Technical Update
Presented by Chris Ray
Partner – KPMG LLP
KPMG LLP
Agenda

GASB Statement No. 49

GASB Statement No. 51

GASB Statement No. 52

GASB Statement No. 53

GASB Statement No. 54

GASB Statement No. 55

GASB Statement No. 56

GASB Technical Bulletin No. 2008-1
– GASB Pronouncements Effective For Fiscal 2009
– Summary of New GASB Pronouncements
– Current GASB Exposure Drafts
– Statement on Auditing Standards No. 115
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– New GASB Pronouncements
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May 2009
GAAP Reporting Workshop
GASB Pronouncements Effective for Fiscal 2009
– GASB Statement No. 49, Accounting and Financial
Reporting for Pollution Remediation Obligations
– GASB Statement No. 55, The Hierarchy of Generally
Accepted Accounting Principles for State and Local
Governments
– GASB Statement No. 56, Codification of Accounting
and Financial Reporting Guidance Contained in the
AICPA Statements on Auditing Standards
– GASB Technical Bulletin No. 2008-1, Determining
the Annual Required Contribution Adjustment for
Postemployment Benefits
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– GASB Statement No. 52, Land and Other Real Estate
Held as Investments by Endowments
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May 2009
GAAP Reporting Workshop
GASB Statement No. 49
Accounting and Financial Reporting for Pollution
Remediation Obligations (Effective: Fiscal Year 2009)
Statement 49 requires recognition of a pollution remediation obligation
when one of five specified obligating events occurs:
1. The government is compelled to take pollution remediation action because of
an imminent endangerment.
2. The government violates a pollution prevention-related permit or license.
3. The government is named, or evidence indicates that it will be named, by a
regulator as a responsible party or potentially responsible party (PRP) for
remediation, or as a government responsible for sharing costs.
4. The government is named, or evidence indicates that it will be named, in a
lawsuit to compel participation in pollution remediation.
5. The government commences or legally obligates itself to commence pollution
remediation.

Obligations should be measured using the expected cash flow technique

Obligation may be measured and recognized in components

Certain outlays may be capitalized in accrual-based financial statements

Guidance is provided on accounting for expected recoveries
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
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May 2009
GAAP Reporting Workshop
GASB Statement No. 49 – continued

For recognized pollution remediation liabilities
and recoveries, must disclose:
– Nature and source of pollution remediation obligations
– Amount of the estimated liability
– Potential for changes in estimates
– Estimated recoveries that reduce the measurement of
the liability.
– General description of the nature of pollution
remediation activities for liabilities (or components
thereof) that are not reasonably estimable.
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– Methods and assumptions used for the estimate
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May 2009
GAAP Reporting Workshop
GASB Statement No. 51
Accounting and Financial Reporting for Intangible Assets
(Effective: Fiscal Year 2010)

Examples of Intangible Assets
– Easements
– Water Rights
– Timber rights
– Patents
– Computer Software

Requires all intangible assets not specifically excluded by
its scope provisions to be classified as capital assets

Addresses the nature of these intangible assets

Recognition and amortization

Retroactive application is required for phase 1 or 2
governments
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– Trademarks
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May 2009
GAAP Reporting Workshop
GASB Statement No. 52
Land and Other Real Estate held as Investments
by Endowments (Effective: Fiscal Year 2009)
 Requires
permanent and term endowments to
report land and other real estate held as
investments at fair value
changes in fair value as investment
income
 Land
and other real estate held as investment by
quasi-endowments requires the use of historical
cost accounting
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 Recognize
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GAAP Reporting Workshop
GASB Statement No. 53

Provides a comprehensive framework for the measurement, recognition,
and disclosure of derivative instrument transactions entered into by state
and local governments

Examples of derivatives used by governments include interest rate and
commodity swaps, interest rate locks, options, swaptions, forward
contracts, and future contracts

Derivative instruments should be measured at fair value, except for the
measurement of fully benefit-responsive synthetic guaranteed investment
contracts. Changes in fair value should be reported as follows:
– For investment derivative instruments, including derivative instruments that are
determined to be ineffective: investment revenue classification on the
statement of revenues, expenses, and changes in net assets
– For hedging derivative instruments: Under hedge accounting, deferred inflows
or deferred outflows on the statement of net assets.

Potential hedging derivative instruments should be evaluated for
effectiveness as of the end of each reporting period using one of the
methods described in the Statement

Disclosure requirements
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Accounting and Financial Reporting for Derivative
Instruments (Effective: Fiscal Year 2010)
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May 2009
GAAP Reporting Workshop
GASB Statement No. 54
Fund Balance Reporting and Governmental Fund
Type Definitions (Effective: Fiscal Year 2011)
 Establishes
accounting and financial reporting
standards for all governments that report
governmental funds
criteria for classifying fund balances
into specifically defined classifications and
clarifies definitions for governmental fund types
 Classifications
comprise a hierarchy based
primarily on the extent to which the government is
bound to honor constraints on the specific
purposes for which amounts in those funds can
be spent
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 Establishes
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GAAP Reporting Workshop
GASB Statement No. 55

Incorporates the GAAP hierarchy for state and local
governments into the GASB’s authoritative standards

The GAAP hierarchy consists of the sources of accounting
principles used in the preparation of financial statements of
state and local governmental entities that are presented in
conformity with GAAP, and the framework for selecting
those principles

Not a substantial revision from the GAAP hierarchy that
currently exists in the AICPA SAS No. 69, The Meaning of
Present Fairly in Conformity with GAAP
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The Hierarchy of Generally Accepted Accounting
Principles (GAAP) for State and Local Governments
(Effective: Upon Issuance (March 2009))
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May 2009
GAAP Reporting Workshop
GASB Statement No. 56
Codification of Accounting and Financial Reporting
Guidance Contained in the AICPA Statements on Auditing
Standards (Effective: Upon Issuance (March 2009))
 Incorporates
 Establishes
accounting and financial reporting
standards for:
– Related party transactions
– Going concern considerations
– Subsequent events
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certain accounting and financial
reporting guidance presented in the AICPA’s
Statements on Auditing Standards into the
GASB’s authoritative literature
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May 2009
GAAP Reporting Workshop
GASB Technical Bulletin No. 2008-1
Determining the Annual Required Contribution Adjustment
for Postemployment Benefits (Effective: Fiscal Year 2009)
 Clarifies
the requirements of GASB Statement
Nos. 27 and 45 for calculating the annual
required contribution (ARC) adjustment
to situations in which the actuarial
valuation separately identifies the actual amount
that is included in the ARC related to the
amortization of past employer contribution
deficiencies or excess contributions to a pension
or other postemployment benefit (OPEB) plan
(the known amount).
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 Applies
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May 2009
GAAP Reporting Workshop
Current GASB Exposure Drafts
 Pension Accounting
and Financial Reporting
(Comment Deadline: July 31, 2009)
 Suggested
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Guidelines for Voluntary Reporting of
SEA Performance Information
(Comment Deadline: October 31, 2008)
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May 2009
GAAP Reporting Workshop
Exposure Draft - Pension Accounting and
Financial Reporting
The GASB’s standards for accounting for and reporting on
the pension benefits that governments provide to their
employees have been in effect for over a decade.
 In 2006, the GASB began a research project to examine
whether those standards are effective.
 The supplement issued by GASB related to Pension
Accounting and Financial Reporting accompanies an
Invitation to Comment that describes key issues raised
during the research project and explores potential
approaches to addressing them.
– The purpose of the Invitation to Comment is to seek public
input on the importance of those issues to transparency,
accountability, and decision usefulness and the
appropriateness of the alternative approaches to pension
accounting and financial reporting.
– This supplement begins with background information about
state and local government pension benefits.
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
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May 2009
GAAP Reporting Workshop
Key Issues Raised in the Pension
Accounting and Financial Reporting
Exposure Draft

What transaction or event should governments account for and
report in their financial reports?
Does a government’s promise to provide pension benefits when
its employees retire constitute a liability that can be reported in the
financial statements? How and when should the cost of pension
benefits be reported?
 How should the potential impact of future changes in benefits be
incorporated into actuarial calculations? How should the discount
rate be determined?
 Which actuarial methods should be allowed for the purpose of
deferring the recognition of certain pension costs to future years?
 Is participation in a cost-sharing plan, as opposed to a sole or
agent plan substantively different enough to justify a different
approach to accounting and financial reporting for pensions?

What liability should be reported by pension plans? Should plans
present a statement of changes in the pension obligation?
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GAAP Reporting Workshop

Without information about a government’s service efforts and
accomplishments (SEA), it is impossible to know how efficiently or
cost effectively roads were paved, how well children were
educated, or the impact of police services on crime, and how that
performance may have changed over time.

The six qualitative characteristics of SEA performance information,
which are drawn from GASB Concepts Statement No. 2, Service
Efforts and Accomplishments Reporting, are:
– Relevance
– Understandability
– Comparability
– Timeliness
– Consistency
– Reliability.
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Exposure Draft - Suggested Guidelines
for Voluntary Reporting of SEA
Performance Information
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May 2009
GAAP Reporting Workshop
Statement on Auditing Standards No. 115,
Communicating Internal Control Related
Matters Identified in an Audit
 SAS
115 supersedes SAS 112 of the same title
 The
 SAS
115 closely aligns the definitions of the
various levels of control deficiencies and the
related guidance for evaluating control
deficiencies with the definitions and guidance in
PCAOB Auditing Standard No. 5, An Audit of
Internal Control That I s Integrated with an Audit
of Financial Statements (AS 5) and SSAE 15.
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provisions of SAS No. 115 will be applied for
fiscal year ending 2009.
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May 2009
GAAP Reporting Workshop
Statement on Auditing Standards No. 115,
Continued

In November 2008, GAO issued interim guidance on reporting
deficiencies in internal control in financial statement only and
integrated audits performed in accordance with GAS. As a result
of GAO's interim guidance, auditors may use the definitions of
material weakness and significant deficiency in SAS 115 and
SSAE 15 when either of those standards is implemented. GAO
has provided the following interim guidance until the next GAS
update for complying with internal control reporting requirements:
– Internal control reporting requirements in GAS paragraph 5.11 are
satisfied by including in the GAS report all identified material
weaknesses and significant deficiencies following the new definitions
and requirements from SAS 115 and SSAE 15.
– All other relevant GAS requirements related to reporting deficiencies
in internal control are required, such as developing findings and
providing recommendations
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Government Auditing Standards
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GAAP Reporting Workshop
Statement on Auditing Standards No. 115,
Continued

SAS 115 establishes standards and provides guidance on communicating matters
relating to an entity's internal control over financial reporting identified in an audit of a
non-issuer's financial statements. The SAS:
– provides the following revised definitions of the terms material weakness and significant
deficiency :

A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is
a reasonable possibility that a material misstatement of the entity's financial statements will not be
prevented, or detected and corrected, on a timely basis.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less
severe than a material weakness, yet important enough to merit attention by those charged with
governance.
– revises the list of deficiencies in internal control that are indicators of material weaknesses to
consist of:




identification of fraud, whether or not material, on the part of senior management;
restatement of previously issued financial statements to reflect the correction of a material misstatement
due to error or fraud;
identification by the auditor of a material misstatement of the financial statements under audit in
circumstances that indicate that the misstatement would not have been detected by the entity's internal
control; and
ineffective oversight of the entity's financial reporting and internal control by those charged with
governance.
– no longer includes a list of deficiencies that ordinarily would be considered at least significant
deficiencies.

The changes in definitions of significant deficiency and material weakness ordinarily
would not result in a different conclusion regarding the severity of a particular
deficiency in comparison to the definitions in SAS 112. Rather, the revisions are
intended to be more clear and consistent with the provisions of AS 5.
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
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May 2009
GAAP Reporting Workshop

The auditor is required to evaluate the severity of each
deficiency in internal control identified during the audit to
determine whether the deficiency, individually or in
combination, is a significant deficiency or a material
weakness.

The severity of a deficiency depends on
– the magnitude of the potential misstatement resulting from
the deficiency or deficiencies; and
– whether there is a reasonable possibility that the entity’s
controls will fail to prevent, or detect and correct a
misstatement of an account balance or disclosure.

The severity of a deficiency does not depend on whether a
misstatement actually occurred.
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Evaluating Deficiencies Identified as Part
of the Audit
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GAAP Reporting Workshop
Evaluating Deficiencies Identified as Part
of the Audit, Continued

Factors that affect the magnitude of a misstatement that
might result from a deficiency or deficiencies include, but
are not limited to, the following:
– The volume of activity (in the current period or expected in
future periods) in the account or class of transactions
exposed to the deficiency

In evaluating the magnitude of the potential misstatement,
the maximum amount by which an account balance or total
of transactions can be overstated generally is the recorded
amount, whereas understatements could be larger.
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– The financial statement amounts or total of transactions
exposed to the deficiency
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May 2009
GAAP Reporting Workshop
Evaluating Deficiencies Identified as Part
of the Audit, Continued

Risk factors affect whether there is a reasonable possibility that a
deficiency, or a combination of deficiencies, will result in a
misstatement of an account balance or disclosure. The factors
include, but are not limited to, the following:
– The susceptibility of the related asset or liability to loss or fraud
– The subjectivity, complexity, or extent of judgment required to
determine the amount involved
– The interaction or relationship of the control with other controls
– The interaction among the deficiencies
– The possible future consequences of the deficiency
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– The nature of the financial statement accounts, classes of
transactions, disclosures, and assertions involved
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GAAP Reporting Workshop

The evaluation of whether a deficiency presents a reasonable possibility of
misstatement may be made without quantifying the probability of
occurrence as a specific percentage or range. Also, in many cases, the
probability of a small misstatement will be greater than the probability of a
large misstatement.

Multiple deficiencies that affect the same significant account or disclosure,
relevant assertion, or component of internal control increase the likelihood
of material misstatement and may, in combination, constitute a significant
deficiency or a material weakness, even though such deficiencies
individually may be less severe.

Therefore, the auditor are required to determine whether deficiencies that
affect the same significant account or disclosure, relevant assertion, or
component of internal control collectively result in a significant deficiency
or a material weakness.
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Evaluating Deficiencies Identified as Part
of the Audit, Continued
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GAAP Reporting Workshop

When performing substantive procedures or tests of the operating
effectiveness of controls, the auditor may obtain evidence that a control
does not operate effectively; for example, by identifying a misstatement
that was not prevented, or detected and corrected by the control.

Management may inform the auditor, or the auditor may otherwise become
aware, of the existence of compensating controls that, if effective, may
limit the severity of the deficiency and prevent it from being a significant
deficiency or a material weakness.

In these circumstances, although the auditor is not required to consider
the effects of compensating controls for purposes of this SAS, the auditor
may consider the effects of compensating controls related to a deficiency
in operation provided the auditor has tested the compensating controls for
operating effectiveness as part of the financial statement audit.
Compensating controls can limit the severity of the deficiency, but do not
eliminate the deficiency.
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Evaluating Deficiencies Identified as Part
of the Audit, Continued
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May 2009
GAAP Reporting Workshop
Evaluating Deficiencies Identified as Part
of the Audit, Continued
 Indicators of material weaknesses in internal control include:
– identification of fraud, whether or not material, on the part of senior
management;
– identification by the auditor of a material misstatement of the financial
statements under audit in circumstances that indicate that the
misstatement would not have been detected by the entity’s internal
control; and
– ineffective oversight of the entity’s financial reporting and internal
control by those charged with governance.

If the auditor determines that a deficiency, or a combination of
deficiencies, is not a material weakness, the auditor should
consider whether prudent officials, having knowledge of the same
facts and circumstances, would likely reach the same conclusion.
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– restatement of previously issued financial statements to reflect the
correction of a material misstatement due to error or fraud;
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GAAP Reporting Workshop
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Questions?
May 2009
GAAP Reporting Workshop
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