1 GASB UPDATE February 2013. 2 The material appearing in this presentation is for informational...

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GASB UPDATEFebruary 2013

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The material appearing in this presentation is for informational purposes

only and is not legal or accounting advice. Communication of this

information is not intended to create, and receipt does not constitute, a

legal relationship, including, but not limited to, an accountant-client

relationship. Although these materials may have been prepared by

professionals, they should not be used as a substitute for professional

services. If legal, accounting, or other professional advice is required, the

services of a professional should be sought.

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EFFECTIVE DATES FOR FYE JUNE 30

• 2013o Statement 60—SCAso Statement 61—Financial Reporting Entityo Statement 62—Codification of AICPA and FASBo Statement 63—Statement of Net Position

• 2014o Statement 65—Assets and Liabilities Reclasseso Statement 66—Technical Correctionso Statement 67—Pension Plans

• 2015o Statement 68—Pensions for Employerso Statement 69—Government Combinations

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Statement No. 60,

Accounting and Financial Reporting for Service Concession Arrangements

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SERVICE CONCESSION ARRANGEMENTS (SCA)

• SCA’s are a form of public-private or public-public partnership

• The terms public-private partnership and public-public partnership are used to refer to a many types of arrangements:o Service arrangementso Management service arrangementso SCAs

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SCOPE—WHAT IS AN SCA?

• See paragraph 4:o Transferor conveys to an operator the right and related

obligation to provide public services through the operation of a capital assets in exchange for significant consideration

o The operator collects and is compensated from fees from third parties

o The transferor determines or has the ability to modify or approve services the operator is required to provide, to whom the operator is required to provide services, and the prices or rates that can be charged for services

o The transferor is entitled to significant residual interest in the service utility of the capital asset at the end of the arrangement

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REPORTING CAPITAL ASSETS

• If the capital asset associated with an SCA is a new capital asset or is constructed by the operator, or an existing capital asset that has been improved by the operator, then the transferor should reporto The new capital asset or the improvement at fair

value when it is placed in operation, along with…o Any contractual obligations recognized as liabilities,

along with a corresponding deferred inflow of resources

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REPORTING UPFRONT OR INSTALLMENT PAYMENTS

• Transferor should report the upfront payment or the present value of installment payments as an asset (cash or receivable) and any contractual obligations recognized as liabilities along with a deferred inflow of resources

• Revenue is recognized as the deferred inflow of resources is reduced over the term of the arrangement

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RECOGNITION OF LIABILITIES

• Liabilities associated with the SCA should be recorded at their present value if a contractual obligation is significant and meets either of the following criteria:o The contractual obligation directly relates to the capital asset

(for example obligations for capital improvements, insurance or maintenance)

o The contractual obligation relates to a commitment made by the transferor to maintain a specific level of service in connection with the operation of the capital asset (for example, providing a specific level of police and emergency services for a facility)

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OTHER REQUIREMENTS

• Disclosures for SCAs• Accounting for an SCA by Governmental

Operators• Revenue sharing provisions

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Statement No. 61, The Financial Reporting Entity—Omnibus

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OVERVIEW

The most significant effects of the amendments are to:

o Increase the emphasis on financial relationshipso Clarify the requirements to blend certain

component unitso Improve recognition of ownership interests

Joint ventures Component units

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INCLUSION CRITERIA

• Statement 14 requires inclusion in the reporting entity if a Potential Component Unit is fiscally dependent. That is,

Budget, or Setting taxes or charges, or Issuing debt

• Statement 61 adds the additional requirement for a financial benefit or burden to exist before inclusion in the reporting entity is required

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BLENDING REQUIREMENTS

• Statement 14 requires blending if the Primary Government and a Component Unit have “substantively” the same governing body

• Statement 61 modifies that requirement to also include:

o A financial benefit/burden relationship, or

o Primary government has “operational responsibility for a Component Unit (For example, the Primary Government’s personnel manage the activities of the Component Unit like a fund or a department of the Primary Government)

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BLENDING REQUIREMENTS

• The blending criteria is broadened to also include component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government.o 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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REPORTING EQUITY INTERESTS

Requires that a primary government report an asset for its equity interest in a discretely presented component unit:

•Blended component units: If the component unit is blended, replace equity interest (decrease net position) with assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the component unit…in other words report the component unit

•Discretely presented component units: If the component unit is discretely presented, the financial statements of the reporting entity also will report the equity interest in the net assets of the component unit as an asset of the primary government.

GASB Update September 2012 16

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NOTE DISCLOSURES

Clarifies that current disclosures require:• Rationale for including each component unit • Whether it is discretely presented, blended, or included

as a fiduciary fund


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Statement No. 62,

Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements

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BACKGROUND

• Conflict with or contradict GASB Standardso FASB Statement 43—Compensated absences

• Are not applicable to governmentso FASB Statement 84—Convertible debt

• Rarely applicable to governments• Are applicable to governments

o FASB Statement 34—Capitalization of interest

• Issues to be addressed in other GASB projects

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SIGNIFICANT TOPICS

• Special and extraordinary items (APB Opinion 30)• Comparative financial statements (ARB 43)• Related parties (FASB Statement 57)• Prior-period adjustments (FASB Statement 16 and APB Opinion 9)• Accounting changes and error corrections (APB Opinion 20 and

FASB Interpretation 20)• Contingencies (FASB Statement 5 and FASB Interpretation 14)• Extinguishments of debt (APB Opinion 26 and FASB Statement 76)• Inventory (ARB 43)• Leases (FASB Statements 13, 22, and 98 and FASB Interpretations

23, 26, and 27)

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SPECIALIZED TOPICS

• Sales of real estate (APB Opinion 30)• Real estate projects (ARB 43)• Research and development arrangements (FASB Statement 68)• Broadcasters (FASB Statement 63)• Cable television systems (FASB Statement 51)• Insurance enterprises (FASB Statement 60)• Lending activities (FASB Statement 91)• Mortgage banking activities (FASB Statement 65)• Regulated operations (FASB Statements 71, 90, and 101)

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BASIC GUIDANCE

• Supersedes Statement 20!o All applicable pre-11/30/89 standards are in GASB’s

codificationo All applicable post-11/30/89 non-GASB standards

are considered “other accounting literature”o Accounting changes to apply Statement 62 should be

retroactively applied

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Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

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BACKGROUND INFORMATIONConcepts Statement 4 identifies 5 elements that make up a statement of financial position:

Assets Liabilities Deferred outflows of resources Deferred inflows of resources Net position

This differs from the composition currently required by Statement 34, which requires the presentation of

Assets Liabilities Net assets

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DEFINITIONS

Deferred outflows of resources: A consumption of net assets by the government that is applicable to a future reporting period

Assets: Resources with present service capacity that the government presently controls

Liabilities: Present obligations to sacrifice resources that the government has little or no discretion to avoid

Deferred inflows of resources of resources: An acquisition of net assets by the government that is applicable to a future reporting period


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DISPLAY REQUIREMENTS

• Deferred outflows of resources should be reported in a separate section following assets

• Deferred inflows of resources should be reported in a separate section following liabilities

• Net position components resemble the existing components of net assets, but also include the effects of deferred outflows of resources and deferred inflows of resources• Net investment in capital assets• Restricted• Unrestricted

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Statement of Net Position

Primary GovernmentGovernmental Business-type Component

Activities Activities Total UnitsASSETSCash and cash equivalents 11,712,829$ 10,516,820$ 22,229,649$ 303,935$ Investments 29,250,291 64,575 29,314,866 7,428,952Derivative instrument--rate swap 1,040,482 1,040,482Receivables (net) 11,792,650 3,609,615 15,402,265 4,042,290Internal balances 313,768 (313,768) —

Inventories 322,149 126,674 448,823 83,697Equity interest in MSA joint venture 2,303,256 — 2,303,256 —

Capital assets: Land, improvements, and construction in progress 28,435,025 6,408,150 34,843,175 751,239 Other capital assets, net of depreciation 141,587,735 150,980,601 292,568,336 36,993,547 Total capital assets 170,022,760 157,388,751 327,411,511 37,744,786 Total assets 226,758,185 171,392,667 398,150,852 49,603,660

DEFERRED OUTFLOWSAccumulated decrease in fair value of hedging derivatives — 127,520 127,520 —

LIABILITIESAccounts payable and accrued expenses 7,538,543 659,592 8,198,135 1,803,332Advances from grantors 1,435,599 1,435,599 38,911Forward contract 127,520 127,520Long-term liabilities: Due within one year 9,236,000 4,426,286 13,662,286 1,426,639 Due in more than one year 83,302,378 74,482,273 157,784,651 27,106,151 Total liabilities 101,512,520 79,695,671 181,208,191 30,375,033

DEFERRED INFLOWSAccumulated increase in fair value of hedging derivatives 1,040,482 — 1,040,482 —

Unamortized service concession arrangement payments — 4,467,536 4,467,536 —

Total deferred inflows 1,040,482 4,467,536 5,508,018 —

NET POSITION Net investment in capital assets 103,711,386 79,088,574 182,799,960 15,906,392Restricted for: Transportation and public works 10,655,737 — 10,655,737 —

Debt service 3,076,829 1,451,996 4,528,825 —

Housing and community redevelopment 6,845,629 — 6,845,629 —

Other purposes 1,483,387 — 1,483,387 492,445Unrestricted (deficit) (1,567,785) 6,816,410 5,248,625 2,829,790 Total net position 124,205,183$ 87,356,980$ 211,562,163$ 19,228,627$

Statement of Net Position

Primary GovernmentGovernmental Business-type Component

Activities Activities Total UnitsASSETSCash and cash equivalents 11,712,829$ 10,516,820$ 22,229,649$ 303,935$ Investments 29,250,291 64,575 29,314,866 7,428,952Derivative instrument--rate swap 1,040,482 1,040,482Receivables (net) 11,792,650 3,609,615 15,402,265 4,042,290Internal balances 313,768 (313,768) —

Inventories 322,149 126,674 448,823 83,697Equity interest in MSA joint venture 2,303,256 — 2,303,256 —

Capital assets: Land, improvements, and construction in progress 28,435,025 6,408,150 34,843,175 751,239 Other capital assets, net of depreciation 141,587,735 150,980,601 292,568,336 36,993,547 Total capital assets 170,022,760 157,388,751 327,411,511 37,744,786 Total assets 226,758,185 171,392,667 398,150,852 49,603,660

DEFERRED OUTFLOWSAccumulated decrease in fair value of hedging derivatives — 127,520 127,520 —

LIABILITIESAccounts payable and accrued expenses 7,538,543 659,592 8,198,135 1,803,332Advances from grantors 1,435,599 1,435,599 38,911Forward contract 127,520 127,520Long-term liabilities: Due within one year 9,236,000 4,426,286 13,662,286 1,426,639 Due in more than one year 83,302,378 74,482,273 157,784,651 27,106,151 Total liabilities 101,512,520 79,695,671 181,208,191 30,375,033

DEFERRED INFLOWSAccumulated increase in fair value of hedging derivatives 1,040,482 — 1,040,482 —

Unamortized service concession arrangement payments — 4,467,536 4,467,536 —

Total deferred inflows 1,040,482 4,467,536 5,508,018 —

NET POSITION Net investment in capital assets 103,711,386 79,088,574 182,799,960 15,906,392Restricted for: Transportation and public works 10,655,737 — 10,655,737 —

Debt service 3,076,829 1,451,996 4,528,825 —

Housing and community redevelopment 6,845,629 — 6,845,629 —

Other purposes 1,483,387 — 1,483,387 492,445Unrestricted (deficit) (1,567,785) 6,816,410 5,248,625 2,829,790 Total net position 124,205,183$ 87,356,980$ 211,562,163$ 19,228,627$

ILLUSTRATION


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GOVERNMENTAL FUNDS

• Governmental activities in Government-wide statements: Statement of Net Position:• assets + deferred outflows – liabilities – deferred inflows = net

position

• Governmental fund format:Balance sheet:• assets + deferred outflows = liabilities + deferred inflows + fund

balance


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WHAT’S REPORTED NOW?

• There are few items that GASB standards require to be reported as deferred outflows/inflows of resources as of today:• Statement 53–Derivative Instruments• Statement 60–Service Concession Arrangements

• NOT SO FAST…Statements 65, 67, 68 and 69 also have items that are reported as deferred outflows of resources or deferred inflows of resources.


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NOTE DISCLOSURES

• Governments should provide details of different types of deferred amounts in the notes in significant components of the total deferred amounts are obscured by aggregation on the face of the statements

• If the amount reported for a component of net position is significantly affected by deferred inflows or outflows, governments should disclose an explanation in the notes


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Statement No. 65, Items Previously Reported as Assets and Liabilities

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OBJECTIVE

• Objective of this Statement is to determine whether certain balances currently reported as assets and liabilities should continue to be reported as such or instead should be reported as:• A deferred outflows of resources, or • An outflow of resources (expense/expenditure);

or• A deferred inflows of resources, or• An inflows of resources (revenue)


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DEFINITIONS

Deferred outflows of resources: A consumption of net assets by the government that is applicable to a future reporting period

Assets: Resources with present service capacity that the government presently controls

Liabilities: Present obligations to sacrifice resources that the government has little or no discretion to avoid

Deferred inflows of resources of resources: An acquisition of net assets by the government that is applicable to a future reporting period


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ITEMS REPORTED AS DEFERRED OUTFLOWS OF RESOURCESTransactions in which the resulting item should be classified as deferred outflows of resources:• Resources advanced to another government in relation to a government-

mandated nonexchange transaction or a voluntary nonexchange transaction when time requirements are the only eligibility requirements that have not been met by the other government (paragraph 19 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions)

• Deferred debit amounts resulting from the refunding of debt (paragraph 5 of Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, and paragraph 221 of Statement No. 62, Codification of Accounting Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements)

• The purchase of future revenues within the same financial reporting entity (paragraphs 13–16 of Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues)

• Deferred loss resulting from sale-leaseback transactions (paragraph 242 of Statement 62)


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ITEMS REPORTED AS A DEFERRED OUTFLOWS OF RESOURCES

Transactions in which the resulting item should be classified as deferred outflows of resources:

• Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for resale prior to the point of sale (paragraph 467 of Statement 62)

• Fees paid to permanent investors to ensure the ultimate sale of loans prior to the point of sale (paragraph 469 of Statement 62)


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ITEMS REPORTED AS OUTFLOWS OF RESOURCES

• Transactions in which the resulting item should be recognized as outflows of resources:

• Acquisition costs for insurance entities and public entity risk pools (paragraphs 28–30 of Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and paragraphs 412–414 of Statement 62)

• Initial direct costs incurred by the lessor for operating leases (paragraph 227 of Statement 62)

• Debt issuance costs (paragraph 12 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, and paragraph 187 of Statement 62)

• Net balance (debit) of direct loan origination costs, including any portion related to points, related to lending activities (paragraph 45 of Statement 10 and paragraph 434 of Statement 62)GASB Update September 2012 36

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ITEMS REPORTED AS OUTFLOWS OF RESOURCES• Transactions in which the resulting item should be recognized as

outflows of resources:

• Fees paid related to a purchased loan or a group of loans (paragraph 442 of Statement 62)

• Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for investment (paragraph 467 of Statement 62)

• Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for resale after the sale occurs (paragraph 467 of Statement 62)

• Fees paid to permanent investors to ensure the ultimate sale of loans after the ultimate sale occurs (paragraph 469 of Statement 62)


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ITEMS REPORTED AS A DEFERRED INFLOWS OF RESOURCES

Transactions in which the resulting item should be classified as deferred inflows of resources:

• Resources received in advance in relation to an imposed nonexchange transaction (paragraph 18 of Statement 33)

• Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when time requirements are the only eligibility requirements that have not been met by the receiving government (paragraph 19 of Statement 33)

• Deferred credit amounts resulting from the refunding of debt (paragraph 5 of Statement 23, and paragraph 221 of Statement 62)

• Proceeds from the sale of future revenues (paragraphs 13–16 of Statement 48)

• Unavailable revenue related to the application of modified accrual accounting (Statement No. 6, Accounting and Financial Reporting for Special Assessments, and Statement 33)GASB Update September 2012 38

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ITEMS REPORTED AS DEFERRED INFLOWS OF RESOURCES

Transactions in which the resulting item should be reported as deferred inflows of resources:

• Deferred gain resulting from sale-leaseback transactions (paragraph 242 of Statement 62)

• Net balance (credit) of loan origination fees, excluding any portion related to points, for mortgage loans held for resale prior to the point of sale (paragraph 467 of Statement 62)

• Net balance (credit) of loan origination fees related to points for lending activities and mortgage loans held for investment (paragraph 45 of Statement 10 and paragraphs 434 and 467 of Statement 62)

• Resources generated by current rates intended to recover costs that are expected to be incurred in the future (paragraph 482 of Statement 62)

• Gains or other reductions of net allowable costs intended to reduce rates over future periods (paragraph 482 of Statement 62)


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ITEMS TO BE REPORTED AS INFLOWS OF RESOURCESTransactions in which the resulting item should be recognized as inflows of resources:

• Net balance (credit) of loan origination fees, excluding any portion related to points, related to lending activities (paragraph 45 of Statement 10 and paragraph 434 of Statement 62)

• Commitment fees realized upon exercise or expiration of the commitment (paragraphs 437 and 438 of Statement 62)

• Commitment fees charged for entering into an agreement that obligates the government to make or acquire a loan or to satisfy an obligation of the other party under a specified condition when exercise is considered remote (paragraphs 437 and 438 of Statement 62)

• Fees received related to a purchased loan or a group of loans (paragraph 442 of Statement 62)


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ITEMS TO BE REPORTED AS INFLOWS OF RESOURCES

Transactions in which the resulting item should be recognized as an inflow of resources:

• Net balance (credit) of loan origination fees, excluding any portion related to points, for mortgage loans held for investment (paragraph 467 of Statement 62)

• Net balance (credit) of loan origination fees, including any portion related to points, for mortgage loans held for resale after the sale occurs (paragraph 467 of Statement 62)

• Fees that are realized after the funding of mortgage loans has occurred or after the commitment to guarantee the funding of mortgage loans expires (paragraph 469 of Statement 62)

• Fees realized when a commitment is arranged directly between a permanent investor and a borrower (paragraph 470 of Statement 62)


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ITEMS WHERE CLASSIFICATION WAS NOT CHANGEDIn the Basis for Conclusion the Board affirmed items resulting from the following transactions should be classified as an asset:

• Prepayments (paragraph 73 of NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles)

• Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33)

• The purchase of future revenues from a government outside the financial reporting entity (paragraphs 13–16 of Statement 48)

• Initial subscriber installation costs in relation to cable television systems (paragraph 398 of Statement 62)

• Capitalized incurred costs related to regulated activities (paragraph 480 of Statement 62)

• Circumstances in which a pension plan’s net position exceeds the total pension liability


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ITEMS WHERE CLASSIFICATION WAS NOT CHANGED

In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as a liability:

• Resources received in advance in relation to a derived tax revenue nonexchange transaction (paragraph 16 of Statement 33)

• Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33)

• Resources received in advance of an exchange transaction (paragraph 23 of Statement 62)

• Excess of initial hookup revenue over of direct selling costs in relation to cable television systems (paragraph 397 of Statement 62)

• Premium revenues for insurance entities and public entity risk pools received in advance (paragraphs 19–21 of Statement 10, and paragraphs 405 and 406 of Statement 62)GASB Update September 2012 43

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ITEMS WHERE CLASSIFICATION WAS NOT CHANGED

In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as a liability(continued):

• Commitment fees charged for entering into an agreement that obligates the government to make or acquire a loan or to satisfy an obligation of the other party under a specified condition, unless exercise is remote (paragraphs 437 and 438 of Statement 62)

• Fees that are received for guaranteeing the funding of mortgage loans (paragraph 469 of Statement 62)

• Fees received for arranging a commitment directly between a permanent investor and a borrower (paragraph 470 of Statement 62)

• Refunds imposed by a regulator (paragraph 482 of Statement 62)


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OTHER AREAS

• Use of the term deferred should be limited to deferred inflows and deferred outflows of resources

• Major fund calculation guidance is amended• Use aggregate assets/deferred outflows and aggregate

liabilities/deferred inflows in the calculation


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Statement No. 66, Technical Corrections—2012

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STATEMENT AMENDMENTS

• Amendments to Statement 10–Use of Special Revenue Funds to Report Risk Financing Activities

• Amendments to Statement 62–Operating Leases

• Amendments to Statement 62—Purchase of a Loan or Group of Loans

• Amendments to Statement 62—Servicing Fees


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GASB'S PENSION STANDARDS

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WHERE HAVE WE BEEN?

• Staff research completed in 2008• Invitation to Comment issue in March 2009• Preliminary Views issued in June 2010• 3 Public Hearings held in October 2010• Exposure Drafts (employers, pension plans) issued in June

2011• 3 Public Hearings held in October 2011• Statements 67 and 68 issued in June 2012

GASB Pension Standards 49

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WHAT WAS THE STARTING POINT?

• Current standards were issued in 1994• Statement No. 25, Financial Reporting for Defined

Benefit Pension Plans and Note Disclosures for Defined Contribution Plans

• Statement No. 27, Accounting for Pensions by State and Local Governmental Employers

• GASB’s strategic plan calls for the periodic reexamination of major standards


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WHY DID THE GASB LOOK AT THIS TOPIC?

• What has changed since the issuance of current standards?• Relevant conceptual points—not available when

Statements 25 and 27 were developed• Concepts Statement No. 4, Elements of Financial

Statements—Issued in June, 2007• Included the definition of a liability• Concepts Statement No. 3, Communication Methods in

General Purpose External Financial Statements That Contain Basic Financial Statements —Issued in April, 2005

• Provided definitions of communications methods—including recognition/display in basic financial statements, notes to basic financial statements, and required supplementary information


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TYPES OF PLANS

• Single-employer plans—involve only one government• Multiple-employer plans—include more than one government

• Agent multiple-employer plans—separate accounts are maintained to ensure that each employer’s contributions are used to provide benefits only for the employees of that government• Individual employers are responsible for benefits associated with

their own employees only, and separate actuarial calculations are made for each participating government in the plan.

• Costs of administering the plan is shared by participating governments and the plan assets are pooled for investment purposes


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TYPES OF PLANS

• Multiple-employer plans—include more than one government• Cost-sharing multiple-employer plans—governments pool (share)

the costs of providing benefits and administering the plan and the assets accumulated to pay benefits

• A single actuarial valuation is conducted for all of the employees of the participating governments combined


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FUNDAMENTAL APPROACH

• Balance between a point-in-time measure of the employer’s obligation to employees and the measures over time of the cost to taxpayers of providing governmental services

• 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

• Accounting-based versus funding-based proposals (currently we compare the ARC with the actual payment made)


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RECOGNIZING A NET PENSION LIABILITY

One of the most significant changes is the requirement for governments to recognize a net pension liability (difference between the total pension liability and the value of pension plan assets available to pay pension benefits) in their financial statements•Currently:

• Governments disclose their total pension obligation (the AAL), the actuarial value of assets (AVA) in the pension plan’s trust, and the UAAL, which equals the difference between the AAL and AVA – these amounts are not recognized in the financial statements

• If an employer’s actual contributions have fallen short of the ARC, the accumulated shortfall is recognized in the financial statements as a net pension obligation (NPO)


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HIGHLIGHTS

Scope is limited to pensions provided through trusts that meet certain criteria

Revises recognition, measurement, disclosure requirements for all employers

Liability Measured net of pension plan’s fiduciary net positionFully recognized in accrual-basis financial statements

Changes in the liabilitySome recognized as expense in the period of changeOthers recognized over defined future periods

Effective for FYE beginning after June 15, 2014

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Statement No. 68, Accounting and Financial Reporting For Pensions

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SCOPE AND APPLICABILITY

Defined benefit and defined contribution pensions provided through trusts that meet the following criteria:

Employer/nonemployer contributions irrevocablePlan assets dedicated to providing pensionsPlan assets legally protected from creditors

Excludes OPEB!

Applies to employers and nonemployer contributing entities that have a legal obligation to make contributions to a pension plan

Special funding situations

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DEFINED BENEFIT PENSIONS

Liabilities to the pension plan (payables)

Liabilities to employees for pensionsNet pension liability (NPL)

Total pension liability (TPL), net of plan’s fiduciary net positionTPL = Actuarial present value of projected benefit payments

attributed to past periodsFiduciary net position as measured by pension plan

Single/agent employers recognize 100% of NPL

Cost-sharing employers recognize their proportionate share of the collective NPL

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NPL: MEASUREMENT—TIMING

Potentially 3 different dates to consider!Employer’s FYEMeasurement dateActuarial valuation date

Measurement date (of NPL)As of a date no earlier than end of prior fiscal yearBoth components (TPL/plan net position) measured as of the

same date

Actuarial valuation date (of TPL) If not measurement date, as of a date no more than 30 months

prior to FYEActuarial valuation at least every 2 years

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NPL: TIMING EXAMPLE

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NPL: MEASUREMENT(GENERAL APPROACH)

3 broad stepsProject benefit paymentsDiscount projected benefit payments to actuarial present valueAttribute actuarial present value to periods

Methods and assumptionsAssumptions in conformity with ASOPsFewer options than in Statement 27 for methods and

assumptions for GAAP reporting purposesNo changes required to actuarial methods and assumptions used

to determine funding amounts

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TOTAL PENSION LIABILITY (TPL): ILLUSTRATION

4025 8062

D I S C O U N T

P R O J E C T B E N E F I T S

P R E S E N T V A L U E

A T T R I B U T I O N

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NPL: MEASUREMENT—PROJECTION

Benefit terms/agreements at the measurement date

Current active and inactive employees

Includes expectations of the following:Salary changesService creditsAutomatic postemployment benefit changes (COLAs)Ad hoc postemployment benefit changes

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NPL: DISCOUNT RATE

• Projected benefit payments must be discounted to their present value, which requires the selection of a discount rate. (for payments received in the future, a lower discount rate (rate of return) would require you to invest a larger amount today)

• Currently, the discount rate used for this purpose is the long term expected rate of return on pension plan investments, since it is those investment that ultimately will be used to make projected benefit payments

• In some cases…the assets held by a pension plan over time may be projected to not fully cover projected benefit payments.

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NPL: DISCOUNT RATE

Under the new Standards, the discount rate should be a single rate that reflects:

The long term expected rate of return on plan investments to the extent that current expected future plan net position available for pension benefits are projected to be sufficient to make benefit payments

A high-quality 20-year municipal bond index rate or yield on tax-exempt general obligation bonds (AA rated or higher or an equivalent rating) beyond the point at which plan net assets available for pension benefits are projected to no longer be available for long-term investment

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NPL: FINDING THE DISCOUNT RATE

1. Compare projected benefit payments to the pension plan’s projected fiduciary net position in each period

2. Apply relevant discount rate to each period’s projected benefit payments

3. Total the present values of all projected benefit payments

4. Determine the single rate that results in the same present value (if applied to all projected benefit payments) as using the two rates

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Crossover Point

Plan Net PositionPlan Net Position

Future contributions and investment earnings

Benefit payments a

nd administrative co

sts

Crossover point

69


Projections of employer contributions Apply professional judgment Consideration of most recent 5-year contribution history Reflect any known events or conditions In other circumstances, projected contributions limited to

average over most recent 5 years Maybe modified by consideration of subsequent events Basis for average determined by application of professional

judgment

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NPL: ATTRIBUTION METHOD

Attribution of the present value of projected benefit payments to periods (for accounting purposes and not for funding purposes):

Single attribution method: Based on entry age normal (used to be 6 methods available for use)

Attribution method: Level percentage of payroll – calculates payments so that they equal a constant percentage of projected payroll over time

Attribution period: over periods beginning in the first period in which the employee’s services lead to benefits under the plan and ending in the last period of the employee’s service

71

NPL: MEASURING PENSION EXPENSE

Pension expense in the financial statements is a product of the following:

Employees work and earn benefits The outstanding liability accrues interest Changes in the measurement of the TPL due to:

Actual economic and demographic changes differing from what was assumed Changing the assumptions about economic or demographic factors Changes in the terms of pension benefits

Changes in the measurement of plan net position due to: Expected investment earnings Effects other than investment earnings, such as receipt of contributions from

the employer and employee and payment of benefits Difference between actual investment earning and what was expected

72

NPL: DEFERRED EXPENSE RECOGNITION

The effects of the following items are reported as a deferred outflow of resources or a deferred inflow of resources and recognized as part of pension expense future reporting periods:

Differences between expected and actual changes in economic and demographic factors (remaining service periods of plan members)

Changes in the assumptions about economic and demographic factors (remaining service periods of plan members)

Differences between actual and projected earnings on plan investments (recognized over a five-year, closed period)

73

NPL: ILLUSTRATION

Total Pension Liability (TPL)

Plan Net Position

Net Pension Liability (NPL)

(a) (b) (a) - (b)Balances—at 6/30/X8 3,045,893$ 2,283,333$ 762,560$ 310,538$ 50,766$ -$ Changes for the year: Service cost 101,695 101,695 101,695 Interest 231,141 231,141 231,141 Benefit changes - - Experience loss (gains) (69,638) (69,638) - 56,690 (9,948) Changes of assumptions - - - - - Contributions - Employer 109,544 (109,544) Contributions - Employees 51,119 (51,119) (51,119) Net investment income 199,273 (199,273) - Expected return on plan (178,268) Expected portion of differences between expected return on plan (4,201) Non-expensed portion of plan investments above - 16,804 Refunds of contributions (2,780) (2,780) - - benefits paid (124,083) (124,083) - - Plan administrative costs (3,427) 3,427 3,427 Other changes 8 (8) (8) Amortization (80,979) (24,250) 56,729 Net changes 136,335 229,654 (93,319) (80,979) 49,244 149,448 Balance—at 6/30/X9 3,182,228$ 2,512,987$ 669,241$ 229,559$ 100,010$ 149,448$

Deferred Outflows of Resources

Deferred Inflows of

ResourcesPension Expense

Total Pension Liability (TPL)

Plan Net Position

Net Pension Liability (NPL)

(a) (b) (a) - (b)Balances—at 6/30/X8 3,045,893$ 2,283,333$ 762,560$ 310,538$ 50,766$ -$ Changes for the year: Service cost 101,695 101,695 101,695 Interest 231,141 231,141 231,141 Benefit changes - - Experience loss (gains) (69,638) (69,638) - 56,690 (9,948) Changes of assumptions - - - - - Contributions - Employer 109,544 (109,544) Contributions - Employees 51,119 (51,119) (51,119) Net investment income 199,273 (199,273) - Expected return on plan (178,268) Expected portion of differences between expected return on plan (4,201) Non-expensed portion of plan investments above - 16,804 Refunds of contributions (2,780) (2,780) - - benefits paid (124,083) (124,083) - - Plan administrative costs (3,427) 3,427 3,427 Other changes 8 (8) (8) Amortization (80,979) (24,250) 56,729 Net changes 136,335 229,654 (93,319) (80,979) 49,244 149,448 Balance—at 6/30/X9 3,182,228$ 2,512,987$ 669,241$ 229,559$ 100,010$ 149,448$

Deferred Outflows of Resources

Deferred Inflows of

ResourcesPension Expense

74

NPL: COST-SHARING EMPLOYERS

• Recognize proportionate shares of collective NPL, pension expense, deferred outflows of resources/ deferred inflows of resources

• Proportion (%)• Basis required to be consistent with contributions• Consider separate rates related to separate portions of

collective NPL• Use of relative long-term projected contribution effort

encouraged• Collective measure x proportion = proportionate share of

collective measure


75

NPL: COST-SHARING EMPLOYERS—ADDITIONAL CONSIDERATIONS• Potentially three items

1. Change in proportion2. Difference between:

• The employer’s proportionate share of all employer contributions included in collective plan net position

• Contributions recognized by the employer in the measurement period

3. Employer’s contributions subsequent to measurement date

• Items 1 & 2—expense in current and future periods (systematic/rational method, closed period equal to average of expected remaining service lives)

• Item 3—deferred outflow of resources, expense in next period


76

NPL: INVOLVEMENT OF NONEMPLOYER CONTRIBUTING ENTITIES

• Statement addresses those with legal requirement to contribute directly to the pension plan o Special funding situations

Contribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contribute

Employer(s) and nonemployer contributing entity apply cost-sharing measurement to collective NPL, expense, and deferred outflows/deferred inflows of resources

– Nonemployer expense classified in same manner as similar grants to other entities

Employer recognizes additional expense and revenue equal to nonemployer contributing entity’s proportionate share of collective expense (portion related to the employer)


77

NPL: INVOLVEMENT OF NONEMPLOYER CONTRIBUTING ENTITIES

• Not special funding• Employer recognizes revenue for change in NPL from

contributions from nonemployer contributing entities (rather than expense)

• Nonemployer entity classifies expense for contributions in same manner as similar grants to other entities


78

NPL: NOTE DISCLOSURES—EMPLOYERS

• Descriptive information• Type of plan, identification of administrator• Benefit terms—types of benefits, key elements of benefit formula,

classes of employees covered, legal authority• Contributions—basis, authority, rates ($ or % of pay), contributions

in reporting period• Availability of plan report

• Significant assumptions/other inputs in TPL• Inflation, salary changes, postemployment benefit changes, mortality

assumptions, dates of experience studies• Discount rate—rate, assumptions re: cash flows, how LTeRoR

determined, municipal bond rate (if applicable), periods to which each rate applied, assumed asset allocation/expected real rates of return, NPL at discount rate +/- 1%


79

NPL: NOTE DISCLOSURES—EMPLOYERS

• Pension expense in current reporting period• Deferred outflows/deferred inflows of resources

• Balances by source• Differences between expected and actual experience (TPL)• Changes of assumptions/other inputs (TPL)• Net difference between projected and actual earnings on

pension plan investments• Individual items for cost-sharing and special funding situations• Employer’s contributions subsequent to measurement date

• Net impact on pension expense in each of the next 5 years and thereafter in the aggregate

• Amount that will be reduction of NPL


80

NOTE DISCLOSURES (NPL)—EMPLOYERS


81

NOTE DISCLOSURES (NPL)—EMPLOYERS


82

NPL: RSI—SINGLE/AGENT EMPLOYERS

• 10-year schedules• Changes in NPL by source• TPL, pension plan fiduciary net position, NPL, plan net position as %

of TPL, covered-employee payroll, NPL as % of covered-employee payroll

• May be presented with changes in NPL by source• If actuarially determined employer contribution (ADEC)

• ADEC, contributions in relation to the ADEC, difference, covered-employee payroll, contributions as % of covered-employee payroll

• If no ADEC, but statutory or contractual contribution requirements, schedule similar to ADEC schedule

• Notes to RSI with methods and assumptions for ADEC and significant changes


83

NPL: RSI—COST-SHARING EMPLOYERS

• 10-year schedules• Employer’s proportion (%), proportionate share

(amount) of collective NPL, covered-employee payroll, proportionate share as % of covered-employee payroll, pension plan’s net position as % of TPL

• If special funding situation, also (1) nonemployer contributing entity’s proportionate share and (2) total of employer’s and nonemployer entity’s proportionate shares

• If statutory or contractual contribution requirements• Required contribution, contributions in relation to required,

difference, covered-employee payroll, contributions as % of covered-employee payroll

• Notes to RSI with significant changes


84

NPL: NOTE DISCLOSURES/RSI—NONEMPLOYER CONTRIBUTING ENTITIES IN SFS


85

EFFECTIVE DATE AND TRANSITION

• Fiscal years beginning after June 15, 2014• Beginning deferred outflows/deferred inflows of resources

balances all or nothing at initial implementation• RSI schedules prospective if information not initially

available


86

Statement No. 67, Financial Reporting for Pension Plans

An amendment of GASB Statement No. 25

87

HIGHLIGHTS

• Scope limited to defined benefit and defined contribution pension plans administered through trusts that meet certain criteria (same as criteria in Statement 68)

• Few changes from Statement 25 for financial statement recognition

• Notes/RSI changes primarily to reflect changes in measurement of liabilities of employers


88

HIGHLIGHTS

• Notable changes in note disclosures/RSI• Annual money-weighted rate of return (10 years in RSI)• RSI for single-employer and cost-sharing pension plans (10 years):• Schedule of changes in NPL by source• Components of NPL/related ratios• Schedule of actuarially determined contributions• Aggregated employer-related information not required for agent

pension plans• Effective for FYs beginning after June 15, 2013• RSI schedules prospective (except for contribution schedule, if

presented), if information not initially available


89

Statement No. 69, Government Combinations and Disposals of Government Operations

90

BACKGROUND Historically, when combinations have occurred in the

governmental environment, APB Opinion No. 16, Business Combinations was applied, to the extent possible.

In 2007, the FASB issued Statement No. 141(R) In 2009, the FASB issued Statement No. 164, Not-for-

profit entities: Mergers and Acquisitions Recently, States have encouraged governments to

consider the possibility of consolidation GASAC members considered the project prospectus in

2010…and the project was added to the GASB current agenda that year.

Organization of Standard

91

SCOPE

Includes transactions that meet definitions for the following arrangements: Government mergers—A government merger is a combination

of legally separate entities in which no significant consideration is exchanged and either:

Two or more governments (or one or more governments and one or more nongovernmental entities cease to exist as legally separate entities and are combined to form one or more new governments or…

One or more legally separate governments or nongovernmental entities cease to exist and their operations are absorbed into, and provided by, one or more continuing governments

Government acquisitions Transfers of operations

92

SCOPE

Includes transactions that meet definitions for the following arrangements: Government acquisitions—A government combination in which

a government acquires another entity, or the operations of another entity, in exchange for significant consideration.

The consideration provided should be significant in relation to the assets and liabilities acquired.

The acquired entity or operation becomes part of the acquiring government’s legally separate entity.

93

SCOPE

Includes transactions that meet definitions for the following arrangements: Transfers of operations—A transfer of operations is a

government combination involving the operations of a government or nongovernmental entity, rather than a combination of legally separate entities, in which no significant consideration is exchanged. Operations may be transferred to another existing entity or to a new entity.

Transfers of operations to existing entities

Transfers of operations to form a new entity

94

SCOPE

Definition of an Operation An operation is an integrated set of activities conducted and

managed for the purpose of providing identifiable services with associated assets and liabilities

Service Continuation To be considered a government combination, arrangements

should result in the continuation of a substantial portion of the services provided by the previously separate entities or their operations. Service continuation means the new or continuing government intends to provide services similar to the formerly separate government, organization, or operations

95

GOVERNMENT MERGERS—BACKGROUND

Guided by State statuesRecent examples of government merger

activitiesPrinceton, New JerseyLouisville/Jefferson CountyState of New York

96

GOVERNMENT MERGERS-RECOGNITION

Recognition of a government merger (the merger date) depends on how the merger is arranged. Statement 69 includes provisions for the following government mergers:New Governments

Merger date is the effective date of the merger

Continuing GovernmentsMerger date is as of the beginning of the reporting period

97

GOVERNMENT MERGERS-ACCOUNTING

Measured using carrying valuesMay make adjustments to carrying values for:

Conforming accounting principles onlyInventory methodsNew accounting principles

Impairment of capital assetsEliminations…follow existing guidance in Statement

34

98

GOVERNMENT MERGERS-DISCLOSURES

Basic information about the combinationAmounts recognized at the merger date for

AssetsDeferred outflows of resourcesLiabilitiesDeferred inflows of resourcesNet position

Information about adjustments

99

GOVERNMENT MERGERS - ILLUSTRATION

100

GOVERNMENT ACQUISITIONS

Predominantly occur for those governments engaged in business type activitiesHealthcareUtilitiesColleges & UniversitiesTransportationSolid Waste

Important scope reminder!

101

GOVERNMENT ACQUISITIONS-ACCOUNTING

Recognition coincides with the closing dateAcquiring government recognizes the assets,

deferred outflows of resources, liabilities, and deferred inflows of resources in conformity with authoritative guidance for SLGs

Paragraph 32, use of Acquisition Value…rather than fair value measurementsWhy use acquisition value?

102

GOVERNMENT ACQUISITIONS-ACCOUNTING

There are exceptions to the use of Acquisition Value that include the following:MSWLF closure and post closure care costs or

obligations for pollution remediation (use existing guidance!)

Postemployment benefits, compensated absences (use existing guidance!)

Investments (use fair value!)Deferred outflows of resources or deferred inflows

of resources of an acquiree (generally, use carrying values!)

103

GOVERNMENT ACQUISITIONS-CONSIDERATION

Consideration provided is measured in conformity with paragraphs 32—36.

May incur a liability to former ownersAssumption of negative net position is not

considered to be consideration for purposes of applying this Statement

Contingent consideration arrangements

104

GOVERNMENT ACQUISITIONS-CONSIDERATION

When consideration provided exceeds the value of net position acquired…report excess as a deferred outflow of resources. “Goodwill” is not reported.

When consideration provided is less than the value of net position acquired…there are 2 possibilities:Default is to reduce the acquisition value assigned to

nonfinancial assetsRecognition of a contribution when arrangements

clearly indicate such intent

105

GOVERNMENT ACQUISITIONS-NOTE DISCLOSURES

Basic combination informationDescription of consideration provided,

including contingent arrangements if applicableTotal of net position acquired

106

TRANSFERS OF OPERATIONS-BACKGROUND

Many arrangements do not involve entire entities, arrangements may be referred to as follows: ReorganizationsRedistrictingsAnnexations“Spin-Offs”

107

TRANSFERS OF OPERATIONS–OPERATIONS

An Operation is an integrated set of activities conducted and managed for purposes of providing identifiable services with assets and liabilities. Could be a department Could be a fundCould be only a specific activity of a fund or

departmentUse professional judgment!

108

TRANSFERS OF OPERATIONS-ACCOUNTING

Generally follow the same accounting as required for government mergers. Use of carrying values and limited adjustmentsTransfer date is the date the transferee obtains

controlFor a continuing government – reports a transaction

during the reporting period for a transfer of operations

For a new entity – initial reporting period begins at the transfer date

109

TRANSFERS OF OPERATIONS-ACCOUNTING

Generally follow the same accounting as required for government mergers. Use of carrying values and limited adjustmentsTransfer date is the date the transferee obtains

controlFor a continuing government – reports a transaction

during the reporting period for a transfer of operations

For a new entity – initial reporting period begins at the transfer date

110

DISPOSALS OF OPERATIONS—BACKGROUND

Necessary to have accounting for the transferor government.

FASB Guidance exists for discontinued operations and disposal activities

APB 30 for disposals was not carried forward into Statement 62

Scope includes disposals of operations that are transferred or sold…abandonments should look to the guidance in Statement 42

111

DISPOSALS OF OPERATIONS—ACCOUNTING

Government recognizes a gain or loss on the disposal of operations. Reported as a special item.

Government should consider and include in the gain or loss certain costs with regard to the disposal: Termination benefits Legal and professional fees Any other costs associated with the disposal

112

DISPOSALS OF OPERATIONS—NOTE DISCLOSURES

Description of the facts and circumstances about the disposal

Total expenses, distinguishing between operating and non operating, if applicable

Total revenues, distinguishing between operating and non operating, if applicable

Total governmental fund revenues and expenditures, if applicable.

113

CURRENT GASB PROJECTS

• Fair Value• Conceptual Statement on Recognition and Measurement• GAAP Hierarchy• OPEB• Fiscal Sustainability—Projections

114

QUESTIONS?

Jeffery Bridgens, Senior Manager

[email protected]

480-366-8328

115

In 1913 an accountant opened a small practice in Seattle to serve the

Pacific Northwest’s booming timber industry. Today, that practice is

one of the largest accounting and consulting firms in the nation,

serving businesses and organizations around the globe.

Yet while we’re pleased to celebrate our centennial, we remain focused

on what’s truly mattered all along: you. Because anniversaries are nice.

But providing you with vital insights to help your organization

succeed? That counts.

CELEBRATING A CENTURY OF SERVICE

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1 GASB UPDATE February 2013. 2 The material appearing in this presentation is for informational...

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