2011   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 ASC Topic 815, Derivatives and Hedging, which aims to highlight to financial statement users additional disclosures on an entity's 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 Topic 815, the fair value of derivative instruments shall be presented on a gross basis when they are subject to master netting 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. PBGC elects to net its derivative receivables and derivative payables and the related cash collateral received for its non-exchange derivative contracts subject to International Swaps and Derivatives Association, Inc. master agreements. As of September 30, 2011, PBGC had $0.1 billion of derivatives in an asset position (recorded in other assets). PBGC had $(0.02) billion of derivatives in an asset position (recorded in other assets) as of September 30, 2010, and $(0.01) billion of derivatives in a liability position (recorded in other liabilities) as of September 30, 2011, and 2010.

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, 2011, and 2010, respectively, TVA had $0.4 billion and $0.2 billion worth of derivatives in an asset position (recorded in other assets), and $2.1 billion and $1.6 billion worth of derivatives in a liability position (recorded in other liabilities).

The gain/(loss) on derivatives was $0.1 billion and $0.2 billion for PBGC and $(0.1) billion and $(0.1) billion for TVA for fiscal years 2011 and 2010, respectively.

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

Last Updated:  February 16, 2012