Investments are an important part of managing public funds—but they can also be one of the most confusing areas of accounting for local governments. Between pooled cash, fair value adjustments, and detailed disclosures, it’s easy for this area to get overlooked until year-end.
The good news? With the right processes in place, investment accounting doesn’t have to be stressful. Here’s how to simplify the process and keep your books accurate all year long.
Start with a Strong Investment Policy
Your investment policy is the foundation of your process. It defines what your entity can invest in, how you’ll report performance, and the safeguards in place to protect public funds.
If your policy hasn’t been reviewed in a while, now is the time. Make sure it clearly covers:
- Which types of investments are permitted
- How deposits will be collateralized
- When investment reports will be presented to your governing body
- How diversification and safekeeping are managed
An updated policy provides consistency for staff and accountability for leadership—especially during times of market change or staff turnover.
Reconcile Investments Regularly
One of the simplest ways to prevent year-end headaches is by reconciling investments to the general ledger on a consistent basis—ideally monthly.
Frequent reconciliations make it easier to identify missing entries, interest misallocations, or changes in fair value early on. They also keep your team ready for audit season, rather than scrambling to fix issues at the last minute.
If your entity pools cash, remember that interest should be allocated based on each fund’s average balance and monthly rate—not equally across funds. And funds with negative cash balances shouldn’t receive any allocation at all.
Understand GASB 31 Fair Value Adjustments
Fair value adjustments are one of the areas that cause the most confusion, but once you understand the intent, they make sense. GASB 31 requires most investments—like LAIF, CAMP, CDs, and mutual funds—to be reported at their fair value as of the statement date, rather than their original cost.
For example, if your agency invests $100,000 and the fair value increases to $105,000 by year-end, that $5,000 change should be recognized as investment income. When the value changes again, that adjustment is reversed.
It’s not an optional step—it’s how financial statements show the true, current value of your portfolio.
Make Your Disclosures Clear and Complete
Investment disclosures can be lengthy, but they serve a purpose. They help explain how your entity measures risk, reports fair value, and manages public funds responsibly.
Your notes should include:
- The methods and assumptions used to estimate fair value
- Which investments (if any) are reported at amortized cost
- Oversight information for any external investment pools not registered with the SEC
- Risk disclosures, including interest rate, custodial credit, concentration, and credit risk
- Fair Value Measurement and Application disclosures, including the fair value hierarchy (Levels 1, 2, or 3 inputs)
The goal is to give readers confidence in your financial management practices—not just to meet audit requirements.
Think Like an Auditor
A good rule of thumb for preparing your investments is to think about what your auditor will look for. They’ll confirm balances directly with your institutions, review your fair value adjustment entries, and tie everything back to your general ledger.
If your reconciliations are complete and documentation is organized, the audit process becomes straightforward. Clear support for your balances and fair value calculations also helps your financial statements tell a consistent, reliable story.
Watch Out for Common Pitfalls
Even experienced finance departments can run into issues with investments. Some of the most common include:
- Missing or outdated fair value entries
- Interest allocations to negative cash balances
- Outdated investment policies
- Misclassified or cost-based impairment valuations
These little slips can snowball fast—but they’re easy to fix with the right routine. The key is catching them early and building habits that keep your reports accurate all year long. Review your entries each month and update your policy and process annually.
Bringing It All Together
Investment accounting may feel technical, but it’s ultimately about transparency and trust. When you have clear policies, consistent reconciliations, and accurate reporting, you not only meet audit requirements—you demonstrate to your governing body and community that their funds are managed responsibly.
If your finance team could use support reviewing your investment process, fair value calculations, or disclosures, contact us today!
