GASB Update –
Latest and
Greatest
Presented by
Beila Sherman, CPA, CA
Objectives
Overview of The Following:
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New GASB Implementation Dates
GASB 54: Implementation Issues
New GASBs
What else is up?
2
GASB
Implementation Dates
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
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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
5
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)
6
GASB Statement No. 54:
Implementation Issues
Statement No. 54
Fund Balance Reporting
and Governmental Fund
Type Definitions
8
Statement 54 Implementation Issues
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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)
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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
10
GASB 54 Implementation Issues
GASB Comprehensive Implementation Guide
 Refer to Chapter Z, Section 54
11
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.
12
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.
13
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.
14
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.
15
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.”
16
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.
17
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.
18
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.
19
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).
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
26
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.
27
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.
28
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.
29
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.
30
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).
31
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.
32
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.
33
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.
34
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.
35
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.
36
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.
37
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.
38
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.
39
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.
40
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.
41
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.
42
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.
43
GASB Statement No. 53:
Implementation Issues
Statement No. 53
Accounting and Financial
Reporting for Derivative
Instruments
45
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.
46
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.
47
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.
48
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.
49
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.
50
How Will a Government Identify and Report
a Hedging Derivative Instrument (cont.)?
 A hedging derivative instrument is a potential hedging derivative
instrument that is effective.
 Effective means that the derivative significantly reduces an identified
financial risk by providing changes in fair values or cash flows that
substantially offset the changes in fair values or cash flows of the
associated item being hedged.
 Each year’s change in fair value would be added to the deferrals in the
balance sheets.
 If the hedging derivative instrument remains effective and continues until
its planned conclusion, the deferrals will balance out the fair value of the
derivative until that value declines to zero when it concludes.
51
Accounting for a Hedge That Ceases to
be Effective or Terminates Early
Many hedges remain effective through the term of the derivative agreement
– the derivative begins with a zero fair value, the annual changes in its fair
value are deferred, and it ultimately concludes as planned and returns to zero
fair value.
However, there are situations in which the hedge does not last as long as
expected:
 The hedging derivative instrument is terminated prior to its expected ending date.
 The hedging derivative instrument ceases to be effective.
 It is no longer probable that a hedged expected transaction will occur.
 The hedged asset or liability is sold or retired, except for current or advance refundings.
In those circumstances, the deferred amounts are removed from the balance sheets and
reported as investment income or loss in the flows of resources statements.
52
Accounting for a Hedge That Ceases to
be Effective or Terminates Early (cont.)
If the hedging derivative instrument hedges a liability that is
reported as a current refunding (outstanding bonds are paid off
immediately from the proceeds of newly issued bonds) or an
advance refunding resulting in a defeasance of debt (the proceeds
are not used to repay the outstanding bonds immediately, but are
set aside with an escrow agent and invested to finance the regular
debt service payments), then the deferred amounts are included in
the amortization associated with the refunding. The deferred
amounts are spread over the remaining term of the refunding and
reported in the flows of resources statements in annual
installments.
53
Accounting for a Hedge That Ceases to
be Effective or Terminates Early (cont.)
The swap in an example of a hedging derivative instrument.
The value of the swap declines to zero when it concludes and
there is no income or loss. However, when a hedging
derivative instrument ends early or ceases to be effective,
the accumulated deferrals from prior years would be
reported as investment income or loss, plus or minus the
changes in fair value for that year.
54
GASB Statement No. 64:
Implementation Issues
Statement No. 64
Derivative Instruments
Application of Hedge
Accounting Termination
Provisions
Effective for years ending June 30, 2012
56
Statement No. 64
 Statement 53 requires immediate recognition of deferred amounts
when swap is terminated
 Statement 64 clarifies when a hedging relationship (and hedge
accounting) continues
 All criteria met:
 Collectibility of swap payments is probable
 Counterparty (or support provider) is replaced with an assignment or in-substance
assignment
 Act of default or termination by counterparty (or support provider)
57
Statement No. 64
Glossary of Statement 53 is amended to define:
 Assignment – Occurs when a swap agreement is amended to replace
an original swap counterparty, or the swap counterparty’s credit
support provider, but all of the other terms of the swap agreement
remain unchanged.
58
Statement No. 64
Glossary of Statement 53 is amended to define (continued):
 In-Substance Assignment – provides that the four criteria are met:
 Original counterparty, or counterparty’s credit support provider, is replaced
 Original swap agreement ended and replacement swap agreement entered
into on same date
 Terms that affect changes in fair values and cash flows in original and
replacement swap agreements are identical.
 Any differences between the original swap agreements exit price and the
replacement swap’s entry price is attributable to the original swap’s exit price
being based on a computation specifically permitted under the original swap
agreement.
59
GASB Statement No. 60:
Implementation Issues
GASB Statement No. 60
Accounting and
Financial Reporting for
Service Concession
Arrangements (SCA)
Effective for years ending December 31, 2012
61
Service Concession Arrangements
SCA is an arrangement in which:
 a transferor conveys to an operator the right and related obligation to
provide services to the public through the operation of a capital asset, in
exchange for significant consideration
 the operator collects and retains fees from third parties
 the transferor is entitled to significant interest in the service utility of the
capital asset at the end of the agreement (a residual interest)
 the transferor determines or has the ability to modify or approve:
 What services the operator is required to provide
 To whom the services will be provided
 The prices or rates that will be charged
62
Service Concession Arrangements
 Governments will enter into SCAs for a number of reasons:
 Leverage existing facilities to generate additional resources in the form of
upfront payments from the operator for the right to operate the facility
 Facilitate construction and financing of new facilities or improvement of
existing facilities
 Provide services to the general populace in a more efficient and cost-effective
manner
63
Service Concession Arrangements
 Assets most commonly used in SCAs are those for which fees for
services are charged:
 Roads and bridges
 Water and sewer
 Golf courses
 Dormitories
 Parking garages
 Parking meters
64
Service Concession Arrangements - Transferor
Significant up-front payments (including installment
arrangements and operator-constructed assets) are
recognized:
 Transferor reports:
1. An asset for up-front payment or the present value of installment
payments or capital assets contributed
2. Any contractual obligations as liabilities,
3. And a corresponding deferred inflow of resources equal to the
difference between (1) and (2).
Periodic amortization – recognized as revenue and the deferred inflow is
reduced in a systemic and rational matter over the term of the agreement
65
Service Concession Arrangements - Transferor
Reporting the capital assets:
 Existing facility
 Transferor continues to report existing facility as capital asset
 New facility or improvements to existing facility:
 Transferor reports
1. A new facility or improvements as capital asset at fair value when placed into
operation
2. Any contractual obligations as liabilities,
3. And a corresponding deferred inflow of resources equal to the difference between
(1) and (2).
4. New facility or improvements to existing facility:
 Transferor does not depreciate capital asset if the agreement requires operator to
return asset in its original or enhanced condition
66
Governmental Operator
 Reports an intangible asset for the right to access and use the
property:
 Measured by the amount of up-front payment or contributed asset
 Amortized over the life of the arrangement
 Improvements made to the facility by the government operator increases the
government operator’s intangible asset if the improvements increase the capacity
or efficiency of the facility.
 Intangible asset is not within the scope of GASB 51 and should not be reported as a
capital asset
 Reports a liability to restore facility to a specified condition if required
by agreement and the facility is not in the expected condition
67
Service Concession Arrangements
Other provisions:
 Revenue-sharing arrangements
 Governmental operator reports all revenues earned and expenses incurred
 Unconditional payments treated like installments
 The transferor recognizes conditional amounts when earned according to the
agreement
 Disclosures:
 Description of the arrangement
 Nature and extent of rights retained or transferred
 Nature and amounts of recognized assets and liabilities
68
GASB Statement No. 62:
Implementation Issues
GASB Statement No. 62
Codification of Accounting and
Financial Reporting Guidance
Contained in Pre-November 30, 1989
FASB and AICPA Pronouncement
Effective for periods ended December 31, 2012
70
Statement No. 62
 Primary objective is to directly incorporate the applicable provisions
in FASB and AICPA pronouncements issued on or before November
30, 1989, into the state and local government accounting and
financial reporting standards:
 Paragraph 17 of Statement 34 requires application of pre-November
30, 1989, FASB statements, APB opinions and ARBs, unless they conflict
with or contradict GASB pronouncements
 FASB introduced its codification ASC, its original pronouncements are
no longer authoritative, which is the main reason for this standard.
71
Statement No. 62
 Accounting and reporting requirements adopted as is, modifying
the language as appropriate to reflect the government environment
without affecting the substance of the provisions
 Provisions generally apply to governmental activities, business-type
activities, and proprietary funds, unless identified in the Statement.
 Election to apply all post-November 30, 1989 FASB pronouncements
not in conflict with GASB pronouncements is eliminated (GASB 20)
 Guidance from post-November 30, 1989 FASB pronouncements
included in the FASB Codification that do not conflict with GASB
pronouncements could still be applied as “other accounting literature.”
72
Statement No. 62
 Topics and guidance brought into the GASB literature:


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









Capitalization of interest costs – capitalizing interest as part of the historical cost of constructing certain businesstype activities
Statement of net assets classification – examples of current noncurrent assets and liabilities
Special and extraordinary items – defines and provides examples
Comparative financial statements
Related parties
Regulated operations – general purpose financial statements for public utilities
Prior-period adjustments
Accounting changes and error corrections – changes versus estimates and policies
Contingencies – when should be recognized as a liability or in notes to financial statements
Extinguishments of debt – when certain types of governmental debt considered extinguished
Troubled debt restructuring
Inventory
Leases – capital versus operating leases
Inputation of interest costs – difference between face amount and certain receivables or payables
73
Statement No. 62
 Topics brought into the GASB literature (continued):
 Sales of real estate
 Real estate projects
 Research and development arrangements
 Broadcasters
 Cable television systems
 Insurance enterprises
 Lending activities
 Mortgage banking activities
 Combinations is a current technical project
74
Modifications for Statement No. 62
(From Comprehensive Implementation Guide)
75
Modifications for Statement No. 62
The requirements of Statement No. 62, Codification of Accounting and
Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB
and AICPA Pronouncements, which are related to the direct incorporation
of the applicable guidance from those FASB and AICPA pronouncements
into the state and local government accounting and financial reporting
standards, are effective for periods beginning after December 15, 2011,
with early implementation encouraged. This appendix identifies questions
and answers in this chapter that are affected by the provisions of that
Statement and presents as marked changes amendments of the material
that will be integrated into the chapter once that Statement is effective.
For governments that implement Statement 62 before its required
effective date, the questions and answers in this appendix also should be
applied.
76
A government makes economic development loans to private
parties at interest rates below commercially available lending
rates. Statement No. 62, Codification of Accounting and Financial
Reporting Guidance Contained in Pre-November 30, 1989 FASB
and AICPA Pronouncements, paragraph 180,generally prescribes
discounting loans or notes receivable that earn interest at belowmarket rates.
Is the government required to discount the loan at a higher
imputed interest rate per Statement 62 and recognize additional
interest income?
No. Because the government makes the low-interest loan to carry
out governmental objectives it “makes the market” for the loan. The
market rate is the rate that the government charges.
77
Paragraph 7 of Statement No. 29, The Use of Not-for-Profit
Accounting and Financial Reporting Principles by Governmental
Entities, stated that enterprise funds (business-type activities)
“should not apply FASB Statements and Interpretations whose
provisions are limited to not-for-profit organizations … or address
issues concerning primarily such organizations.” However,
Statement 29 was superseded by Statement No. 62, Codification of Accounting
and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
Can business-type activities apply FASB standards whose
provisions are limited to or primarily address not-for-profit
organizations?
No. Business-type activities are not considered not-for-profit
activities and should not apply guidance for not-for-profit
organizations.
78
Statement 37, paragraph 6, clarifies that construction-period interest on assets used in
governmental activities should not be capitalized. If capital assets that will be used in
enterprise funds are financed with general long-term debt, should a portion of the
interest on that debt be capitalized as construction-period interest?
Generally, no. Paragraph 46 of Statement 34 states that interest on general long-term
debt generally should not be allocated to functions or programs as a direct expense.
Therefore, unless the debt is expected to be retired by the enterprise fund (see question
7.22.11), it is considered general long-term debt, and construction-period interest
should not be included in the cost of the capital assets constructed.
The interest capitalization requirement in Statement 62, paragraphs 11–20,does not
require or anticipate matching specific debt to specific assets. Generally, that Statement
requires a portion of all interest expense to be allocated to the costs of all assets under
construction during the period. Therefore, if the enterprise fund has any type of debt,
the portion of the interest expense that theoretically could have been avoided generally
should be capitalized as part of the cost of assets constructed during the period.
79
Should Build America Bonds and similar bonds discussed in
question Z.33.25 be considered to be tax-exempt for the
purpose of determining interest that should be capitalized
for capital assets constructed with the proceeds of those
bonds?
No. Those bonds are taxable and the requirements for taxexempt borrowings in footnote 6 and paragraphs 19 and 20 of
Statement 62 do not apply.
80
Once a depreciable asset's useful life is estimated, is it ever necessary
to review the estimate in later years?
Yes. Because depreciation is a method of allocating an asset's cost over
its useful life, a periodic review of this useful life is necessary for
depreciation to reflect that allocation. Any change in useful life is
applied prospectively in accordance with paragraph 69 of Statement
62. As many factors may affect the useful life of an asset, periodic
reassessment of estimated useful lives may be appropriate. For
example, equipment may not be replaced according to property
management policies if appropriations for the replacement costs are
not made. Planned preventative maintenance may not be performed,
resulting in a reduction in the useful life of an asset. The use of the
asset may have changed, or the asset may have been damaged or
impaired by weather or other circumstances.
81
If a government elects to use the classified format in its government-wide statement of net
assets, is it required to separately display restricted assets of governmental activities?
Statement 34 does not require separate presentation of restricted assets in the governmentwide statement of net assets for either governmental activities or business-type activities;
however, the decision to use the classified format may result in the presentation of a portion
of restricted assets as “noncurrent.” The classified format distinguishes between current and
noncurrent assets and liabilities as defined in paragraphs 29–44 of Statement 62. One of the
requirements of that approach is that current assets should exclude assets that will not be
used in current operations, are restricted for acquisition or construction of noncurrent assets,
or are restricted for liquidation of long-term debt.
Resources accounted for in the general fund, special revenue funds, and debt service funds
are generally expected to be used in current operations or to liquidate current obligations and
thus generally would be considered current assets. Conversely, a portion of the resources
accounted for in capital projects funds and permanent funds may meet the criteria for assets
that should not be reported as current assets. (Question 7.22.3 discusses reporting restricted
assets when the “order of liquidity” format is used.)
82
How should a government report the correction of an error in previously issued
financial statements?
A correction of an error is addressed in Statement 62, paragraphs 88 and 89, which
requires that the correction of an error be reported as restatements of beginning
net assets/fund equity, not as a separately identified cumulative effect in the
current-period statement of activities or proprietary fund statement of revenues,
expenses, and changes in fund net assets. Paragraph 88 of Statement 62 states
that a correction of an error should be reported as a prior period adjustment.
Consistent with footnote 13 of Statement 34, governments should implement that
requirement by either displaying the amount on the face of the statement as an
adjustment to beginning net assets/fund balance, as previously reported, or by
displaying beginning net assets/fund balances, as restated, with an explanation of
the restatement in the notes to the financial statements. When comparative
statements are presented, corresponding adjustments should be made to the
transactions and balances for all periods presented to incorporate the retroactive
application of the prior period adjustments, as discussed in paragraph 61 of
Statement 62
83
Is a change in capitalization threshold a change in accounting
principle that requires restatement of beginning net assets?
No. Use of a capitalization threshold is an application of
accounting policy, and any change in capitalization threshold
should appropriately ensure that all significant capital assets,
collectively, are capitalized while considering the cost of
record keeping for capital assets.
84
Unusual in nature and infrequent in occurrence are key
characteristics of extraordinary and special items, as
discussed in Statement 34, paragraphs 55 and 56,
respectively. What is the difference between “unusual in
nature” and “infrequent in occurrence”?
Statement 62, paragraphs 46–48, defines both terms as
follows:
Special and extraordinary items are events and transactions
that are distinguished either by their unusual nature or by the
infrequency of their occurrence, or both. The following criteria
should be met to classify an event or transaction as either
unusual in nature or infrequent in occurrence:
85
a. Unusual nature—the underlying event or transaction
should possess a high degree of abnormality and be of a
type clearly unrelated to, or only incidentally related to, the
ordinary and typical activities of the government, taking
into account the environment in which the government
operates. (See paragraph 47 [below].)
b. Infrequency of occurrence—the underlying event or
transaction should be of a type that would not reasonably
be expected to recur in the foreseeable future, taking into
account the environment in which the government
operates. (See paragraph 48 [below].)
86
Unusual Nature. The specific characteristics of the government,
such as type and scope of operations and operating policies, should
be considered in determining ordinary and typical activities of the
government. The environment in which a government operates is a
primary consideration in determining whether an underlying event
or transaction is abnormal and significantly different from the
ordinary and typical activities of the government. The environment
of a government includes such factors as the characteristics of its
business-type activities, the geographical location of its operations,
and the nature and extent of governmental regulation. Thus, an
event or transaction may be unusual in nature for one government
but not for another because of differences in their respective
environments. Unusual nature is not established by the fact that an
event or transaction is beyond the control of management.
87
Infrequency of Occurrence. For purposes of applying [the
guidance in paragraphs 45–50 of Statement 62], an event or
transaction of a type not reasonably expected to recur in the
foreseeable future is considered to occur infrequently.
Determining the probability of recurrence of a particular event
or transaction in the foreseeable future should take into account
the environment in which a government operates. Accordingly, a
specific transaction of one government might meet that
criterion, and a similar transaction of another government might
not because of different probabilities of recurrence. The past
occurrence of an event or transaction for a particular
government provides evidence to assess the probability of
recurrence of that type of event or transaction in the foreseeable
future.
88
Paragraph 99 of Statement 34 requires restricted assets to be
reported separately in the proprietary fund statement of net
assets. How should restricted assets be reported under the
classified approach?
Restricted assets should often be reported as noncurrent assets.
Statement 62, paragraph 31, excludes from current assets “cash and
claims to cash which are restricted as to withdrawal or use for other
than current operations, are designated for disbursement in the
acquisition or construction of noncurrent assets, or are segregated
for the liquidation of long-term debts.” Restricted assets that will be
used in current operations—certain grants and contract revenues,
for example—should be reported as current assets.
89
Do the additional display/disclosure requirements in paragraph 89 of Statement 34 (for significant transactions or other
events that are either unusual or infrequent but are not within
the control of management) for governmental funds also apply
to proprietary funds?
Yes. Governments are required to display or disclose those
events and transactions for their proprietary funds. The
display/disclosure requirements in paragraph 89 apply the
requirements in paragraphs 45–50 of Statement 62 to
governmental fund reporting. Because proprietary funds also are
subject to the requirements of Statement 62, it is not necessary
to repeat the language in paragraph 89 for proprietary funds.
90
What disclosures should a phase 3 government that does not elect to
retroactively report infrastructure make for infrastructure that is not
included in the basic financial statements?
The requirements related to the selection of accounting policies and
methods from existing acceptable alternatives in paragraph 93 of
Statement 62 and the paragraph 115e of Statement 34 requirement to
disclose the policy for capitalizing assets would apply. Phase 3
governments that do not elect to retroactively report infrastructure should
include a statement in their summary of significant accounting policies on
an ongoing basis such as “General infrastructure assets acquired prior to
July 1, 2003, are not reported in the basic financial statements,” “General
infrastructure assets include all roads and bridges and other infrastructure
assets acquired subsequent to July 1, 2003,” or other language that
indicates how infrastructure was capitalized.
91
When a government first implements Statement 34, if it has general
obligation bonds outstanding resulting from an advance refunding,
are the deferral and amortization requirements of Statement No. 23,
Accounting and Financial Reporting for Refundings of Debt Reported
by Proprietary Activities, applicable? Should any premiums,
discounts, and debt issuance costs related to general obligation bonds
be calculated, deferred, and amortized pursuant to Statement 62,
paragraphs 176–187?
No. Governments may, but are not required to, calculate those
beginning balances at implementation. Paragraph 146 of Statement 34
allows governments to apply the provisions of all those
pronouncements to governmental activities prospectively (except for
governmental activity debt that is deep-discount or zero-coupon debt).
92
A government that has adopted the requirements of Statement 34 in
a prior year is retroactively reporting some of its general
infrastructure in the current year. Is this reported as a current-year
addition to general capital assets?
No. Retroactive reporting of infrastructure is presented as an
adjustment of a prior period, as was the adjustment to proprietary and
fiduciary funds pursuant to the adoption of other provisions of
Statement 34. Thus, beginning net assets and any affected note
disclosures, such as beginning balances in the schedule of changes in
capital assets, are restated. Guidance that should be followed when
comparative statements are presented is provided in paragraph 61 of
Statement 62. See question 7.22.16 for additional discussion of that
guidance
93
GASB Statement No. 63:
Implementation Issues
GASB Statement No. 63
Financial Reporting of
Deferred Outflows of Resources,
Deferred Inflows of Resources and
Net Position
Effective for years ending December 31, 2012
95
GASB No. 63
 Concepts Statement 4 identifies 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 Statement 34, which requires the presentation of
assets, liabilities, and net assets in a statement of financial position
96
GASB No. 63
 GASB 63 addresses presentation issues associated with the new
financial position elements created in Concepts Statement No. 4,
Elements of Financial Statement
 Deferred outflows of resources
 Deferred inflows of resources
 Net position
97
GASB No. 63
Concept Statement 4 Definitions of Elements
 Assets
 Resources with present service capacity that the government controls
 Liabilities
 Present obligations to sacrifice resources with little or no discretion to avoid
 Deferred outflows of resources
 A consumption of net assets by the government that is applicable to a future
reporting period
 Has a natural debit balance and, therefore, increases net position similar to assets
 Has a positive effect on net position similar to assets
98
GASB No. 63
Concept Statement 4 Definitions of Elements
 Deferred inflows of resources
 An acquisition of net assets by the government that is applicable to a future
reporting period
 Has a natural credit balance and, therefore, decreases net position similar to
liabilities
 Has a negative effect on net position
 Net position
 The residual of all elements presented in a statement of financial position
 New terminology
99
GASB No. 63
Deferred Outflows of Resources and Deferred
Inflows of Resources
 Concept Statement 4 specifically states the deferred outflows of
resources and deferred inflows of resources should only be used as
specifically required in authoritative GASB pronouncements.
 Currently deferred outflows of resources and deferred inflows of
resources are only required in:





GASB 53 on derivative instruments
GASB 60 on service concession arrangements
GASB 65 on items previously presented as assets and liabilities (effective 12/31/13)
GASB 67 on pension plans
GASB 68 on pension plans - employers
100
GASB No. 63 Reporting Requirements
 Report each of the financial position elements in a separate section in
the statements of financial position in the following order:
 Assets
 Deferred Outflows of Resources
 Liabilities
 Deferred Inflows of Resources
 Net Position
 Allowed to report subtotals for:
 Combination of assets and deferred outflows of resources
 Combination of liabilities and deferred inflows of resources
101
GASB No. 63 Reporting
 The statements of financial position financial statements should be
referred to as the Statement of Net Position
 Preferred reporting format is: assets + deferred outflows – liabilities –
deferred inflows = net position
 Traditional balance sheet format is permitted:
 Assets + deferred outflows = liabilities + deferred inflows + net position
 Equity section referred to as net position instead of net assets and is reported in
the following three components:

Net investment in capital assets

Restricted

Unrestricted

No change in the definitions of these net position components other than incorporating impact of
deferred outflows and inflows
102
GASB No. 63
Governmental Fund Financial Statements
 The statements of financial position for governmental fund financial
statements should continue to be referred to as the Balance Sheet
 Equity section continues to be referred to as fund balance
 Report in fund balance classifications required by GASB Statement No. 54
103
GASB No. 63 Net Position
*
Assets + deferred outflows – liabilities – deferred inflows = net position
Assets + deferred outflows = liabilities + deferred inflows + net position
* Preferred Presentation
104
GASB No. 63 Disclosures
 If components of the total deferred amounts are obscured by
aggregation on the face of the statements - provide details of different
types of deferred amounts.
 If the amount reported for a component of net position is significantly
affected by the difference between deferred inflows or outflows and
their related assets or liabilities – provide an explanation in the notes
105
GASB No. 63 Major Fund Determinations
 Remember to include deferred items
 Deferred outflows and deferred inflows are the
only areas deferred is used
 Policy notes will be effected
106
GASB Statement No. 65:
Implementation Issues
GASB Statement No. 65
Items Previously Reported as Assets
and Liabilities
Effective December 31, 2013
108
Definition Revisited
 Deferred outflows of resources
 A consumption of net assets by the government that is applicable
to a future reporting period
 Has a natural debt balance
 Has a positive effect on net position, similar to assets
 Deferred inflows of resources
 Acquisition of net assets by the government that is applicable to a
future reporting period
 Has a natural credit balance
 Has a negative effect on net position, similar to liabilities
109
GASB No. 65
Items Previously Recognized as Assets
 Deferred outflows of resources currently classified as
assets:




Grant paid in advance of meeting timing requirement
Deferred amounts from refunding of debt (debits)
Cost to acquire rights to future revenues (intra-entity)
Deferred loss from sale-leaseback
110
GASB No. 65
Items Previously Recognized as Liabilities
 Deferred inflows of resources currently classified as
liabilities:







Grants received in advance of meeting timing requirement
Taxes received in advance
Deferred amounts from refunding of debt (credits)
Proceeds from sales of future revenues
Deferred gain from sale-leaseback
“Regulator” credits (gains or other reductions)
“Unavailable” revenue in governmental funds
111
GASB No. 65
Debt-Related Transactions
 Accounting gain/loss on debt refunding
 Report as a deferred outflow of resources (loss) or deferred inflow
of resources (gain) and recognize as a component of interest
expense over shorter of life of old debt or new debt
 Report separately from related bonds payable
 Debt issuance costs
 Debt issuance costs, other than prepaid insurance costs, should be
recognized as an outflow of resources in the period incurred
 Report prepaid insurance costs as an asset
112
GASB No. 65
Nonexchange Transactions
 Imposed nonexchange revenues:
 Report as deferred inflows of resources, resources received or recognized as
receivables before:


The period for which the taxes are levied for property taxes
The period when resources are required to be used or when use is first permitted for all other imposed
nonexchange transactions for which time requirements are specified
 Government-mandated and voluntary nonexchange transactions:
 Resources received/provided in advance of one of the eligibility requirements being
met other than time requirements:


Provider reports as an asset
Recipient reports as a liability
 Resources received/provided in advance of time requirements being met (all other
eligibility requirements are met):


Provider reports as deferred outflows of resources
Recipient reports as deferred inflow of resources
113
GASB No. 65
Other Items
 Revenue determined to be unavailable under modified accrual
basis- report as deferred inflows of resources
 Transactions of regulated entities:
 Refunds imposed by a regulator should be recognized as liabilities
 Report as deferred inflows:
 Revenues generated by current rates intended to recover costs that
are expected to be incurred in the future
 Gains and other reductions of net allowable costs intended to reduce
rates over future periods
 Incurred costs expected to be recovered through future rates
should continue to be reported as assets
114
GASB No. 65
Transactions Without Change in Classification
 In the Basis for Conclusions, GASB 65 affirms the following should
continue to be reported as assets:
 Prepayments
 Including when a pension plan’s net position exceeds the total pension liability
 Resources advanced to another government in relation to a governmentmandated nonexchange transaction or a voluntary nonexchange transaction
when eligibility requirements, other than time requirements, have not been
met
 Capitalized incurred costs related to regulated activities
 The purchase of future revenues from a government outside the financial
reporting entity
 Initial subscriber installation costs in relation to cable television systems
115
GASB 65
Transactions Without Change in Classification
 In the Basis for Conclusions, GASB 65 affirms the following should continue to
be reported as liabilities:
 Resources received in advance in relation to a derived tax revenue nonexchange
transaction
 Resources received in advance in relation to a government-mandated nonexchange
transaction or a voluntary nonexchange transaction when eligibility requirements
other than time requirements have not been met
 Resources received in advance of an exchange transactions
 Excess of initial hookup revenue over direct selling costs in relation to cable
television systems
 Premium revenues for insurance entities and public entity risk pools received in
advance
 Commitment fees charged for entering into an agreement that obligates the
government to make or acquire a loan or to satisfy an obligation of the other party
under a specified condition, unless exercise is considered remote
 Fees that are received for guaranteeing the funding of mortgage loans
116
GASB Statement No. 61:
Implementation Issues
Statement No. 61
The Financial Reporting Entity –
Ominbus
(Reexamination of Statement 14)
Effective for years ended June 30, 2013
118
GASB No. 61
A Reexamination
 Determine whether the standards for defining and
presenting the financial reporting entity in Statement 14,
as amended:
 Include the organizations that should be included
 Exclude organizations that should not be included
 Display and disclose the financial data of component units in the
most appropriate and useful manner
 Are consistent with the current conceptual framework
119
Inclusion Criteria
 Component units are separate legal entities
 Examples are CRAs, port authorities, mass transit systems,
financing entities
 Statement No. 14 requires inclusion if the potential component
unit is fiscally dependent, the primary government has authority
over the component units:
 Budget or,
 Setting taxes and charges, or
 Issuing debt
 Statement 61 adds a requirement for a financial benefit or
burden before inclusions is required
120
Inclusion Criteria
 Statement 14 requires inclusion of a potential component
unit if exclusion would make reporting entity’s statements
“misleading or incomplete”
 Statement 61 eliminates “incomplete,” and emphasizes
that the determination would normally be based on
financial relationships
 Such as significant financial benefit to/burden on the primary
government that is other than temporary
121
GASB No. 61
 Increase the emphasis on financial relationships, financial
accountability
 Refocus and clarify the requirements to blend certain
components units
 Improve the recognition of ownership interests
 Joint ventures
 Component units
 Investments
122
Blending Requirements
 Statement 14 requires blending if primary government &
component unit have “substantively the same” governing body
 For example, City Board also serves as the Board of the Community
Redevelopment Agency
 Statement 61 expands that requirement to also include:
 A financial benefit/burden relationship, or
 Primary government has “operational responsibility” for component
unit
 Primary government’s personnel manage activities of the component unit like a
fund, program, or department of the primary government
123
Blending Requirements
 The blending criteria is broadened to include component
units whose total debt outstanding is expected to be repaid
entirely or almost entirely by revenues of the primary
government
 Even if the component unit provides services to constituents or
other governments, rather than exclusively or almost exclusively to
the primary government
124
Blending Requirements
 Statement 61 clarifies that the funds of a blended
component unit have the same characteristics, reporting
alternatives, and limitations as those of the primary
government
 Major fund reporting
 Could be combined with other funds for display
125
Blending Requirements
 GASB 61 clarifies that the general fund of a blended
component unit should continue to be reported as a special
revenue fund of the primary government
 GASB 61 clarifies that governments engaged only in
business-type activities may use a single-column
presentation, and the component unit may be blended by
consolidating its financial statement data within the single
column of the primary government and presenting
combining information in the notes to the financial
statements (or the multiple column approach).
126
Blending Business-Type Activities
Component Units
 If condensing combining information should include in the
notes to the financial statements:
 Condensed statement of net assets/net position
 Condensed statement of revenues, expenses, and changes in net
assets/net position
 Condensed statement of cash flows
127
Major Component Units
 Clarifies the types of relationships that should generally
affect the major component unit determination:
 Primarily financial relationships
 Significant transactions with the primary government
 Significant financial benefit/burden relationship
 Could be based on the nature of services provided by component
unit
 Eliminates consideration of each component unit’s
significance relative to other component units
128
Major Component Units
 Major component units should be presented either:
 In a separate column in the statement of net assets and activities
 In combining statements of major component units in the basic
financial statement following the fund financial statements, or
 In the notes to the financial statement in a condensed financial
statement format
 Nonmajor component units should be aggregated in a
single column. A combining schedule is not required but is
allowed as supplementary information.
129
Reporting Equity Interests
 An asset should be recognized for an equity interest in:




A joint venture
A partnership
An investment
A component unit
 If the component unit is blended, the equity interest is eliminated in the blending
process
 Equity interests of minority participants would be classified in net assets as
“Restricted net assets, nonexpendable”
 Recognition and measurement is based on JV equity interest
requirements in Statement 14
130
GASB No. 61
Note Disclosures
 Clarifies that current disclosures require:
 Rationale for including each component unit
 Whether it is discretely presented, blended, or included as a
fiduciary fund
 No new disclosures, just clarifying what should be
presented.
131
GASB Statement No. 66:
Implementation Issues
Technical Corrections - 2012
Effective for years ended December 31, 2013
133
Statement No. 66
Eliminates inconsistencies in standards:
 Statement 54 and Statement 10 – The requirement for the
general fund or an internal service fund, if single fund used for
risk financing, has been deleted in its entirety
 Statement 62 and Statements 13 and 48:
 Paragraphs 222 and 227b in No. 62 guidance when operating lease
payments that vary from a straight-line basis
 Paragraph 442 of No. 62 states the initial investment in a purchased
loan or group of loans should include the amount paid to seller plus
any fees paid or less any fees received
 Paragraph 460 of No. 62 provides guidance on servicing fees for
mortgage loans and receivables that have been sold
134
GASB Statement No. 67:
Implementation Issues
Statement No. 67:
Financial Reporting for Pension Plans
Effective for years beginning after June 15, 2013
136
Summary GASB No. 67
 Key conceptual shift in reporting pension liabilities and expense under the
economic resources measurement focus from a “funding” approach to an
“earnings” approach for defined benefit plans:
 Currently, no liability is reported if government fully funds its annual required
contribution (single-employer and agent plans) or pays its contractually required
contribution (cost-sharing plan)
 GASB 67 Approach:


Pension liability will be reported as employees earn their pension benefits by providing services
Changes in pension liability will be immediately recognized as pension expense or reported as deferred
outflows/inflows or resources depending on nature of change
 No significant changes to accounting for pensions in governmental funds
 Post employment benefits and termination benefits not included in
provisions of No. 67
 In year of implementation, treat as a prior period adjustment with
restatement, if practical
137
Summary GASB No. 67
GASB No. 67 distinguishes reporting by the types of plans involved.
The definitions are largely unchanged from current practice:
 Single-employer pension plans. Those plans in which pensions
are provided to the employees of one employer.
 Agent multiple-employer pension plans. Those plans in which
plan assets are pooled for investment purposes, but are legally
segregated to pay the pensions of each employer’s employees.
 Cost-sharing multiple-employer pension plans. Those plans in
which the participating employers pool or share their obligations
to provide pensions to their employees, and plan assets can be
used to pay the pensions of the employees of any participating
employer.
138
Summary GASB No. 67
 A single pension plan can be reported under the
new standards, even if separate tiers or classes of
employees or retirees are included in the plan
provisions, as long as all plan assets may be used
to pay for any plan benefit.
 The actual operations may not have to change
because laws or contracts may require separate
reserves or separate actuarial valuations.
139
Financial Statements for Plans
GASB No. 67 contains provisions for two financial
statements:
1. Statement of fiduciary net position. This includes
information about assets, deferred outflows of resources,
liabilities, deferred inflows of resources, and net position
as of the end of the plan’s reporting period.
2. Statement of changes in fiduciary net position. This
includes information about the additions to, deductions
from, and net increase (or decrease) in net position for
the reporting period.
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Notes to Basic Financial Statements for Plans
The notes to the basic financial statements will be similar to
what is prepared by the plans today.
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Disclosures Specifically for Single and Cost
Sharing Multiple-Employer Plans
 For single-employer and cost sharing multiple-employer
plans, disclosure will include the components of the netpension liability (or asset) of the employer(s).
 These components include the total pension liability, the
plan’s fiduciary net position, the net pension liability (asset)
of the employer(s), and the ratio of the plan’s fiduciary net
position to the total pension liability of the employer(s)
 Other disclosures include significant assumptions used in
the valuation, the discount rate, and the date of the
actuarial valuation.
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Required Supplementary Information
Required supplementary information (RSI) for single-employer and cost sharing
multiple-employer plans will include 10-year schedules which include:
 A schedule of changes in net pension liability, including beginning and ending total
pension liability and the net pension liability, and the annual changes to net
position, including the components of those changes.
 A separate 10-year schedule, including the total pension liability, the plan’s fiduciary
net position, the net pension liability, and the ratio of plan fiduciary net position to
total pension liability. Also included similar to today is the plan’s covered payroll and
the ratio of the net pension liability to covered payroll.
 If an actuarially determined employer contribution is calculated, a schedule of
those contributions in comparison to contributions made to the plan from all
sources. The sources should be separated as non-employer entities made to the
plan from all sources. The sources should be separated as non-employer entities
may contribute to the plan (primarily states for teacher plans.)
 A 10-year schedule of money-weighted rates of return.
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Agent Multiple-Employer Plans Required
Supplementary Information
For agent multiple-employer plans, only the 10-year
schedule of money-weighted rates of return will be
presented. The other RSI will be presented within the
employer’s notes to the basic financial statements and RSI.
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Notes to Required Supplementary Information
 Notes to required supplementary information are
presented to explain changes within the schedules.
(may include changes in benefit provisions, the size or
composition of the population covered by the benefit
terms, or assumptions used).
 Amounts presented for prior years should not be
restated for the effects of changes (e.g., benefit changes
or changes in assumptions) that occurred subsequent to
the end of the year for which the information is
reported.
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Defined Contribution Plans
 Defined contribution plans will include note
disclosure similar to what we have now.
 Will include a plan description similar to defined
benefit plans.
 Fair value of the plan investments unless they are
already reported at fair value in the basic financial
statements.
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GASB Statement No. 68:
Implementation Issues
Statement No. 68:
Accounting and Financial Reporting for
Pensions – an Amendment to
GASB No. 27
Effective for years beginning after June 15, 2014
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Summary of GASB No. 68
 GASB No. 68 covers:
1.
2.
the measurement of pension obligations that derive liabilities (or
assets); and
The calculations behind pension expense.
 Deferred outflows and deferred inflows of resources;
 Methods and assumptions of pension calculations, including
how to calculate the discount rate to be used and how to
attribute the pension liability to various periods;
 Note disclosure and required supplementary information; and
 Defined contribution pension plan reporting.
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Summary of GASB No. 68
GASB No. 68 requires employer to report either a liability or
an asset on their statement of net assets (statement of net
position), which is the net of the total pension liability and
the assets irrevocably held in trust to pay benefits.
 The date at which the liability is measured is no earlier
than the end of the employer’s prior fiscal year
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Summary of GASB No. 68
 GASB No. 68 requires methods and assumptions in accordance with Actuarial
Standards of Practice issued by the Actuarial Standards Board.
 GASB will no longer dictate particular nuances and methods of actuarial standards.
 If actuarial standards change, they will be automatically incorporated by reference
into GASB No. 68
 Actuaries will project benefits based solely on the benefit terms and assumptions
that are in place as of the measurement date
 Only cost of living adjustments that are substantially automatic or automatic are
included as part of the valuation
 Cost of living adjustments that are haphazardly approved are not included.
 Only entry age actuarial cost method will be used to attribute the present
value of benefits to an employee’s service
 The service cost of an employee will be determined as a level percentage of
pay.
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Discount Rate
 GASB No. 68 requires that a government project when it
will run out of plan assets to pay for benefits assuming a
long-term rate of return in a similar fashion to what is
contained in GASB No. 27.
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Pension Expense, Deferred Inflows of
Resources, and Deferred Outflows of Resources
 Pension expense will no longer be the amount of cash that is sent to the
plan based on an actuarially required contribution (ARC).
 Pension expense will be derived from an accrual based methodology
that is the accumulation of work-based benefits for a period
 Interest on the total pension liability is also included in expense
 Plan changes that solely affect retirees or inactive employees will be
expensed
 Changes that affect current employees will be a deferred inflow of
resources and amortized over the estimated remaining service life of
each employee
 The difference between projected and actual investment return must
be expensed (or offset if the expense is positive) over five years in a
systematic and rational manner
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Modified Accrual
 If a net pension liability (or asset) exists that will be
liquidated with current financial resources, then a fund
financial statement entry will be needed
 Expenditures will be recognized for the amounts paid to
the plan, including amounts that will be expected to be
liquidated with current financial resources
 The notes to the basic financial statements will be similar
to what is prepared by employers today
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Required Supplementary Information
 Required supplementary information (RSI) for
single and agent employers will include 10-year
schedules
 Notes to RSI will include significant methods and
assumptions, including trends and changes.
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From: GASB’s Setting the Record Straight:
Do the new GASB Statements establish
requirements for how governments should
fund their pensions?
156
No. In the past, the accounting and financial reporting standards
were closely associated with the approach that many governments
take to funding their benefits – that is, toward contributing
sufficient resources to a defined benefit pension plan to finance
benefit payments when they come due. Consequently, many
governments have established funding policies based on the
GASB’s standards. However, after reexamining the prior standards
for pensions, the GASB concluded that approaches to funding are
not necessarily the best approach to accounting for and reporting
pension benefits. Therefore, the new Statements mark a definitive
separation of accounting and financial reporting from funding.
157
Will governments have to pay more each year
for pensions because of the GASB’s new
Statements?
158
As just stated, the new pension Statements relate only to
accounting and financial reporting, or how pension costs and
obligations are measured and reported in external financial
reports. How much governments actually contribute each year
to a pension plan is a policy issue. Governments will likely
report pension expense more quickly than under the prior
standards; however, how or whether this information is used in
assessing the amounts that governments will contribute to
their pension plans is a public policy decision made by
government officials.
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Do governments have to use a municipal
bond rate for discounting as punishment for
not fully funding their pensions?
160
No. The selection of an appropriate interest rate for discounting projected future
benefit payments to their present value is based on what resources are projected
to be used to make those payments:
1.
Assets of the plan that have been invested using an investment strategy to
achieve the assumed long-term expected rate of return and their earnings;
or
2.
The general resources of the government employer. As long as the projected
plan net position related to current employees and inactive employees
exceeds the projected benefit payments for those employees, the long-term
expected rate of return on investments wills serve as the basis for
discounting. This asset-based rate is appropriate because the earnings on
the plan’s investments reduce the amount an employer will need to
contribute to the plan.
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If a government reaches a crossover point – when projected benefit payments for
current employees and inactive employees exceed projected plan net position related
to those employees – then benefit payments projected to be made from that point
forward will be discounted using a high-quality municipal bond interest rate. This
liability-based rate is appropriate because the plan would no longer be expected to
have sufficient assets related to those employees to produce investment income that
will reduce how much an employer will have to contribute. The pension liability would
then resemble the employer’s outstanding debt and other typical long-term liabilities.
However, it is true – all other factors being equal – that the less well-funded a pension
plan is, the more likely it will reach a crossover point and therefore have to discount
some projected benefit payments using the municipal bond index rate. Under current
economic conditions, municipal bond rates are lower than long-term expected returns
on pension plan investments. Using a lower discount rate increases the present value
of projected benefit payments and, thereby, increase the size of the pension liability.
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Do the GASB’s standards allow governments
to make their liabilities look smaller by using
a discount rate based on unrealistically high
expected rates of investment return?
163
No. The new Statements require that governments measure their pension liabilities using
assumptions that are consistent with the standards of practice of the actuarial profession. If a
government assumes a rate of return that is out of line with the actuarial standards, then it is
misapplying the accounting standards rather than exploiting a loophole in the standards.
It is important to note that examining a pension plan’s investment return in any short-term period
is not appropriate for drawing conclusions about the appropriateness of a government’s assumption about long-term investment earnings. The investment return in any given year or short-term
period is likely to be either higher or lower than the assumed long-term return. However, an
appropriate long-term investment return assumption will reflect expected average earnings over a
long period, even though it may not be the same as actual earnings in any particular single or
short-term period.
Governments will disclose information about their long-term investment return assumptions in
the notes to the financial statements to assist in evaluating the reasonableness of those assumptions. The information will include a brief description of how the long-term expected rate of
return was determined, significant methods and assumptions used for that purpose, the assumed
asset allocation of the pension plan’s portfolio, and the long-term expected real rate of return for
each major asset class.
164
Is the discount rate the most important factor
in determining the size of a government’s
pension liability?
165
The guidance put forth in the new Statements pertaining to the selection of a
discount rate is certainly an important element but it is only one part of the
determination. Discounting is one of the basic three steps involved in measuring
a government’s total pension liability – projecting, discounting, and attributing.
(The measurement process is more fully described in separate fact sheets about
accounting and financial reporting by governments that provide pension
benefits.)
The amount of a government’s pension liability also depends on a variety of
other factors such as:
• The types of benefits a government has promised
• The length of service of employees and their salaries in the final years of their
employment
• The life expectancy of retirees, which determines how long they will continue to receive
benefits
• The inflation rate, which affects both salaries and rates of return on investments
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Can the information reported by
governments under the new Statements be
compared?
167
Yes. The comparability of the pension information that will result from the new Statements has been
significantly improved. One of the features of the prior standards that many financial statement users
have criticized is the variety of choices that employers could make when attributing the present value of
projected benefit payments to past, present, and future periods. Governments previously were allowed
to select from six different actuarial cost allocation methods, each of which could be applied in two ways
– as a level dollar amount each year or as a level percentage of payroll in each year. In the view of many
users, these options seriously diminished comparability. The new Statements, however, require that all
governments use one type of actuarial cost method – called entry age – and apply it only as a level
percentage of payroll.
It should be noted that, although governments are required to measure their pensions within the same
parameters set forth in the standards, the resulting amounts will be different because of differences in
the terms of the governments’ respective pension plans, differences in the demographics of the plan
members, and differences in other relevant factors. In other words, because the governments are in
different circumstances, their measurements will employ different assumptions.
It has been suggested that comparability would be greatly improved if all governments were required to
use the same assumptions. However, taking a one-size-fits-all approach would ignore significant
differences between governments – such as the mix of their investment portfolios and their actual
earnings experience – that are relevant to determining the amount that governments are obligated to
provide for pensions.
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Has the GASB determined that state and local
government pension plans are underfunded
by $3 trillion?
169
No. The GASB has never conducted research
regarding the extent to which pension plans
are funded in the aggregate. Funding relates
to a public policy issue that is beyond the
scope of the GASB’s activities.
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GASB Projects in Process
Implementation Issues
Projects in Process
 Government Combinations
 OPEB – Accounting and Reporting
 Financial Guarantees
 Conceptual Framework - Recognition of Elements of
Financial Statements and Measurement Approaches
 Economic Condition Reporting - Financial Projections
 Fair Value Measurement and Application
 GAAP Hierarchy
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GASB Current Agenda
 Conceptual Framework (Modified Accrual Project)
 Economic Condition Reporting
 Fair Value Measurement and Application
 Financial Guarantees
 Government Combinations
 Postemployment Benefit Accounting and Financial
Reporting
173
Postemployment Benefit Accounting and
Financial Reporting Project Overview
 Project undertaken to reexamine standards related to postemployment benefits in order to improve:
 Accountability and transparency related to postemployment
benefits
 Decision-making usefulness of information to postemployment benefits for users of the financial statements
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OPEB – August 2012
 The Board reaffirmed its tentative decision to propose that an
employer’s net obligation for post employment benefits, when
determined by projecting future benefits, including probabilities
of future events, discounting to present value using an
appropriate rate attributing to the costs to periods using an
appropriate actuarial cost allocation method, and subtracting
net position accumulated in a qualifying trust (as defined in
GASB No. 68) meets the definition of a liability.
 Board not sure yet if the net liability is sufficiently reliable for
recognition in the financial statements
 Looking to issue final statement in June 2014
175
Government Combinations and
Disposals of Government Operations
Proposed Effective Date is December 31, 2014
176
Government Combinations and Disposals of
Government Operations
Scope includes:
 Combinations in which no consideration is provided
 Government mergers
 Transfers of operations
 Combinations in which consideration is provided
 Government acquisitions
 Disposal of government operations
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Government Combinations and Disposals of
Government Operations
Service (operations) continuation requirement:
 Distinguishes a combination from a contribution or
purchase of assets and related liabilities
 “Operations” is defined as an integrated set of activities
conducted and managed for the purpose of providing
identifiable services with associated assets and liabilities
 Service continuation: Obligation or responsibility to
continue to provide the services that were provided by the
previously separate governments, organizations, or
operations
178
Government Combinations and Disposals of
Government Operations
When NO consideration is provided:
 Government mergers – mergers of legally separate entities
 Often guided by statute
 Some states have passed or considered legislation to cause or
encourage streamlining (too many layers)
 Few successes for general purchase governments
 Shared service alternative
 Transfers of operations
179
Government Combinations and Disposals of
Government Operations
When no consideration is given:
 Assets and liabilities brought in at carrying values
 Presumption of GAAP
 Initial reporting
 New entity
 Continuing entity
 Transfers of operations
 Adjustments
 Accounting principles, policies, and estimates
 Capital asset impairment
 Transaction eliminations
180
Government Combinations and Disposals of
Government Operations
When consideration is given:
 Control versus ownership
 Governmental reporting entity concept
 Government acquisitions
 Assets (and liabilities) at acquisition value
 Recognize based on GAAP applicable to state and local governments
 Market-based entry price measurements
 Exceptions
 Accounting for the difference
 Goodwill – deferred outflow of resources
 Contribution received or reduction of non-current assets
 Reporting period
181
Government Combinations and Disposals of
Government Operations
When consideration is given:
 Consideration
 Contingent consideration arrangements
 Additional provisions:
 Reporting government acquisitions on a provisions basis
 Initial measurement not finalized
 Acquisition costs
 Intra-entity acquisition
 Reporting in governmental funds
182
Government Combinations and Disposals of
Government Operations
Reporting disposals of government operations:
 Includes all disposals of operations (transfers or sales)
 Gains and losses reported as special items
 Costs associated with disposals of government operations
 Should consider only costs directly associated with disposal
 Period costs
 Disclosure
 Description of the circumstances leading to the discontinuation
 Operations revenues, expense, and non-operating items
183
Government Combinations and Disposals of
Government Operations
Note disclosures:
 For all government combinations
 Brief description of the combination and identification of the entities
involved
 Date of the combination
 Primary reasons for the combination
 Additional information about mergers and transfers of operations
 Carrying values recognized as of the merger date
 Description of significant adjustments
 Amounts recognized
184
Government Combinations and Disposals of
Government Operations
Note disclosures:
 Additional information about acquisitions
 Brief description of consideration provided
 Total amount of net assets acquired
 Brief description of contingent consideration arrangements
185
Questions
Contacts
Beila Sherman, CPA
Marcum LLP
450 East Las Olas Boulevard
Ninth Floor
Fort Lauderdale, Florida 33301
Phone 954.320.8013
beila.sherman@marcumllp.com
187