Www.eidebailly.com What the GASB’s Preliminary Views May Mean to Your State Marcie Handy, CPA, Assistant State Comptroller – State of Utah Eric S. Berman,

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What the GASB’s Preliminary Views May Mean to Your State

Marcie Handy, CPA, Assistant State Comptroller – State of Utah

Eric S. Berman, MSA, CPA, Partner – Eide Bailly LLP

Give Me Leases or Give Me Fiduciary Responsibilities!

Patrick Henry 1775

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Leases—Biggest Deals

• Single approach—right of use• No classification of leases into

operating/capital or other categories• Potentially develop some exceptions• Underlying assumption that leases are

financings

• Practicality exception—short-term lease• Lease that, at the beginning of the lease, has

maximum possible term under the contract, including any options to extend, of 12 months or less

2


Leases

• Lessees – Recognition and Measurement• Intangible asset for the right to use the

underlying asset and• Liability for future payments

• Day 0 liability =• Fixed payments over lease term• Variable payments based on an index / rate in effect at

that date• Variable payments that are in-substance fixed• Residual value guarantees that are probable of being

required• Termination penalties if based on the determination of

the lease term, the termination option is probable of being exercised

• Liability does not include lease payments that are dependent on a lessee’s performance or usage of an underlying asset


So What is the Right of Use Model?

Lessor Lessee

Right to Use Asset

Lease Payments

Lease Agreement

A lease contract conveys the right to use an asset (the underlying asset) for a period

of time in exchange for consideration


Leases

• May have multiple components• Lease principle and interest• Maintenance• Utilities• Security• Other

• Should separate lease and non-lease components or multiple lease components if practical


Leases

• Governmental lessor• Board is proposing symmetry• Lessor would recognize receivable for the right to

receive payments• Payments discounted by the rate charged lessee

• No de-recognition of underlying asset• No recognition of performance liability (e.g.

security)• Deferred inflow of resources is credit = [receivable

+ cash received]• Lease revenue recognized systematically &

rationally over lease term (e.g. effective interest method)


Leases

• Governmental lessor• Receivable includes

• Residual value guarantees• Purchase options• Termination penalties (if measured, exercised and

unpaid)

• Direct costs expensed (just like GASB-65)

• Sub-lease situations• 2 separate transactions• Do not net• Apply all applicable guidance


Leases

State of Utah – Field Test • Evaluated Lessee Perspective Only

• Primary Governmental Activities Only• 325 Leases • Mainly office space/buildings• 10 Capital Leases, $24.9M Net Assets, $21.8M

Liability• 225 Operating Leases, $67.7M Future Minimum Lease

Payments, $27.7M Expenditures• Use Excel Spreadsheet to Maintain/Track Each Lease


Leases

State of Utah – Field Test • Field Test - Issues

• Time Consuming – Have to Reexamine Each Lease

• Renewal, Termination Clauses• Non-lease or Multiple Lease components• Subleases• Measure Underlying Asset at Historical Cost• Determine Current Lease Liability• Recalculate the Net Present Value

• Determined Will Take 1 Hour Per Lease, so….


Leases

State of Utah – Field Test • We Ignored Lease Payments < $100K

• Eliminated the Evaluation of 90 Leases• $3.1M or 2% of $157M in Future Minimum Lease

Payments

• We Grouped Leases by Dollars• Leases Between $100K - $200K Evaluated as a

Group and Applied Patterns• Most Leases have a term of 5 years or less

• Going Forward Will Evaluate All New Leases


Fiduciary Responsibilities—Where The Board Has Been

• Fiduciary definition• A government is a fiduciary and has a fiduciary

responsibility when it controls assets• From a pass-through grant for which the government does not have

administrative or direct financial involvement• In accordance with a trust agreement or equivalent arrangement in

which the government itself is not a beneficiary• For the benefit of individuals that are not required to be part of the

citizenry, as a condition of being a beneficiary, or organizations or other governments that are not part of the financial reporting entity.

• Custodial funds—A new fund type that includes any fiduciary arrangement that is not governed by a formal trust agreement or equivalent arrangement

• Fiduciary activities continue to be reported as basic financial statements


When Does a Government Control Assets – putting it all together

• Government Might Have Control IF• It is directly holding the assets, regardless of its

responsibility for administering the exchange of those assets

• It is directly responsible for administering the exchange of assets, regardless of the legal structures that might separate the government and the entity that is holding the assets

• It has assigned its responsibility for administering the exchange of assets (for example, to an asset manager) but maintains the ability to reassign that responsibility, regardless of the legal structures that might separate the government and the entity that is holding the assets.


When Does a Government Control Assets – putting it all together

• Government Might NOT Have Control IF• It is acting as a trustee for assets and has no

responsibility for administering the exchange of assets even though it may have the ability to establish parameters (for example, providing a selection of investment options) for those that have the responsibility

• It is neither directly holding nor acting as a trustee for assets and has no responsibility for administering the exchange of assets even though it may have the ability to establish parameters for those that have the responsibility

• It is not directly holding assets and has no responsibility for administering the exchange of assets.


In other words…


So What are the Board’s Views?

• Fiduciary funds would continue to be reported in the basic financial statements• No change in full accrual• Classification within fiduciary funds based on

the presence or absence of a trust agreement or equivalent

• No change in investment trust / private purpose trusts with trust agreements or equivalent if

• Trust assets are dedicated to providing benefits to recipients in accordance with the benefit terms

• Trust assets are legally protected from the creditors of the government that is acting as the trustee


But There’s Something New…

• Custodial Funds• Would report fiduciary activities for which

there is no trust agreement or equivalent arrangement. Including:

• Certain funds previously classified as agency funds• The portion of certain funds previously classified as

pension (and other employee benefit) trust funds that is held for the benefit of employees of another government, but for which there is no trust agreement or equivalent arrangement• Could include things like rate stabilization reserves for future

pension contributions held at employers• Certain funds previously classified as investment trust

funds or private-purpose trust funds, but for which there is no trust agreement or equivalent arrangement.


Other Aspects of the PV

• Reporting of fiduciary funds would continue• Additions disaggregated by source • Net investment income• Deductions disaggregated by type• Administrative costs (if applicable)

• Fiduciary component unit reporting• Inconsistent at best, especially with IRC 457, 403(b) and

401 plans• Proposal is to present combined fiduciary component units

of fiduciary component units• Example - Combine plans before presentation in a general

government’s pension trust funds

• Business-type activities with fiduciary activities would now present fiduciary funds

• Examples – Hospitals, Higher Education


State of Utah – Field Test

• State Has Approximately 400 Funds• Evaluated 24 Private Purpose Trust Funds• Evaluated 69 Agency Funds• Evaluated 2 Investment Trust and OPEB Funds• Did Not Evaluate Pension Trust funds• Results

• No Change to Investment Trust Funds or OPEB Trust Funds

• Reclassified 7 Funds PPT, 5 to Custodial, 2 to Governmental

• 5 PPT Are Custodial = No Trust Agreement/Equivalent Arrangement

• 2 PPT Are Governmental = Assets Are Not Fiduciary



• Field Test - Issues• Trust Agreement or Equivalent Arrangement

Where Trust Assets:• Are dedicated to providing benefits to recipients• Are legally protected from the creditors of the

government

• No Examples of Equivalent Arrangement• Implied/inferred from previous actions?• Statute?• Court cases?



• Field Test - Issues• Recognition of a Liability in Fiduciary Funds

• “Present obligations to sacrifice resources that the government has little or no discretion to avoid”

• When an event has occurred that compels the government to disburse the fiduciary resources.

• When no further action or condition is required by beneficiary

• Need Further Clarification – When to Recognize a Liability

• Utah has a PPT that has an annual actuary valuation• Liability is recorded based on results of the actuary

report• No longer be reported in PPT?

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What Does This All Mean?

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Questions!

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Eric S. Berman, MSA, CPA, CGMAPartner

Eide Bailly LLP

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Experience the Eide Bailly Difference

Marcie L. Handy, CPAAssistant State Comptroller

State of Utah

350 North State Street, Salt Lake City, UT 84114

T 801.538.1678E [email protected]

www.utah.gov

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Www.eidebailly.com What the GASB’s Preliminary Views May Mean to Your State Marcie Handy, CPA, Assistant State Comptroller – State of Utah Eric S. Berman,