Financial Reporting Impacts of the Troubled Financial Markets

1. Financial Reporting Impacts of the Troubled Financial Markets Presented by Ken Al-Imam, C.P.A. Shareholder MAYER HOFFMAN MCCANN P.C. (Certified Public Accountants) 2301 Dupont Drive, Suite 200 Irvine, California 92612 (949) 474-2020, Ext. 273 kalimam@cbiz.com

2. Impacts of Troubled Financial Markets • Declines on investment values • Declines in investment ratings • Challenges for variable rate debt issuers • Challenges for auction rate debt issuers • More expensive exit pricing for swap agreements (which can compound refundings) • Collateral calls

3. Impacts of Troubled Financial Markets • Higher interest rates for debt issuance • Difficulty in issuing debt • Use of GIC’s for debt service reserve accounts • General economic conditions • Impacts on debt covenants

4. Accounting Challenges Associated with Current Markets • How do post-balance sheet investment fair value declines affect prior year financial reporting • How do post-balance sheet investment rating declines affect prior year financial reporting • Purchase of own auction-rate securities or variable rate debt • Collateral calls associated with swap agreements • Going concern issues for the reporting government

5. Post-balance sheet investment declines • GAAP requires fair value reporting for investments as of balance sheet date • Post-balance sheet declines in fair value caused by post-balance sheet market conditions are recorded as a loss for the subsequent year • Exception for non-fair valued investments (GIC’s, etc.) • Because of absence of fair value information for these investments, they need to be evaluated for possible permanent impairments of value caused by conditions as of the balance sheet date

6. Post-balance sheet declines in investment credit ratings • GASB Q&A 1.9.11 • Generally disclosure is not required for post-balance sheet declines in the rating of a fair valued investment • Use of professional judgment • If the magnitude of the amount of investments subject to the down-grade is sufficiently large, disclosure may be appropriate • Exception—if non-fair valued investment has a post-balance sheet rating decline, this should be evaluated for permanent impairment as of balance sheet date

7. Guidance on Purchase of Entity’s Own Auction Rate Securities or Variable Rate Debt • GFOA has advised that this represents an extinguishment of debt • Analogous to “treasury bonds” in the private sector • Record as a reduction of debt • “Purchased” debt should not be recorded as an investment • Purchase of ARS or variable rate debt issued by other agencies would be an asset.

8. Accounting for Collateral Calls • Some swap agreements have required cash to be deposited with a fiscal agent in accordance with terms of the agreement • Account for as a local government asset (“Cash with fiscal agent”, “collateral deposits”, etc.)

9. Going Concern/Risk Assessment Issues • Effect on auditor’s risk assessment • Twelve month window • Ability to pay obligations as they become due for twelve month period after the balance sheet date without extraordinary actions such as substantial assets sales outside the normal course of business, restructuring of debt, externally forced revisions of operations, etc. • Auditors may want to add information in notes for management’s plans to deal with diminishing revenues and reserves