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2005 Midwest Regional2005 Midwest RegionalProfessionalProfessionalDevelopment Development ConferenceConference
Roberta ReeseRoberta Reese
May 12, 2005May 12, 2005
AGA Topeka AGA Topeka ChapterChapter
OverviewOverview
New Implementation GuideNew Implementation Guide Statement 40: Investment Statement 40: Investment
disclosuresdisclosures TB 2003-1: Derivatives disclosuresTB 2003-1: Derivatives disclosures Statement 46: Restricted net assetsStatement 46: Restricted net assets Pollution remediation obligationsPollution remediation obligations Sales and pledgesSales and pledges Statement 44: Statistical sectionStatement 44: Statistical section
Comprehensive Comprehensive Implementation Guide Implementation Guide
– Released in September 2004Released in September 2004– Updates the 2003 edition Updates the 2003 edition
which consolidated the which consolidated the existing guidesexisting guides
– Statement 40 Guide Statement 40 Guide incorporatedincorporated
– 800 pages, includes 1,245 800 pages, includes 1,245 questionsquestions
– Exhibits and exercisesExhibits and exercises– Annual updatesAnnual updates
2004
Issued Issued
March 2003March 2003Effective for Periods Effective for Periods
Beginning After June 15, Beginning After June 15, 20042004
Statement No. 40—Statement No. 40—Deposit and Investment Deposit and Investment Risk DisclosuresRisk Disclosures
Deposits and Deposits and Investments RisksInvestments Risks Risks are the focusRisks are the focus
– Fair value considers variabilities of Fair value considers variabilities of cash flows discounted for time value cash flows discounted for time value and riskand risk
Disclosures by Disclosures by Investment TypeInvestment Type Investments should be organized Investments should be organized
by investment type, such as:by investment type, such as:– U.S. TreasuriesU.S. Treasuries– Corporate bondsCorporate bonds– Commercial paperCommercial paper
Dissimilar investments should not Dissimilar investments should not be aggregatedbe aggregated
Level of DetailLevel of Detail
Generally, the disclosures should Generally, the disclosures should be made for the primary be made for the primary government for which disclosures government for which disclosures are essential for fair presentationare essential for fair presentation
Level of DetailLevel of Detail
Risk disclosures should also be made for:Risk disclosures should also be made for:– governmental and business-type activities, governmental and business-type activities, – individual major funds, individual major funds, – nonmajor funds in the aggregate, or nonmajor funds in the aggregate, or – fiduciary fund types fiduciary fund types
when the risk exposures are significantly when the risk exposures are significantly greater than the deposit and investment greater than the deposit and investment risks of the primary governmentrisks of the primary government
Level of Detail—Level of Detail—An ExampleAn Example A capital projects fund, because of its A capital projects fund, because of its
investment in one issuer of corporate investment in one issuer of corporate bonds, is exposed to a concentration of bonds, is exposed to a concentration of credit risk. However, the primary credit risk. However, the primary government’s total investments might government’s total investments might not indicate a concentration risk. In this not indicate a concentration risk. In this case, additional disclosure should be case, additional disclosure should be made for the capital projects fund’s made for the capital projects fund’s exposure to a concentration of credit exposure to a concentration of credit risk.risk.
Interest Rate RiskInterest Rate Risk
The risk that changes in interest rates The risk that changes in interest rates may adversely affect an investment’s fair may adversely affect an investment’s fair valuevalue
Five methods identified, must choose Five methods identified, must choose one:one:– Specific identificationSpecific identification– Weighted average maturityWeighted average maturity– DurationDuration– Simulation modelSimulation model– Segmented time distributionsSegmented time distributions
Specific IdentificationSpecific Identification
MaturitiesMaturities Fair ValueFair Value
State investment poolState investment pool Not applicableNot applicable $1,506,980$1,506,980
U.S. Treasury billU.S. Treasury bill Jan 2003Jan 2003 452,980452,980
Government National Government National Mortgage AssociationMortgage Association Mar 2003Mar 2003
282,230282,230
ABC Corp. commercial paperABC Corp. commercial paper Jan 2003Jan 2003 350,000350,000
DEF Corporation bondsDEF Corporation bonds Mar 2004Mar 2004 50,00050,000
TotalTotal $2,642,190$2,642,190
Fair Fair ValueValue < 1< 1 1-51-5 6-106-10 > 10> 10
ReposRepos $150$150 $150$150
U.S. TreasuryU.S. Treasury 6262 4545 1717
Corporate bondsCorporate bonds 4646 55 3535 44 22
Certificate of Certificate of depositdeposit
8585
6060 2525 __ __
TotalTotal 343343 260260 7777 44 22
Segmented Time Segmented Time DistributionDistribution
Highly Sensitive Highly Sensitive InvestmentsInvestments A debt investment with contract A debt investment with contract
terms that make the investment’s terms that make the investment’s fair value highly sensitive to fair value highly sensitive to interest rate changesinterest rate changes
Highly Sensitive Highly Sensitive Investments: Examples Investments: Examples Inverse floatersInverse floaters Variable coupons with multiplier Variable coupons with multiplier
[for example, coupon varies by [for example, coupon varies by 125% of London Interbank 125% of London Interbank Offered Rate (LIBOR)]Offered Rate (LIBOR)]
Collateralized mortgage Collateralized mortgage obligations, such as interest-only obligations, such as interest-only or residual tranchesor residual tranches
Credit RiskCredit Risk
Disclose credit quality as of year-endDisclose credit quality as of year-end Includes corporate debt, state and Includes corporate debt, state and
local governments, external local governments, external investment poolsinvestment pools
Exempt: Debt investments with Exempt: Debt investments with explicit guarantee of US governmentexplicit guarantee of US government—GNMA—GNMA
If not rated, indicate as muchIf not rated, indicate as much
Custodial Credit RiskCustodial Credit Risk
Disclose only “Category 3”Disclose only “Category 3”– Deposits that are uninsured and Deposits that are uninsured and
uncollateralizeduncollateralized– Uninsured investments that are Uninsured investments that are
either held by the: either held by the: Counterparty, or Counterparty, or Counterparty’s trust department, but Counterparty’s trust department, but
not in the name of the governmentnot in the name of the government
Concentration of Concentration of Credit RiskCredit Risk Defined as investments of more Defined as investments of more
than 5 percent in any one issuerthan 5 percent in any one issuer Excluded: Excluded:
– US government debtUS government debt– Debt explicitly guaranteed by the US Debt explicitly guaranteed by the US
governmentgovernment– Pooled investments such as mutual Pooled investments such as mutual
funds or external investment poolsfunds or external investment pools
Foreign Currency RiskForeign Currency Risk
Applies to deposits and Applies to deposits and investmentsinvestments
Disclose currencyDisclose currency If debt security, disclose interest If debt security, disclose interest
rate riskrate risk
Deposit and Deposit and Investment PoliciesInvestment Policies Disclose only those policies that Disclose only those policies that
are relevant to the risks that are are relevant to the risks that are disclosed disclosed
In other words, if there is no risk In other words, if there is no risk disclosure, no policy disclosure is disclosure, no policy disclosure is requiredrequired
Effective DateEffective Date
Fiscal years beginning after June Fiscal years beginning after June 15, 200415, 2004
Earlier application is encouragedEarlier application is encouraged
Technical Bulletin Technical Bulletin 2003-012003-01
Disclosures for Derivatives Disclosures for Derivatives Not Reported at Fair ValueNot Reported at Fair Value
Derivatives—Derivatives—DisclosuresDisclosures Previous guidance provided in Previous guidance provided in
Technical Bulletin 94-1Technical Bulletin 94-1 Final TB issued in June 2003Final TB issued in June 2003 Effective date—Periods ending Effective date—Periods ending
after June 15, 2003 (FYE June 30, after June 15, 2003 (FYE June 30, 2003)2003)
Derivatives—Derivatives—DisclosuresDisclosures Objective of the derivativeObjective of the derivative Significant termsSignificant terms
– Notional amountNotional amount– Interest ratesInterest rates– Embedded optionsEmbedded options– Effective date and ending dateEffective date and ending date
Fair valueFair value
Derivatives—Derivatives—DisclosuresDisclosures RisksRisks
– CreditCredit– Interest rateInterest rate– BasisBasis– TerminationTermination– RolloverRollover– Market accessMarket access
Associated debt—effect of the Associated debt—effect of the derivative on net cash flowderivative on net cash flow
Statement 46: Net Statement 46: Net Assets Restricted by Assets Restricted by Enabling LegislationEnabling Legislation
Net AssetsNet Assets
Two Issues:Two Issues:– Clarifies “legally enforceable”Clarifies “legally enforceable”– Requires separate reporting of net Requires separate reporting of net
assets restricted by enabling assets restricted by enabling legislationlegislation
Net AssetsNet Assets
Enabling legislationEnabling legislation authorizes the authorizes the government to assess, levy, charge, government to assess, levy, charge, or otherwise mandate payment of or otherwise mandate payment of resources (from external resource resources (from external resource providers) providers) andand includes a includes a legally legally enforceableenforceable requirement that those requirement that those resources be used only for the resources be used only for the specific purposes stipulated in the specific purposes stipulated in the legislation legislation
Net AssetsNet Assets
Legally Enforceable:Legally Enforceable:– The government can be compelled The government can be compelled
by an external party to use by an external party to use resources only for a specific purposeresources only for a specific purpose
– Based on presumption (and legal Based on presumption (and legal opinion?)opinion?) May never be provenMay never be proven
– ““Tainting” the pool?Tainting” the pool?
Net AssetsNet Assets
““New” enabling legislation to New” enabling legislation to replace existing lawreplace existing law– New resourcesNew resources– Remaining balancesRemaining balances
Noncompliant use of restricted Noncompliant use of restricted assetsassets– Re-evaluate classificationRe-evaluate classification
Reclassify as unrestrictedReclassify as unrestricted Maintain restrictionMaintain restriction
Net AssetsNet Assets
Net assets restricted by enabling Net assets restricted by enabling legislation should be displayed legislation should be displayed separately from other restricted separately from other restricted assetsassets– To emphasize different level of To emphasize different level of
influenceinfluence
Pollution Pollution Remediation Remediation ObligationsObligations
Pollution Remediation Pollution Remediation ObligationsObligations What types of obligations are out What types of obligations are out
there?there?– Range from superfund sites to Range from superfund sites to
brownfieldsbrownfields Issues addressed in the projectIssues addressed in the project
– What is the obligating event?What is the obligating event?– How should the obligation be measured?How should the obligation be measured?
Preliminary Views documentPreliminary Views document
Pollution Remediation Pollution Remediation ObligationsObligations ScopeScope
– Pollution remediation obligationsPollution remediation obligations Except Statement 18 (landfills)Except Statement 18 (landfills)
– No asset retirement obligationsNo asset retirement obligations– No pollution prevention obligationsNo pollution prevention obligations
Cost accumulation, not fair value Cost accumulation, not fair value Current cost, not present valueCurrent cost, not present value Expected cash flow, rather than best Expected cash flow, rather than best
estimateestimate
Two ContingenciesTwo ContingenciesNeither is ProbableNeither is Probable
Potential payment Probability (a) x (b)$0 60% $0
$200 40% $80$80.00
Potential payment Probability (a) x (b)$0 60% $0
$200 40% $80$80.00
Probable TogetherProbable Together
Permutations of Potential Payments JointContingency 1 Contingency 2 Total Probabilities
$0 $0 $0 36.0%$0 $200 $200 24.0%
$200 $0 $200 24.0%$200 $200 $400 16.0%
100.0%
Pollution Remediation Pollution Remediation ObligationsObligations Recognition triggers—liability when:Recognition triggers—liability when:
– Imminent endangerment compels actionImminent endangerment compels action– Named as responsible partyNamed as responsible party– Named in lawsuit to enforce actionNamed in lawsuit to enforce action– Cleanup or containment commencedCleanup or containment commenced
Recognize component when Recognize component when measurable (benchmarks approach)measurable (benchmarks approach)
Pollution Remediation Pollution Remediation ObligationsObligations Current cost based on Current cost based on reasonable reasonable
and supportable assumptionsand supportable assumptions about future events about future events – laws expected to be in effectlaws expected to be in effect– technology expected to be used technology expected to be used
Pollution Remediation Pollution Remediation ObligationsObligations What costs are to be included in What costs are to be included in
liability?liability?– Pre-cleanup site assessment, feasibility Pre-cleanup site assessment, feasibility
study, design, etc.study, design, etc.– Cleanup, containment, disposal activitiesCleanup, containment, disposal activities– Oversight and enforcement costsOversight and enforcement costs– Operation and maintenance of the remedy Operation and maintenance of the remedy
and monitoringand monitoring Entity must decide whether to include Entity must decide whether to include
indirect and non-incremental costsindirect and non-incremental costs
Pollution Remediation Pollution Remediation ObligationsObligations What is the debit entry?What is the debit entry?
– Generally expenseGenerally expense– Can defer expense under FASB Stmt Can defer expense under FASB Stmt
7171– Capitalize in certain situationsCapitalize in certain situations
Do NOT record liabilities for Do NOT record liabilities for capitalizable costs!capitalizable costs!
Pollution Remediation Pollution Remediation ObligationsObligations Capitalize ifCapitalize if
– Cleanup to prepare property for sale Cleanup to prepare property for sale (limited to FV)*(limited to FV)*
– Polluted property bought and cleaned Polluted property bought and cleaned for service (cap)*for service (cap)*
– Asset impaired and cleanup restores Asset impaired and cleanup restores lost service utility (cap)lost service utility (cap)
* Capitalize if incurred within a reasonable period* Capitalize if incurred within a reasonable period
Pollution Remediation Pollution Remediation ObligationsObligations Recoveries—net against expenseRecoveries—net against expense
– Recoveries from other partiesRecoveries from other parties Recognize consistent with liability Recognize consistent with liability
(expected cash flow technique)(expected cash flow technique)
– Insurance recoveriesInsurance recoveries Recognize as separate recovery assets Recognize as separate recovery assets
when realized or realizablewhen realized or realizable If not realized or realizable—offset If not realized or realizable—offset
against liabilitiesagainst liabilities
Pollution Remediation Pollution Remediation ObligationsObligations AccretionAccretion
– Adjust liability annually for changesAdjust liability annually for changes Inflation or deflationInflation or deflation Price increases/decreases for specific Price increases/decreases for specific
cost elementscost elements Changes in technologyChanges in technology Changes in laws or regulationsChanges in laws or regulations
– Same as Statement 18Same as Statement 18
Pollution Remediation Pollution Remediation ObligationsObligations
Timetable:Timetable: Preliminary Views—March 2005Preliminary Views—March 2005 Exposure Draft—December 2005Exposure Draft—December 2005 Statement—Fall/Winter 2006Statement—Fall/Winter 2006
Sales and Pledges of Sales and Pledges of Receivables and Future Receivables and Future RevenuesRevenues
Sales and PledgesSales and Pledges
Scope of the project—government Scope of the project—government receives proceeds from a third party in receives proceeds from a third party in exchange for the rights to future cash exchange for the rights to future cash flows from:flows from:– Receivables:Receivables:
Delinquent property taxesDelinquent property taxes Uncollected finesUncollected fines Mortgages Mortgages Student loansStudent loans
– Future revenuesFuture revenues
Sales and PledgesSales and Pledges
Scope of the project:Scope of the project: Also includes situations in which Also includes situations in which
the government does not receive the government does not receive proceeds, but pledges future cash proceeds, but pledges future cash flowsflows– Primary government pledges Primary government pledges
revenues to debt-issuing component revenues to debt-issuing component unitunit
Sales and PledgesSales and Pledges
Added to the agenda in 2004:Added to the agenda in 2004: TB 2004-1 (tobacco settlement) TB 2004-1 (tobacco settlement)
concernsconcerns Budgetary pressures to accelerate cash Budgetary pressures to accelerate cash
flowsflows Current lack of disclosures about Current lack of disclosures about
pledged revenues pledged revenues Need for government-specific Need for government-specific
standardsstandards
Sales and PledgesSales and Pledges
Sale or borrowing?Sale or borrowing? Intent of the parties, terms of the Intent of the parties, terms of the
agreementagreement Continuing involvement—controlContinuing involvement—control
– Does the transferor government retain Does the transferor government retain control, or is control relinquished?control, or is control relinquished?
– Criteria for receivablesCriteria for receivables– Criteria for salesCriteria for sales
Sales and PledgesSales and Pledges
Are receivables sold or pledged?Are receivables sold or pledged? Transferee’s ability to sell or pledgeTransferee’s ability to sell or pledge Isolation Isolation
– Legally separate Legally separate – No access to cash No access to cash – Source and timing of paymentsSource and timing of payments– Satisfaction of accountsSatisfaction of accounts– Bankruptcy protectionBankruptcy protection
Obligation to replace or repurchase Obligation to replace or repurchase accountsaccounts
Sales and PledgesSales and Pledges
Are future revenues sold or pledged?Are future revenues sold or pledged? Transferee’s ability to sell or pledgeTransferee’s ability to sell or pledge Transferor’s continuing active Transferor’s continuing active
involvement in the generation of the involvement in the generation of the revenuesrevenues– Excludes own-source revenuesExcludes own-source revenues
TaxesTaxes User chargesUser charges
– Grants, entitlementsGrants, entitlements
Sales and PledgesSales and Pledges
If not a sale (collateralized borrowing):If not a sale (collateralized borrowing): Pledging government:Pledging government:
– Recognizes liability for the proceedsRecognizes liability for the proceeds– Does not de-recognize receivablesDoes not de-recognize receivables– Continues recognition of revenues pledgedContinues recognition of revenues pledged– Payments reduce liability (G/F Payments reduce liability (G/F
expenditure)expenditure) Transferee government recognizes a Transferee government recognizes a
receivable receivable
Sales and PledgesSales and Pledges
Meets the conditions for sale treatment:Meets the conditions for sale treatment: Selling government:Selling government:
– De-recognizes receivablesDe-recognizes receivables– No asset to de-recognize for future revenuesNo asset to de-recognize for future revenues– Difference between proceeds and carrying Difference between proceeds and carrying
value is gain (loss)value is gain (loss) Purchasing government:Purchasing government:
– Intra-entity—asset at carrying valueIntra-entity—asset at carrying value– Outside of the reporting entity—asset at costOutside of the reporting entity—asset at cost
Sales and PledgesSales and Pledges
Other assets and liabilities:Other assets and liabilities: Residual interests—subordinate Residual interests—subordinate
note/certificatenote/certificate– Excess receivable collectionsExcess receivable collections– Excess future revenuesExcess future revenues
Recourse and other obligationsRecourse and other obligations Servicing fees—deferred revenues Servicing fees—deferred revenues
and chargesand charges
Sales and PledgesSales and Pledges
Pledging government does not Pledging government does not receive proceeds:receive proceeds:– Government may be prohibited or Government may be prohibited or
have limited ability to issue debthave limited ability to issue debt– Creates/uses component unit to issue Creates/uses component unit to issue
debtdebt– Pledge does not constitute a liabilityPledge does not constitute a liability– Liability arises when pledged revenue Liability arises when pledged revenue
is recognizedis recognized
Sales and PledgesSales and Pledges
Disclosures:Disclosures:– Required for direct or indirect pledgesRequired for direct or indirect pledges
What revenue?What revenue? Purpose of the debtPurpose of the debt For how long?For how long? Significance of pledged amountSignificance of pledged amount
– Required for future revenues sold:Required for future revenues sold: What revenue?What revenue? For how long?For how long? Significance of amount soldSignificance of amount sold
Statement No. 44Statement No. 44
Economic Condition Economic Condition Reporting:Reporting:
The Statistical The Statistical SectionSection
The Statistical SectionThe Statistical Section—Objectives—Objectives
For assessing economic condition:For assessing economic condition: Provide perspective, context, and Provide perspective, context, and
detail relative to the financial detail relative to the financial statementsstatements
Provide information (outside the Provide information (outside the financial statements) about the financial statements) about the demographic and economic demographic and economic environmentenvironment
The Statistical SectionThe Statistical Section
Applicability:Applicability: Any government that provides a Any government that provides a
statistical sectionstatistical section
Focus:Focus: On the primary governmentOn the primary government
Status:Status: Supplementary informationSupplementary information
Types of Statistical Types of Statistical Section InformationSection Information
Financial trends informationFinancial trends information Revenue capacity information—factors affecting Revenue capacity information—factors affecting
ability to generate own-source revenuesability to generate own-source revenues Debt capacity informationDebt capacity information Demographic and economic informationDemographic and economic information
– Understand socio-economic environmentUnderstand socio-economic environment– Facilitate comparisons over time and among Facilitate comparisons over time and among
governmentsgovernments Operating information—contextual information Operating information—contextual information
about operations and resourcesabout operations and resources
Transition ProvisionsTransition Provisions
Effective Date: Periods Beginning Effective Date: Periods Beginning after June 15, 2005after June 15, 2005
Retroactive reporting encouraged, Retroactive reporting encouraged, but not requiredbut not required
Encouraged, but not required, to Encouraged, but not required, to report government-wide information report government-wide information retroactively to the year Statement retroactively to the year Statement 34 was implemented34 was implemented
Other ProjectsOther Projects
TB 2004-2, TB 2004-2, Recognition of Pension and Recognition of Pension and Other Postemployment Benefit Other Postemployment Benefit Expenditures/Expenses and Liabilities Expenditures/Expenses and Liabilities by Cost-Sharing Employersby Cost-Sharing Employers
Accounting for Termination BenefitsAccounting for Termination Benefits, , ED released December 10, 2004, ED released December 10, 2004, comment period ended March 11, comment period ended March 11, 20052005
Derivatives and hedgingDerivatives and hedging Electronic reportingElectronic reporting
Questions:Questions:
Roberta Reese:Roberta Reese:– Telephone—(203) 847-0700 X324Telephone—(203) 847-0700 X324– E-mail: E-mail: rereese@gasb.orgrereese@gasb.org
Web site—www.gasb.orgWeb site—www.gasb.org