CLARK COUNTY DEPARTMENT OF AVIATION

CLARK COUNTY, NEVADA

Notes to Financial Statements

For the Fiscal Years Ended June 30, 2016 and 2015

93

(a) Interest Rate Swaps

The intention of the Department’s implementation of a swap portfolio was to convert variable

interest rate bonds to synthetically fixed interest rate bonds as a means to lower its borrowing

costs when compared to fixed-rate bonds at the time of issuance. The Department executed

several floating-to-fixed swaps in connection with its issuance of variable rate bonds. The

Department also executed forward starting swaps to lock in attractive synthetically fixed rates

for future variable rate bonds. Some of the Department’s swaps are structured with step-down

coupons to reduce the cash outflows of the fixed leg of those swaps in the later years of the

swap.

With the implementation of GASB 72, the derivative instruments are valued at fair value. The

fair values of the interest rate derivative instruments were estimated using an independent

pricing service. The valuations provided were derived from proprietary models based upon

well-recognized principles and estimates about relevant future market conditions. The

instruments' expected cash flows are calculated using the zero-coupon discount method,

which takes into consideration the prevailing benchmark interest rate environment as well as

the specific terms and conditions of a given transaction and which assumes that the current

forward rates implied by the benchmark yield curve are the market’s best estimate of future

spot interest rates. The income approach is then used to obtain the fair value of the instruments

by discounting future expected cash flows to a single valuation using a rate of return that takes

into account the relative risk of nonperformance associated with the cash flows and the time

value of money. This valuation technique is applied consistently across all instruments. Given

the observability of inputs that are significant to the entire sets of measurements, the fair values

of the instruments are based on inputs categorized as Level 2. As of June 30, 2016, the

derivative instruments are stated at fair value as required under GASB 72. Information required

to restate the derivative instruments to fair value as of June 30, 2015, as required under GASB

72, was not available, therefore, the derivative instruments were stated at mark-to-market

value for FY 2015 in accordance with GASB 53.

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