The National Association of State Auditors, Comptrollers and Treasurers GASB Update: Keeping Pace in...

The National Association of State Auditors, Comptrollers and Treasurers

GASB Update:Keeping Pace in a Changing

EnvironmentApril 14, 2010

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The views expressed in this presentation are those of the speakers. Official positions of the GASB are determined only after extensive due process and deliberation.

Statement No. 54, Fund Balance Reporting and Governmental Fund

Type Definitions

• Effective for periods beginning after June 15, 2010

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Fund Balance Reporting and Governmental Fund Type Definitions

Fund Balance Reporting• Existing classifications (reserved, designated,

etc.) replaced with:– Nonspendable– Restricted– Committed– Assigned– Unassigned

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Governmental Fund Type Definitions– Special revenue fund—used to account for and report

the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.

– Capital projects fund—used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets.

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Other Issues:– Reporting “stabilization” funds– Reporting encumbrances– Budgets and the appropriation of existing

fund balance– Classifying negative balances– Policy disclosures

Reexamination of Statement 14, The Financial Reporting Entity

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•Exposure Draft available online now•Comment deadline is June 30, 2010

•Public hearing scheduled for August 3, 2010

Reexamination of Statement 14

Project Objectives • Determine whether the standards for defining and

presenting the financial reporting entity in Statement 14, as amended:– Include the organizations that should be included – Exclude organizations that should not be included– Display and disclose the financial data of component units

in the most appropriate and useful manner– Are consistent with the current conceptual framework

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Overview• The most significant effects of the proposal would be

to:– Increase the emphasis on financial relationships

• Raises the bar for inclusion

– Refocus and clarify the requirements to blend certain component units

– Improve the recognition of ownership interests• Joint ventures• Component units• Investments

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Inclusion Criteria

• Statement 14 requires inclusion if PCU is fiscally dependant. That is, PG has authority over:– Budget, or

– Setting taxes and charges, or

– Issuing debt

• The ED would add a requirement for a financial benefit or burden before inclusion is required.

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Blending Requirements• The ED would expand the blending criteria to include

component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government– Even if the component unit provides services to

constituents or other governments, rather than exclusively or almost exclusively to the primary government

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Blending Requirements• The ED clarifies how to blend component units

in a BTA reporting model: – For a multiple column BTA

• Additional column(s), as if funds of the PG

– For a single column BTA• Consolidate CU data into the single column

– Present combining info in the notes

• Additional column(s), with PG total column

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Reporting Equity Interests• An asset should be recognized for an equity interest in:

– A joint venture

– A partnership

– An investment

– A component unit• If the component unit is blended, the equity interest is eliminated in the blending

process• Minority interests would be classified in net assets as “Restricted, nonexpendable”

• Recognition and Measurement is based on JV equity interest requirements in Statement 14

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Other Provisions• Sharpens the “misleading to exclude” consideration• Amends the “substantively the same board” blending

criterion• Clarifies how to account for the funds of a blended

component unit• Clarifies the major component unit determination• Clarifies the existing note disclosure requirements

– No additional disclosures are proposed

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Project Timeline• Final Statement scheduled for first quarter of

2011• Effective for periods beginning after 6/15/12

(FYE 6/30/13)

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Service Concession Arrangements(Public-Private [-Public] Partnerships)

– Exposure Draft issued June 30, 2009– Comment period ended September 30, 2009– First effective date would be years ended June 30

2012

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Service Concession Arrangements

Scope: What is an SCA?An arrangement in which:• a transferor conveys to an operator the right and related obligation to

provide services to the public through the operation of a capital asset• the operator collects and retains fees from third parties• the transferor is entitled to significant interest in the service utility of the

capital asset at the end of the agreement (a residual interest)• the transferor determines or has the ability to modify or approve:

– What services the operator is required to provide – To whom the services will be provided– The prices or rates that will be charged

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Scope: What is different from the exposure draft?

– In the ED, the control criteria, including the residual interest requirement, were factors to consider in determining the appropriate accounting (The ED included arrangements in which control was either retained or transferred.)

– Accordingly, arrangements in which control is transferred to the operator are not included in the scope

• Eliminated the controversial issue of asset de-recognition and immediate gain recognition

• In those situations, lease guidance would likely be applicable

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How should the significant up-front payments (including installment arrangements) be recognized? –The ED proposed that the “credit” should be a liability (to recognize a performance obligation)–The Board is still debating whether the credit should instead be reported as a deferred inflow (applicable to future periods)–Periodic amortization would be the same—recognized as revenue over the duration of the agreement

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Who reports the capital asset?The transferor would continue to report the capital asset subject to the SCA

•Depreciation generally would continue to be recognized

The governmental operator would report an intangible asset for the right to access and use the property (measured by the amount of the up-front payment or the contributed asset)

•Amortized over the life of the arrangement

Improvements made to the property during the arrangement would increase the transferor’s asset and the operator’s intangible asset

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Other provisions:Revenue-sharing arrangements –Unconditional payments treated like installments–Conditional amounts recognized when earned according to the agreementDisclosures:–Description of the arrangement –Nature and extent of rights retained or transferred–Nature and amounts of recognized assets and liabilitiesSilent on governmental fund reporting

Codification of Pre-November 30, 1989 FASB Pronouncements

Exposure Draft Issued January 2010

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Overview of the Project• Since FASB introduced its codification, its original

pronouncements are nonauthoritative• Paragraph 17 of Statement 34 requires application of

pre-November 30, 1989, FASB pronouncements, unless they conflict with or contradict GASB pronouncements

• Project objective: Specifically identify applicable provisions in FASB Statements and Interpretations, APB Opinions, ARBs, and AICPA Accounting Interpretations, and incorporate those provisions into the GASB’s literature

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Tentative Decisions• Statement 20 would be superseded

– All applicable pre-11/30/89 standards would be contained in the GASB’s codification

– All potentially applicable post-11/30/89 non-GASB standards would be “other accounting literature”

• Guidance on 29 topics would be brought into the GASB literature, including:– Capitalization of interest costs (FAS 34)– Statement of net assets classification (ARB 43, APB 12 &

FAS 6)

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Tentative Decisions (cont.)– Special and extraordinary items (APB 30)– Comparative financial statements (ARB 43)– Related parties (FAS 57)– Prior-period adjustments (FAS 16 & APB 9)– Accounting changes and error corrections (APB 20 and FIN

20)– Contingencies (FAS 5 & FIN 14)– Extinguishments of debt (APB 26 & FAS 76)– Troubled debt restructuring (FAS 15)– Inventory (ARB 43)– Leases (FAS 13, 22 & 98 & FIN 23, 26 & 27)

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Tentative Decisions (cont.)– Sales of real estate (FAS 66)– Real estate projects (FAS 67)– Research and development arrangements (FAS 68)– Broadcasters (FAS 63)– Cable television systems (FAS 51)– Insurance enterprises (FAS 60)– Lending activities (FAS 91)– Mortgage banking activities (FAS 65)– Regulated operations (FAS 71, 90 & 101)

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Due Process• Exposure Draft issued January 29• Comment period of six months• Exposure Draft includes:

– Crosswalk from original standards to paragraphs in the Exposure Draft

– Listings of FASB and AICPA original pronouncements (numerically and topically) and their applicability

– Mark-up of the applicable FASB and AICPA original pronouncements

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Statements 55 and 56

Issued in March 2009

Statements 55 and 56

• Statements 55 and 56 moved accounting and financial reporting standards from the AICPA literature to the GASB literature:– GAAP hierarchy– Going concern considerations– Subsequent events– Related party transactions

• Language transferred basically as is, but set in a governmental context

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Pension Accounting and Financial Reporting by Employers

Preliminary Views of the GASB

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Preliminary views• A type of due process document that sets

forth tentative conclusions of the GASB for comment prior to Exposure Draft stage

• Scope of this PV is limited to fundamental issues related to pension accounting and financial reporting by employers

• PV due out in June 2010; projected comment due date is September 28, 2010

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Starting point: employer’s pension obligation to employees•Pension benefits are compensation for employees’ services in financial-reporting periods•Employment-exchange transactions create an obligation of employer to employees to provide pension benefits in retirement

– Annual exchanges, viewed by Board within context of a career-long employment relationship

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Primary and secondary responsibilities for the obligation•Funded portion of the obligation

• Plan becomes primarily responsible for the obligation to employees to the extent plan assets have been accumulated to provide for payment of benefits; employer is secondarily responsible for the funded portion

• Unfunded portion of the obligation:•Employer remains primarily responsible for the obligation to employees to the extent the obligation exceeds plan assets

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Unfunded pension obligation should be recognized as a liability•The unfunded pension obligation meets Concepts Statement 4 definition of a liability of the employer:

– A present obligation—created by past exchanges– Requires sacrifice of employer’s resources– Little or no discretion to avoid the sacrifice of resources—

generally a legally enforceable liability, but if not, in some cases, is a constructive liability

•The liability is measurable with sufficient reliability to be recognized in employer’s financial statements•Thus, Concepts Statement 3 criteria for recognition are met

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Measurement of the net pension liability• Projection of benefits—inclusive of future changes,

including, potentially, ad hoc COLAs in circumstances where essentially not different from automatic

• Discount rate or rates (hybrid method):– Long-term expected rate of return for projected benefit

payments covered by current and projected future plan net assets

– High-quality tax-exempt municipal bond index rate for projected benefit payments, if any, beyond the point at which plan net assets are projected to be fully depleted

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Measurement of the net pension liability (cont.)• Single method for attribution of the present value of

projected benefit payments (employee service cost) to periods: entry age/level-percentage-of-payroll basis, applied over service lives of plan members

• Employer’s net pension liability equals the difference between:– The accumulated value of employee service costs

attributed to past periods– An amount equal to plan net assets (including investments

at fair value)

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Attribution of changes in the net pension liability to periods •Current-period employee service cost and interest on the beginning liability should be recognized as expense currently•Effects of other changes in the (total) liability should be recognized as expense over the remaining service lives of plan members (or, if there is no remaining service life, immediately):

– Differences between expected and actual experience– Assumption changes– Benefit changes

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Attribution of changes in the net pension liability to periods (cont.)•Corridor method:

– Expected returns on plan net assets should be recognized as a component of pension expense

– Net cumulative differences between expected and actual returns also should be recognized only if and to the extent they exceed 15% of plan net assets

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Recognition by cost-sharing employers• Cost-sharing is a way that employers share benefit risks and

pool assets• The unfunded obligation is the primary responsibility of the

employers collectively• Each cost-sharing employer is implicitly primarily

responsible for a proportionate share of the collective unfunded obligation

• An employer’s share of the collective unfunded pension obligation:– Meets the definition of a liability– Is measurable with sufficient liability to support recognition

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Recognition by cost-sharing employers (cont.)• Each cost-sharing employer also should recognize a

proportionate share of the collective deferred outflows, deferred inflows, and pension expense

• Measurement approach:– A single measurement at the collective level—that takes into

consideration the risk-sharing and asset-pooling features of a cost-sharing plan

– Allocation of the collective results to individual employers for financial reporting purposes

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Statement 57, OPEB Measurements by Employers and Agent Multiple-Employer Plans

• Issued December 2009

• Effective immediately, except for paragraph 8, which is effective for periods beginning after June 15, 2011

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OPEB Measurements by Employers and Agent Multiple-Employer Plans

• Expands option for qualified agent employers to use the alternative measurement method

• Amends agent multiple plan reporting requirements

• Clarifies measurement frequency and timing requirements for agent employers (Paragraph 8)

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Statement 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies

• Issued December 2009

• Effective for periods beginning after June 15, 2009

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Accounting and Financial Reporting for Chapter 9 Bankruptcies

• Chapter 9 (“municipal”) bankruptcies excludes state and tribal governments

• As of 2009 only 24 states authorized Chapter 9 filings by their municipal governments

• Provides accounting/reporting guidance for:– Recognition and display of bankruptcy impact– Measurement of obligations– Required disclosures (e.g., conditions and events leading

to bankruptcy petition, how to obtain government’s Plan of Adjustment, etc.)

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Suggested Guidelines For Voluntary Reporting, SEA Performance Information

• Proposal issued in June 2009 with a comment deadline of October 30, 2009

• The project does:– Focus on voluntary reporting– Focus on suggested guidelines

• The project does not:– Establish performance measures– Establish performance benchmarks– Require SEA Reporting

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Reporting Guidelines composed of three parts:

• Four essential components of an effective SEA report

• Six qualitative characteristics that are appropriate for reporting SEA performance information

• A discussion of how to effectively communicate SEA performance information

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Essential Components of Effective SEA Reports:

•Purpose and Scope•Major Goals and Objectives•Key Measures of SEA Performance•Discussion and Analysis of Results and Changes

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Qualitative Characteristics of SEA Performance Information:•Relevance•Understandability•Comparability•Timeliness•Consistency•Reliability

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• Suggested guidelines, although voluntary, will assist governments in improving the quality of their reported SEA performance information

• Traditional financial statements provide information about fiscal and operational accountability but not the degree to which the government was successful in helping to maintain or improve the well-being of its citizens by providing services

• Final Guidelines expected in June 2010

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Economic Condition Reporting: Fiscal Sustainability

• Basic Facts about GASB’s Projecthttp://www.gasb.org/facts/Economic_Condition_Reporting_Fact_Sheet.pdf

• Article Regarding GASB’s Projecthttp://www.gasb.org/newsletter/fiscal_sustainability_dec2009.html

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http://www.gasb.org/facts/Economic_Condition_Reporting_Fact_Sheet.pdf

http://www.gasb.org/facts/Economic_Condition_Reporting_Fact_Sheet.pdf

http://www.gasb.org/newsletter/fiscal_sustainability_dec2009.html

http://www.gasb.org/newsletter/fiscal_sustainability_dec2009.html

Questions?

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Web site—www.gasb.org

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