GASB Update – Latest and Greatest Presented by Beila Sherman, CPA, CA

1. GASB Update –Latest and GreatestPresented by Beila Sherman, CPA, CA

2. Objectives Overview of The Following: New GASB Implementation Dates GASB 54: Implementation Issues New GASBs What else is up?

3. GASB Implementation Dates

4. Effective Dates – Issued GASB Standards June 30, 2012 GASB Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions December 31, 2012 GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position

5. Effective Dates – Issued GASB Standards June 30, 2013 GASB Statement No. 61, The Financial Reporting Entity Omnibus, an amendment of GASB Statements No. 14 and No. 34 December 31, 2013 GASB Statement No. 65, Items Previously Reported as Assets and Liabilities GASB Statement No. 66, Technical Corrections

6. Effective Dates – Issued GASB Standards June 30, 2014 GASB Statement No. 67, Financial Reporting for Pension Plans June 30, 2015 GASB Statement No. 68, Accounting and Financial Reporting for Pensions – An Amendment to GASB No. 27 (Employers)

7. GASB Statement No. 54:Implementation Issues

8. Statement No. 54Fund Balance Reporting and Governmental Fund Type Definitions

9. Statement 54 Implementation Issues Committed Fund Balance – highest level of authority. Negative unassigned fund balance in the general fund Disclosure of encumbrances if significant Special revenue fund Substantial portion Minimum fund balance disclosure Transfers vs. revenues and expenditures Budgetary comparisons (can be different)

10. Statement 54 Implementation Issues Assignments can take place after year end but commitments can not Use of existing fund balance to balance the subsequent year’s budget should be assigned

11. GASB 54 Implementation Issues GASB Comprehensive Implementation Guide Refer to Chapter Z, Section 54

12. Should the classifications of unrestricted fund balance— committed, assigned, and unassigned—also be applied to unrestricted net assets in proprietary funds and in the government-wide statement of net assets? No. The classifications of unrestricted fund balance should be used only in the governmental fund financial statements.

13. Paragraph 6 of Statement 54 states that long-term receivables and property held for resale should not be included in the calculation of nonspendable fund balance if the proceeds from their collection or sale are restricted, committed, or assigned. Does that provision also apply to other nonspendable items such as inventories and prepaid amounts? Generally, no. Inventories and prepaid amounts reported in governmental funds are examples of nonspendable items that are not expected to be converted to cash, so it is expected that there would not be any restricted, committed, or assigned collections or sale proceeds associated with inventories or prepaid amounts.

14. Paragraph 6 of Statement 54 provides that the long-term amount of loans and notes receivable should be included in nonspendable fund balance unless the proceeds from their collection are restricted, committed, or assigned. Does that provision apply to interfund balances? Yes. However, as a practical matter, it will only apply to interfund receivables in the general fund because all loans and notes receivable reported in other governmental funds, by definition, are restricted, committed, or assigned.

15. Paragraph 6 of Statement 54 states that if the proceeds from the collection of long-term receivables or the sale of properties held for resale are restricted, committed, or assigned, they should be included in those classifications rather than nonspendable fund balance. How should the provision in paragraph 19 of Statement 54 that requires nonspendable fund balance to be determined before classifying amounts as restricted, committed, or assigned be considered in light of the guidance in paragraph 6? Governments should first determine which amounts meet the nonspendable criteria in paragraph 6 of Statement 54 and then whether any of the qualifying items should be reclassified to restricted, committed, or assigned classifications based on the guidance provided in that paragraph.

16. Paragraphs 22 and 25 of Statement 54 require that amounts for the two components of nonspendable fund balance-those that are not in spendable form and those that are contractually or legally required to be maintained intact – either be displayed on the face of the statement or disclosed in the notes. Are those components required to be separately classified as “resources not in spendable form” and “resources contractually and legally required to be maintained intact”? No. It is not necessary to separately classify the components using the Statement 54 descriptions as long as amounts for the two components are discernable. For example, rather than presenting “Resources not in spendable form,” governments could instead label that amount as “Inventories and prepaid amounts.”

17. A government is awarded a transportation study grant with the condition that it is required to provide a 20 percent match of the grant award. The government receives the grant proceeds and deposits them in a separate special revenue fund. The government's matching amount is transferred in from the general fund. How should the amount transferred in be classified? The government's 20 percent match becomes bound by the same constraints imposed by the grantor agency on the award. Therefore, in this example, both the grant proceeds and the government's matching amount would be classified as restricted fund balance.

18. A special revenue fund is used to account for the proceeds and use of federal grant money that is restricted to specified purposes. Does the interest earned on the investment of those resources also constitute a restricted revenue source? If the grant agreement requires that interest earned on invested grant proceeds can be used only for the same purposes as the grant award, the interest should be considered a restricted revenue source. If the grant agreement does not include such a provision, then the interest earned, if retained in the fund, should be classified as assigned to the purpose of the fund.

19. Should the amount reported in governmental funds as restricted fund balance equal the amount reported as restricted net assets for governmental activities in the government-wide statement of net assets? There are three reasons why those amounts will generally be different. First, the principal amount of a permanent fund is classified as nonspendable fund balance in the governmental fund financial statements but is included in restricted net assets in the government-wide statement of net assets. Second, reconciling items that represent basis of accounting differences may cause the amounts to be different. And, finally, internal service fund net assets are generally included with governmental activities.

20. Paragraph 10 of Statement 54 states that committed fund balance should include resources that have been specifically committed for use in satisfying contractual obligations. Under what circumstances is that expected to occur? The agreement between a government and a counterparty (a capital lease agreement or out-of-court settlement award, for example) sufficiently binds the government to spending for a specific purpose and therefore constitutes the commitment. Often, scheduled payments to liquidate or reduce those contractual obligations are included in a government's budget and are expected to be paid from current-period revenues. Fund balance should be classified as committed only if the government commits existing resources, rather than future revenues, to satisfy the contractual obligation (to the extent that the obligation is not recognized as a fund liability).

21. A government transfers an amount to a special revenue fund and in doing so assigns that amount to the purpose of the fund. If the resources are not spent at year end, does that assignment carry over to the subsequent years? Yes. The assignment is effective until the government commits or reassigns the resources to another purpose.

22. What effect does the legal adoption of budget and appropriation documents for the subsequent year have on fund balance classification? An adopted appropriation ordinance, resolution, or similar legislation generally authorizes a government to spend budgeted revenues and other financing sources and, therefore, does not impose constraints on the use of existing resources. However, if a portion of existing fund balance is included as a budgetary resource in the subsequent year's budget to eliminate a projected excess of expected expenditures over expected revenues, then that portion of fund balance (in an amount no greater than is necessary to eliminate the excess) should be classified as assigned. The amount should not be classified as committed because the governing body does not have to take formal action to remove or modify that specific use-the purpose assignment expires with the appropriation.

23. In the situation described in the preceding question, does the assignment of existing fund balance to cover a projected budgetary deficit carry over to the following year? No. The assignment terminates at the effective date of the next period's budget.

24. Paragraph 12 of Statement 54 requires that the formal action to commit an amount to a specific purpose should occur prior to the end of the reporting period. Does a similar provision apply to the action taken to assign fund balance amounts? No. The determination of the purposes, as well as the amounts for assigned fund balances can be made after the end of the reporting period.

25. Expenditures have been made in a capital projects fund from resources advanced from the general fund in anticipation of bond proceeds that will be restricted to the purpose for which those expenditures have been made. Should the capital projects fund report negative restricted fund balance? No. Paragraph 19 of Statement 54 provides that a negative balance should not be reported for restricted, committed, or assigned fund balance in any fund. In this example, the capital projects fund should report a negative unassigned fund balance.

26. Is the answer to the preceding question different if the capital projects fund also includes resources that are committed and assigned to other purposes? Yes. The negative amount should first reduce assigned fund balances in that fund until they are completely eliminated. The amount of the negative balance that exceeds assigned fund balances should be reported as a negative unassigned fund balance. Committed fund balances should not be reduced by overexpenditure for other purposes in that fund.

27. What is the difference between a stabilization arrangement and a minimum fund balance policy? • For financial reporting purposes, resources set aside under a stabilization arrangement may be expended only when certain specific circumstances or conditions exist that are not expected to occur routinely. • A minimum fund balance policy generally does not stipulate the conditions under which fund balance may fall below the minimum but, rather, establishes a target amount that the government believes should be maintained to provide a reasonable level of assurance that day-to-day operations can continue if revenues are insufficient to cover expenditures.

28. How specific are the circumstances for use of stabilization resources required to be, in order for those resources to be classified as committed fund balance? The required level of specificity is intended to convey the understanding that the resources would be available only under specific circumstances that are not expected to occur routinely. For example, a condition that stabilization resources become available for spending if revenues fall one percent below expectations is sufficiently specific but does not meet the requirement that the condition is not expected to occur routinely. In that situation, the amount set aside should not be classified as committed fund balance; however, the government would be required to provide the disclosures described in paragraph 26 of Statement 54.

29. By exercising its highest level of decision-making authority, a government has established a Budgetary Stabilization Fund and imposed a requirement that 15 percent of certain mineral rights royalties received should be set aside to provide for budgetary imbalances. That decision can only be reversed or modified by the government taking the same action. The conditions under which the resources can be used are sufficiently prescriptive to be reported as committed fund balance. Can the Budgetary Stabilization Fund be reported as a special revenue fund? Yes. Because the foundation of the separate fund is a specific committed revenue source , it can be reported as a special revenue fund, provided that the revenues are recognized in the separate fund.

30. Should encumbrances be displayed on the face of the governmental funds balance sheet? No. Encumbrances should not be displayed on the face of the financial statements. Generally, encumbered amounts should already be included in the restricted, committed, and assigned fund balance classifications.

31. Can encumbrances be included in unassigned fund balance in the general fund? No. Executing a purchase order is tantamount to assigning the amount of the purchase order to a specific purpose; thus, the outstanding encumbrance amount would be included in assigned fund balance (unless the purchase order relates to restricted or committed resources).

32. Are governments required to disclose reasons why fund balance may have decreased below the established minimum or what corrective measures will be taken to restore it to the minimum level? No. Paragraph 27 of Statement 54 only requires note disclosure of the policy that sets forth the minimum amount. The government should consider whether to discuss those issues in management's discussion and analysis in the context of discussing significant changes in fund balances.

33. Are governments required to use special revenue funds to report restricted or committed revenue sources? No. Special revenue funds are not required, except to report the general fund of a blended component unit.

34. Can assigned revenues or resources be reported in a special revenue fund? Yes. However, the fund is required to also include substantial restricted or committed revenues as its foundation. Assigned revenues or resources cannot be the foundation for establishing a special revenue fund.

35. In order to satisfy the criteria for reporting as a special revenue fund, are restricted or committed revenues required to constitute a substantial portion of the revenues in the fund? The requirement is that restricted or committed revenues should comprise a substantial portion of the inflows of the fund. Inflows of the fund would include transfers or assigned revenues in addition to restricted or committed revenues.

36. A government establishes a special revenue fund to account for a restricted revenue, but the fund has a limited life expectancy. When inflows into the fund ultimately cease, does the remaining balance in that fund have to be reported as part of the general fund? No. Provided that there are no continuing inflows into the fund (transfers from other funds, for example), the separate fund can continue to be reported until the restricted resources have been used for their specified purposes.

37. If a governing body passes a resolution (the highest level of decision-making authority, in this case) to annually transfer amounts from the general fund to a separate fund to be used for a specified purpose, do those amounts qualify as committed revenues so that the separate fund can be reported as a special revenue fund? No. Transfers are not revenues. The transferred-in resources in this example do not provide the foundation of restricted or committed revenues required for a special revenue fund. The separate fund can, however, be reported as a special revenue fund if there are also substantial restricted or committed revenues recognized in that fund.

38. Are taxes levied for a specific purpose regarded as restricted for purposes of reporting in a special revenue fund? If the taxes result from a separate dedicated levy that can only be used for the specific purpose for which they are levied, they constitute a restricted revenue. If, however, the taxes result from the general fund corporate levy and the purpose for which the taxes are intended to be spent is one of the many purposes underlying that levy, they are not restricted to that purpose.

39. Paragraph 31 states that if a fund no longer qualifies as a special revenue fund its remaining resources should be reported in the general fund. Can those resources be reported as part of another special revenue fund with a similar purpose (for, example, if both funds are transportation-related)? Yes. Resources accounted for in a separate fund that does not meet the criteria to be reported as a special revenue fund can be reported as part of the general fund or as part of another fund with a similar purpose that does meet the criteria to be reported as a special revenue fund.

40. A government intends to purchase several movable storage facilities that will not meet its capitalization threshold. Can those acquisitions be made from a capital projects fund? Yes. Capital projects funds may include expenditures for items that are capital in nature but do not qualify for reporting as capital assets under the government's capitalization policy.

41. A separate special revenue fund is used only to account for specific restricted resources. Can nonspendable fund balance be reported for that fund? Yes. For example, if inventories or prepaid amounts are reported in that fund, the fund balance pertaining to those amounts should be classified as nonspendable.

42. If a governmental fund reports an inventory balance for items that will be sold, rather than used in providing services, should the fund balance pertaining to that inventory be classified as nonspendable? Fund balance related to inventory should be classified as nonspendable, because the resources are not in a spendable form, unless the proceeds from the sales are restricted, committed, or assigned. Fund balance representing inventory balances held for sale should not be reclassified from the nonspendable category, even if the proceeds from sales are expected to be unassigned.

43. Does paragraph 24 of Statement 54 require disclosure of specific individual encumbrances by fund balance classification, if significant? No. The requirement in paragraph 24 is to disclose the total amount of encumbrances by major fund and nonmajor funds in the aggregate, if significant. Disclosure of individual encumbrances is not required and classification of encumbered amounts as restricted, committed, or assigned also is not required.

44. GASB Statement No. 53: Implementation Issues

45. Statement No. 53Accounting and Financial Reporting for Derivative Instruments

46. Statement No. 53 Definition of a Derivative is: Derivatives are financial arrangements that are leveraged (meaning they require minimal or no initial investment on the part of the government but nevertheless achieve changes in fair value that would have required a far larger initial investment). The financial arrangements can be settled early with a cash payment or the transfer of an equivalent asset.

47. Statement No. 53 Statement No. 53 requires: Fair value of derivatives be reported in the financial statements when using the full accrual basis. Fair value and changes in fair value of a hedging derivative instrument are required to be deferred – reported as deferred inflows and deferred outflows on the balance sheet. A hedging derivative instrument significantly reduces financial risk by substantially offsetting the changes in cash flows or fair values of the item the derivative is associated with.

48. Statement No. 53 Statement No. 53 requires (continued): Deferral of changes in fair value will last until the transaction involving the hedged item ends. If terminated or no longer an effective hedge (no longer significantly reduces risk) then accumulated gains or losses, if any, are reported as investment gain or loss in financial statements. Requires significant disclosure Statement No. 53 does not address investment derivatives.

49. How Will a Government Identify and Report a Hedging Derivative Instrument? Derivatives that are (1) associated with an item that is eligible to be hedged and (2) determined to be effective are considered a hedging derivative instrument and governments are required to report their hedging derivative instruments using hedge accounting provisions.

50. How Will a Government Identify and Report a Hedging Derivative Instrument (cont.)? Items eligible to be hedged are reported in the financial statements using a measurement other than fair value. Expose a government to a risk of losing cash flows or fair value. Example of a “hedgeable” item is variable-rate debt, which exposes a government to the risk of increasing interest rates and therefore larger interest payments to the bondholders. For the purpose of these standards, a derivative associated with a hedgeable item is known as a potential hedging derivative instrument.