MEMORANDUM TO: All NASACT Members and Other Interested Parties FROM: R. Kinney Poynter, Executive Director DATE: July 13, 2014 SUBJECT: April 8-10, 2014, GASB Meetings Gerry Boaz, CPA and CGFM, Technical Manager, State of Tennessee, is attending the meetings of GASB as an observer on behalf of NASACT. These comments are not an official statement, but represent Gerry’s summary of the actions of the board. All board members and the director of research were present for all or a portion of the April 8-10, 2014, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered: 1. Fair Value–Measurement and Application 2. Postemployment Benefits 3. Leases 4. Fiduciary Responsibilities 5. Tax Abatement Disclosures 6. Technical Plan Please note that all board decisions are tentative until a final pronouncement is issued. Fair Value–Measurement and Application Randy Finden and Jialan Su, project managers, Deborah Beams, practice fellow, and Kathryn Walsh and Mitchell Harrison, postgraduate technical assistants, presented the board with a preballot of the Exposure Draft (ED) and an issue paper that discussed the scope paragraph, codification instructions, and respondent questions. The preballot of the ED did not pose any formal questions. Because the ED was preceded by questions posed in the Preliminary Views (PV), staff recommended that the ED not pose any questions. A public hearing was held for the proposals in the PV. A user roundtable, however, was not held. Public hearings were appropriate unless based on the available evidence the board believed an informed decision could be made without one. Because the provisions of the ED were not substantively changed from the PV, staff recommended that neither a public hearing nor a user roundtable be scheduled. The board agreed with staff. Ms. Taylor believed that if significant changes had occurred based on feedback, questions would have been appropriate, but that did not occur. For ¶23 (market approach), Mr. Granof wanted to define or explain “multiples.” Mr. Fish suggested clarifying it by describing it as “market multiples” as FASB had described it. The board agreed. For ¶50 (identifying transactions that were not orderly), Mr. Granof was concerned about the discussion of “when measuring fair value or estimating market risk premiums” because the notion of “market risk” had not been introduced before this paragraph. He believed market risk was inherent within a fair value measurement. For ¶72d (acquisition value: nonmonetary assets acquired in an exchange when the value of the asset received was used to measure the cost of the asset acquired

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as provided in ¶274 of GASB 62), the board agreed to delete this item. For the “market risk” definition in the glossary, staff suggested conforming the GASB 53 definition of market risk to the fair value project definition of market risk. Staff also suggested deleting credit risk as a component of market risk because FASB clarified that credit risk was security specific, not a broad based market risk. For ¶B11 (basis for conclusions or BFC), Ms. Taylor suggested deleting the last two sentences because it confused the discussion and was really just a repeat of the standard. The board agreed. For ¶B29-30 (BFC – identifying transactions that were not orderly), Mr. Fish wanted to explain how to determine when transactions were not orderly. Mr. Bean indicated that the standard, not the BFC, provided the guidance as more appropriate. For illustration 4 (#2), the board agreed that if the loan was securitized, it should be measured at fair value. In regard to the scope paragraph and codification instructions, the text of the standard should include a paragraph listing the statements and paragraphs being amended. Thus, paragraph 3 in the ED should read as follows: "This Statement amends GASB Statement No. 10, Public Entity Risk Pools, paragraphs 42, 43, and 46; GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, paragraph 44; GASB Statement No. 27, Accounting for Pensions by State and Local Government Employers, paragraph 39; GASB Statement No. 28, Accounting and Financial Reporting for Securities Lending Transactions, paragraph 6; GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, paragraphs 2, 8, 15 and 22; GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, paragraphs 18 and 27; GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, paragraphs 22, 30, and34; GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, paragraph 3; GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, paragraphs 21 and 82; GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, paragraph 9; GASB Statement No. 61, The Financial Reporting Entity: Omnibus, paragraph 10; GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in pre-November 30, 1989 FASB and AICPA Pronouncements, paragraphs 105, 137, 203, 274, 275, 279, 281, 373, 409, 424, and 425; GASB Statement No. 67, Financial Reporting for Pension Plans, paragraph 18." The board agreed. The board also agreed with moving forward with a ballot draft of the proposed standard. Postemployment Benefits

Scott Reeser and Michelle Czerkawski, project managers, and Emily Clark, Francisco Loredo, and Meredith Hightower, postgraduate technical assistants, presented the board with a ballot draft of an ED, Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered through Trusts That Meet Specified Criteria and Amendments to Certain Provisions of GASB Statements 67 and 68.

Clarifying language was added to indicate that the reporting requirements of this Statement applicable to pension plans not administered through trusts that met the criteria in ¶4 of this Statement specifically applied to any assets accumulated for purposes of providing pensions through such plans. Staff revised language to clarify that, for multiple-employer defined benefit pension plans not administered through trusts that met the criteria in ¶4, the government holding the assets was reporting those assets rather than the activity of the pension plan in an agency fund. Similarly, if a single-employer defined benefit pension plan was not administered through a trust that met the criteria in ¶4, any assets accumulated for purposes of providing pensions through that plan should continue to be reported as assets of the employer (or nonemployer contributing entity). Although

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discussed generally as a disclosure for pension plans, staff proposed that, because there was no plan level reporting when the plan was not administered through a trust meeting the criteria in ¶4, the employer (or nonemployer contributing entity) should provide this disclosure. The proposed disclosure was presented as additions to ¶37d and ¶65c of this ballot draft. Staff proposed removing the note disclosures required by ¶37e (employer) and ¶65d (nonemployer contributing entity). However, staff noted that, because there were no requirements for pension plan reporting when the plan was not administered through a trust that met the ¶4 criteria, the disclosures required by ¶37e and ¶65d might not be relevant.

Furthermore, staff proposed revising certain requirements in ¶43, which addressed the

accounting and financial reporting for pensions in stand-alone financial statements of primary governments and component units that provided pensions through the same defined benefit pension plan. So that the disclosures required for a primary government and component unit that provided pensions through the same pension plan were consistent with disclosures required by this Statement for other employers and disclosures required by GASB 68 for cost-sharing employers, staff recommended that the requirements in ¶43c(1) include disclosures of the employer’s covered-employee payroll and of the employer’s proportionate share of the collective total pension liability as a percentage of covered-employee payroll. For understandability, staff restructured ¶43c(1) to be consistent with ¶43c(2), but noted that the proposed requirements in ¶43c(1)(a) and ¶43c(1)(b) were the same as those required by ¶68a-b. The proposed additional disclosures were presented in ¶43c(1)(c) and ¶43c(1)(d). Additionally, for similar reasons, staff proposed that the requirements of ¶43(2) include disclosure of the employer’s covered-employee payroll for consistency purposes. The board tentatively agreed that the requirements of GASB 67 ¶34 should continue to apply to all 10-year schedules (including the money-weighted rates of return on pension plan investments schedule for pension plans), with the modification that information about external, economic factors that significantly affected trends in investment-related amounts, should not be required to be included. When integrating this decision into the ballot draft, staff noted that this amendment also applied to GASB 68, Accounting and Financial Reporting for Pensions, because although GASB 68 did not require a schedule of money-weighted rates of return on pension plan investments, it did require other schedules that presented investment-related amounts, such as investment income, and notes to those schedules regarding factors that significantly affected trends in the amounts report. As such, staff proposed applying the recommendation above to GASB 68 ¶47, ¶82, and ¶115. The proposed amendment was presented in ¶92 of this ballot draft. Regarding the amendments related to payables to the pension plan, staff edited ¶95 and ¶96 to further clarify the specific requirements of those paragraphs. Staff recommended that early application should be applicable to GASBs 67 and 68 amendments. Although governments would not be required to implement the amendments prior to fiscal years beginning after June 15, 2015, staff believed a government should not be precluded from implementing the amendments for fiscal years ending in 2015 (e.g., for a December 31, 2015 year-end.) The board agreed with staff’s recommendations and suggested improvements to the document. Leases Deborah Beams, practice fellow, Randy Finden and Jialan Su, project managers, Ken Schermann, senior technical advisor, and, Christopher Teats and Cody Domasky, postgraduate technical assistants, presented the board with issues papers discussing lessee disclosures, including short-term lease disclosures.

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Staff noted that current GASB and FASB guidance on the general description of leasing arrangements were nearly identical. However, the FASB’s revised ED contained a number of changes for the general description of leasing arrangements. Staff provided an analysis on each element, other than the general description requirement. The revised ED required information about the nature of the entity’s leases to be disclosed for subleases as well. Current GASB and FASB guidance required disclosure of the basis on which contingent rental payments were determined. The revised ED replaced contingent rental payments with variable lease payments. The revised ED also added the phrase terms and conditions to the disclosure requirement. Staff believed this was a matter of improved wording and did not substantively change the disclosure requirement. For these reasons, staff recommended that the due process document include a proposed requirement for lessees to disclose the basis, and terms and conditions, on which variable lease payments were determined. The board agreed with staff. One difference between current GASB and FASB guidance and the FASB’s revised ED was that the FASB’s revised ED did not require disclosure of purchase options which could because it informed financial statement users about potential future payments and allowed them to analyze the likelihood of exercising a purchase option. Disclosure of this information could be helpful for a user to understand management’s decision-making relating to purchase options and to analyze the potential payments the lessee might make related to the lease arrangement. Based on the board’s tentative decisions, a lessee would include in the lease liability an amount for purchase options probable of being exercised. Staff believed that if the option was included in the liability, users had quantitative information about future payments probable of being made. Staff believed this was better information than qualitative disclosure of the existence and terms, as currently required. If the option was not included in the liability, staff believed it was not important enough to warrant disclosure (GASB 62 ¶107 required disclosure of a loss contingency not accrued at the reasonable possibility threshold). Staff argued that the purchase option in a lease was not truly a loss contingency because the offset was to the lease asset and there was no net impact on net position. Therefore, staff recommended not including a proposed requirement for lessees to disclose the existence and terms of purchase options. Mr. Sundstrom disagreed with staff. He was concerned about staff’s recommendation because preparers had to determine the probability of exercising the option and the liability incurred for significant leases. He believed preparers would be able to recognize material leases to apply this requirement. He suggested disclosing how the obligation/liability was built (i.e., the components such as a purchase option). Ms. Taylor did not believe this disclosure was necessary, especially for every purchase option for every lease. She believed the fact that the purchase options existed was more important than disclosing the detail for each lease with and without purchase options. What elements were in the lease obligation was also important to her. She believed this would result in meaningless boilerplate language and thus ultimately agreed with staff. Mr. Fish agreed with Ms. Taylor and Mr. Sundstrom. He was concerned about how to operationalize this in a disclosure. He wanted the disclosure of the options. He agreed with the existence but not the terms. Mr. Vaudt was concerned about the number of leases that could be involved and the volume of disclosure that would be required. He struggled with the level of detail that would be meaningful to the user. He agreed with staff. Mr. Granof was troubled about information overload and wanted to establish what was most essential information. He believed that the board really was not assessing cost/benefit, but instead information overload. He wanted to recognize the longer-term implications of electronic reporting. He was perplexed about how to assess the costs/benefits. Overall, he agreed with staff though. Ms. Sylvis agreed with staff because of the difficulty of obtaining the information and for the preparer to determine the probability of exercising the options. She believed much of this information was good to know but was not essential when rolled up to the financial report. Mr. Brown agreed with staff. He

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believed the essential information was the amount of the obligation and when it was to occur (i.e., probability of exercising the purchase option). He did not believe disclosing the existence and terms were essential information. Next, current GASB and FASB standards required disclosure of the existence and terms of renewal options and escalation clauses. Escalation clauses were a different term for scheduled rent increases. The board tentatively decided that existing guidance related to scheduled rent increases should be superseded because the increasing future payments would be included in the total lease liability. Therefore, staff believed disclosures related to escalation clauses likewise were unnecessary. Staff noted that termination options could be just as significant as renewal options in their impact on the lessee, and agreed with the FASB’s revised ED approach of including both renewal and termination options in the general leasing disclosure. Similar to purchase options, under the board’s tentative decisions, renewal and termination options also were incorporated into the lease liability. Payments to be made for renewal periods (or after a potential termination date) would be included if it was probable the government would renew (or not probable the government would terminate). Under the current lessee accounting model, many leases were not capitalized, and information about the renewal terms of the lease agreement might be used to estimate future payments. Under the proposed model, preparers were making those estimates about future payments and factoring them into the measurement of the lease liability (and asset). Therefore, staff recommended not including a proposed requirement for lessees to disclose the existence, and terms and conditions, of renewal/termination options because the information might not be essential to understand the amounts recognized in the financial statements under the proposed lessee accounting model. Mr. Brown disagreed with staff because the information was essential if it was not discernable from the liability and how it was calculated. Mr. Fish disagreed with staff because he believed the existence of the options was essential information (not the terms). Mr. Granof believed this was nice to know information but was not essential and believed the disclosure would be meaningless. The board, except Mr. Brown and Mr. Fish, agreed with staff. Mr. Sundstrom believed all the components to calculate the liability should be included. Because the board agreed with staff above, he agreed with staff here.

In regard to residual value guarantees, this disclosure did not have a corresponding current GASB or FASB guidance requirement. A residual value guarantee could lead to a significant payment from a lessee at the end of a lease if the actual value of the underlying asset was below the residual guarantee amount. The board tentatively decided that residual value guarantees probable of being required should be included in the measurement of the lease liability. However, unlike purchase options and renewal/termination options that depended solely on a lessee’s future choice, a lessee had less control over whether a residual value guarantee payment would be required. Therefore, staff recommended that a requirement should be proposed for lessees to disclose the existence, and terms and conditions, of residual value guarantees provided by the lessee. Mr. Brown agreed with staff because of the rarity of this, but there would need to be a distinction between those used and not used in the liability calculation. Mr. Sundstrom believed aggregation was not valuable without knowing how the liability calculation was determined (i.e., components of the liability). Mr. Fish agreed with staff because the lessor would determine the value. Mr. Granof agreed with staff but questioned how this information would be aggregated. Mr. Vaudt was also concerned that aggregation of this information for multiple leases would be meaningless. The board generally agreed with staff.

For restrictions or covenants imposed by leases, the FASB’s revised ED changes from requiring disclosure of “restrictions imposed by lease agreements, such as those concerning dividends, additional debt, and further leasing” to “the restrictions or covenants imposed by leases, for example, those relating to dividends or incurring additional financial obligations.” The reference in

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FASB’s disclosure requirement relating to dividends was not applicable to government entities. The remainder of the current disclosure was the same between GASB and FASB in requiring information regarding restrictions imposed by leases, including additional debt and further leasing. The revised ED added the term covenants in addition to restrictions. This wording change was applicable based on the board’s tentative decision to classify leases as financings. The term additional financial obligations encompassed both additional debt and further leasing. GASB literature generally did not require disclosure of restrictions or covenants imposed by bond agreements or other debt (unless such covenants had been violated). Therefore, staff did not believe such a difference existed, and therefore recommended that lessees should not be required to disclose the restrictions and covenants imposed by leases. Mr. Fish disagreed with staff as a step backward. Mr. Granof agreed with staff and questioned how this would be practical. The board, except Mr. Fish, agreed with staff.

Next, the significant assumptions and judgments disclosure did not have a corresponding current GASB or FASB requirement, as it was not currently required in the general leasing description disclosure. However, the revised ED included this disclosure to give insight as to how and why management made certain decisions regarding leasing arrangements. This type of disclosure also increased comparability between entities relating to leases, as users could distinguish between how different entities treated certain items and made better judgments regarding the comparison. GASB 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, did not include a disclosure requirement of significant assumptions and judgments for this reason. Conversely, GASB 68 required disclosure of significant assumptions and other inputs used to calculate the pension liability. Aggregating the assumptions and judgments made for all leasing activity could be difficult for preparers with a high volume of leases. Therefore, staff recommended not including a proposed requirement for lessees to disclose the information about significant assumptions and judgments made in accounting for leases because this information would be more of a policy description (i.e., covered by the GASB 62 ¶90–95 requirements to disclose accounting policies) rather than useful accounting information. Mr. Vaudt believed the level of detail to make this meaningful was not feasible. The board, except Mr. Fish, agreed with staff. Mr. Fish believed this information would be meaningful. Mr. Brown did not believe this information was essential for decision-making but was nice to know.

In regard to reconciliation of lease liabilities, the FASB’s proposed disclosure and the current GASB disclosure attempted to provide the same information—how the liability balance changed from the prior period to the current period. Because the FASB’s proposal was specific to leases, it was more detailed in the descriptions (liabilities created due to leases commencing vs. increases). Staff believed this project should not change the existing disclosure requirement for a reconciliation of long-term liabilities. Adding a separate disclosure for lease liabilities with a more detailed reconciliation (either in addition to the long-term liabilities disclosure or excluding leases from it) was a possibility (e.g., GASB 68 ¶44). Staff recommended that the disclosure currently required by GASB 34 for a reconciliation of long-term liabilities, including leases, be considered sufficient and additional detailed disclosure of the changes in lease liabilities was not necessary. Staff believed the incremental benefit to users might not justify the incremental cost to preparers. Additionally, this would be an approach similar to that taken in GASB 70, which required disclosure of the changes in the guarantee liability and illustrated them with the general increases and decreases headings. The board agreed with staff.

For the reconciliation of lease assets, GASB 34 ¶117 provided for a disclosure of rollforward information related to capital assets. Staff recommended that information about the changes in lease assets from the beginning of the reporting period to the end should continue to be disclosed for lease assets. The next question to consider was if the currently required capital asset disclosure provided sufficient information about the changes in lease assets (e.g., separate information about lease

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assets). While other lease disclosure requirements provided users with the amount of assets under lease, information about the changes in the lease assets specifically (e.g., new leases or terminated leases) might not be provided. Staff believed the level of detail required by the capital asset disclosure currently required by GASB 34 was sufficient. Additionally, staff recommended that the disclosure not be modified to require lease assets to be shown separately. The existing GASB 34 requirement was for disclosure by major class of asset. Major classes of assets were not defined in the GASB literature; it was a matter of professional judgment. Staff believed this should remain the case. Therefore, staff recommended that lessees should disclose only the reconciliation required for all capital assets currently required by GASB 34, and therefore should not include a proposed requirement for a more detailed reconciliation. Mr. Fish believed materiality was a consideration. The board agreed with staff.

In regard to assets recorded and accumulated amortization, GASB 62 ¶223 established disclosure requirements for lease assets. Staff believed the intangible right of use asset created by the leasing arrangement should be distinguished from owned assets because the asset was the right rather than the underlying asset. Staff expected lease assets to be considered a separate major class of capital asset. With the lease asset being a separate class (or classes), the gross amount of the asset and the accumulated amortization, would be shown separately in the capital asset rollforward. Thus, staff recommended that the total amount of lease assets and related accumulated amortization should be disclosed. Disclosing the gross amount of assets recorded under leases by major asset class of underlying asset might provide useful details to financial statement users about the government’s decisions related to leasing versus owning an asset. Staff believed requiring disclosure of lease assets by major class of underlying asset would not be cost-beneficial. Governments would not be prevented from disaggregating their disclosures if their circumstances warranted major classes. Therefore, staff recommended not disaggregating the right-of-use assets into major classes as was done for owned assets. Mr. Vaudt agreed with staff and with Mr. Brown’s suggestion to include the level of control. Ms. Taylor believed that a requirement for lease assets to be disaggregated by major classes of underlying assets would be overkill. Mr. Granof believed this was an example of useful information to know (information overload), but not an assessment of costs/benefits. The board agreed with staff.

Next, current GASB and FASB guidance on disclosure of amortization expense was very similar. The FASB’s revised ED did not contain a similar requirement. Staff noted that separate disclosure of the amortization expense of other intangible assets was not required by existing literature, and questioned why expense related to intangible lease assets should be different. Therefore, staff believed separate disclosure of amortization expense related to lease assets should not be required by the proposed Leases standard. However, the capital asset rollforward disclosure would include information regarding right-of-use lease assets, including accumulated amortization. Under this guidance, current-period amortization expense would be provided regardless of what was proposed in the due process document. Staff recommended not specifically proposing that lessees disclose the amount of amortization expense for lease assets. Mr. Brown believed this would be duplicative because of the rollforward of capital assets. Thus, he agreed with staff. The board agreed with staff.

For contingent rentals (variable lease payments), GASB 62 ¶223 established disclosure requirements for incurred contingent rentals. Current GASB and FASB guidance treated the disclosure of contingent rentals the same. The revised ED changed contingent rentals to variable lease payments. There was no substantive difference in these terms. Staff considered the nature of variable lease payments and whether these types of payments were conceptually different from other expenses that might be incurred such as repairs and maintenance expense. Staff noted that the basis

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on which these highly variable payments were made would be disclosed, and believed it was reasonable that lessees also disclosed the total variable lease payments actually incurred. Therefore, staff recommended including a proposed requirement for lessees to disclose the total variable lease payments actually incurred. Ms. Sylvis, Ms. Taylor disagreed with staff. Mr. Brown wanted to limit the disclosure to those actually incurred and included in the lease liability. He agreed with staff as long as the disclosure did not duplicate the capital asset rollforward. Mr. Fish agreed with Mr. Brown.

For rental expense, GASB 62 ¶223 established general descriptions disclosure requirements for operating lease arrangements. Current GASB and FASB guidance for operating leases were very similar. The lessee was required to disclose rental expense relating to the operating lease. However, based on tentative board decisions to date on the Leases project, there would no longer be a distinction between operating and capital leases. All leases would be treated the same, other than those meeting the short-term exception. Leases meeting the short-term exception would be treated similarly to the way operating leases were treated now. For this reason, staff recommended superseding any currently required operating lease disclosures. The board agreed with staff.

In regard to future lease obligations, GASB 38, Certain Financial Statement Note Disclosures, ¶11, established the disclosure requirement for future minimum payments. The FASB’s proposed disclosure requirement was essentially the same as GASB’s current disclosure requirement for capital leases. In both cases, the future payments that made up the lease liability were scheduled out by future fiscal years (i.e., payments shown undiscounted, with a reconciliation for the imputed interest portion to arrive at the present value of the liability). The difference between the FASB’s current and proposed disclosure requirement and the GASB’s current disclosure requirement was the level of detail after the first five years. Based on the notion that leases were financings, staff recommended that the maturity analysis disclosure be made with the existing requirements to show each of the next five years and in five-year increments thereafter. Staff did not believe there was a reason for lease disclosures to be more detailed than other debt disclosures. GASB 38 required a long-term debt analysis to show separately the principal and interest requirements for each year, whereas this was not required for the analysis on lease payments. However, staff recommended retaining the current presentation of the lease analysis. Under both GASB and FASB’s current disclosure requirements, the maturity analysis of capital lease payments only included those leases included in the capital lease liability. Based on tentative board decisions to date, the proposals in a due process document would not differ from the FASB’s revised ED, as short-term leases would be expensed as incurred. Therefore, staff recommended including a proposed requirement for lessees to disclose a maturity analysis of future minimum lease payments, the proposed requirement for a lease liability maturity analysis included five-year increments of payments after the first five years, and the proposed requirement for a lease liability maturity analysis be kept as was currently with undiscounted payments and total interest summed for all years. Mr. Fish believed it was important to know whether the payments were backend loaded. Mr. Brown agreed with Mr. Fish. The board agreed with staff.

For sublease rentals, GASB 62 ¶223 established disclosure requirements for minimum sublease rentals to be received under both capital and operating leases. The current GASB and FASB required disclosures for subleasing activity were identical. However, the FASB’s revised ED did not contain the same lessee disclosure requirement that sublease rentals to be received in the future be disclosed. Paragraph 87 (BFC) of the FASB’s revised ED indicated that the boards (FASB and IASB) decided that a lease and a sublease should be accounted for as two separate contracts. Disclosures required for lessors would cover subleasing activity based on this approach. Therefore, staff recommended that lessee disclosure requirements should not include amounts of sublease

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rentals to be received. However, such a disclosure might be required by lessor disclosures or sublease disclosures. Mr. Granof wanted to link subleases to leases. The board agreed with staff.

In regard to commitments for leases not begun, ¶158 of National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, described the disclosures required for lease commitments. Current GASB and FASB guidance was not the same regarding the disclosure of lessee commitments. The current GASB guidance explicitly stated that disclosure was required for commitments under noncapitalized leases. Based on the board’s tentative decisions to date, operating leases would no longer exist, but leases accounted for under the short-term exception fell into the noncapitalized category. Staff believed a disclosure helped estimate future liabilities and should be made about leases that impacted the entity in the future, but were not yet accounted for on the statement of net position. The requirement in NCGA Statement 1 should cover any noncapitalized lease, though governments might not think of contracts not yet begun as leases. Therefore, staff recommended considering making a conforming edit to NCGA Statement 1, stating that disclosure of commitments under leases not yet begun was required, rather than the current statement of commitments under noncapitalized leases. This improved the clarity of the disclosure requirement by being more specific about what it included. Mr. Granof questioned how often leases were entered into well before they could be used. Mr. Brown agreed with staff if this did not apply to short-term leases. However, if it did apply to short-term leases, it had to be material. He preferred to exclude short-term leases from this requirement. Otherwise, he agreed with staff. Mr. Vaudt agreed with Mr. Brown. The board agreed with staff as long as this just applied to long-term leases.

For the maturity analysis of nonlease components, the FASB’s revised ED required disclosure of a maturity analysis of the nonlease components of a contract (Accounting Standards Codification or ASC 842-20-50-9). This disclosure had no corresponding current GASB or FASB requirement. Staff believed an analysis of the future payments relating to nonlease components of a contract could be useful in terms of better understanding cash flows and commitments. However, it also was inconsistent with current GASB guidance, which did not require disclosure of future payments for service arrangements for owned assets. Thus, requiring disclosure of the commitments relating to nonlease components of a lease contract created inconsistent treatment of similar items. Many users felt that this disclosure did not contain information essential in analyzing the leasing arrangements of a government entity. For these reasons, staff recommended that lessees should not disclose a maturity analysis of the nonlease components of a contract. Mr. Granof wanted to discuss service contracts. The board agreed with staff.

In regard to other considerations regarding lessee disclosures (noncash transactions), GASB 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, provided guidance in ¶37 for disclosure of certain noncash transactions. GASB standards generally did not provide guidance on presentation in the statement of cash flows, considering GASB 9 to be sufficient. However, like the FASB proposed, a conforming edit would be required to GASB 9 ¶37. Staff believed that if the phrase obtaining an asset by entering into a capital lease was replaced by obtaining a right-of-use asset by entering into a lease, it would be apparent that such a transaction should be disclosed as a noncash transaction. Therefore, staff recommended not referring to the noncash transaction disclosure requirement in GASB 9. Staff also proposed replacing the capital lease example in GASB 9 (i.e., “obtaining an asset by entering into a capital lease” with “obtaining a right-of-use asset by entering into a lease”). The board agreed with staff. Mr. Granof wanted to define “right-of-use asset.” He questioned how this term would be used since the standard would not distinguish between capital and operating leases and these would be financing leases.

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For related party transactions, GASB 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, ¶4 referred to the disclosure requirements. The related party disclosure requirements in GASB 62 applied to all related party transactions, whether there was a specific standard on the subject or not. Therefore, the related party disclosures currently applied to leases, and staff believed they should continue to do so. However, staff believed this could be mentioned in the BFC; consistent with the board’s decision in the recently issued GASB 70 ¶54 in the BFC. Staff recommended not referring to the related party disclosures in GASB 62. The board agreed. Mr. Brown strongly recommended including the guidance in the BFC. Mr. Fish agreed with Mr. Brown.

In regard to the discount rate, staff recommended not including a proposed requirement for

disclosure of the discount rate(s) used in measuring lease liabilities, but that the due process document should amend GASB 62 to exempt lease liabilities from imputed interest guidance. The board agreed with staff’s recommendation.

Next, the board discussed the fair value of a lease liability. Requiring disclosure of the fair value of the lease liability was considered because of an existing disclosure requirement in International Financial Reporting Standard No. 7, Financial Instruments: Disclosures. Paragraph 25 of that standard required disclosure of the fair value of financial assets and liabilities. Currently, a finance (capital) lease liability would be included in that disclosure. Staff noted that FASB ASC Topic 825, Financial Instruments, section 825-10-50 also required disclosure of fair value of financial instruments for certain entities, but ¶50-8.d. of that section exempted lease liabilities from being included. GASB currently had no such disclosure requirement. Staff agreed with the FASB’s decision that the determination of fair value for a lease liability likely was more difficult than any benefit it would provide to users. Thus, staff recommended not including a requirement for lessees to disclose the fair value of the lease liability. The board agreed.

In regard to initial direct costs, staff agreed with the argument about immateriality of these costs. Additionally, there was no current requirement to disclose the initial direct costs capitalized in the measurement of owned capital assets. Staff believed requiring such a disclosure for lease assets was inconsistent with the board’s tentative decision that a lease asset was an intangible asset that should be subject to existing authoritative guidance for capital assets. Therefore, staff recommended not including a requirement for lessees to disclose the amount of initial direct costs capitalized as part of lease assets during the reporting period. The board agreed.

Next, because of these potential changes to the lease definition, it was possible that some governments with arrangements meeting the current lease definition would not meet the revised definition. One concern was that the disclosures currently made for these lease arrangements would no longer be required upon transition. Staff believed it was not within the Leases project scope to provide disclosure requirements for arrangements that were not leases. Additionally, some of these arrangements might fall within the scope of another standard that had other disclosure requirements. Therefore, staff recommended not including a requirement for lessees to disclose information about arrangements that upon transition no longer met the lease definition. The board agreed. Mr. Brown believed in many instances that if this occurred it would be immaterial and likely would be service contracts that should not be disclosed.

In regard to tables of expenses and cash flows, staff acknowledged the concern about having lease-related expense information in multiple places in the financial statements. Staff believed any lease-related expenses should be presented together. The only lease-related expenses that would be disclosed separately would be variable lease payments and short-term lease expense. These

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disclosures had to be included with other lease disclosures because of their nature. However, disclosure of amortization and interest expense might be in other locations because of other requirements for capital assets and long-term liabilities. Therefore, staff recommended not including a requirement for lessees to disclose the amount of interest expense related to leases; including a requirement for lessees to disclose together all lease-related expenses, except for those disclosed with other elements; and not including a requirement for lessees to disclose cash paid for principal and interest on leases. Mr. Brown believed disclosing together all lease-related expenses would raise cost allocation issues and thus agreed with staff. The board agreed with staff’s recommendations.

The board next discussed some FASB alternative views and five recommended additional disclosures: a) disaggregation of lessee and lessor transactions, b) actual lease terms for significant leases and weighted-average lease term of all, c) information about renewal options, d) categorization of renewal options by likelihood, and e) amounts of lease payments in excess of contractual payments. For item a, staff did not believe it necessary to specifically state that lessee and lessor transactions should be disclosed separately from each other. While lessor disclosures were yet to be considered, staff believed lessee and lessor disclosures would be different enough that preparers would not attempt to combine them. For items b and d, staff believed the cost of providing these disclosures would be more than the benefit provided to users. Computing a weighted-average lease term would be an additional step governments would not otherwise perform when accounting for its leases. Categorization of renewal options by likelihood presented implementation challenges and seemed unnecessary when the likely renewals were already included in the lease liability. Because these additional disclosures were put forth in alternative views that did not align with the board’s tentative decisions, staff did not believe they needed to be considered further at this point. Therefore, staff recommended that the proposed lessee disclosure requirements should not include the above items. Mr. Fish was averse to netting the information. The board agreed with staff on a-d (a would be in light of the lessor discussion). Mr. Brown did not agree with staff on e. He wanted to disclose the incursion of the costs, not the payment (i.e., disclosure of amount not in the liability, the expense). He would require disclosure of the total liability and the amount that ended up being in expense/expenditure. Ms. Taylor wanted to be internally consistent in how they were treated because she believed this issue was similar to the variable lease payment issue. Mr. Fish, Mr. Vaudt, Mr. Granof, and Mr. Sundstrom agreed with Mr. Brown. Ms. Sylvis and Ms. Taylor agreed with staff on e (i.e., no disclosure).

Next, the Leases project task force, participants in the user interviews, and board members in previous meetings made other disclosure suggestions. A task force member suggested considering a disclosure requirement about below-market leases (i.e., leases where the required payments were below those charged in a normal market transaction). Staff noted that contracts with significantly below-market rates might not meet the proposed revised lease definition, which qualified a lease as being an exchange or exchange-like transaction. Staff therefore believed that while the payments might be somewhat discounted from market rates, if the contract met the definition of an exchange-like transaction, the discount was not significant enough to be disclosed. Likewise, if the discount was significant, the arrangement would not meet the lease definition. Thus, staff believed the proposed lessee disclosure requirements should not include information about below-market leases. Mr. Brown believed these likely would not meet the lease definition and thus GASB 33 would apply to capital assets received in a nonexchange transaction. He wanted to clarify in the CIG that a lease for $1 (which was there to create a legal contract) and a nominal lease payment would be covered here. The board agreed with staff.

For information about decision-making, one user suggested a disclosure that compared lease costs with the costs to own the underlying asset, which would help users to assess the

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government’s decision to lease versus buy. Another user thought information about the government’s decision-making process, such as how the government selected the lessors with whom it did business, would be useful. While staff understood why users were interested in this type of information, staff did not believe this information met the criteria set forth in Concepts Statement 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, for inclusion in the notes. Staff recommended that the due process document should include a statement that the requirements in GASBs 48 and 62 to disclose any pledged revenues or collateral applied to leases, with the exception that the underlying asset as collateral need not be disclosed. The board agreed with staff. However, Mr. Granof supported disclosing why governments entered into leases when the majority of the time it was to avoid debt limitations. He was concerned about only the most significant leases when disclosing the leases entered into to avoid debt limitations. He believed leasing usually was more costly. Ms. Taylor believed the costs were significant to determine this for every lease. Mr. Brown agreed with Mr. Granof’s premise of transparency but disagreed that this was a role of historical financial reporting.

In regard to components of net impairment, the board tentatively decided to propose a net calculation of the impairment of a lease asset (i.e., any change in the lease liability would offset the impairment loss recognized). The amount of the impairment loss would be a required disclosure under existing guidance in GASB 42. However, it was suggested during the discussion that the board should consider requiring disclosure of the components of that net amount (i.e., the gross impairment loss and the adjustment for the lease liability). This provided information about how much of the change in asset value was due to permanent loss of service utility beyond the change in liability. It could be seen as similar to the requirement in GASB 67, Financial Reporting for Pension Plans, which required disclosure of the components of the net pension liability, or GASB 34, which required disclosure of the discounts and allowances netted against revenue. Staff noted that GASB literature did not always require disclosure of components of a net amount (e.g., GASB 68 required a net deferred inflow or outflow). Staff recommended requiring this disclosure, as it was consistent with several other GASB standards that required disclosures of the components of net amounts. Staff recommended that the proposed lessee disclosure requirements include the components of a net impairment loss (i.e., gross impairment loss and adjustment to the lease liability). The board, except Ms. Sylvis, agreed with staff.

Next, the board discussed short-term lease disclosures for lessees. The board tentatively decided to allow for an exception for short-term leases to the overall lease accounting model for lessees. Under this exception, lessees would not recognize an asset for the right to use an underlying asset or a liability for the obligation to make payments. Instead, lessees would expense the lease payments as they were due. However, the board also discussed the need for compensating disclosures if this exception was allowed. In regard to disclosing a policy, a description of the accounting for short-term leases might be considered a significant accounting policy by some governments and therefore would be disclosed as such. In those cases, staff believed the existing guidance on disclosure of accounting policies (GASB 62 ¶90–94) should be sufficient and additional disclosure proposals in the due process document were unnecessary. The board agreed. Mr. Granof saw only marginal benefit to such a disclosure.

Next, a disclosure to consider was the amount of expense/expenditure recognized under short-term leases for the reporting period. The accounting for short-term leases would be similar to the current operating lease treatment (GASB 62, ¶223.c.). This disclosure provided information about the magnitude of short-term leasing activities. Staff noted that the disclosure requirement would be for amounts recognized in the financial statements and was similar to a currently required disclosure (rent expense for operating leases) for which governments had to extract similar information.

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Therefore, staff believed the effort likely to be required by this disclosure should not be much more than current disclosure requirements. Staff believed disclosure of short-term lease expense/ expenditure would provide some benefit if it were material. While there might be some cost involved, many governments already had a process in place to capture lease expense information. Therefore, staff recommended requiring disclosure of the expense/expenditure recognized for the period related to short-term leases. Mr. Sundstrom believed the costs would exceed any benefits and thus disagreed with staff. He believed the short-term exemption was a reason to limit disclosures. Mr. Fish agreed with staff and that this was a valuable disclosure for lenders who needed the expense information for short-term leases. Ms. Taylor disagreed with staff. She wanted to be consistent with her other votes. Mr. Brown agreed with staff as long as the disaggregation issue with leases for lessees was addressed. The board, except Ms. Taylor and Mr. Sundstrom, agreed with staff.

Another disclosure to consider was the amount of commitments under short-term leases. Future payments required under short-term leases would not be included in the proposed maturity schedule of the lease liability. This disclosure provided information about the magnitude of short-term leasing activities. In particular, it approximated what the additional lease liability would be if short-term leases were not exempted from recognition. Additionally, the disclosure included commitments for short-term lease contracts executed but the lease term had not yet begun. The accounting for short-term leases would be similar to that currently required for operating leases (GASB 38, Certain Financial Statement Note Disclosures, ¶11). A disclosure of commitments under short-term leases would be similar to this disclosure, however, by definition there only would be one subsequent fiscal year of payments for short-term leases. In many cases the amount of those short-term commitments were insignificant and therefore not essential to users. Additionally, National Council on Governmental Accounting (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, required disclosure of “commitments under noncapitalized leases, construction and other significant commitments” (¶158). Therefore, one could argue that disclosure of significant short-term lease commitments were already required by this statement. Noncapitalized leases would be amended to refer to leases that have not yet begun. Staff believed the “other significant commitments” phrase still covered significant short-term leases. Any significant commitments already would be covered by requirements in NCGA Statement 1. Therefore, staff recommended that disclosure of commitments related to short-term leases not be proposed in the due process document. The board agreed with staff.

Furthermore, an additional disclosure to consider was qualitative information of any circumstances that existed whereby the expense in the next reporting period related to short-term leases was expected to be significantly different than the expense in the current reporting period. This disclosure could be seen as an alternative to disclosing the amount committed under short-term leases. Some might argue that it provided better information about future claims on resources because the next period’s expected expense might include new short-term leases that had not begun. However, staff believed requiring this disclosure contradicted Concepts Statement 3 ¶37. Additionally, there were many other operating expenses that might be expected to increase (or decrease) significantly in the next period but disclosure of that expectation was not required for those types of expenses. Staff noted that if circumstances existed when the next period’s short-term lease expense were expected to be different and had a significant effect on the financial statements, that information would be required as part of management’s discussion and analysis (MD&A) under GASB 34. Based on these reasons, staff recommended that such a disclosure should not be proposed in the due process document. The board agreed.

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Fiduciary Responsibilities

Lisa Parker, project manager, Jay Fountain, consultant, Blake Rodgers, Ken Schermann, and Christopher Teats and Cody Domasky, postgraduate technical assistants, presented the board with issue papers that discussed clarifying the concept of control in a fiduciary capacity and a government’s own programs. Regarding the definition of a fiduciary and fiduciary responsibility, the board tentatively decided to propose that: 1) a fiduciary be defined as, “A government that controls assets other than those that can be used to support the government’s own programs.” 2) the concept of control be included in the definition of a fiduciary: “A government is considered to be controlling assets in a fiduciary capacity if those assets are used to provide benefits to specified or intended beneficiaries and have (a) present service capacity that can be used, (b) present service capacity that can be exchanged for another asset, such as cash, or (c) the ability to be employed in any other way that provides benefits.” and 3) a discussion outside of the definition of a fiduciary explained i) how the concepts of holding and administering were implied within the concept of control, ii) how a government was controlling the assets when it assigned or delegated the responsibility for holding the assets to another entity if it had legally or contractually been authorized to do so, and iii) how other duties of a fiduciary were implied as part of their fiduciary responsibility. In regard to the scope of fiduciary activities, staff discussed the types of relationships that a governmental entity had with a fiduciary activity and the governmental entity’s responsibility for administering the exchange of assets. It was important to note that if an entity met the definition of a component unit, the guidance provided in GASB 14, The Financial Reporting Entity, as amended by GASB 61, The Financial Reporting Entity: Omnibus, prevailed. Staff believed a governmental entity had responsibility for administering the exchange of assets when the governmental entity had the ability to reassign that responsibility. When a governmental entity made decisions about the types of assets held, assigned the responsibility for those decisions, and reassigned the responsibility for those decisions, the governmental entity had the ultimate responsibility for administering the exchange of assets. Mr. Brown agreed with staff and believed that staff’s analysis got to the heart of what administering meant. The board agreed.

For the spectrum of responsibility for administering the exchange of assets, a governmental entity might have unilateral authority over the types of assets held in some instances. In other instances, the governmental entity’s responsibility might be constrained through internal or external restrictions (e.g., donor or legal restrictions) or relinquished through legal structures. Staff believed a governmental entity should consider both the legal structure that defined its relationship with the fiduciary activity and its responsibility for administering the exchange of assets to determine whether it had control over the fiduciary assets. Staff developed a matrix for the determination of whether a government had control over fiduciary assets: columns: 1) responsible for administering exchanges; 2) assigned responsibility for administering exchanges; 3) relinquished responsibility for administering exchanges, but could establish parameters for those who were responsible; and 4) completely relinquished responsibility for administering exchanges. Rows: a) governmental entity directly held the assets outside of a trust or equivalent arrangement, b) governmental entity was acting as trustee for a trust or equivalent arrangement, and c) separate legal entity was responsible for holding or acting as trustee. Staff acknowledged that this approach appeared to make clean distinctions; however, in the circumstances when a government was acting as trustee or a separate legal entity (other than a trust) was involved (categorized as rows b and c), it might be more difficult for a governmental entity to determine whether it had relinquished its responsibility for administering the exchange of assets.

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For matrix options 1a–4a, staff believed a governmental entity that was directly holding fiduciary assets, regardless of its responsibility for administering the exchange of those assets, had control over those assets. As the direct holder of the assets, the governmental entity had the ability to control, even if operating within imposed parameters. Thus, these met the asset definition in Concepts Statement 4 and should be included in general-purpose external financial reports. The board agreed with staff’s approach. Mr. Sundstrom had trouble with some of the terminology (e.g., relinquishment). He questioned if relinquishment also addressed a government not having the authority or responsibility for administering to begin with. Mr. Brown believed this would be a major change from current practice. Staff believed the assumption was that the government had the responsibility to begin with. Ms. Taylor believed that the table/matrix was very beneficial but needed explanation to make it clear to readers. The board agreed with staff. For matrix options 1a–1c, staff believed a governmental entity that was directly responsible for administering the exchange of assets had control over those assets regardless of the legal structures that might separate the governmental entity and the entity that was holding the assets. The ability to exchange the assets was tantamount to control. Thus, these met the asset definition in Concepts Statement 4 and should be included in general-purpose external financial reports. The board agreed.

For options 2a–2c, staff believed a governmental entity that assigned its responsibility for administering the exchange of assets but maintained the ability to reassign that responsibility had control over those assets regardless of the legal structures that might separate the governmental entity and the entity that was holding the assets. The ability to assign the responsibility for administering the exchange of assets and to reassign the responsibility for the administering exchange of assets was tantamount to control. Thus, these met the asset definition in Concepts Statement 4 and should be included in general-purpose external financial reports. Ms. Taylor believed 2b and 3b needed to clarify where the government had responsibility for selecting to whom to delegate the responsibility. She was unsure what the difference was between assigning and setting parameters. She believed a parameter was establishing maximum percentages, for example, for investment decisions and categories. Mr. Bean wanted to clarify the difference between assignment and relinquishing control. He was also trying to distinguish when the government gave the employees only one option in which to invest (e.g., 457 plan) rather than the employees making their own investment decision in only one fund. Mr. Fish believed the distinction was if the employee retained the ability to choose or exchange. Mr. Brown wanted to focus on a framework that was conceptually sound and then address the application of what was in or out of financial reporting. He believed the real distinction was who had the real power to do an exchange. Mr. Granof wanted to establish some conceptual rules as to where the board wanted trusts to be located in the matrix/table. The board generally agreed with staff’s recommendation.

In regard to no control over fiduciary assets (i.e., options 3b and 4b), staff believed a governmental entity that was acting as a trustee for fiduciary assets and had completely relinquished the responsibility or established parameters for those that had the responsibility for administering the exchange of assets did not have control over the fiduciary assets. The act of establishing parameters on those that had responsibility for administering the exchange of assets represented restrictions on the use of assets from the perspective of those that had the responsibility. Thus, these fiduciary resources met the asset definition for those with the responsibility for administering the exchange of assets within those parameters, not the governmental entity. Ms. Taylor believed that if the government could somehow direct the work of the third party that some form of control was present (3b) and based on the facts and circumstances could be either “no control” or “control.” She believed 3b was closer to control rather than no control. Mr. Brown believed a conceptually sound approach would lead to consistent financial reporting. He did not want to sort out degrees of parameters, except substance over form. Ms. Sylvis believed another distinguishing feature was whether the money

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could be taken out of the trust. Mr. Granof believed the board could not independently evaluate each row and column because they were all interrelated. The board generally agreed with staff.

For option 3c, staff believed a governmental entity that was neither directly holding nor acting

as a trustee for fiduciary assets and had relinquished the responsibility for administering the exchange of assets, but maintained the ability to establish parameters on those that had the responsibility for administering the exchange of assets, did not have control over the fiduciary assets. The act of establishing parameters on those with responsibility for administering the exchange of assets represented restrictions on the use of assets from the perspective of those that had the responsibility. Thus, these fiduciary resources met the asset definition for those with the responsibility for administering the exchange of assets within those parameters, not the governmental entity. Without the responsibility for administering the exchange of the assets and without physical custody, staff believed the fiduciary resources would not meet the asset definition in Concepts Statement 4 and should not be included in general purpose external financial reports. The board agreed with staff.

In regard to option 4c, staff believed a governmental entity that was neither directly holding nor acting as a trustee for fiduciary assets and had completely relinquished the responsibility for administering the exchange of assets did not have control over the fiduciary assets. Without the responsibility for administering the exchange of the assets and without physical custody, staff believed the fiduciary resources would not meet the asset definition in Concepts Statement 4 and should not be included in general purpose external financial reports. The board agreed.

Next, the discussion focused on a government’s own programs. In determining whether it

would be appropriate for the board to (1) define what was meant by a government’s own programs or (2) amend the tentative proposed definition of a fiduciary to remove the reference to a government’s own programs, staff first considered if an appropriate definition of a government’s own programs could be developed. Staff believed the concept of a government’s own programs was potentially ambiguous and therefore, could not be defined in a manner that would be universally applicable. Staff was concerned that there potentially could be unintended consequences from defining a government’s own programs. It was important to note that in considering whether and how to define a government’s own programs, staff considered the use of the criteria for defining a fiduciary. Staff believed it was more appropriate to use these criteria to distinguish when a government was a fiduciary rather than when an activity would be considered a government’s own program. As a result, staff did not believe the board should define the concept of a government’s own programs but rather should consider amending the proposed tentative definition of a fiduciary to remove this reference. Mr. Granof was concerned about the government’s lack of decision-making power/ability with the assets regardless of whether a trust was used. Mr. Brown indicated that this would have an impact on reporting activities that were custodial in nature but the entity (e.g., school district) had some decision-making authority. Ms. Sylvis believed “administering” vs. “administrative” would be confusing and needed to be clarified. She suggested referring to it as GASB 24 criteria. The board generally agreed with staff.

In regard to amending the proposed tentative definition of a fiduciary, the majority of the guidance of other standard setters for the definitions of a fiduciary or related concepts focused on who the beneficiaries of the assets were and the existence of a trust or some other legal arrangement or contract that established how the assets were provided to the beneficiaries, and not on a government’s own programs. Staff believed this focus might be more appropriate than a government’s own programs. In order to be considered a trust or equivalent arrangement, similar conditions to those in GASBs 67 and 68 needed to be present. In other words, the activity needed to be administered through trusts or equivalent arrangements in which: a) trust assets were dedicated

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to providing benefits to recipients in accordance with the benefit terms, and b) trust assets were legally protected from the creditors of the government acting as the trustee. Staff did not believe the criteria requiring contributions to the trust and earnings on those contributions be irrevocable was applicable. Staff believed that when a government was considered a fiduciary for non-postemployment benefit trust assets, it did not matter whether the contributor could withdraw the assets being held. Staff recognizes that this would create two sets of trust criteria; one for postemployment benefit plans and one for all other fiduciary activities, but did not believe this would create issues in practice. Further, staff did not believe that for these purposes it was applicable to require that the trust assets be legally protected from the creditors of the beneficiaries. If a trust or equivalent arrangement existed, staff believed a government should then consider whether the government (the institution-not including its employees) was a beneficiary. In taking this approach, all activities for which a trust or equivalent arrangement existed and the government itself (the institution) was not a beneficiary, would be reported as a fiduciary fund. As a result, staff believed the concepts of the existence of a trust and the government itself (the institution) not being a beneficiary should be included within the definition of a fiduciary.

When the government was not the trustee but was a beneficiary, the issue was whether the government would report a beneficial interest. Based on current guidance in GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, the government would report nothing (no beneficial interest) until it actually received assets from the trust. However, a separate GASB pre-agenda research project would specifically address the accounting and financial reporting for irrevocable charitable trusts. If a trust or equivalent arrangement did not exist, staff believed a government needed to determine if the assets could be used only for the benefit of individuals not part of its citizenry, or organizations or other governments not part of the financial reporting entity. Staff believed it would be more appropriate to include a reference to “individuals that are not part of its citizenry, or organizations or other governments that are not part of the financial reporting entity” in the proposed definition of a fiduciary rather than in an accompanying narrative. Staff believed an individual was someone who was not directly associated in some way with the governmental entity (e.g., someone who was not a citizen of a general purpose government, student of a university, or customer of a business-type activity). Staff believed that by stating whom the beneficiaries were, the definition provided clearer guidance that the beneficiary could not be the government itself (including its employees) or its citizenry, which was consistent with other references in the literature to government programs. Staff also believed that including in the definition that these beneficiaries were “not part of the financial reporting entity” would provide even clearer guidance if the activity involved a component unit.

Therefore, staff recommended that the concept of variance power (the ability to redirect fiduciary assets to another beneficiary or to further the government’s own purposes) not be specifically referenced in the proposed tentative definition of a fiduciary. Mr. Brown believed the ability to use its variance power should result in reporting in the government’s own funds. He believed variance power overrode fiduciary responsibility. He indicated that administrative involvement should result in governmental activities and would be outside the project scope. Mr. Granof indicated that the board’s approach was first based on control. Mr. Bean indicated that once the activity was a governmental activity, it no longer was within the scope of this project. The board generally agreed with staff.

Next, in considering potential amendments to the proposed tentative fiduciary definition, to provide guidance for whether an activity should be reported in a fiduciary fund in the absence of a trust or equivalent arrangement when the beneficiaries were not the government or its citizenry, staff considered an approach similar to that found in GASB 24 for pass-through grants, utilizing the

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concepts of administrative and direct financial involvement. The board had tentatively decided that administrative and direct financial involvement should be used to distinguish between pass-through grants that were a government program and pass-through grants that were a fiduciary activity. The board also had tentatively decided that the term administering, as tentatively implied within the concept of control in the fiduciary definition, differed from administrative involvement in GASB 24 for pass-through grants. Staff believed a government might have the responsibility to determine whether a beneficiary was eligible and qualified for the benefits (one criteria in GASB 24 for determining administrative involvement) in fiduciary activities other than pass-through grants. Based on the criteria provided in GASB 24, whether a government was determining eligible recipients directly or through the use of grantor established criteria did not differentiate whether the government had administrative involvement. For fiduciary activities, a government generally would not be liable for how the beneficiary used the assets. A government generally would be held liable only for its own violations of its fiduciary agreement rather than the potential for the beneficiary to breach any restrictions on how it was to use the assets. As a result, staff believed administrative and direct financial involvement, as used in GASB 24, would be an appropriate concept to use in determining whether a government was a fiduciary in the absence of a trust or equivalent arrangement when the beneficiaries were not the government or its citizenry.

Staff also believed that for a government to have administrative or direct financial involvement over assets used to provide benefits to individuals, organizations, or other governments, one of the five similar criteria to those in GASB 24 for pass-through grants needed to be present. In other words, the government would be considered to have administrative involvement over these assets if, for example, it (1) monitored secondary recipients for compliance with contributor specific requirements, (2) determined eligible secondary recipients or projects, even if using grantor-established criteria, or (3) had the ability to exercise discretion in how the funds were allocated. A government would be considered to have direct financial involvement over these assets if, for example, it (1) financed some direct program costs because of a contributor imposed matching requirement, or (2) was liable for costs disallowed by the contributor. As noted in GASB 24 ¶34 and ¶35 (BFC), staff believed that if a government had administrative or direct financial involvement over assets, its responsibility in relation to these assets was much more than custodial; the government was exercising operational responsibility. As a result, staff believed reporting these assets used to provide benefits to individuals, organizations, or other governments as revenue and expenditures or expenses of the primary government would be appropriate.

As noted in GASB 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, ¶178 (BFC), staff believed that when a pension or OPEB plan was not administered as a trust or equivalent arrangement, the role of the plan administrator or sponsor of a multiple-employer plan with regard to assets collected, paid, or held incident to providing benefits most closely approximated that of an agent for the participating employers. The plan should be reported in a fiduciary fund (prior agency fund, now to be custodial fund). Thus, staff believed it would be more appropriate to exempt these plans from the resulting guidance and to require following the guidance in GASB 43 being proposed in the Other Postemployment Benefit Accounting and Financial Reporting Project. Therefore, staff recommended that administrative and direct financial involvement be utilized as criteria to determine whether a government was a fiduciary in the absence of a trust or equivalent arrangement when the beneficiaries were not the government or its citizenry. Staff also recommended that the due process document issued on the Fiduciary Responsibilities Project include the approach being proposed to solicit feedback on whether the activity of a government that was controlling assets to be used to provide benefits to individuals, organizations, or other governments and met one of the five criteria for administrative or direct financial involvement (monitors, determines eligibility, exercise discretion, matches contributions, or was liable), should be

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reported in the primary government’s revenues and expenses, rather than in a fiduciary fund. Ms. Sylvis was concerned about “administering” and “administrative” as potentially being confusing if they did not mean the same thing. The board agreed with staff’s recommendations.

In regard to the proposed tentative definition of a fiduciary, staff believed that by amending the proposed tentative definition to focus on who the beneficiaries of the assets were, the existence of a trust or equivalent arrangement, and whether a government had administrative or direct financial involvement, a fiduciary could be defined in an appropriately positive manner. As a result, staff recommended that a fiduciary be defined as “A government that controls assets either: (1) as a trustee for the sole benefit of its own employees or recipients other than the financial reporting entity, or (2) for which it does not have administrative or direct financial involvement over the assets used to provide benefits to individuals that are not part of its citizenry, or organizations or other governments that are not part of the financial reporting entity.” Staff agreed to bring back to the board a revised flow chart. Ms. Sylvis was concerned about the negatives (i.e., not); she preferred to posit the questions in a positive context. The board agreed with staff. Tax Abatement Disclosures Dean Mead, research manager, Ken Schermann, and Mitchell Harrison, postgraduate technical assistant, presented the board with an issue paper that discussed a definition of tax abatements and the project scope.

Although there was substantial commonality across governments’ tax abatement programs in terms of how they were administered, staff did not view a description of the mechanisms for tax reduction as a viable distinguishing characteristic. Staff considered four options for whether and how the mechanism for reducing taxes could be incorporated into the definition of a tax abatement: 1) develop a specific description of the mechanism considered within the project scope, 2) describe the most common mechanism but explain that tax abatements might operate via other mechanisms, 3) do not include the mechanism as a distinguishing characteristic of tax abatements and state in the standards section that the specific mechanism for reducing the taxes was not a relevant characteristic distinguishing tax abatements from other transactions that reduced taxes, or 4) remain silent in the standards section regarding the mechanism. Staff believed the first approach was unworkable because no single description would capture all of the relevant tax abatements. It would be a simple matter to describe the most common mechanism for reducing taxes through abatements (option 2). Such a description needed to be accompanied by an explanation that tax abatements might take other forms. Effectively, each of the mechanisms for tax reduction had the same result—the taxpayer paid less in taxes and the government received less in taxes. Ultimately, that characteristic was more important than the specific mechanism used to achieve the reduction (i.e., substance of a transaction over its form).

Under any of the four options, the BFC would describe this issue and the alternatives

considered. Staff believed the issue should be addressed directly in order to emphasize that an evaluation of whether a transaction constituted a tax abatement should focus on the substance of the transaction (in addition to other characteristics) rather than on the mechanism or terminology (e.g., credit or exemption) employed. Staff believed option c above was the best option. The description of a tax abatement should emphasize that the substance of a transaction was key in determining if it was a tax abatement, not the particular mechanism for reducing taxes or the terminology used to describe the transaction. Therefore, staff recommended that the BFC of the due process document describe the most common mechanism but note that other mechanisms and terminology existed and, therefore, mechanism and terminology were considered as possible characteristics and rejected. Ms.

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Sylvis agreed with staff and with focusing on the substance of the characteristics of the transactions. Mr. Brown did not believe it was feasible to include all types of tax abatements in the definition. Mr. Fish was interested in abatement transfers (state refilling or reimbursing the coffers of the local government). The board agreed with staff.

Next, the purpose of tax abatements was discussed. Tax abatements were used to achieve a variety of goals including: (1) to increase the property tax base; (2) to address cost disadvantages; (3) to revitalize distressed local economies; (4) to retain or attract jobs, companies in particular industry, or a specific company; and (5) to increase the number of persons employed by existing employers, among other purposes. Tax abatements also were used for purposes as varied as historical preservation, environmental incentives, brownfield cleanup, and construction of senior housing. Tax abatements were widely considered to be primarily an economic development tool. It was likely true that economic development was the most common purpose of tax abatements. Nevertheless, some tax abatement programs existed to promote goals other than improving the local economy. If true, a definition of a tax abatement that specified a particular purpose could exclude some transactions that would appropriately be included within the project scope. In regard to addressing the purpose in the definition of a tax abatement, staff presented two options: a) define tax abatements as being for the purpose of encouraging economic development or other actions benefiting the government or its citizens, or b) exclude purpose from the definition of a tax abatement. Staff believed that a was a viable option. Staff also believed that “economic development or other actions that benefit the government or its citizens” was specific enough to be a useful distinction between tax abatements and other tax reductions, yet sufficiently broad to include all relevant transactions. Ms. Taylor agreed with the approach to “weed out” some transactions. Mr. Sundstrom wanted to address transactions that were permanent in nature (e.g., open space). The board agreed with staff.

Another possible distinguishing characteristic of tax abatements might be how broadly applicable they were. Certain programs that reduced taxes paid were available to broad classes of taxpayers, such as the income tax deductions available to homeowners with mortgages and donors to charity or the exemption of interest earned on nontaxable municipal debt. These types of tax reductions would not be considered tax abatements by most observers. Tax abatements were distinguishable because (1) they were available to a relatively smaller group of taxpayers than other tax reduction programs and (2) they were relatively more difficult to obtain than other tax reduction programs. Whereas tax abatements generally are less broadly available and require recipients to meet a relatively higher threshold, tax abatements are not universally either. Staff believed neither feature (i.e., narrower availability and higher threshold for eligibility) should be included in the definition of a tax abatement. Narrower availability and a higher threshold for eligibility were both characteristics that many tax abatement programs exhibited; however, neither was sufficient on its own (or in combination) to distinguish tax abatements from other tax reductions. Furthermore, either feature was likely to fail to capture transactions that should be considered tax abatements. Both features should be discussed in the BFC as possible characteristics that were considered and rejected. Ms. Sylvis wanted something that would narrow this some way. She did not believe eligibility was a factor per se. She wanted something other than materiality to drive the scope. Mr. Brown believed this standard would be difficult to apply materiality because of opinion units. He wondered to what level material misstatement would be applied to a fund since he believed this was more of a government-wide issue. The board agreed with staff.

Next, an issue related to the breadth and applicability of a program to reduce taxes was whether an explicit agreement between the government and the taxpayer existed. The common types of tax exemptions and deductions mentioned thus far occurred either automatically or when the

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taxpayer decided to take advantage of them. A tax abatement, by contrast, was the result of an explicit agreement—typically a written agreement—between the government and the taxpayer. Tax abatements were not broad exemption programs, such as veterans or homestead exemptions, which did not involve individual agreements with each recipient. A tax abatement agreement stipulated at least two things: 1) the government would reduce the amount of tax that the taxpayer would otherwise have paid, and 2) the taxpayer would do something in return for the abatement. Based on staff research, it was known that some tax abatement agreements contained clawback provisions that required the taxpayer to “repay” all or a portion of the abated taxes if the taxpayer did not reach its promised goal (such as a certain increase in the number of persons it employed or construction of a new office building). Such provisions suggested that the agreements might be legally enforceable. However, tax abatement programs with repayment provisions are the exception rather than the rule. Furthermore, there was considerable evidence that relatively little enforcement of tax abatement provisions was conducted. Common criticisms of tax abatements were that (1) governments did not follow up to determine if a taxpayer met its commitment and (2) if governments find a taxpayer had not performed as promised, the governments did nothing about it. Therefore, staff believed the existence of an agreement between a government and a taxpayer was one of the most important characteristics that distinguished tax abatements from other tax reduction programs and, thus, it should be a part of the definition of a tax abatement. Staff did not believe, however, that the agreement should be described as a legal agreement. Mr. Granof agreed with staff because otherwise it would be difficult to distinguish between an abatement and tax expenditure. Ms. Taylor wanted to address when there was another agreement with a third party not directly made by the government (i.e., piggybacked party to the abatement transaction). She was concerned about these types of transactions not being included. She agreed with Mr. Brown that defining “agreement” could address her concern. Mr. Brown agreed with Ms. Taylor. He agreed with staff’s recommendation as long as “legal” was omitted. He also wanted to define “agreement.” Ms. Sylvis did not want to lose the discussion about application versus agreement and could address this in the BFC. The board agreed with staff.

In regard to the type of revenue being abated, tax abatements reduced the amount a taxpayer otherwise would pay, an obvious distinguishing characteristic. Abatements most commonly reduced property taxes. The most notable difference between agreements that reduced taxes and those that reduced customer charges was that the former involved nonexchange transactions whereas the latter involved exchange transactions. In the case of an agreement that reduced charges to a customer, it could be argued that the reduction was a part of the exchange transaction. It was true that a tax abatement also might have some exchange features between a government and a taxpayer; however, based on the absence of legal enforcement or lack of legal enforcement, it would be difficult to argue that these exchange features resulted in value for value. In this case, the agreement was an extension of a nonexchange transaction—an imposed nonexchange revenue or a derived tax revenue. There was no willing exchange of equal value in these transactions and the attachment of a tax abatement agreement did not convert them to exchange transactions, even if it could be determined that the tax abatement represented an equal exchange of value. Ultimately, when the abatement expired (or even sooner, depending upon the economic impact of the taxpayer making good on its commitment), the government might benefit in terms of increased tax revenues. There also might be increases in that particular tax revenue and other tax revenues related to general improvements in the economy. The realization of these benefits was, however, contingent upon future events, whereas forgoing tax revenues otherwise due to the government in the present was a certainty in a tax abatement. Staff believed tax abatements should be limited by definition to reductions of tax revenues only. Mr. Sundstrom believed there would always be a problem with a tax versus a fee in applying this requirement. Mr. Granof would limit this to tax abatements only. Mr. Brown shared Mr. Sundstrom’s

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concern. He agreed with the nonexchange transaction component. He was concerned about a government calling a tax a fee just to avoid this. The board agreed with staff.

Based on staff’s recommendations above, the following tentative definition of a tax abatement was proposed: For financial reporting purposes, a tax abatement was a reduction in taxes resulting from an agreement between a governmental entity and an individual taxpayer in which (a) the governmental entity forgoes tax revenues that the taxpayer otherwise would have been obligated to pay and (b) the taxpayer promised to take a specific action that contributed to economic development or otherwise benefited the government or its citizens (such as building or improving property, maintaining or increasing employment, remediating pollution, or constructing facilities for public use). Staff believed the project scope should be limited to only transactions meeting the proposed definition of a tax abatement. Ms. Taylor’s preference was to include it in the definition. Mr. Brown believed the board needed to address whether the other entity must agree, disagree, avoid, or voluntarily agree with the terms of the tax abatement agreement to become or not become a party to it. The board agreed with staff’s recommendation. Technical Plan Staff presented the board with a proposed technical plan for the second third of 2014. For the Fiduciary Responsibilities due process document, staff believed there were three primary reasons why the board should issue a Preliminary Views (PV) document: 1) the tentative board decisions made to date resulted in significant changes to existing financial reporting for fiduciary activities, 2) it was reasonable to anticipate that stakeholders might be sharply divided on the subject, and 3) the Governmental Accounting Standards Advisory Council (GASAC) members provided overwhelming support in favor of issuing a PV due process document prior to an ED. Therefore, staff recommended issuing a PV document for the Fiduciary Responsibilities project. Mr. Brown believed that “significant changes” was not a reason for a PV; however, he agreed with staff’s recommendation nonetheless in order to be more informed in the board decision-making process. Ms. Taylor believed a PV should be used sparingly; however, because the board identified so many different issues during its deliberations, she agreed with staff. The board agreed with staff.

In regard to the leases project due process document, staff believed there were three primary reasons to consider issuing a PV: 1) the tentative board decisions made to date resulted in significant changes to long-standing financial accounting and reporting for leases; 2) it was reasonable to anticipate that stakeholders might be sharply divided on the subject, particularly in light of the feedback received by the FASB and IASB in response to multiple due process documents those boards had issued; and 3) GASAC members provided support in favor of issuing a PV due process document prior to an ED. A few of the significant changes included the tentative board decisions to: 1) eliminate the existing classifications of operating and capital leases, 2) require a lessee to recognize and measure a lease asset and liability for all leases, other than those meeting the short-term exception, and 3) requiring separation of contracts with multiple components for financial reporting purposes, including guidance on how to allocate consideration to each component. Therefore, staff recommended issuing a PV document for the Leases project.

Mr. Sundstrom believed the board had addressed all of the issues and preferred to move

forward with an ED. However, he believed sharp division among the GASB constituents would exist, and thus agreed with staff. Ms. Taylor did not believe a significant change in practice was sufficient for a PV document. She also did not believe the board was as divided on the issues because of all of the work and feedback FASB had done and received. Mr. Brown agreed with Ms. Taylor that a PV was unnecessary. He believed the government environment would not face the types of push back

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that FASB received because GASB was not adopting FASB’s two-lease types approach. He believed GASB had a fundamentally different model from FASB and thus was not concerned about moving forward. Mr. Fish believed the costs aspects and the significant changes the board had proposed warranted a PV. Mr. Granof believed the board did not have nearly the issues of the FASB because this standard would be much cleaner. He also believed a PV should be used sparingly. He preferred to get feedback and more information as to whether there would be push back on the proposed standard before deciding on a PV. However, on balance he supported staff. The board, except Ms. Taylor and Mr. Brown, agreed with staff. The board also agreed with the CIG approach.