{GASB Update} · Effective dates Pronouncement Effective Date – Years beginning AFTER June year end December year end 60 - SCA 12/15/2011 2013 2012 61 – Financial reporting entity

{GASB Update}

Presented by David Helisek, CPA

{AGENDA}

GASB Issued by not yet effective

GASB 60 – Service Concession Agreements

GASB 61 – Reporting Entity (GASB 14) Omnibus

GASB 62 – FASB Codification (pre-11/30/89)

GASB 63 – Net position and deferred inflows/outflows

GASB 65 – Items Previously Reported as Assets and Liabilities

GASB 66 – Technical Corrections – 2012

GASB 67/68 – Pension Standards

Other future pronouncements and exposure drafts

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Effective dates

Pronouncement Effective Date – Years beginning

AFTER

June year end

December year end

60 - SCA 12/15/2011 2013 2012

61 – Financial reporting entity 6/15/2012 2013 2013

62 – Codification of pre-11/30/89 FASB 12/15/2011 2013 2012

63 – Net position; Deferred inflow/outflow

12/15/2011 2013 2012

65 – Items previously recognized as assets/liabilities

12/15/2012 2014 2013

66 – Technical corrections 12/15/2012 2014 2013

67/68 – Pension standards Pension – 6/15/2013 Employer- 6/15/2014

Pension-2014 Employer-2015

Pension-2014 Employer-2015

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GASB - ISSUED BUT NOT YET EFFECTIVE

PLANTE MORAN

{GASB 60 – Service Concession Arrangements}

Effective: Years beginning after 12/15/2011

Applicability: Arrangements in which government (transferor) uses another party (operator) to provide public services through the use and operation of a capital asset.

Must meet ALL the following 4 conditions:

Government maintains control over assets, services provided, prices and rate structure.

Government receives significant consideration

Operator collects and KEEPS the user fees

The control and operation of the asset reverts back to the government at the end of the agreement

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SCA Examples:

Operator designs and builds municipal-owned recreation facility for the right to

collect fees from third parties for the use of the facility.

Operator provides significant consideration for the right to access a City owned

parking garage, and collect fees from third parties

Operator will design and build a new bridge, finance construction costs, collect fees,

and convey the bridge to the government at the end of the arrangement

NOT SCA

City hires management company to operate a golf course for a monthly management

fee. City is entitled to all revenue from the green fees.

Operator will provide significant consideration for use of a government parking lot.

The government has no say in what capacity the parking lot will be used.

6


Transferor (Government) Accounting:

Dr. - Cash or FV of new or improved facility

Cr. - Liability for the PV of significant contractual obligations

Related to facility (maintenance, capital improvements)

Minimum service level commitments (Police and Fire)

Cr. - Deferred inflows, which would be reduced in a systematic and rational manner over the term of the engagement.

NOTE: A transferor (the government) would keep the facility subject to an SCA as its capital asset on its books.

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Operator Accounting (assuming it is a govt)

Report an intangible asset related to the facility at cost

for its right to access the facility and collect third-party

fees;

Amortize the intangible asset over the term of the

arrangement in a systematic and rational manner

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{GASB 60 - Service Concession Arrangements: Illustration}

State (transferor) enters into an agreement with Tunnel

Authority (operator), in which the Authority will design,

build, and operate a tunnel for 40 years.

The cost of the tunnel is $4 million, and the fair value is $5

million (PV of expected net cash inflows).

The State has an obligation to insure the tunnel. The

present value of the insurance cost is $1 million

Assume that all 4 requirements of an SCA have been met

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{GASB 60 - Service Concession Arrangements: Illustration}

State reports (full accrual):

Asset for $5 million

Liability for $1 million

Deferred inflow of resources for $4 million

Recognize $100k revenue at end of year 1 ($4 million ÷ 40 years)

Authority reports (full accrual):

Intangible asset for $4 million

Amortized $100k at end of year 1 (straight line, 40 years)

Revenue and expense on tunnel operations based on applicable revenue and expense recognition guidance

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{GASB 61 – Reporting Entity (GASB 14/34) Omnibus}

Old Definition: Either-

Appoint majority AND

[financial benefit/burden

OR Imposition of will], Or

Fiscal dependency

New definition: Either-

Appoint majority AND

[financial benefit/burden

OR Imposition of will], Or

Fiscal dependency AND

financial benefit/burden

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Impacts:

Which entities to include/exclude

How to include (blend, discretely present, footnote)

Most significant change modifies requirements for inclusion–

Financial Accountability Concept:

Old Method New Method

NFPs that provide their resources almost exclusively to the PG should almost always be discretely presented. All other CU’s should also be discretely presented unless they meet one of the following criteria:

1. The CU governing body is substantively the same as the PG

1. The CU governing body is substantively the same as the PG AND either there is a financial benefit/ burden, Or management of the PG has operational responsibility for CU

2. The CU provides its services almost entirely to the PG

2. The CU provides its services almost entirely to the PG

3. The CU’s debt is expected to be paid by the PG

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Change in “misleading to exclude”

Closely related to (focus on financial relationships) OR

Financially integrated with

PGs now required to report equity interest in a for-profit discretely presented CU as an asset (subject to modified accrual)

Redefines “MAJOR” component unit – significance in relation to the PG (no longer significance in relation to other CU’s)

Govt engaged only in BTA that use single column presentation – may consolidate blended CU but show condensed combining information in the notes

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{GASB 62 – Codification of pre-11/30/89 FASBs}


Intent is to include all pre-11/30/89 private sector

guidance into a GASB statement

Supersedes GASB Statement 20

This means we no longer have the ability to specifically continue to

follow FASBs written after 11/30/1989

Generally, does NOT apply to governmental funds

Some exceptions:

Lease accounting

Contingencies

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Some of the more impactful sections include:

Classification of assets (restricted assets – Noncurrent)

Related parties

Accounting Changes, errors, prior period adjustments

Contingencies

Inventory

Leases

Regulated activities

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Classification of assets

ARB 43 tells us that restricted assets, even though they may be liquid, are not to be reported as current assets.

Example – we issue a bond, and the bond ordinance dictates that the proceeds must be kept physically separate and spent only on the described project.

This is a fairly common item that is not always being reported correctly!

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Related parties

Related parties includes related organizations, joint

ventures, elected and appointed officials, or members of

their immediate family

F/S should disclose related party transactions other than

Compensation arrangements

Expense allowances

And other similar items in the normal course of business

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Accounting Changes, errors, prior period adjustments

Prior period adjustments/correction of errors

Restate opening net assets

Retroactively restate for all prior period presented

Change in accounting principle

Restate opening net assets

DO NOT change comparative balances presented

Requires disclosure of pro forma effects of retroactive application

Changes in estimates – prospective only

Changes in reporting entity –restate f/s of all prior periods presented

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Contingencies

Adopts FASB 5.

Contingent Liabilities:

If probable and estimable – record

If reasonably possible – disclosure only

Gain contingencies only recordable if realized

This is in fairly wide use today, so really only codifies

current practice.

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Inventory

Proprietary funds and BTA activities

Reinforces the “lower of cost or market” concept

Governmental funds and Governmental activities

This section of GASB 62 does not apply to governmental activities

or governmental funds

Refer to existing GASB guidance on accounting for inventory in

governmental funds and governmental activities

20


Leases

Codifies FASB 13 – no changes.

A capital lease would be recorded in an arrangement

that includes ownership transfer, bargain purchase, 75%

of the useful life, or 90% of the value is paid.

Regardless of legal title.

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Regulated Activities

Codifies FAS 71, which allows for the use of regulatory

accounting methods when those methods have been used

in rate-making by a regulatory authority. This authority

might include the governing body.

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{GASB 63 – Net Position and Deferred inflows/outflows}


Concepts Statement No 4 defined “deferred inflows” and “deferred

outflows”

This pronouncement :

Provides guidance for how to present deferred inflows and outflows

in financial statements

Provides for new reporting format:

Statement of Net Assets becomes Statement of Net Position

Changes to modified-accrual balance sheets

This pronouncement does NOT tell us which F/S line items to report as

deferred inflows or outflows (but GASB 65 does!)

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Statement of Net Position

Two format choices:

Assets + Deferred outflows – Liabilities - Deferred inflows = Net

Position (Encouraged)

Assets + Deferred outflows = Liabilities + Deferred inflows + Net

Position (Balance sheet format)

For governmental funds, must use the balance sheet format above

except you retain the terminology “fund balance” vs “net position”

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Disclosures:

Footnote disclosure of the components of deferred

inflows/outflows if aggregated in the statement of net position or a

governmental fund balance sheet

Significant impacts on a component of net position (invested in

capital assets, restricted or unrestricted) resulting from large

differences between deferred inflow/outflow and the related asset

or liability.

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{GASB 65 – Items Previously Reported as Assets and Liabilities}


Purpose: Identify reclassification guidance for transactions and other

events addressed in previous pronouncements that should now be

recognized as deferred inflows or outflows, following Concepts

Statement No. 4 and the Elements of F/S concepts statement

Implications:

Reclassification of balance sheet items

Limits future use of the term deferred to refer only to deferred

outflows of resources and deferred inflows of resources

Major fund determination will be impacted as assets should be

combined with deferred outflows of resources and liabilities should

be combined with deferred inflows of resources

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Account Balance Treatment

Debt refunding – diff b/w reacquisition price and carrying value of debt (or lease)

Deferred inflow

Imposed nonexchange revenue – resources received (or receivable) before the period resources may be used (incl. prop taxes before the period levied)

Deferred inflow

Government- mandated nonexchange revenue or Voluntary nonexchange resources received before eligibility requirements are met (excluding time requirements)

Liability (Assets by payers)

Same as above, eligible except for time requirements Deferred inflow/ outflow

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Account Balance Treatment

Sale of future revenue (unless GASB 48 allows revenue in period of sale)

Deferred inflow

Debt issuance costs Expense

Prepaid insurance costs Asset (then amortized)

Operating leases – initial direct costs Expense

Sale-Leaseback gain or loss Deferred O/I

Insurance – acquisition costs Expense

GOVERNMENTAL FUNDS – Revenue that is not yet “available”

Deferred inflow

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{GASB 66 – Technical Corrections - 2012}

Effective: Years beginning 12/15/2012

Very minor!!

Changes to GASB 10:

Removes the provision that limits fund-based reporting

of a state and local government’s risk financing activities

to the general fund and the internal service fund type.

Governments will now base their fund type classification

of risk financing activities on the nature of the activity

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{GASB 66 – Technical Corrections - 2012}

Changes to GASB 62:

Modifies the specific guidance on accounting for:

1. operating lease payments that vary from a straight-line basis,

2. the difference between the initial investment (purchase price) and the principal amount of a purchased loan or group of loans, and

3. servicing fees related to mortgage loans that are sold when the stated service fee rate differs significantly from a current (normal) servicing fee rate

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{GASB 67/68 – PENSIONS!}

History:

The GASB issued an Invitation to Comment on Pension & OPEB accounting

(comments were due July 2009)

The GASB issued a “Preliminary Views” document with its preliminary

conclusions in June 2010

The 2 exposure drafts were issued June 2011

Final standards were issued in June 2012

Effective:

Pensions – Years beginning after 6/15/2013

Employer – Years beginning after 6/15/2014

The new standards are restricted to pension (not OPEB). However, it is

fairly certain that ultimately the rules will be consistent.

Applies to the government wide statements, and proprietary fund

statements – not to the modified accrual fund based statements.

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Pension costs are part of the employment exchange, and

should be recognized as the obligation is incurred

The pension plan is the primary obligor for the funded

portion – but the employer is the primary obligor for the

unfunded portion; this does meet the definition of a

liability and should be recorded as a liability (in the full

accrual statements)

The NET PENSION LIABILITY (similar to the UAAL today) will be put

on the balance sheet!!

But the full change will not necessarily go on the income statement

– keep listening!

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Net pension liability =

Total pension liability (similar to the AAL today)

MINUS the amount of plan net position restricted for

pensions

Plan Net Position (Plan Assets – Plan Liabilities)

Assets are valued at FMV (not smoothed value!)

All other amounts determined on same accounting basis

used by pension plan

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Net pension liability measurement date – up to 12 months

plus one day before the balance sheet date

Actuarial valuations

Every two years

Encourage valuation at measurement date

If not, allow valuations up to 30 months and 1 day prior to the

employer’s most recent year end

Must update procedures to roll forward amounts to the measurement

date

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Everyone will now use the same actuarial methodology:

The “entry age” actuarial cost method, and

The “level % of payroll” basis for liability measurement.

This means no more choice to use projected unit credit,

aggregate, etc; and no more level dollar contribution!

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Discount rate (to be applied to “present-value” the

projected benefit payment)

Single blended rate

Long-term expected rate of return – funded portion

Index rate for a high-quality 20 year tax exempt

bond (AA/Aa or higher) – unfunded portion

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Impact on pension expense: The change in the net pension liability does NOT

all get recognized as pension expense immediately.

The following can be deferred (shown as deferred inflow or outflow related to

pensions):

Differences between actual and expected experience

Changes in assumptions about future economic or demographic factors

Amortize into pension expense over a closed period over the “expected

remaining service lives” of all employees

Expected remaining service lives – most people are saying this would

be approximately 12-15 years

Asset smoothing can be done over a closed five year period

Everything else (including benefit changes) will impact pension expense

immediately

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Cost-sharing employers will now have to report their proportionate

share of the collective net pension liability

Substantial (HUGE) impact on government-wide presentation

No impact on modified accrual statement amounts

GASB encourages the estimation of expected future

contributions as the basis to allocate; but it allows any method

that is determined on a basis that is consistent with the manner

in which required contributions are determined.

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Very significant footnote disclosure changes (the illustrative

model takes 5 pages!):

Benefit terms;

# of participants;

Contribution requirements;

Assumptions;

support for the discount rate;

Details of the changes in the net pension liability

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Expanded Required Supplementary Information:

10 years of changes in net pension liability

10 year comparison of funding status

10 years of ARC v. actual contributions

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Things to consider:

ARC is no longer relevant for financial reporting

But still need to comply with state law!

ARC calculated under the new standards will most likely

be higher than under current GAAP

Coordination with actuary

Timing of roll forward procedures, if required

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Agent Employers

Plan net position – your piece

Verifiable information

Timing

Who calculates the deferrals?

Actuary report

Timing

Rollforward

Setting discount rate – could be different for each different

employer

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Impact of these changes:

Better measure of interperiod equity (the cost of providing services

will be matched better with the periods the employment services

were rendered)

Higher volatility – possibly very significant

These rules will not be required to be used for funding – just for

financial statement measurements

ARC is no longer meaningful for accounting purposes

Expect similar changes to OPEB (eventually!)

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OTHER FUTURE PRONOUNCEMENTS AND

EXPOSURE DRAFTS

PLANTE MORAN

{Preview of Upcoming Pronouncements}

Recognition and Measurement Approaches

This is only a CONCEPT STATEMENT – it will only provide the

FOUNDATION for future accounting and reporting standards, rather

than implementation guidance

GASB is looking at three things:

Replacing current financial resources model with a “near-term

financial resources” model

Concepts related to deferred inflows/outflows

Redefining when each measurement approach (initial amount

versus remeasured amount) should be used

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Near-term financial resources model

Near-term = period after the b/s date during which

financial resources at period end can be converted to

cash to satisfy obligations for spending for the reporting

period

Implications – current model may include longer

term assets that would no longer show up in near-

term model

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Measurement Approach

Proposes when each of the following should be used:

Initial Amount

Assets that are used directly in providing services

Remeasured Amount

Assets that will be converted to cash (e.g. financial

assets)

Variable-payment liabilities (compensated

absences)

48



Economic Condition Reporting – Financial Projections

The proposal is to report five year financial projections as required

supplemental information in all basic financial statements

The projections would include five components: 1- Total cash inflows and major individual cash inflows (in dollars and

as % of total) & explanations

2- Total cash outflows and major individual cash outflows (in dollars

and as % of total) & explanations

3- Total financial obligations and major individual obligations (bonds,

pensions. OPEB, long-term contracts)

4- Annual debt service payments

5- Narrative discussion of major intergovernmental interdependencies

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Government Combinations and Disposals of Operations

Defines and provides accounting and reporting guidance

for governmental

Mergers

Acquisitions

Transfer of operations

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The proposal would differentiate between the following types

of combinations: Merger, Acquisition, or Transfer of

Operations

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Is there significant consideration?

Yes No

Does the combination involve the entire legal entity?

Entire entity

Acquisition

Merger

A portion of its operations

Transfer of Operations


Mergers and Transfers of Operations

In general, assets and liabilities (and deferred inflows and

deferred outflows) would come forward at their originally

reported values

Subject to any corrections for misapplication of GAAP, or

to bring differing accounting principles into alignment

In a transfer of operations, the government would report a

special item for the amount of assets and liabilities (and

deferred inflows/ outflows) received

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Acquisitions

In general, the acquiring government should recognize all assets and

liabilities, regardless of whether the acquired government had

recognized them, at acquisition value (FMV); Exceptions are:

Prior goodwill recorded by the acquired entity (or deferred outflows

resulting from previous acquisitions) should not be recognized;

Employment benefit liabilities can come forward; so can landfill closure;

pollution remediation; investments, derivatives and deferred inflows &

outflows

If Consideration paid is greater than recordable amounts the difference

(goodwill) is a deferred outflow; If less than, the difference should be

used to reduce carrying value of noncurrent assets acquired.

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Disposals

Transferor Governments (whether in an acquisition or in a

transfer of operations) should recognize a gain or loss on

disposal of operations as a special item

Nonexchange Financial Guarantee Transactions

Exposure draft issued June 2012, comments due back

9/28/2012

Financial guarantee involving 3 parties

Holder of obligation

The issuer of the obligation

The entity extending the financial guarantee

Excludes special assessment debt

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Financial guarantees – steps:

Assess likelihood of making payment under guarantee

When “more likely than not” a payment will have to be

made, govt must recognize liability

Best estimate of the discounted PV of future

outflows

Only record under current financial resources model

if “due and payable”

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{Thank you.}

[email protected]

mailto:[email protected]

Documents

{GASB Update} · Effective dates Pronouncement Effective Date – Years beginning AFTER June year end December year end 60 - SCA 12/15/2011 2013 2012 61 – Financial reporting entity