Governmental
Accounting: New and
Not So New
Alaska GFOA
Anchorage, Alaska
November 17, 2014
1
Topics
• Pension accounting changes
• Government combinations
• Nonexchange financial guarantees
• Deferred outflows and inflows
• Common misconceptions
2
Part 1
PENSION ACCOUNTING CHANGES
3
Our focus
• Defined benefit plans
• Single-employer & agent multiple employer
plans
• Cost-sharing plans
4
Preliminary note
• No effect on governmental funds
• Report expenditures rather than expense
• No effect on fund balance
5
Employers in
Single-employer and agent multipleemployer plans
6
Key changes
1.
2.
3.
4.
5.
Employer liability
Employer expense
Discount rate
Actuarial method
Amortization
7
1. Employer liability
• Current:
Annual required contribution (ARC)
Less: Actual contributions
Net pension obligation (NPO)
• New:
Total pension liability (TPL)
Less: Fiduciary net position (FNP)
Net pension liability (NPL)
8
Employer liability - Illustration
9
2. Employer expense
• Current guidance
• Calculation tied to funding
• ARC adjusted for the cumulative effect of prior
differences between required contributions and
actual contributions
• New guidance
• Calculation tied to cost
• Changes in the net pension liability (NPL)
10
3. Discount rate
• Current guidance
• Estimated long-term investment yield for the
plan, with consideration given to the nature
and mix of current and expected plan
investments
• New guidance
• Modification necessary if it is expected that
FNP will not be sufficient to pay benefits to
active employees and retirees
• Single blended rate
11
Discount rate – single blended
rate
• Single rate equivalent to the combined
effect of using the following rates:
• For projected cash flows up to the point the
FNP will be sufficient
• Long-term expected rate of return on plan
investments
• For projected cash flows beyond that point
• A yield or index rate on tax-exempt 20-year, Aa-orhigher rated municipal bonds.
12
4. Actuarial method
• Current guidance
• Whatever actuarial method is used for funding
• Six acceptable methods
• Must be applied within parameters defined by GASB
• New guidance
• No tie to actuarial method used for funding
• All employers will use the entry age method for
accounting and financial reporting purposes (with
service cost determined as a percentage of pay)
13
5. Amortization
• Background
• Circumstances that could affect the net pension
liability (NPL)
A. Changes in benefit terms
B. Changes in economic and demographic assumptions
C. Differences between economic and demographic
assumptions and actual experience (other than
investment returns)
D. Differences between expected and actual investment
returns
14
Amortization (cont.)
• Current guidance
• Effect amortized over a period not to exceed
30 years
• New guidance
• Effect to be amortized over a much shorter
period
• Different periods, depending on the circumstances
15
Amortization (cont.)
• Amortization period
A. Changes in benefit terms
• Immediate recognition
B. Changes in economic and demographic
assumptions
• Closed period equal to average remaining service
period of plan members
• Average remaining service period of retirees = 0 years
16
Amortization (cont.)
• Periods (cont.)
C. Differences between economic and
demographic assumptions and actual
experience (other than investment returns)
• Closed period equal to average remaining service
period of plan members
• Average remaining service period of retirees = 0 years
D. Differences between expected and actual
investment returns
• Closed 5-year period
17
Employers in cost-sharing plans
Cost-sharing plans
18
Key changes
1. Employer liability
2. Employer expense
19
1. Employer liability
• Current guidance
• Liability only if employer contribution is less
than the contractually required amount
• New guidance
• Liability equal to the employer’s
proportionate share of the total NPL of all
participating employers
20
2. Employer expense
• Current guidance
• Expense = contractually required
contribution
• New guidance
• Expense = employer’s proportionate share of
total pension expense of all participating
employers
21
Effective date
• Implementation first required
• Fiscal year ending 6/30/15
• Earlier application encouraged
22
Implementation
23
Major challenges
• Audit implications
• Funding guidelines
• Explaining the change
24
GASB Statement No. 68 implementation challenges
Audit implications
25
Responsibility for financial
statements
• Management
• Independent auditors
26
Challenge
• Reasonable basis needed for assuming
responsibility
• Systems managed, governed, and audited
separately
• Impossible to audit numbers that the employer
cannot support or document
27
Meeting the challenge
• Need for cooperation between plan
auditor and employer auditor
• Guidance from AICPA
• Whitepapers (best practices)
• Interpretations of auditing standards
• Forthcoming creation of a pension chapter
for State and Local Governments (“Audit
Guide”)
28
Solution – cost-sharing plans
• Information needed on the employer’s
proportionate share of total for all
employers
• Supplemental schedule of employer
allocations (audited by plan auditor)
• Schedule of plan pension amounts by
employer (audited by plan auditor)
29
Schedule of employer allocations
Employer
A
B
C
D
E
F
G
H
I
Total
Actual
Employer
Contributions
$
72,000
$
58,000
$
36,000
$
8,000
$
12,400
$
16,000
$
5,000
$
18,500
$
2,000
$ 227,900
Employer
Allocation
Percentage
32%
25%
16%
4%
5%
7%
2%
8%
1%
100%
30
GASB Statement No. 68 implementation challenges
Funding guidelines
31
Information challenge
• Accounting and financial reporting
information no longer directly useful in
assessing the adequacy of funding
32
Funding guidelines
• “Big 7” public interest groups
• GFOA
• National Association of State Auditors,
Comptrollers, and Treasurers
• National Association of State Retirement
Administrators
• National Council on Teacher Retirement
33
Essential elements
• Use actuarially determined contributions
(ADC) as a basis for actual employer
contributions
• Guidelines for making principled decisions
regarding the calculation of the ADC
• Actuarial cost method
• Asset smoothing
• Amortization
• Provide information needed to assess
funding progress
34
GFOA best practice
• Adopts and adapts funding guidelines
• Specific recommendations on how to apply
the guidelines
• Recognition that a transition period may be
necessary
35
GASB Statement No. 68 implementation challenges
Explaining the change
36
Nothing has “happened”
• The accounting and financial reporting has
changed, not the underlying factual
situation
• Essential information already in the note
on employer funding progress
37
Response to the NPL
• Different liabilities are funded differently
• Compensated absences are not funded in
advance because they are already budgeted as
payroll
• Key consideration with pension liabilities =
disciplined, systematic funding over time
• Assured by actuarially determined contributions
• Appropriate actuarial method and assumptions
• Comparison – funding a child’s college
education
38
Employer contributions vs.
expense
• Difference
• What something costs (expense)
• How we pay for it (contributions)
39
Part 2
GOVERNMENT COMBINATIONS
40
Why guidance needed?
• Private-sector guidance largely inapplicable
• Presumes conditions and circumstances
typically not present in public-sector
combinations
• Fails to address important factors typically
present in public sector combinations
41
GASB response
• GASB Statement No. 69, Government
Combinations and Disposals of
Government Operations
42
Types of government combinations
• Loss of separate legal identity
• Included as part of a completely new entity
(A+B = C)
• Absorbed into an existing entity (A + B = B+)
• Specific operation moved to separate legal
entity
• Including “spinoff” of an operation as a
separate legal entity
43
Terminology
• Loss of separate legal identity?
• Exchange of significant consideration?
• Yes = acquisition
• No = merger
• Specific operation moved to separate legal
entity
• Transfer of operations
44
Clarification
• Transfers of operations
• Distinguish from
• Purchase, contribution, or disposal of assets
• Assumption of liabilities
• Two essential criteria
• Operation = an integrated set of activities conducted
and managed for the purpose of providing identifiable
services with associated assets or liabilities
• Operation must continue to provide essentially the
same services
45
Mergers - timing
• Recognize as of the date the combination
becomes effective (merger date).
• Creation of new entity (A + B = C)
• Reporting period starts as of merger date
• Absorption into continuing government (A +
B = B+)
• Report as though merger had occurred as of the
start of the continuing government's fiscal period
46
Mergers – measurement of
financial statement elements
• Two possible situations
• Merger date = reporting date of merged
entity
• Carrying value as of merger/reporting date
• Merger date ≠ reporting date of merged
entity
• Carrying value that would have been as of the
reporting date
47
Mergers – capital asset
impairments
• Intent = disposal
• Use prior to disposal?
• Report at carrying value until disposal
• No use prior to disposal?
• Evaluate for potential impairment
• Intent = change in manner or duration of
use
• Evaluate for potential impairment
48
Acquisitions - timing
• An acquisition should be recognized as of
the date the acquiring government obtains
control of the assets and becomes
obligated for the liabilities of the acquired
entity (acquisition date)
• Normally: acquisition date = closing date
49
Acquisitions – measurement of
financial statement elements
• Measurement = acquisition value
50
Acquisition value - assets
• Market-based entry price
• Price to acquire similar assets having similar
service capacity
51
Acquisition value - liabilities
• Amount necessary to discharge liabilities
assumed
• Exceptions: regular GASB rules apply to
•
•
•
•
Compensated absences
Pension and OPEB obligations
Obligations for termination benefits
Obligations for municipal solid waste landfill
closure and postclosure care costs
• Obligations for pollution remediation
52
Acquisition value – deferred
outflows/inflows
• Normally = carrying value
53
Acquisitions – consideration
• Amount of consideration
• Assets remitted + liabilities incurred
• Contingent amounts
• Report as liability when probable and
measurable
54
Consideration > net position
• Deferred outflow of resources
• Recognized in operations in a systematic and
rational manner consistent with the
circumstances of the acquisition
55
Consideration < net position
• Form of economic assistance?
• Yes
• Difference = contribution
• No
• Reduce acquisition values assigned to noncurrent
assets (other than financial assets)
• Excess = special item
56
Acquisition costs
• Recognize when services received
57
Acquisitions – within the
financial reporting entity
• Assets acquired continue to be reported at
their carrying value
• Difference between acquisition price and
carrying value
• Reporting entity statements
• Blended component unit = transfer
• Discretely presented component unit = subsidy
• Separate financial statements
• Special item
58
Transfers of operations
• Government reporting continuing
operations
• Treated like a merger
• Transferring government
• Treated like a disposal (gain or loss = special
item )
59
Application to governmental
funds
• Report only financial statement elements
consistent with measurement focus and
basis of accounting
• No capital assets
• No long-term debt
• Net change in fund balance = special item
60
Effective date
• Implementation first required
• Fiscal year ending 12/31/14
• Prospective implementation
• Earlier application encouraged
61
Part 3
NONEXCHANGE FINANCIAL
GUARANTEES
62
Why guidance needed?
• Private sector
• Financial guarantees almost always arise
from exchange transactions
• Public sector
• Financial guarantees frequently arise
independently (nonexchange financial
guarantees)
63
GASB response
• GASB Statement No. 70, Accounting and
Financial Reporting for Nonexchange
Financial Guarantees
64
Definition of financial
guarantee
• Agreement to indemnify a third party
should the issuer of the guaranteed
obligation not fulfill its requirements
under the obligation
• Three separate parties
• Issuer of the obligation being guaranteed
• Those entitled to payment
• Guarantor
65
Scope
• Excludes
• Obligations related to revenue-supported
debt
• Obligations related to special assessments
• “Joint and several” obligations
• Obligations that are not legally binding.
66
Guarantors - recognition
• Two-step approach
• Consider qualitative factors and historical
data that indicate likelihood of payments
• Point of recognition = “more likely than not”
to occur
67
Guarantors – qualitative factors
• Issuer bankruptcy or financial reorganization
• Issuer breach of debt covenant
• Indicator of significant financial difficulty
•
•
•
•
•
•
Issuer receipts intercepted
Debt holder concessions
Significant investment losses
Loss of a major revenue source
Significant increase in noncapital disbursements
Issuer subject to financial supervision
68
Obligations with similar
characteristics
• Example = student loan receivables
• May need to consider qualitative factors
and historical data from perspective of
group as a whole
69
Guarantors - point of
recognition
• “More likely than not”
• Likelihood as little as 51%
• Contrast with normal treatment of
contingencies
• “Probable”
• Likelihood well in excess of 50 percent
70
Guarantors - valuing the
liability
• Discounted present value of estimated
future payments
• Range of possible values? Normal rules apply
• One amount = “best estimate”
• Recognize that amount
• No amount better than any other
• Recognize the minimum amount of the range
71
Guarantors – governmental
funds
• Report an expenditure only when due and
payable
• Classify in the same manner as
grant/financial assistance payments
72
Issuer accounting/reporting
• Guaranteed obligation
•
Continue to report until legally released as obligor
• Ultimate decrease = revenue
•
Reclassify payments that must be reimbursed to
guarantor
• Receivable recognition
•
Normal rule against recognizing gain contingencies
• Exception = guarantees within the primary government
• Liability to issuer matched by issuer receivable
73
Implementation
• Implementation first required FYE 6/30/14
• Earlier application encouraged
• Application generally retroactive
• Exception
• Prospective disclosure for cumulative payments
• Disclose starting date
74
Part 4
DEFERRED OUTFLOWS AND INFLOWS
75
Why guidance needed?
• GASB Concepts Statement No. 4
introduced two new financial statement
elements
• Deferred outflows of resources
• Previously classified as assets
• Deferred inflows of resources
• Previously classified as liabilities
• GASB reserves the right to identify which
specific items qualify for deferral
76
GASB response
• GASB Statement No. 65, Items Previously
Reported as Assets And Liabilities
77
Assets vs. deferred outflows
• Assets
• Resources with present service capacity that
the government presently controls
• Example: prepaid rent
• Deferred outflows
• Consumption of net assets applicable to a
future reporting period
78
Liabilities vs. deferred inflows
• Liability
• Present obligations to sacrifice resources that
the government has little or no discretion to
avoid
• Deferred inflow
• Acquisition of net assets applicable to a
future reporting period
79
Previous decisions
• GASB Statement No. 53 – derivatives
• Change in the fair value of a derivative used
as part of an effective hedge
• GASB Statement No. 60 – service
concession arrangements
• Consideration received from the operator
(less any contractual obligations reported as
liabilities)
80
GASB’s objective
• Review items currently reported as assets
or liabilities
• Three options
• Continue to report as asset/liability
• Report instead as a deferred outflow/inflow
of resources
• Report as an outflow/inflow of the period
81
GASB’s approach
• Test 1:
• Meet the definition of an asset or liability?
• Yes? - report as asset or liability
• Test 2:
• Meet the definition of a deferred outflow/
inflow of resources?
• Yes? - report as deferred outflow/inflow of resources
• Default:
• Outflow/inflow of the current period
82
Asset
deferred outflow
• Resources provided to a grantee when the
only eligibility criterion that has not been
met by the recipient is a time requirement
• If other eligibility requirements are not met =
receivable
• Excess of the reacquisition price of
refunded debt over its net carrying
amount
83
Asset
outflow
• Debt issuance costs (other than prepaid
insurance)
84
Liability
deferred inflow
• Revenue of a governmental fund that is
not recognized solely because it is not yet
considered to be available
• Property taxes received or recognized as a
receivable prior to the period they were
intended to finance
85
Liability
deferred inflow (cont.)
• Other imposed nonexchange revenues
received or recognized as a receivable
prior to the period when the use of the
resources is either required or first
permitted
• Resources received from a grantor when
the only eligibility criterion that has not
been met by the recipient is a timing
requirement
• If other eligibility criteria not met = liability
86
Liability
deferred inflow (cont.)
• The excess of the net carrying amount of
refunded debt over its reacquisition price
• A reduction in the present value of the
payments due from a lessee under a
capital lease as a result of the lessor’s
passing on the economic advantages of a
refunding of tax-exempt debt
87
Specialized accounting for
regulated industries (optional)
• Rates set in anticipation of future charges
• Deferred inflows or resources
• Expenses or losses recoverable from future
rates
• Deferred outflows of resources
88
Determination of major funds
(10 percent and 5 percent tests)
• Application of 10 percent and 5 percent
tests
• Assets + deferred outflows of resources
• Liabilities + deferred inflows of resources
89
Use of the term “deferred”
• Current practice – used to describe
• Unearned amounts (liability)
• Amounts related to future periods (deferred
inflows of resources)
• Unavailable amounts (deferred inflow of
resources)
• Future practice
• Use limited to deferred outflows/inflows of
resources
90
Effective date
• First mandatory for FYE 12/31/13
• Earlier application encouraged
91
Part 5
COMMON MISCONCEPTIONS
92
Background
• Most often the product of “half truths”
• “Believability factor”
93
“Number of funds” principle
• Half truth:
• The “number of funds principle” means “the
fewer funds the better”
• Full truth:
• Use all the funds and fund types needed, but
only the funds and fund types needed—no
more, no less
• It is possible to report “too few” funds.
94
Blending and fiduciary-type
units
• Half truth:
• Data from fiduciary-type component units
should be “blended”
• Full truth:
• Technique is the same, but terminology is
different
• Term blended = method of including component
unit data in the government-wide financial
statements
95
Liabilities in governmental
funds
• Half truth:
• Liabilities should be recognized in governmental
funds only if they are due and payable
• Full truth:
• Applicable only for liabilities not normally
expected to be liquidated with expendable
available financial resources
• Salaries and wages recognized when earned
• Vendor payables recognized when goods and services
provided
96
Operating subsidies to
component units
• Half truth:
• Operating subsidies to component units should
be reported as transfers
• Full truth:
• True for blended component units, but not true
for discretely presented component units
• For discretely presented component units, treat like
any other grant (expenditure/expense)
97
Criteria for special items
• Half truth:
• A special item is a transaction or event that
meets just one of the two criteria for an
extraordinary item
• Full truth:
• Must also be subject to management control
• Exclude natural disasters that are not infrequent in
occurrence (hurricanes in Florida)
98
Long-term internal borrowings
• Half truth:
• A long-term borrowing within the government
should be reported as a fund liability
• Full truth:
• True only within the primary government
• Borrowing from another fund = liability
• Borrowing from a discretely presented component
unit = other financing source
99
Transactions with discretely
presented component units
• Half truth:
• Transactions with discretely presented
component units should be treated just like
transactions with outside parties
• Full truth:
• Capital assets cannot change value within the
financial reporting entity
• Difference between carrying value and
consideration given not capitalized
• Reported instead as expense/expenditure of purchaser
100
Option to classify a fund as
major
• Half truth:
• A government has the option to voluntarily
classify a given fund as major
• Full truth:
• Option available only for governmental funds
and enterprise funds
• Fiduciary funds can never be reported as major
funds
101
Interest capitalization in
proprietary funds
• Half truth:
• Interest capitalization is required in
proprietary funds
• Full truth:
• Interest capitalization does not apply to
internal service funds
• Otherwise interest expense would be reported as a
functional expense in governmental activities
102
Application of benefit/burden
criterion
• Half truth:
• A legally separate entity should be included
as a component unit if there is an ongoing
relationship of financial benefit or burden.
• Full truth:
• Financial benefit/burden only relevant if
either
• Fiscal dependency
• Board appointment
103
Availability criterion
• Half truth:
• Revenue should be recognized in
governmental funds as soon as amounts
become available.
• Full truth:
• Availability is only a consideration
subsequent to earning/eligibility.
• Cash received in advance is not revenue, even
though it is available.
104
Revenue from expendituredriven grants
• Half truth:
• All legal requirements need to be met before
revenue from an expenditure-driven grant
can be recognized.
• Full truth:
• Routine administrative requirements (filing
grant reports) should not delay revenue
recognition.
105
Difference between proprietary
funds
• Half truth:
• The difference between internal service
funds and enterprise funds is that the former
serve internal customers, whereas the latter
serve external customers.
• Full truth:
• Internal service funds assume cost recovery
over time, whereas enterprise funds do not
• Activities reported in enterprise funds may be
subsidized
106
Netting capitalized interest
• Half truth:
• Interest expense on tax-exempt debt should
be capitalized net of interest revenue on the
reinvested proceeds.
• Full truth:
• Interest expense and interest revenue on the
reinvested proceeds are netted only if the
related debt is legally restricted to the
acquisition or construction of specified
qualifying assets.
107
Assets in governmental funds
• Half truth:
• Governmental funds should not report land,
buildings, equipment, and similar assets.
• Full truth:
• Used in operations = capital asset
• Not reported in governmental funds
• Acquired for sale = financial asset
• Reported in governmental funds
108
Netting disaster losses against
recoveries
• Half truth:
• Disaster losses should be netted against
recoveries.
• Full truth:
• True of insurance recoveries
• Netting based on prior transfer of risk to insurer
• Not true of disaster assistance
• No prior transfer of risk
109
Cash flows: public vs. private
sector
• Half truth:
• The essential difference between the public
and private sectors is the use of two different
financing categories
• Full truth:
• Categories defined differently
• Operating activities (focuses on operating income)
• Investing activities (excludes capital outlay)
110
Encumbrances and fund
balance
• Half truth:
• Encumbrances should be included in
assigned fund balance.
• Full truth:
• Not applicable to encumbrances that will be
repaid from restricted or committed
resources
111
Dedicated taxes as program
revenue
• Half truth:
• Revenues that must be used for a specific
program or function are properly classified as
program revenues
• Full truth:
• Program revenues must come from outside
the government’s tax base
• Dedicated taxes are not program revenues
112
Segment disclosure and
condensed data
• Half truth:
• Segment disclosure requires that condensed
financial statements be provided in the notes
to the financial statements for each segment.
• Full truth
• Only necessary if information not provided in
the financial statements
• Unnecessary for segments reported as major
enterprise funds
113
Deficits in individual funds
• Half truth:
• Deficits in individual funds need to be
disclosed in the notes to the financial
statements.
• Full truth:
• Not true of major funds, since the deficit
would already be visible
114
Condensed data and cash flows
• Half truth:
• Condensed financial statements should
include a statement of cash flows.
• Full truth
• Two situations where condensed financial
statements must be included in the notes
• Segment disclosure
• Major discretely presented component units
115
Condensed data (cont.)
• Full truth (cont.)
• Data for discretely presented component
units always drawn from government-wide
financial statements
• Hence no requirement for statement of cash flows
116
Payments to a public-entity
risk pool
• Half truth:
• Payments to a public-entity risk pool should
be treated like insurance premiums.
• Full truth:
• Appropriate treatment depends on the
characteristics of the pool
• Participants transfer risk to pool?
• Yes – treat like insurance premium
• No – treat like deposit
117
MD&A and the letter of
transmittal
• Half truth:
• The same topic should not be addressed in
both management’s discussion and analysis
(MD&A) and the letter of transmittal.
• Full truth:
• The letter of transmittal is properly used to
provide more subjective information on
topics treated in MD&A
118
Project-length budgets
• Half truth:
• Budgetary comparisons are not required for
governmental funds with project-length
budgets
• Full truth:
• Budgetary comparisons are required if a
project-length budget is re-appropriated
annually.
• Annual reappropriation equivalent to annual
budget
119
References to the notes
• Half truth:
• Financial statements should refer to the
notes to the financial statements
• Full truth
• Only if fully audited
• Not applicable to combining and individual fund
financial statements that receive only an “inrelation to” opinion
120
10 percent and 5 percent tests
• Half truth:
• Governmental funds should be classified as
major if they meet both the 10 percent and 5
percent tests
• Full truth:
• Both tests must be met for the same element
•
•
•
•
Assets and deferred outflows of resources
Liabilities and deferred inflows of resources
Revenues
Expenditures/expense
121
Location of budgetary
disclosures
• Half truth:
• If budgets are presented as RSI, related
disclosure should be in notes to RSI.
• Full truth:
• Excess of expenditures over appropriations =
legal violation, therefore included in notes to
the financial statements
122
Trust fund liabilities
• Half truth:
• Trust funds do not report liabilities to
beneficiaries.
• Full truth:
• Liabilities are reported when due and
payable to individual beneficiaries
123
Condensed data and revenuesupported debt
• Half truth:
• Segment reporting is required in connection
with revenue-supported debt
• Full truth:
• Only if there is a requirement to separately
maintain the data needed to present
condensed financial statements
• Only if the segment is not already separately
reported as a major fund (or a single
nonmajor enterprise fund)
124
Individual fund statements
• Half truth:
• Individual fund statements needed to
support combining financial statements
• Full truth:
• Only if additional information is provided in
the individual fund statements
125