State Of Idaho
Office Of The State Controller
2017 GAAP Closing Procedures Manual

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10 Investments GL 1203, 1205, 1206, 1210, 1309

.Due Date: July 13

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Complete this closing package if you have investments of $100,000 or more per fund at June 30.

PURPOSE

The purpose of this closing package is to gather information regarding the State’s investments and the risks associated with those investments. This information will be used to prepare the State's Comprehensive Annual Financial Report (CAFR).

Investments reported in this closing package are securities or other assets held primarily for obtaining income or profit. Include the following types of investments:

• Investments your agency holds as a trustee or agent for others
• Money market accounts
• Mutual funds
• Repurchase agreements
• Commercial paper
• U.S. government obligations
• U.S. government agency obligations
• Corporate or governmental unit obligations
• Investment agreements
• Pooled investments
• Common and preferred stock
• Real estate acquired for obtaining income or profit

Do not include the following investments on this closing package:

• Certificates of Deposit (Report on Cash Closing Package Form 8b-Deposits in Outside Bank Accounts)
• Investments managed and reported by the State Treasurer (Idle Pool, Local Government Investment Pool, and Diversified Bond Fund)

ACCOUNTING PRINCIPLES AND POLICIES

The State prepares its financial statements in accordance with Generally Accepted Accounting Principles (GAAP). GAAP requires the State's balance sheet to show the fair value of investments under State control at June 30. GAAP also requires a note to the financial statements disclosing the risks associated with the investments. Guidance on investments can be found in the Governmental Accounting Standards Board (GASB) Codification Sections I50, I55, I60, D40; GASB Statement Nos. 3, 31, 40, 52, 53, 64 and 72; and GASB Comprehensive Implementation Guide No. 2016-1.


DEFINITIONS

Accrued Earnings - Interest that has been earned, but not yet received as of June 30.

Acquisition Value - The price that would be paid to acquire an asset with equivalent service potential in an orderly market transaction at the acquisition date, or the amount at which a liability could be liquidated with the counterparty at the acquisition date.

Active Market - A market in which transactions for an asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Agent - A party who acts solely as a custodian of securities owned by another party. An agent neither sells nor buys securities for the investor.

Brokered Market - A market in which brokers attempt to match buyers with sellers but do not stand ready to trade for their own account. In other words, brokers do not use their own capital to hold an inventory of the items for which they make a market. The broker knows the prices bid and asked by the respective parties, but each party is typically unaware of another party’s price requirements. Prices of completed transactions are sometimes available. Brokered markets include electronic communication networks, in which buy and sell orders are matched, and commercial and residential real estate markets.

Collateral - Security pledged by a financial institution to guaranty return of an asset.

Concentration of Credit Risk - The risk of loss attributable to the magnitude of investments in a single issuer. The State reports investments in any one issuer that represent 5 percent or more of total investments.

Cost Approach - A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Cost of Investment Purchases - Amount paid to acquire investments during the fiscal year.

Counterparty - The other party to the transaction. In the case of investments, the party that sells investments to or buys investments for the State, or the party that pledges collateral or repurchase agreement securities to the State.

Credit Quality Rating - Credit quality ratings associated with debt securities provide valuable information regarding a counterparty’s ability to fulfill its obligation in an investment transaction. Credit quality ratings are associated with corporate debt securities, U.S. agency obligations not explicitly guaranteed by the U.S. government, external investment pools, money market funds, bond mutual funds, and other pooled investments of fixed-income securities. Credit quality ratings are provided by nationally recognized statistical ratings organizations such as Standard & Poor's or Moody's. Generally, obligations of the U.S. government or those explicitly guaranteed by the U.S. government are considered not to have credit quality risk. Credit quality ratings are not associated with equity securities.

Credit Risk - The risk that a counterparty will not fulfill its obligations.

Custodial Credit Risk - The risk that, in the event of the failure of a counterparty to an investment transaction, the State will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. Custodial credit risk does not apply to external investment pools, open-end mutual funds, or reverse repurchase agreements. Investment securities are exposed to custodial credit risk if the securities are uninsured, not registered in the name of the government, and are held by either:

• the counterparty or
• the counterparty’s trust department or agent, but not in the government’s name.

Dealer Market - A market in which dealers stand ready to trade (either buy or sell for their own account), providing liquidity by using their capital to hold an inventory of the items for which they make a market. Typically, bid and ask prices (representing the price at which the dealer is willing to buy and the price at which the dealer is willing to sell, respectively) are more readily available than closing prices. Over-the-counter markets (for which prices are publicly reported, for example, by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group, Inc.) are dealer markets. The market for U.S. Treasury securities is another example of a dealer market. Dealer markets also exist for some other assets and liabilities, including other financial instruments, commodities, and physical assets (for example, used equipment).

Derivative Instrument - A financial instrument or other contract that has all of the following characteristics:

• Settlement factors (see definition)
• Leverage (see definition)
• Net settlement (see definition)

Diversified Bond Fund - A voluntary investment pool sponsored by the State Treasurer for State and public agencies able to exchange current liquidity for potentially greater returns over the long run (3.5 years or longer). Do not report investments in the Diversified Bond Fund on this closing package.

Endowment - An asset, fund, or property donated to an institution, individual, or group as a source of income. Endowments exist to invest resources for the purpose of generating income.

Exchange Market - A market in which closing prices are both readily available and generally representative of fair value. An example of such a market is the New York Stock Exchange.

Exit Price - The price that would be received to sell an asset or paid to transfer a liability.

Expected Cash Flow Technique - The probability-weighted average (that is, mean of the distribution) of possible future cash flows.

Fair Value - The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Financial Asset - Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:

a. Receive cash or another financial instrument from a second entity
b. Exchange other financial instruments on potentially favorable terms with the second entity (for example, an option).

Financial Instrument - Cash, evidence of an ownership interest in an entity, or a contract that both:

a. Imposes on one entity a contractual obligation to (1) deliver cash or another financial instrument to a second entity or (2) exchange other financial instruments on potentially unfavorable terms with the second entity (for example, an option)
b. Conveys to that second entity a contractual right to (1) receive cash or another financial instrument from the first entity or (2) exchange other financial instruments on potentially favorable terms with the first entity (for example, an option).

Financial Liability - A contract that imposes on one entity an obligation to do either of the following:

a. Deliver cash or another financial instrument to a second entity
b. Exchange other financial instruments on potentially unfavorable terms with the second entity (for example, an option).

Hedging Derivative Instrument - A derivative instrument that is associated with a hedgeable item and significantly reduces an identified financial risk by substantially offsetting changes in cash flows or fair values of the hedgeable item.

Highest and Best Use - The use of a nonfinancial asset by market participants that would maximize the value of the asset or the group of assets and liabilities within which the asset would be used.

Idle Pool - Cash held by the State Treasurer until needed by the agency to which the money has been appropriated. The investment department of the State Treasurer manages this pool and distributes interest earnings from the investments on a monthly basis. Do not report investments in the Idle Pool on this closing package.

Income Approach - A valuation technique that converts future amounts (for example, cash flows or income and expenses) to a single current (discounted) amount.

Inputs - The assumptions that market participants would use when pricing an asset or liability, including assumptions about risk, such as the following:

a. The risk inherent in a particular valuation technique used to measure fair value (such as a pricing model)
b. The risk inherent in the inputs to the valuation technique.

Inputs may be observable or unobservable.

Insurance - For purposes of reporting investment risk, insurance is a contract that one party will compensate another party, contingent upon conditions specified in the agreement. Insurance includes Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC) in certain circumstances. The following may also qualify if coverage is substantially the same as FDIC or SIPC:

• Multiple financial institution collateral pools
• Commercial insurance
• An irrevocable letter of credit not issued by the counterparty

Interest Rate Risk - The risk that changes in interest rates will adversely affect the fair values of a government's financial instruments or a government's cash flows. The State reports interest rate risk based on the security's maturity date.

Investee - An entity that issued an equity instrument of which all or a portion is held by an investor.

Investments - A security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has present service capacity based solely on its ability to generate cash or to be sold to generate cash.

Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets or liabilities that a government can access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included within Level 1 that are observable for an asset or liability, either directly or indirectly.

Level 3 Inputs - Unobservable inputs for an asset or liability.

Investment Derivative Instrument - A derivative instrument that is entered into primarily for the purpose of obtaining income or profit, or a derivative instrument that does not meet the criteria of a hedging derivative instrument.

Issuer - Entity that has authority to distribute (develop, register, or sell) a security or other investment. A bond issuer is the entity that is legally obligated to make principal and interest payments. In the case of mutual funds, external investment pools, and other pooled investments, issuer refers to the entity invested in, not the investment company-manager or pool sponsor.

Leverage - The means of enhancing changes in fair value while minimizing or eliminating an initial investment. A leveraged investment has changes in fair value that are disproportionate to the initial net investment. An unleveraged investment requires a far greater initial investment to replicate similar changes in fair values. Derivative instruments are leveraged instruments because their changes in fair value are disproportionate to the initial net investment. For example, an interest rate swap that has a notional value of $100 million is entered with no initial net investment. Thereafter, as interest rates change, the swap produces changes in fair value consistent with a $100 million fixed-rate financial instrument.

Local Government Investment Pool - A short-term investment Pool sponsored by the State Treasurer for state and public agencies able to deposit monies not needed to meet immediate operating obligations. Do not report investments in the Local Government Investment Pool on this closing package.

Market Approach - A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or groups of assets and liabilities.

Market-Corroborated Inputs - Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Market Maker - An entity or individual that provides both a bid and ask price and is willing and able to transact at those prices.

Market Multiples Technique - A valuation technique that relies on the use of multiples or ratios as an expression of market price relative to a key statistic, such as earnings, book value, or cash flows.

Market Participants - Buyers and sellers that (1) are in the principal (or most advantageous) market for an asset or liability and (2) have all of the following characteristics:

a. They are independent of each other. That is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if a government has evidence that the transaction was entered into at market terms.
b. They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary.
c. They are able to enter into a transaction for the asset or liability.
d. They are willing to enter into a transaction for the asset or liability. That is, they are motivated but not forced or otherwise compelled to do so.

Market Risk - The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises the following:

a. Interest rate risk
b. Currency risk
c. Other price risks.

Matrix Pricing Technique - A valuation technique used to value securities based on their relationship to benchmark quoted prices.

Maturity Date - The date on which the issuer must retire an investment instrument and pay the face value.

Measurement Date - The date as of which the fair value of an asset or liability is determined.

Most Advantageous Market - The market that maximizes the amount that would be received to sell an asset or minimizes the amount that would be paid to transfer a liability, after taking into account transaction costs and transportation costs.

Multiperiod Excess Earnings Technique - A valuation technique based on prospective financial information (for example, revenues, expenses, or cash flows) associated with a collection of assets. The initial amount is reduced for the contributions of supporting assets, with the residual amount being the excess earnings associated with the asset being valued.

Net Asset Value per Share - The amount of net assets attributable to each share of capital stock (other than senior equity securities; that is, preferred stock) outstanding at the close of the period. It excludes the effects of assuming conversion of outstanding convertible securities, whether or not their conversion would have a diluting effect.

Net Settlement - Settlement provisions within a financial instrument or other contract that meet one of the following criteria:

• Neither party is required to deliver an asset that is associated with the reference rate and has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount (or the notional amount plus a premium or minus a discount) of the financial instrument. For example, most interest rate swaps do not require either party deliver cash or interest-bearing assets with a principal amount equal to the notional amount of the contract.
• One of the parties is required to deliver an asset of the type described above, and a market mechanism facilitates net settlement. An example of that type of market mechanism is a futures exchange that offers a ready opportunity to enter into an offsetting contract.
• One of the parties is required to deliver an asset of the type described above, but that asset is readily convertible to cash or is itself a derivative instrument. An example of that type of contract is a forward contract that requires delivery of a bond. Another example is a swaption - an option to require delivery of a swap contract, which is a derivative instrument.

Nonperformance Risk - The risk that an entity will not fulfill an obligation. Nonperformance risk includes, but may not be limited to, a government’s own credit risk.

Observable Inputs - Inputs that are developed using market data, such as publicly available information about actual events or transactions, and which reflect the assumptions that market participants would use when pricing an asset or liability.

Open-End Mutual Fund - A mutual fund with no fixed number of shares or restriction on the amount of money that can be invested in the fund. Investors buy shares from and sell shares back to the fund itself.

Option Pricing Model Technique - A valuation technique used to value an option contract that is based on the critical terms of the contract and implied volatility.

Orderly Transaction - A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. It is not a forced transaction (for example, a forced liquidation or distress sale).

Present Value Technique - A valuation technique used to link future amounts (cash flows or values) to a present amount by employing a discount rate (an application of the income approach).

Principal Market - The market with the greatest volume and level of activity for an asset or liability.

Principal-to-Principal Market - A market in which transactions, both originations and resales, are negotiated independently with no intermediary. Little information about those transactions may be made available publicly.

Proceeds From Sales - The amount received from sale of an investment during the fiscal year.

Readily Determinable Fair Value - An equity security has a readily determinable fair value if it meets any of the following conditions:

a. The fair value of an equity security is readily determinable if sales prices or bid-and-asked quotations are currently available on a securities exchange registered with the U.S. Securities and Exchange Commission or in the over-the-counter market, provided that those prices or quotations for the over-the-counter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by OTC Markets Group, Inc. Restricted stock meets that definition if the restriction terminates within one year.
b. The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to in (a).
c. The fair value of an investment in a mutual fund is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions.

Relief from Royalty Technique - A valuation technique used to value certain intangible assets (for example, trademarks and trade names) based on the premise that the only value that a purchaser of the assets receives is the exemption from paying a royalty for its use. Application of this method usually involves determining the fair value of an intangible asset by quantifying the present value of the stream of market-derived royalty payments that the owner of the intangible asset is exempted from or “relieved” from paying.

Restricted Investment - Amount of investment balance subject to constraints imposed by creditors, grantors, contributors, laws and regulations of other governments, constitutional provisions, or enabling legislation that change the nature or normal understanding of asset's availability. The restriction must be one that cannot be removed without the consent of those imposing the restriction or some formal due process.

Risk Premium - Compensation sought by risk-averse market participants for bearing the uncertainty inherent in the cash flows of an asset or a liability; also referred to as a risk adjustment.

Settlement Factors - Factors included within a financial instrument or contract. To be a derivative instrument, factors that must be included are:

• One or more reference rates, such as specified interest rate, security price, commodity price, foreign exchange rate, etc.
• One or more notional amounts (number of currency units, bushels, pounds, etc.) or payment provisions (may specify payment to be made if reference rates behave in a certain manner)

Transaction Costs - The costs to sell an asset or transfer a liability in the principal (or most advantageous) market for the asset or liability that (1) are directly attributable to the disposal of the asset or the transfer of the liability and (2) meet both of the following criteria:

a. They result directly from and are essential to that transaction.
b. They would not have been incurred by the entity had the decision to sell the asset or transfer the liability not been made.

Transportation Costs - The costs that would be incurred to transport an asset from its current location to its principal (or most advantageous) market.

Unit of Account - The level at which an asset or a liability is aggregated or disaggregated for measurement, recognition, or disclosure purposes.

Unobservable Inputs - Inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing an asset or liability.

Valuation Technique - A specific method or combination of methods used to determine the fair value of an asset or liability

WORKING PAPERS
Click here for a definition of Working Papers
Working papers may include, but are not limited to, the following items:

• June 30 bank or investment account statements from financial institutions and brokers
• List of securities in investment portfolios
• Bond fund fact sheets as of June 30
• Description of method used to value investments
• Documents that show the maturity date, original purchase price, interest rates, credit quality ratings, and other related documents

GENERAL INSTRUCTIONS--INVESTMENTS CLOSING PACKAGE

Agencies are required to complete an Investments Closing Package for each fund that has investments of $100,000 or more as of June 30.

• Report your agency's investments, as well as any investments your agency holds as a trustee or agent for others.
• If your agency is involved in securities lending, repurchase agreements, or reverse repurchase agreements, please call the Office of the State Controller (SCO) for reporting requirements.
• If your agency has derivative instruments, please complete the Form 10a-Derivative Instruments Closing Package.
• Carefully read the special definitions that apply to this closing package (see Definitions section).
• Internal schedules may be submitted in lieu of the closing package if they provide all required information.
• Prepare a separate form for each fund. If one form does not provide enough space, open another form and click on the box in the header that indicates this is a continuation of an already submitted closing package form (e.g., Addendum 1, Addendum 2, etc.).
• Round all dollar amounts to the nearest whole dollar.
• Call the SCO for guidance, if needed. Include all investments that meet the definitions.
• CLICK HERE FOR SUBMISSION INSTRUCTIONS
• Submit the completed form to the SCO by July 13.

COMPLETING THE INVESTMENT CLOSING PACKAGE

1. Complete the header information.
2. Enter the name of the financial institution.
3. Briefly describe the type of investment (e.g., money market certificates, mutual fund, marketable securities, or other financial instruments). Please use a separate column for each investment.
4. Enter the level of inputs (see Definitions).
5. Enter the valuation technique (see Definitions).
6. Enter the identifying number (e.g., account number, mutual fund number, stock certificate number).
7. Enter date the investment was purchased.
8. Enter the amount of investment for each maturity range. If maturity date is more than 10 years, enter the amount and maturity date in the Comments Box.
9. Enter the fair value of investments from the prior year’s closing package.
10. Enter the fair value of each investment acquired during the current fiscal year. If the investment was not purchased during the current year, this space should be blank. Do not include acquisition costs with this amount (e.g., broker fees).
11. Enter the amount of investments sold this fiscal year.
12. Enter the investment's fair value at June 30 (see Definitions).
13. Enter the amount that was restricted as of June 30 (see Definitions).
14. Enter the investment's accrued earnings as of June 30 (see Definitions) that will be received by August 31.
15. Enter the investment's accrued earnings as of June 30 (see Definitions) that will be received after August 31.
16. Enter the investment's credit quality rating (see Definitions). If the investment is unrated, please enter "unrated."
17. Enter the amount of the investment covered by insurance or collateral (see Definitions). If you have any questions about the amount of investment covered by insurance, please contact your financial institution or broker to verify the coverage.
18. Enter the name of the registered owner if the investment or collateral is not held in the State's name.
19. Enter the name of the person who has custody of the investment or collateral (agency, your agent, the counterparty, or the counterparty's agent. See Definitions).
20. Answer the questions regarding fair market value, restrictions, income recognition, and foreign currency investments in the Comments Box, as applicable.
21. If you have land or real estate held as an investment, complete the Land and Real Estate section.
22. If you have derivative instruments, answer yes, open the attached instructions and fill out the spreadsheet. Save the spreadsheet with a new name and then attach to the closing package before submitting this closing package.

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10 Investments GL 1203, 1205, 1206, 1210, 1309

Due Date: July 13

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