1 Office of the Utah State Auditor GASB UPDATE. 2 Office of the Utah State Auditor New GASB...

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Office of the

Utah State Auditor

GASB UPDATE

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Office of the

Utah State Auditor

New GASB Pronouncements

Statement Title 12/31 6/30

65 Items Previously Reported as Assets and Liabilities 13 14

66 Technical Corrections 13 14

67 Pensions (Plan) 14 14

68 Pensions (Employer) 15 15

69 Disposals of Government Operations 14 15

70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

14 14

71 Pension Transition For Contributions Made Subsequent to the Measurement Date – an amendment of GASB 68

15 15

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Office of the

Utah State Auditor

Items Previously Reported as Assets and Liabilities

GASB STATEMENT NO. 65

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Office of the

Utah State Auditor

GASB 65

• Background– GASB Concepts Statement No. 4

introduces:• Deferred outflows of resources• Deferred inflows of resources

– GASB will identify which items should be classified in these categories

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Office of the

Utah State Auditor

Deferred Outflows

• Definition – a consumption of net assets by the government that is applicable to a future reporting period. – Positive effect on net

position, similar to assets.

– (Debit)

• Definition – resources with present service capacity that the government presently controls.– Prepaid rent – Yes– Advance to grantee

(time requirement not met) – No

Deferred Outflow Asset

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Office of the

Utah State Auditor

Deferred Inflows

• Definition – an acquisition of net assets by the government that is applicable to a future reporting period.– Negative effect on net

position, similar to liabilities.

– (Credit)

• Definition – present obligations to sacrifice resources that the government has little or no discretion to avoid.– Payment for services

not yet performed? – Yes

– Proceeds from sale of future revenues? – No

Deferred Inflows Liabilities

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Office of the

Utah State Auditor

Decisions to date

• GASB 53– Hedging Derivatives

• Deferred Outflow – decrease in value• Deferred Inflow – increase in value

• GASB 60– Service concession arrangements

• Deferred Inflow – Consideration received up front

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Office of the

Utah State Auditor

Goal

• Review items currently reported as assets or liabilities

• Three options:1. Continue to report as asset/liability

2. Report as a deferred outflow/inflow of resources

3. Report as an outflow/inflow of the period

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Office of the

Utah State Auditor

Asset Deferred Outflow

• Resources provided by a grantor to a grantee when the only eligibility criterion that has not been met by the recipient is a time requirement– If other eligibility requirements are not

met = receivable

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Office of the

Utah State Auditor


• Excess of the reacquisition price of refunded debt over its net carrying amount.$ 95 Outstanding debt

$100 New debt issued

$ 5 Deferred outflow (amortize in a systematic and rational manner)

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Office of the

Utah State Auditor


• Payments made within the financial reporting entity to purchase the right to future revenue

• A loss on a sale-leaseback transaction

• Certain items associated with lending activities and mortgage banking activities

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Office of the

Utah State Auditor

Asset Outflow

• Debt issuance costs (other than prepaid insurance)

• Initial direct costs of operating leases

• Acquisition costs related to insurance activities


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Office of the

Utah State Auditor

Liability Deferred Inflow

• Revenue of a governmental fund that is not recognized solely because it is not yet considered to be available

• Property taxes received or recognized as a receivable prior to the period they were intended to finance

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Office of the

Utah State Auditor


• The excess of the net carrying amount of refunded debt over its reacquisition price$100 Outstanding debt

$ 95 New debt issued

$ 5 Deferred inflow

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Office of the

Utah State Auditor


• Other imposed non-exchange revenues received or recognized as a receivable prior to the period when the use of the resources is either required of first permitted

• Resources received from a grantor when the only eligibility criterion that has not been met by the recipient is a timing requirement – If other eligibility criteria not met =

liability• Proceeds from the sale of future revenues

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Office of the

Utah State Auditor


• A reduction in the present value of the payments due from the lessee under a capital lease as a result of the lessor’s passing on the economic advantages of a refunding of tax-exempt debt

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Office of the

Utah State Auditor


• Payments received within the financial reporting entity for the right to future revenues

• Gain on sale-leaseback transaction• Certain items associated with

lending activities and mortgage-banking activities

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Office of the

Utah State Auditor

Liability Inflow

• Loan origination fees received (other than the portion related to points) in connection with lending activities


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Office of the

Utah State Auditor

Determination of Major Funds (10 percent and 5 percent tests) Application of 10 percent and 5

percent tests (use the combination)• Assets + deferred outflows of

resources• Liabilities + deferred inflows of

resources

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Office of the

Utah State Auditor

Use of term “deferred”

• Future practice – Use limited to deferred outflows/inflows

of resources

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Office of the

Utah State Auditor

Note Disclosure

• This used to be classified as an asset, but is now classified as a deferred outflow.

OR• This used to be classified as an

asset, but is now classified as an outflow.

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Office of the

Utah State Auditor

Effective Date

• Financial statement periods beginning after December 15, 2012.

• Earlier application encouraged.

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Office of the

Utah State Auditor

Technical Corrections


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Office of the

Utah State Auditor

GASB’s Objective

Resolve conflicting guidance• Issuance of GASB 54 – Conflicts with

GASB 10• Issuance of GASB 62 – Conflicts with

GASB 13 and 48

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Office of the

Utah State Auditor

Conflicting Guidance

• Requires risk financing activities to be accounted for in either a general fund or internal service fund, if a single fund is used.

• Allows for certain risk financing activities to be reported in a special revenue fund.

GASB 10 GASB 54

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Office of the

Utah State Auditor

Resolution

• GASB 10 language limiting risk financing activities to general fund and internal service fund was deleted.

• Governments should base their fund type decision on the nature of the activity to be reported.

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Office of the

Utah State Auditor

Conflicting Guidance

• Provides guidance on accounting for operating lease payments with scheduled rent increases that could be perceived as a prohibition against the use of the fair value method.

• Permits the fair value method of accounting for operating lease payments.

GASB 62 GASB 13

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Office of the

Utah State Auditor

Resolution

• GASB 62 was amended to specifically allow for recognition based on the fair value of the rental payments.

• Professional judgment should be used to determine whether rental payments are based on economic factors relating to the property or, instead are an inducement to the lessee.

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Office of the

Utah State Auditor

Effective Date

• Financial statement periods beginning after December 15, 2012.


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Office of the

Utah State Auditor

Accounting and Financial Reporting for Pensions

GASB STATEMENT NO. 67 & 68

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Office of the

Utah State Auditor

Introduction

• Statements affect only proprietary statements

• No effect on governmental funds

• Affects defined benefit pensions through plans administered as trusts or equivalent arrangements– Replaces GASB 27

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Office of the

Utah State Auditor

Plan Types

• Single Employer – pay according to experience (State has two)

• Agent Plan – each plan has own rates based on experience, but plan managed by someone else (State plus five cities)

• Cost Sharing – everyone pays same rate regardless of experience (Nearly all)

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Office of the

Utah State Auditor

Key Changes – Single and Agent Plans

1. Employer liability (What should the employer show)

2. Employer expense

3. Discount rate

4. Actuarial method (spread cost over service life of employee)

5. Amortization (how many years to defer, what is the amortization period)

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Office of the

Utah State Auditor

Employer Liability

Current:Annual required contribution

(ARC) (Mortgage payment supposed to pay for year)

Less: Actual contributions (What you did pay on your mortgage for the year)

Net pension obligation (NPO)

New:Total pension liability (TPL) (What have employees earned)

Less: Fiduciary net position (FNP)

(How much has the employer set aside)

Net pension liability (NPL) (Employer liability will be the unpaid mortgage)

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Office of the

Utah State Auditor

Employer liability – illustration

Current: Annual required contribution (ARC)

$100

Less: Actual contributions (80)

Net pension obligation (NPO) $ 20

Liability reported by employer: $ 20

New:

Total pension liability (TPL) $10,000

Less: Fiduciary net position (FNP) (8,500)

Net pension liability (NPL) $ 1,500

Liability reported by employer:$1,500

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Office of the

Utah State Auditor

Employer Expense

Current:• Calculation tied to

funding– ARC adjusted for the

cumulative effect of prior differences between required contributions and actual contributions

New:• Calculation tied to

cost– Changes in the net

pension liability (NPL)

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Office of the

Utah State Auditor

Components of Expense

• Annual service cost• Interest on the net pension liability• Projected earnings on plan

investments• The full effect of any changes in

benefit terms• Amortization of deferred

outflows/inflows of resources

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Office of the

Utah State Auditor

Discount rate

Current:• Estimated long-term

investment yield for the plan

New:• Modification necessary if it

is expected that FNP will not be sufficient to pay benefits to active employees and retirees– Single blended rate

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Office of the

Utah State Auditor

Discount Rate – Single Blended Rate

• Single rate equivalent to the combined effect of using the following rates:– For projected cash flows (including future

contributions) up to the point the FNP will be sufficient• Long-term expected rate of return on plan

investments

– For projected cash flows beyond that point• A yield or index rate on tax-exempt 20-year, AA or

higher rated municipal bonds.

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Office of the

Utah State Auditor

Actuarial Method

Current:• Whatever actuarial

method is used for funding– Six acceptable methods– Must be applied within

parameters defined by GASB

New:• No tie to actuarial method

used for funding– All employers will use

the entry age method for accounting and financial reporting purposes

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Office of the

Utah State Auditor

Amortization

Circumstances that could affect the net pension liability (NPL)– Changes in benefit terms– Changes in economic and demographic

assumptions– Differences between economic and

demographic assumptions and actual experience (other than investment returns) (i.e. changes in life expectancy, inflation etc.)

– Differences between expected and actual investment returns

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Office of the

Utah State Auditor

Amortization

Current:• Amortize over a

period not to exceed 30 years

New:• Amortize over a much

shorter period– Different periods,

depending on the circumstances

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Office of the

Utah State Auditor

Amortization

• Amortization period– Changes in benefit terms

• Immediate recognition

– Changes in economic and demographic assumptions (ie. People retire later than expected)• Closed period equal to the average

remaining service period of plan members– Average remaining service period of retirees = 0

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Office of the

Utah State Auditor

Amortization

• Periods (continued)– Differences between economic and

demographic assumptions and actual experienced (other than investment returns)• Closed period equal to average remaining

service period of plan members– Average remaining service period of retirees = 0

– Differences between expected and actual investment returns• Closed 5-year period

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Office of the

Utah State Auditor

Cost Sharing Plans

Key changes:

1. Employer liability

2. Employer expense

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Office of the

Utah State Auditor

Employer liability (cost-sharing)

Current• Liability only if

employer contribution is less than the contractually required amount

New• Liability equal to the

employer’s proportionate share of the total NPL of all participating employers

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Office of the

Utah State Auditor

Employer expense (cost-sharing)

Current• Expense =

contractually required contribution

New• Expense = employer’s

proportionate share of total pension expense of all participating employers

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Office of the

Utah State Auditor

Note Disclosure (cost Sharing)

• Plan description• Information about the employer’s

proportionate share of the collective net pension liability (NPL)– Assumptions and other inputs– Fiduciary net position (FNP)

• Other information

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Office of the

Utah State Auditor

RSI (cost Sharing)

• 10-year schedules– Schedule of funding progress– Employer contributions– Agent and Single – Net Asset Schedule

• URS will provide templates for notes and schedules

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Office of the

Utah State Auditor

Potential Impact Considerations

• How much work will implementation be?– URS implements many of the difficult

elements of the standards– URS will provide amounts to be

reported– URS will provide footnote and RSI

templates

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Office of the

Utah State Auditor

Potential Impact Considerations

• What if the additional liability creates a deficit fund balance or net position?– Pension standards apply to funds using the economic

resources measurement focus (entity wide and proprietary fund). Entity wide statements do not adopt a budget.

– State law prohibits a local government from making an appropriation in excess of the estimated expendable revenue for the budget period.

• Estimated Expendable Revenue = Estimated Revenue + Net Position Money Available to Spend – Required Reserve (usually 5% of total revenue from last completed fiscal year).

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Office of the

Utah State Auditor

Auditing Guidance

• Cost Sharing– Sufficient and Appropriate Audit

Evidence

• Plan Auditor Must Express Opinion on Schedules– Schedule of Employer Allocations– Schedule of Pension Amounts by

Employer

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Office of the

Utah State Auditor

Auditing Guidance

• Evaluate that plan’s schedules and reports are adequate

• Evaluate plan auditor’s – Competence– Independence

• Verify and recalculate amounts

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Office of the

Utah State Auditor

Auditing Guidance

• Single Employer and Cost Sharing• URS Auditor’s Will Test• Census Data

– Date of Birth– Date of Hire– Years of Service– Eligible Compensation

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Office of the

Utah State Auditor

Effective Date

• GASB 67 (Plans) Financial statement periods beginning after June 15, 2013.

• GASB 68 (Employers) Financial statement periods beginning after June 15, 2014.

• Earlier application encouraged.– URS plans to early implement

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Office of the

Utah State Auditor

Government Combinations and Disposals of Operations


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Office of the

Utah State Auditor

Three Types of Combinations

• Merger • Acquisition • Transfer of operations

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Office of the

Utah State Auditor

Merger

• At least one entity ceases to exist– A+B=C (new entity)– A+B=B+ (B becomes larger)

• Service continuation (substantial portion of services)

• No exchange of significant consideration

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Office of the

Utah State Auditor

Acquisition

• At least one entity ceases to exist– A+B=C (new entity)– A+B=B+ (B becomes larger)

• Service continuation (substantial portion of services)

• Exchange of significant consideration (Difference from a merger)

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Office of the

Utah State Auditor

Transfer of Operations

• Identifiable services (ie. library, museum, etc.)

• Move the whole service• Related assets and liabilities• Service continuation (substantial

portion of services)• No significant consideration

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Office of the

Utah State Auditor

Treatment of Financial Statement Elements

• Merger– Carrying value (with adjustments -- if the two

entities had different useful lives for the same assets you can adjust the useful lives for consistency.)

• Acquisition– Acquisition value

• Price to acquire similar assets• Price to discharge liabilities as of acquisition date

• Transfer of operations– Carrying value (with adjustments)

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Office of the

Utah State Auditor

Consideration Not Equal to Net Position

• Consideration > net position acquired– Deferred outflow of resources

• Consideration < net position acquired– Meant to assist acquiring government?

• Yes = Recognize contribution• No = Reduce acquisition value of

noncurrent assets (other than investments reported at fair value)

– Remainder = special item (if noncurrent assets are reduced to zero, the remainder should be recognized as a special item)

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Office of the

Utah State Auditor

Disposals

• Transferred operation = gain or loss on disposal

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Office of the

Utah State Auditor

Note Disclosures

• All combinations– A brief description of the government combination,

including identification of the entities involved in the combination and whether the participating entities were included within the same financial reporting entity

– The date of the combination– A brief description of the primary reasons for the

combination

• Additional disclosures depending upon the type of combination.

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Office of the

Utah State Auditor

Effective Date

• Financial statement periods beginning after December 15, 2013.– Prospective implementation


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Office of the

Utah State Auditor


Accounting and Financial Reporting for Nonexchange Financial Guarantees

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Office of the

Utah State Auditor

Definition of Financial Guarantee

• Agreement to indemnify a third party if the issuer of the guaranteed obligation does not fulfill its obligation.

• Three separate parties– Issuer of the obligation being

guaranteed– Those entitled to payment pursuant to

the obligation– Guarantor

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Office of the

Utah State Auditor

Need for Guidance

• Private Sector– Financial guarantees almost always

arise from exchange transactions

• Public Sector– Financial guarantees frequently arise

independently (nonexchange financial guarantees)

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Office of the

Utah State Auditor

Scope

• Excludes:– Obligations related to revenue-

supported debt– Obligations related to special

assessments– “Joint and several” obligations– Obligations that are not legally binding

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Office of the

Utah State Auditor

Guarantors – Recognition

• Two-step approach– Consider qualitative factors and

historical data that indicate likelihood of payments.

– Point of recognition = “more likely that not” to occur.

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Office of the

Utah State Auditor

Guarantors – Qualitative Factors

• Issuer bankruptcy or financial reorganization

• Issuer breach of debt covenant

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Office of the

Utah State Auditor

Guarantors – Qualitative Factors (Continued)

• Indicator of significant financial difficulty– Issuer receipts intercepted – Debt holder concessions– Significant investment losses– Loss of a major revenue source– Significant increase in noncapital

disbursements– Issuer subject to financial supervision

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Office of the

Utah State Auditor

Obligations with Similar Characteristics

• Example = student loan receivables• Treatment

– May need to consider qualitative factors and historical data from perspective of group as a whole.

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Office of the

Utah State Auditor

Guarantors – Point of Recognition

• “More likely than not”– Likelihood as little as 51 percent

• Contrast with normal treatment of contingencies– “Probable” (I would be surprised if it

didn’t happen)• Likelihood well in excess of 50 percent

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Office of the

Utah State Auditor

Guarantors – Valuing the Liability

• Discounted present value of estimated future payments– Range of possible values? Normal rules

apply• One amount = “best estimate”

– Recognize that amount

• No amount better than any other– Recognize the minimum amount of the range.

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Office of the

Utah State Auditor

Guarantors – Governmental Funds

• Report an expenditure only when due and payable– Classify in the same manner as

grant/financial assistance payments

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Office of the

Utah State Auditor

Guarantors – Disclosure

• Description– Legal authority for extending guarantees– Limits on extending guarantees – Types of obligations guaranteed– Relationship of guarantor to issuers– Length of guarantees– Arrangements for recovering payments from

issuers

• Total guarantees outstanding

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Office of the

Utah State Auditor

Guarantors – Disclosure (Contintued)

• If liability recognized or payments made– Description of

• Timing of recognition• Measurement of liability

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Office of the

Utah State Auditor


• Changes in liabilities– Beginning balances– Increases (including initial recognition)– Adjustments that increase estimates– Payments– Adjustments that decrease estimates– Ending balances

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Office of the

Utah State Auditor


• Cumulative payments on outstanding guarantees– Amounts expected to be recovered from

issuers

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Office of the

Utah State Auditor

Issuer Accounting – Reporting

• Guaranteed obligation– Continue to report until legally released

as obligor• Ultimate decrease = revenue

– Reclassify payments that must be reimbursed to guarantor

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Office of the

Utah State Auditor

Issuer Accounting – Reporting

• Receivable recognition– Normal rule against recognizing gain

contingencies• Exception = guarantees within the primary

government (blended component unit)– Liability to issuer matched by issuer receivable

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Office of the

Utah State Auditor

Issuer – Note Disclosure

• If guaranteed obligations outstanding– Name of guarantor– Amount of guarantee – Length of guarantee– Amount paid during the current period– Cumulative amount paid on outstanding

obligations– Requirement to repay the guarantor

• Outstanding amounts to be repaid

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Office of the

Utah State Auditor

Issuer – Note Disclosure (Continued)

• If payments made by guarantor during the current period (even if obligation is no longer outstanding)– Amount paid during the current period– Cumulative amount paid by the

guarantor on guaranteed obligations outstanding

– Requirements to repay guarantor• Outstanding amounts to be repaid

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Office of the

Utah State Auditor

Effective Date

• Financial statement periods beginning after June 15, 2013– Earlier application encouraged

• Application generally retroactive – Exception

• Prospective disclosure for cumulative payments

– Disclose starting date

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Office of the

Utah State Auditor


Pension Transition for Contributions Made Subsequent to the Measurement Date

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Office of the

Utah State Auditor

Background

• Transition guidance (employers) for pension related deferred outflows/inflows of resources (paragraph 137)– Beginning balances

• Reporting not required if impractical• Must report all balances or none at all

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Office of the

Utah State Auditor

Net Pension Liability Measurement Date

12/31/11 6/30/12 6/30/13 6/30/14

Actuarial Valuation must be within this period. (30 months and 1 day)

Actuarial Valuation must be updated to a measurement

date within this period. (12 months and 1 day)

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Office of the

Utah State Auditor

Practical Challenge

• Potential Situation– Employer makes contribution for year

prior to transition following the measurement date

• Result if the employer contribution is not reported as a deferred outflow of resources– Significant understatement of

• Beginning net pension liability• Pension expense

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Office of the

Utah State Auditor

Solution

• Eliminate “all or nothing” approach– Report a deferred outflow of resources

for employer contribution for the prior year made after the measurement date

– Do not report any other pension-related deferred outflows or inflows of resources, if impractical to do so for all.

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Office of the

Utah State Auditor

Effective Date

• Apply simultaneously with the provisions of GASB 68.

• GASB 68 (Employers) Financial statement periods beginning after June 15, 2014.

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Office of the

Utah State Auditor

Contact Information

(801) 538-1394

[email protected]

Van Christensen

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