GASB Implementation Update
CSMFO
Palm Springs, CA
February 22, 2006
New guidance to be covered
Capital asset impairments (GASB 42) Statistical reporting (GASB 44)
Detailed session later Restrictions associated with enabling
legislation (GASB 46) Termination benefits (GASB 47)
Capital Asset Impairments
GASB Statement No. 42
Key issue
Accounting for assets that are impaired, but still in service
Private-sector
Authoritative guidance FASB Statement No. 144
Approach Identify circumstances indicative of potential
asset impairment Apply “recoverability” test
Example of recoverability test
Carrying value $50,000
Estimated future cash inflows
Use of asset $ 27,000
Salvage value $10,000
Total estimated future inflows $37,000
Carrying value over inflows $13,000
Result: Write down to fair value
Potential relevance of FASB guidance to public sector Relevant
Business-type activities that recover cost Less relevant
Subsidized business-type activities Irrelevant
Governmental activities
GASB approach
Rejected option One approach for business-type activities that
recover cost Another approach for other situations
Selected option One approach for all situations based on decline
in service potential (v. cash flows)
Step 1: Is there an indicator of impairment? Evidence of physical damage Changes in legal or environmental factors Technological changes or obsolescence Changes in manner or duration of use Construction stoppage
Note: change in demand is not, of itself, an indicator of impairment
Step 2: Is the impairment permanent? Only permanent impairments recognized
All impairments presumed to be permanent
Step 3: Is the “test of impairment” met?
Event or change must be outside the normal life cycle of the capital asset
The magnitude of the decline in service value must be large Typically discussed by governing body or
reported in the media
Step 4: What is the dollar amount of the impairment? What portion of the book value of the asset
is equivalent to the service potential lost as a result of the impairment? Method will depend upon nature of the
impairment
Reason Measurement
Evidence of physical damage
Changes in legal or environmental factors
Technological changes or obsolescence
Restoration cost approach
Service units approach
Service units approach
Reason Measurement
Change in manner or duration of use
Construction stoppage
Two alternatives Service units approach Deflated depreciated
replacement cost approach
Lower of carrying value or fair value
Restoration cost approach
Used when evidence of physical damage Create ratio:
Restoration cost/replacement cost Deflated restoration cost/historical cost
Apply to carrying value
Service units approach
Used for Changes in legal or environmental factors Technological changes or obsolescence Changes in manner or duration of use
Compare previous service potential to current service potential Ratio Remaining units at original unit cost
Deflated depreciated replacement cost approach Used for change in manner or duration of
use Compare book value of asset with what
would have been the book value of an asset acquired for the purpose for which now used
Lower of carrying value or fair value approach Construction stoppage (other than
temporary)
Subsequent recoveries
May not be recognized, even to the extent of previously recognized losses
Step 5: How should insurance recoveries be handled Applicable generally Treatment
Only recognize when realized or realizable Same year as loss? Net (as in examples) Restoration/replacement is a separate
transaction (as in examples) Other financing source in govt. funds
Potentially extraordinary item
Step 6: How should the impairment be reported? Three possibilities
Extraordinary item Special item
Must be subject to management control Program/operating expense
Effective date
Fiscal periods starting after 12/15/04 Earlier application encouraged
Statistical Reporting
GASB Statement No. 44
Financial position v. economic condition Financial position
Assets Liabilities Difference
Economic condition Financial position Fiscal capacity Service capacity
Need for change
Existing authoritative guidance framed too narrowly
Inconsistent application Lack of description in NCGA Statement 1 Lack of examples in NCGA Statement 1
Newly available information
Basic changes
Organize guidance based on objectives that are generally applicable
Detailed descriptions and illustrative material
Incorporation of data from SGAS 34
Five objectives
Provide information on financial trends. How has a government's financial position changed over time?
Provide information on revenue capacity. What is the government's ability to generate own-source revenues?
Five objectives (cont.)
Provide information on debt capacity. What is a government's debt burden and is it able to issue additional debt?
Provide demographic and economic information. What is the government's socioeconomic environment and how does the government compare to past periods and other governments?
Five objectives (cont.)
Provide operating information. How does the government operate? What are its resources? What is the context for understanding and
assessing its economic condition?
Financial Trend Data
Specific presentations
Information about net assets (10 years) Information about changes in net assets (10
years) Information about fund balances (10 years) Information about changes in fund balances
(10 years)
Information on Revenue Capacity
Specific presentations
Information about the revenue base (10 years)
Information about revenue rates (10 years) Information about principal payers or
remitters (current year and 9 years previous) Information about property tax levies and
collections (10 years)
Debt Capacity Information
Specific presentations
Ratios of outstanding debt (10 years) Ratios of general bonded debt (10 years) Information about direct and overlapping
debt (current year) Information about debt limitations (current
year and 9 years previous) Information about pledged revenue
coverage ( 10 years)
Demographic and Economic Information
Specific presentations
Demographic and economic indicators (10 years)
Information on principal employers (current year and 9 years previous)
Operating Information
Specific presentations
Number of government employees (10 years)
Demand for or level of service (10 years) Indicators of volume, nature, or use of
capital assets (10 years)
Effective date
Periods beginning after 6/15/05
Restrictions Associated with Enabling Legislation
GASB Statement 46
Definition of enabling legislation
Two elements Authorization to raise resources Legally enforceable requirement that those
resources be used for the purpose for which raised
Are such resources “restricted”?
Local level Typically there is legal enforceability by the
state State level
Sovereignty means there is nothing to stop a state from subsequently unilaterally changing the law
Compare to other types of legal restrictions
Treatment – general rule
“Tantamount to a legally binding agreement between the government and the resource providers (the taxpayers)”
Normally properly classified as “restricted,” but should be reported separately within the restricted net assets category (compare expendable and nonexpendable)
Potential reclassification
May be needed if… Resources subsequently spent for some other
purpose Subsequent legislation specifically changed the
purpose for which existing balances may be spent
Compare changes for resources raised subsequently
Never automatic Always judged separately by source
Effective date
Fiscal years beginning after 6/15/05 Early implementation encouraged
Termination Benefits
GASB Statement No. 47
Definition
Incentive for voluntary early termination Settlement for involuntary early termination
Termination benefits v. post-employment benefits Post-employment benefits (pensions/OPEB)
Related to the past Compensation for prior service
Termination benefits Related to the present Cost of discontinuing future service
Change from scope of prior guidance Previous guidance limited to special
termination benefits Voluntary Short duration
Now extended to all types of termination benefits Voluntary and involuntary Regardless of duration
Examples (voluntary)
Cash payments Enhancements to existing pension and other
postemployment benefits (OPEB) Healthcare that otherwise would not be
provided COBRA
Examples (involuntary)
Severance pay Continued access to health insurance
through the employer’s group insurance Career counseling and outplacement
services COBRA
Distinguishing termination from post-employment benefits Intended or viewed as compensation or as
incentive to terminate? Conditioned on termination prior to normal
retirement age? Duration so long as to function in essence
as part of the post-employment package?
Elements of cost
Benefits themselves Related fringe benefits Indirect effect upon other types of benefits
Exception for effect on defined benefit pension benefits and OPEB
Measurement target
Discounted present value of expected future benefit payments Application differs depending upon whether
benefit relates to healthcare
Measurement of healthcare-related benefits Two approaches
Total claims costs Age-adjusted premiums approximating claims
costs Option = unadjusted premiums (if neither large-scale
nor age-related)
Use OPEB guidance if benefits offered through existing defined benefit OPEB plan
Measurement of benefits not related to healthcare Option = current cost levels (if specific
amounts not payable on fixed or determinable dates)
Recognition – accrual basis
Voluntary termination benefits Offer accepted Measurable
Involuntary termination benefits Plan approved and communicated Measurable Defer and amortize amounts related to services
yet to be provided
Recognition – modified accrual basis When due and payable
Note disclosure
Description Year employer becomes obligated Each year service must be performed in
connection with involuntary plans Cost and change in actuarial accrued
liability Year employer becomes obligated
Note disclosure (cont.)
Significant methods and assumptions used As long as liability reported
Amounts not recognized because not measurable
Effective date
Portions related to OPEB Simultaneous with implementation of GASB 45
Other provisions Fiscal years beginning after 6/15/05
Early implementation encouraged
Applicable to all unpaid amounts at transition