purposes. The accounting for changes in fair value of these instruments depends on whether TVA uses regulatory accounting to defer the derivative gains and losses, and whether the derivative instrument qualifies for hedge accounting treatment. As of September 30, 2010, and 2009, respectively, TVA had $0.2 billion and $0.04 billion worth of derivatives in an asset position (recorded in other assets), and $1.6 billion and $1.0 billion worth of derivatives in a liability position (recorded in other liabilities).

The gain/(loss) on derivatives was $0.2 billion and $0.2 billion for PBGC and $(0.1) billion and $(0.3) billion for TVA for fiscal years 2010 and 2009, respectively.

Please refer to the individual financial statements of PBGC and TVA for more detailed information related to derivatives.

Last Updated:  December 07, 2011