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GASB Update

GASB Update. AGA Montgomery 2012 Fall Seminar November 9, 2012. Disclaimer. The opinions expressed in this presentation are those of the presenter. Official positions of the GASB are established only after extensive public due process and deliberation. Agenda.

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GASB Update

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  1. GASB Update AGA Montgomery 2012 Fall Seminar November 9, 2012

  2. Disclaimer The opinions expressed in this presentation are those of the presenter. Official positions of the GASB are established only after extensive public due process and deliberation.

  3. Agenda • GASB 60: Service Concession Arrangements • GASB 61: The Financial Reporting Entity • GASB 64: Hedge Termination Provisions • GASB 62 & 66: Pre-1989 FASB/AICPA Pronouncements & Technical Corrections • GASB 63 & 65: Statement of Net Position and Items Previously Reported as Assets and Liabilities • GASB 67 & 68: Pensions • Current Projects

  4. GASB Statement 60 Accounting and Financial Reporting for Service Concession Arrangements

  5. GASB 60: Service Concession Arrangements (SCAs) • Applies only to financial statements that use the economic resources measurement focus • Type of public-private or public-public partnership • The term “public-private partnership” is used to refer to a variety of: • Service arrangements • Management arrangements • SCAs

  6. Benefits of an SCA • Ability to leverage existing public assets to generate additional resources up-front from operator for right to operate such assets • Facilitate construction and financing of new public assets and transfer the construction and maintenance risks to a private entity • Provide services in a more efficient and cost-effective manner

  7. Requirements for an SCA • SCAs must meet all of these criteria: • Transferor conveys to operator the right and related obligation to provide public services through the use and operation of a capital asset in exchange for significant consideration • Operator is collects and is compensated by fees from third parties • Transferor is entitled to significant residual interest at the end of the arrangement • Transferor has the ability to modify or approve what services the operator provides, to whom they are provided, and the prices or rates that will be charged

  8. Examples of SCAs • The operator will design and build a facility and will obtain the right to collect fees from third parties (for example, construction of a municipal complex for the right to lease a portion of the facility to third parties) • The operator will provide significant consideration in exchange for the right to access an existing facility (for example, a parking garage) and collect fees from third parties for its usage • The operator will design and build a facility (for example, a new toll way), finance the construction costs, provide the associated services, collect the associated fees, and convey the facility to the government at the end of the arrangement

  9. Transferor Accounting • Existing facility - Continue to report as a capital asset • New facility or improvements to existing facility: • Report a new facility or improvements at fair value when placed into operation • Report any contractual obligations as liabilities at present value • Any differences between the new facility or improvement and the contractual obligations should be reported as a deferred inflow of resources

  10. Transferor Accounting (continued) • Upfront or Installment Payments • Report up-front payment or present value of installment payments as an asset • Report any contractual obligations as liabilities at present value • Any differences between the asset from the upfront or installment payments and the contractual obligations should be reported as a deferred inflow of resources

  11. Transferor Accounting (continued) • A liability is recorded at present value if a contractual obligations exists and it meets either of the following criteria: • (1) The contractual obligation directly relates to the facility (for example, capital improvements, insurance, or maintenance) OR • (2) The contractual obligation relates to a commitment by the transferor to maintain a minimum or specific level of service in connection with the operation of the facility (for example, police or emergency services, maintenance around the facility)

  12. Transferor Accounting (continued) • Revenue is recognized in a systematic and rational manner over the term of the arrangement as the deferred inflow is reduced • Liability is reduced as transferor’s obligations are satisfied • When obligation is satisfied, a deferred inflow is reported and related revenue is recognized in a systematic and rational manner over the term of the arrangement

  13. Transferor Accounting (continued) • After initial measurement, the capital asset is subject to existing requirements for depreciation, impairment, and disclosures • Improvements made to the facility during the arrangement would increase the transferor’s asset • Facility does not depreciation if arrangement requires operator to return facility to transferor in its original or enhanced condition

  14. Governmental Operator Accounting • Report an intangible asset for the right to access and use the property • Measured by the amount of the upfront payment or contributed asset • Amortized over the life of the arrangement • Improvements made to the facility by the government operator increase the government operator’s intangible asset if the improvements increase the capacity or efficiency of the facility • Reports a liability to restore the facility to a specified condition if required by agreement and the facility is not in the expected condition

  15. Revenue Sharing Arrangments • Transferor reports only its portion of revenues and expenses • Recognized when earned in accordance with the terms of the arrangement • Unconditional payments to transferor treated like installment payments discussed earlier • Governmental operator reports all revenues earned and expenses incurred

  16. Note Disclosures • Both the transferor and the governmental operator are required to disclose: • A general description of the arrangement including management’s objectives for entering into the arrangement and the status of the project • Nature and amounts of assets, liabilities, and deferred inflows of resources related to the SCA • Nature and extent of rights retained by the transferor or granted to the government operator • If applicable, any guarantees and commitments, including identification, duration, and significant contract terms of the guarantees or commitments • May be disclosed individually or in aggregate for SCAs with similar facilities and risk

  17. Effective date • Effective for periods beginning after December 15, 2011 • Fiscal years ending: • December 31, 2012 • May 31, 2013 • June 30, 2013 • August 31, 2013 • September 30, 2013 • Early application is encouraged • Required to be applied retroactively for all periods presented

  18. GASB Statement 61 The Financial Reporting Entity: Omnibus

  19. Objectives • Amend standards for defining and presenting the financial reporting entity in Statement 14 to ensure that financial statements: • Include the organizations that should be included • Exclude organizations that should not be include • Display and disclose the financial data of component units (including equity interests) in the most appropriate and useful manner • Are consistent with the current conceptual framework

  20. Overview • The most significant effects of Statement 61: • Increase the emphasis on financial relationships • Raises the bar for inclusion • Refocus and clarify the requirements to blend certain component units • Improve the recognition of ownership interests • Component units • Joint ventures • Investments

  21. Inclusion criteria • Statement 14 requires inclusion if PCU is fiscally dependant. That is, PG has authority over: • Budget, or • Setting taxes and charges, or • Issuing debt • Statement 61 adds a requirement for a financial benefit or burden before inclusion is required • Effect: PCU needing PG approval for its budget, levies, or debt issuances is no longer a sufficient reason, on its own, to include it

  22. Inclusion criteria • Statement 14 requires inclusion of a PCU if exclusion would make reporting entity’s statements “misleading or incomplete” • Statement 61 eliminates “incomplete,” and emphasize that the determination would generally be based on: • Nature and significance of financial relationship with PG • Generally financial in nature, such as significant financial benefit to/burden on the PG that is other than temporary • Based on preparer professional judgment

  23. Blending requirements • Statement 14 requires blending if PG & CU have “substantively the same” governing body, allowing complete control • Statement 61 additionally requires either of the following relationships to qualify for blending: • A financial benefit/burden relationship, or • PG has “operational responsibility” for CU • PG’s personnel manage activities of the CU like a fund, program, or department of the primary government

  24. Blending requirements - example • Scenario: • Voters elect individuals as board members of County Board of Supervisors and Forest Preserve Board (FPB) • The two boards are “substantively the same” and are required to be blended under Statement 14 • Under Statement 61, what happens if: • A – FBP is essentially autonomous and financially independent? • B – The County is required to pay pension costs for FBP employees? • C – The county does the FBP’s accounting and the County Administrator manages the FBP’s activities and oversees the budget?

  25. Blending requirements • Statement 61 expands the blending criteria to include CUs whose total debt outstanding is expected to be repaid entirely or almost entirely by resources of the PG • This criteria applies even if the CU provides services to constituents or other governments, rather than exclusively or almost exclusively to the PG • Statement 61 clarifies that funds of a blended CU have the same characteristics, reporting options, and limitations as those of the PG • Major fund reporting • Could be combined with other funds for display

  26. Blending requirements • Statement 61 clarifies how to blend CUs in single-column business-type activity reports: • Consolidate CU data into the single column • Present condensed combining information in the notes • Business-type activities still have the option to present a multiple-column report • Additional column(s), as if funds of the PG • Present PG total column

  27. Blending requirements – Example

  28. Blending requirements – Example

  29. Major component units • Statement 61 provides guidance for the types of relationships that generally affect the major CU determination: • Services provided by CU to citizenry considered essential information to PG financial statement users • Significant transactions with the PG • Significant financial benefit/burden relationship • Eliminates consideration of each CU’s significance relative to other CUs

  30. Reporting equity interests • Requires that a primary government report an asset for its equity interest (net assets) in a discretely presented component unit • Requires that a primary government report the assets, deferred outflows of resources, liabilities, and deferred inflows of resources of a blended component unit. In other words, consolidate the blended component unit.

  31. Reporting minority interests • When an organization with joint venture characteristics is included as a CU in a PG’s financial report: • Organization should report any equity interests of the minority participants as “restricted net assets, nonexpendable”

  32. Note disclosures • Clarifies that current disclosures require: • Rationale for including each component unit • Identification of the component unit as discretely presented, blended, or included as a fiduciary fund

  33. Effective date • Effective for periods beginning after June 15, 2012 • Fiscal years ending: • June 30, 2013 • August 31, 2013 • September 30, 2013 • December 31, 2013 • May 31, 2014 • Early application is encouraged • Required to be applied retroactively for all periods presented

  34. GASB Statement 64 Derivative Instruments: Application of Hedge Accounting Termination Provisions

  35. GASB 64: Hedge Termination Provisions

  36. Derivatives in the Government Sector • Swaption • Gives the purchaser of the option the right, but not the obligation, to enter into an interest rate swap • Commodity swap • Reduce expose to a commodity’s price risk • Interest rate swaps • Variable-rate to fixed-rate: Government issues variable rate bonds to enjoy a lower cost of funds, but swaps into a fixed rate for budgetary reasons • Fixed-rate to variable-rate: Government issues fixed rate debt, but swaps into a variable rate because it believes rates will fall over the life of the debt

  37. Derivatives in the Government Sector • Derivative instruments are measured at fair value on the statement of net assets • Fair value changes are reported on the statement of resource flows as investment income • Exception: Effective hedges – Changes in fair value of derivative instruments are reported on the statement of net position as deferred outflows/inflows of resources • Paragraph 22 of Statement 53 describes circumstances when hedge accounting should be terminated

  38. What is Statement 64 about? • Questions regarding the application of the termination of hedge accounting have been raised in practice when swap counterparties have been replaced in swap agreements • Statement 64 amends paragraph 22(d) of Statement 53 to clarify when hedge accounting should continue in certain limited circumstances

  39. Termination of Hedge Accounting • A hedging relationship is maintained and hedge accounting should continue to be applied when all of the following criteria are met: • Collectibility of swap payments is considered to be probable • Counterparty of interest rate swap or commodity swap, or counterparty’s credit support provider, is replaced with an assignment or in-substance assignment • Government enters into assignment or in-substance assignment in response to swap counterparty, or swap counterparty’s credit support provider, either committing or experiencing an act of default or termination event as described in the swap agreement

  40. Effective date • Effective for periods beginning after June 15, 2011 • Fiscal years ending: • June 30, 2012 • August 31, 2012 • September 30, 2012 • December 31, 2012 • May 31, 2013 • Early application is encouraged • Required to be applied retroactively for all periods presented

  41. GASB Statements 62 & 66 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements Technical Corrections

  42. GASB 62: Pre-1989 FASB/AICPA Pronouncements • Primary objective is to directly incorporate the applicable provisions in FASB and AICPA pronouncements issued on or before November 30, 1989 into GASB literature • Since FASB introduced its codification, its original pronouncements are nonauthoritative • GASB 34, p. 17 requires application of pre-November 30, 1989, FASB statements, APB opinions, and ARBs for governmental and business-type activities unless they conflict with or contradict GASB pronouncements. The same is required for proprietary funds in GASB 20, p. 6

  43. GASB 62: Pre-1989 FASB/AICPA Pronouncements • Does not significantly affect practice as accounting and financial reporting should not change; Only the source of the guidance is different • Applies to accounting and financial reporting for governmental, business-type activities, and proprietary funds, except as identified otherwise • No longer need to disclose use of pre-November 30, 1989 FASB and AICPA literature • No longer need to elect to apply post-November 30, 1989 FASB and AICPA literature – Now nonauthoritative and can apply when it does not conflict with GASB guidance

  44. GASB 62: Pre-1989 FASB/AICPA Pronouncements • Guidance brought into GASB literature includes: • Capitalization of interest costs (FAS 34) • Statement of net assets classification (ARB 43, APB 12 & FAS 6) • Special and extraordinary items (APB 30) • Comparative financial statements (ARB 43) • Related parties (FAS 57) • Prior-period adjustments (FAS 16 & APB 9) • Accounting changes and error corrections (APB 20 & FIN 20) • Extinguishments of debt (APB 26 & FAS 76) • Troubled debt restructuring (FAS 15) • Inventory (ARB 43) • Contingencies (FAS 5 & FIN 14) • Leases (FAS 13, 22 & 98 & FIN 23, 26 & 27) • Regulated operations (FAS 71, 90 & 101)

  45. GASB 66: Technical Corrections to GASB 10 & GASB 62 • Amendments to GASB 10 – Use of special revenue funds to report risk financing activities • Restricted revenues dedicated to risk financing can be presented as a special revenue fund • Amendments to GASB 62 • Operating leases – Appropriate to recognize uneven rent using a fair value or straight-line approach • Purchase of a loan or group of loans – Recognize purchase of loans at acquisition cost • Servicing fees – Do not have follow the guidance in GASB 62 for sales of mortgage loans with servicing retained. Follow guidance in GASB 48.

  46. Effective date • Statement 62 is effective for periods beginning after December 15, 2011 • Early application is encouraged • Required to be applied retroactively for all periods presented • Change in accounting principle vs. correction of an error • Statement 66 is effective for periods beginning after December 15, 2012 • Early application is encouraged • Required to be applied retroactively for all periods presented

  47. GASB Statements 63 & 65 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Items Previously Reported as Assets and Liabilities

  48. GASB 63: Statement of Net Position &GASB 65: Previously Reported as Assets and Liabilities • Background • Concepts Statements 4 and 5 identified 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, and net assets in a statement of financial position

  49. GASB 63: Statement of Net Position &GASB 65: Previously Reported as Assets and Liabilities • Deferred outflows of resources • A consumption of net assets by the government that is applicable to a future period • Has a positive effect on net position, similar to assets • Deferred inflows of resources • An acquisition of net assets by the government that is applicable to a future period • Has a negative effect on net position, similar to liabilities • Net position • The residual of all elements presented in a statement of financial position • Assets + deferred outflows – liabilities – deferred inflows

  50. GASB 63: Statement of Net Position &GASB 65: Previously Reported as Assets and Liabilities • 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 net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows • Net investment in capital assets • Restricted • Unrestricted • Governmental funds continue to report fund balance

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