ACCOUNTING & FINANCE
by Olga A. Darlington and Jennifer Chu
Deferred inflows and outflows
Upcoming changes to the financial statements?
G
overnment Accounting Standards Board (GASB) has
been very active in recent years, working diligently on
issuing guidance that intends to improve financial
reporting of its constituents. One of the projects that GASB
has focused its efforts on relates to nature and substance of
recorded assets and liabilities to determine if what is currently being reported as assets and liabilities should continue into the future. GASB concluded this project with
issuance of two statements, which may significantly impact
the look of the financial statements as we know them:
Statement 63, Financial Reporting of Deferred Outflows of
Resources, Deferred Inflows of Resources, and Net
Position; and Statement 65, Items Previously Reported as
Assets and Liabilities. The first statement is designed to
recategorize the balance sheet (matter of geography), but
the second may require governmental utilities to change certain accounting practices.
GASB 63 summary
GASB Statement 63 provides the definitions of a
“deferred outflow” and “deferred inflow” and introduces
some name changes to accommodate for addition of these
new elements of the balance sheet. This statement differentiates between an asset and deferred inflow, and a liability
and deferred outflow. In short, governmental utilities will
need to assess every item they are currently calling an asset
and liability, and determine which definition each item
meets. Although conceptually there are no significant
changes to accounting theory as a result of this statement, it
will require a number of changes in reporting.
One of the more pervasive alterations resulting from
this statement is the renaming of the Statement of Net
Assets, which was generally comprised of three components:
assets, liabilities, and net assets. The Statement of Net
Assets (or Balance Sheet as some governmental utilities have
continued to call it) is now to be known as the Statement of
Net Position and is to be comprised of five components:
assets, liabilities, deferred outflow of resources, deferred
inflow of resources, and net position.
While the definitions of asset and liability have not
changed, the GASB has further defined the categories of
deferred inflows and outflows:
• Deferred outflows of resources: Represents consumption of resources that is applicable to future reporting
periods that will be reported in a separate section
after assets.
BULLETIN/August 2012
One of the projects that GASB has
focused its efforts on relates to nature
and substance of recorded assets and
liabilities to determine if what is
currently being reported as assets
and liabilities should continue into
the future.
• Deferred inflows of resources: Represents acquisition
of resources that is applicable to future reporting
periods that will be reported in a separate section
after liabilities.
Net position has also been clarified to report the difference between (a) assets and deferred outflows of resources,
and (b) liabilities and deferred inflows of resources in addition to assets and liabilities.
This statement is effective in 2012 for calendar year
reporting entities and will be applied on a retroactive basis,
which could involve restatement of prior period presentation in a period of adoption.
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Continued on page 12
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ACCOUNTING & FINANCE
incurred. The following activities are those common to the
utility industry:
• Debt issuance costs (other than insurance)
• Initial costs incurred by the lessor in an operating
lease
• Acquisition costs for risk pools
• Loan origination costs (other than the portion related
to points)
This statement is effective in 2013 for calendar year
reporting entities and will also be applied on a retroactive
basis resulting in potential restatements of prior periods presented.
These standards do require retroactive
reporting, which means that your
accounting departments should
start considering the impact of these
standards as soon as possible.
GASB 65 summary
Whereas Statement 63 provided a technical definition
of deferred outflow and inflow of resources, the question of
what balances should be reclassified from currently presented assets and liabilities still remained. GASB Statement
65 identifies the items that can be defined as a deferred
inflow or outflow in an effort to improve consistency
between constituents. The following transactions most commonly transacted in the utility industry should now be
classified as deferred inflows or outflows:
• Deferred outflows of resources
G Grant paid on advance of meeting time requirements
G Deferred amounts from debt refunding or changes
in lease obligations (debits)
G Cost to acquire rights to future revenues (intraentity)
G Deferred loss from sale-leaseback transactions
• Deferred inflows of resources
G Grants received in advance of meeting the timing
requirement
G Deferred amounts from debt refunding or changes
in lease obligations (credits)
G Proceeds from the sale of future revenue
G Deferred gain from sale-leaseback transactions
G “Regulatory” credits
In addition, this Statement includes a list of items that
should not be classified as a deferred inflow or outflow. The
GASB has determined that these items should follow the
route of period costs and be expensed in the period
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Consideration of the impact
The reporting changes required by Statements 63 and 65
present a number of unanswered questions, specifically surrounding debt issuance costs. Historically, utilities have been
reporting these issuance costs as deferred debits on the balance sheet that are amortized over the life of the related debt.
Given the substantial costs that many utilities pay in debt
issuance, for many, expensing these costs in the period
incurred could have significant impact on debt ratios and
other compliance requirements. Going forward, should ratios
be calculated differently? How will the financial community
react to these changes? Would the need to comply with these
requirements affect the transparency of issuance costs? In
addition, depending on the size of the utility and its annual
debt financing needs, the financial results could vary significantly from year to year requiring different management
approaches to budgeting and rate-setting processes. Can your
utility use regulatory accounting (FAS 71) to defer any costs
not included in Statement 65?
It is important to remember that Statement 63 is effective
for 2012 reporting, while Statement 65 will become effective
in 2013. This one year provides some time for careful consideration and analysis of balances historically recorded as
deferred debits and credits. In preparation for year-end reporting, careful itemization should be completed for such balances
and transactions that may, in fact, be assets and liabilities as
defined by the standards. Once identified, these balances
should be reclassified to more appropriate categories of assets
and liabilities.
Also note that gains and losses on debt refunding previously reported as offsets to the long-term debt balance will
now be reported separately as deferred inflows/outflows. This
change will affect the balance sheet reporting as well as extensive debt-related note disclosures. These standards do require
retroactive reporting, which means that your accounting
departments should start considering the impact of these standards as soon as possible. NWPPA
Olga A. Darlington is a senior manager in the Everett office
of Moss Adams LLP. Jennifer Chu is a business assurance
manager in the Everett office as well. They can be reached at
olga.darlington@mossadams.com and
jennifer.chu@mossadams.com respectively.
www.nwppa.org
BULLETIN/August 2012