Not Your Boss’s GASB Update

Eric S. Berman, CPADeputy ComptrollerCommonwealth of

MassachusettsNational Association

of State Auditors Comptrollers and

Treasurers Joint Middle Management Conference

April 10, 2006

How to implement GASB the New Standards (and yes quick reviews)

Implementing NOW Statement 42 - Accounting and Financial

Reporting for Impairment of Capital Assets and for Insurance Recoveries

Statement 44 – Economic Condition Reporting Statement 46 - Net Assets Restricted by

Enabling Legislation Statement 47 – Accounting for Termination

Benefits On the Horizon

Statements 43 and 45 – Post Employment Benefits

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Not just infrastructure Physical damage Legal or

environmental changes

Technological development or obsolescence

Change in manner or duration of use

Construction stoppages

Key Factors in Decision Tree: Is event significant? Is decline in utilization unexpected? IF YES to BOTH above 2, impairment is

present. IF impairment is present, is impairment

temporary? IF NO – disclosure about idle assets needed

Will asset continue to be used? IF NO – write down to lower of basis or FMV

Recoveries – separate transaction Other financing source or extraordinary item Can also be recoveries of non-capital items

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Brainstorm risks of impairment and outcomes Departments /

stakeholders involved

What is the average age of fixed assets?

What is significant? Hint – it’s not “material”

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Develop / Confirm policy – new policy should address Who makes impairment decision

Must be able to gauge five factors explained before

Must judge if temporary or permanent Must be involved in deciding fair market

values or service units Who is in charge of disclosure

Also address insurance recoveries & embezzlement

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Statement 44 – Economic Condition Reporting

States if part of GFOA CAFR program are 95% there – already doing Financial trends Revenue Debt Demographic /

Economic Operations

Key for states to focus onOPERATING INFORMATION – why?

Focus on information that isVerifiableReplicableTells the story that ‘should be told’

Statement 44 – Economic Condition Reporting

Statement 44 – Economic Condition Reporting

OPERATING INFORMATION – basic requirements:By GASB 34 Activity category:

Number of government employees

“Indicators” (e.g. performance measures) of the demand of level of service

“Indicators” of capital asset usage

In other words “YIKES!”

Pitfalls to watch out for as a middle manager recommending courses of action to a decision maker Not getting consensus on what an

“employee” is or what is the employee’s home agency

Not agreeing with policymakers up front as to what the key indicators should be for operations

What do you think key indicators should be for your state?

Statement 44 – Economic Condition Reporting

Statement 46 – Net Assets Restricted by Enabling Legislation

Clarifies “restrictions” Can’t be removed

by Government easily

External – legal constraints

Can be imposed by public interest groups or citizens in judicial finding

Statement 46 – Net Assets Restricted by Enabling Legislation

Succeeding in implementing 46Review all current restrictions

Special revenue funds are not necessarily restricted revenue

Beware of “earmarking”Work with legal staffWatch out for higher education

endowmentsCreate a database / spreadsheet of

restrictions

Statement 46 – Net Assets Restricted by Enabling Legislation

Statement 46 database or spreadsheetFundAccountLegal cite or source of restrictionInternal or external restrictionType of activity

Statement 46 – Net Assets Restricted by Enabling Legislation

Statement 46 database or spreadsheet Amount of net assets (%) that could be

restricted How can restriction be identified (for future

decision making) Revenue source codes that are tied to

restriction Have any net assets been used for other

than this purpose? What and why Treatment for statutory restrictions if

different than GAAP

Statement 47 – Accounting for Termination Benefits

Key points Must be involuntary Plan has to be

communicated to employees and committed to by government

Numbers have to be known and accruals recognized

May change OPEB / Pensions

Statement 47 – Accounting for Termination Benefits

Keys for managerial successEstablish a line of communication

with HR decision makers toQuantify populationCalculate benefits dueUnderstand timing

Health care costs related to early retirement (ERIP) will increase pensions and OPEB

Work with actuary to make sure changes are done

On the Horizon – Statements 43 and 45 - OPEB

Misunderstood and feared statements – why?Big dollars potentiallyDeals with healthcare and benefitsNeed for specialized help to

accomplish

Statements 43 and 45 – OPEB – calm your fears!

For most governments, obligation is large

No budgetary effect if it’s not funded

It is not a liability unless ARC is not made

Statements 43 and 45 – OPEB – calm your fears!

Key talking points Statement 43 applies to PLANS –

separately audited entities that manage benefits

Implementation is one year sooner (FY07) Statement 45 applies to employers Component Units need to undoubtedly

have separate valuations Need to implement when parent does

If you understand pensions, you understand OPEB

Same standard, different components

Statements 43 and 45 – OPEB – calm your fears!

Don’t Do This!!

Beware of the Headlines“The Trillion - Dollar Pothole” –

Barron’s Magazine 3/13/2006“The great state health-care

giveaway” – Fortune Magazine 5/2/2005

“Our health plan is in a death spiral, and the lawmakers are under-funding it” – State Employees Assn. of North Carolina

Statements 43 and 45 – OPEB – calm your fears!

Statements 43 and 45 – OPEB – calm your fears through planning

Answer the “W”’s Who is in my

census? What information is

available and what do I need?

Where is the information located?

When does it need to be done?

Who can I get to help?

Statements 43 and 45 – OPEB – calm your fears!

Keys to successAgree on a census of covered

employees / retirees BEFORE you engage an actuary

Turn over all the rocks you can NOW and document decisions

Align data to that of your pension valuation

Document all plans, rates, groups, sources of data

Keys to success (continued)Work with your budget / treasury

people earlyFunding for actuarial studyAssumptions for interest rates – drives

amortizationSEC is getting very active on bond

disclosure of OPEB liability DO NOT disclose the unknown or draft

Brainstorm on funding possibilities

Statements 43 and 45 – OPEB – calm your fears!

Keys to success (continued)External issues abound so be

carefulLegal issuesPolitical issuesLabor issuesFederal issuesFinance issues

Be logical and methodicalRationalize all decisions and their

effects on the valuation

Statements 43 and 45 – OPEB – calm your fears!

Questions?