GASB Update
APPA
September 14, 2009
The views expressed in this presentation are
those of
Mr. Galloway. Official positions
of the GASB are determined only after
extensive due process and deliberation.
Slide 1
Effective Dates
Now
– Statement 55—GAAP Hierarchy
– Statement 56—AICPA Codification
Beginning after Dec. 15, 2007 (Dec. 31 ‘08, June 30 ‘09)
– Statement 49, Pollution Remediation
Obligations
Beginning after June 15, 2008 (June 30 ‘09, Dec. 31 ‘09)
– Statement 52, Real Estate Investments in
Endowments
Slide 2
Effective Dates
Beginning after Dec. 15, 2008 (Dec. 31 ‘09, June 30 ‘10)
– Statement 45, OPEB Employer reporting,
Phase III
Beginning after June 15, 2009 (June 30 ‘10, Dec. 31 ‘10)
– Statement 51, Intangible Assets
– Statement 53, Derivative Instruments
Beginning after June 15, 2010 (June 30 ‘11, Dec. 31 ‘11)
– Statement 54, Fund Balance Reporting and
Governmental Fund Type Definitions
Slide 3
Current Exposure Documents
Pension Accounting and Financial
Reporting (Invitation to Comment)
Service Concession Arrangements
Chapter 9 Bankruptcies
OPEB Measures by Agent Employers and
Agent Multiple-Employer Plans
Financial Instruments Omnibus
Suggested Guidelines for Voluntary
Reporting of SEA Information
Slide 4
Emission Credits
How should a governmental power utility
record emissions credits?
Staff view—If the emission credits will be
used in operations, no asset would be
recognized. If the emission credits will be
sold, they are intangible assets held for
income or profit and would be reported at
cost, which is zero, with gains recognized
when sold.
Slide 5
Build America Bonds
Government issues taxable bonds and
feds. Reimburse 35% of interest paid.
How to treat the debit and credit in a
utility setting?
Staff view—Interest expense and
nonexchange revenue.
Slide 6
Applicability of New FASBs
FASB 157, Fair Value Measurements—
Generally, no. Typically conflicts with
GASB 31.
No new contingency disclosures
Others concerns?
Slide 7
Other Current Projects
Codification of Pre-1989 FASB standards
– Tentative decision to rescind option to apply all
post-1989 FASB Statements and
Interpretations
– They would be other accounting literature in
GAAP heirarchy
Statement 14 Reexamination
– Tentative amendments to blending criteria
– Blending it single-column BTA presentations
Slide 8
Statement 55
The Hierarchy of Generally
Accepted Accounting Principles for
State and Local Governments
Slide 9
Project Objective
AICPA requested that standards setters
incorporate accounting and financial
reporting standards into their own literature
General approach to the project was to bring
in the AICPA literature “as is,” with minimal
modifications only where necessary for the
governmental environment
Final statements are not expected to change
current practice
Slide 10
GAAP Hierarchy
The Hierarchy was generally
maintained from the AICPA literature
Still 4 categories (a–d)
– (a) officially established accounting
principles
– (b) GASB TBs, AICPA Industry Audit
Guides and Statements of Position
– (c) AICPA Practice Bulletins
– (d) Implementation Guides and widely
recognized and prevalent practices
Slide 11
Statement 56
Codification of Accounting and
Financial Reporting Guidance
Contained in the AICPA Statements
on Auditing Standards
Slide 12
Project Objective
Project brought in guidance on the
following topics:
– Related Party Transactions
– Subsequent Events
– Going Concern Considerations
Final statements are not expected to
change current practice
Slide 13
Significant Changes
Rename “type I/type II” subsequent events as
“recognized/non-recognized” subsequent
events
Changed the time horizon to assess going
concern
– AICPA language: “…not to exceed one year beyond the date of
the financial statements…”
– Statement 56 language: “…for 12 months beyond the financial
statement date. Moreover, if there is information that is
currently known to the government that may raise substantial
doubt shortly thereafter (for example, within an additional three
months), it also should be considered.”
Slide 14
OPEB Implementation
Issues
Slide 15
OPEB Implementation Issues
Defining the “plan”
Qualifying trusts
Implicit rate subsidies
Defined contribution plans require
individual accounts
– Contractual per-employee contributions
may still be defined benefit
Effect of using Internal Service Fund
Slide 16
OPEB Implementation Issues
OPEB & Insurance accounting differ
Contributions
– Direct payment of insurance counts
Reporting by participants in agent
multiple-employer plans
– Agents’ actuarial dates and frequency
must match with plan’s
Fiduciary reporting by BTAs
Slide 17
Technical Bulletin 2008-1
Determining the Annual Required
Contribution Adjustment for
Postemployment Benefits
Issued December 2008
Slide 18
TB 2008-1
Applies 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 OPEB plan
In response to constituent feedback that
questioned the availability of actual amounts,
Statements 27 and 45 required a procedure for
estimating the amount
Slide 19
TB 2008-1
TB encourages use of the actual amount, if
known, in place of the estimation procedure for
purposes of the ARC adjustment
Effective dates:
– For pensions, periods ending after December 15,
2008 (12-31-08 and 6-30-09)
– For OPEB, periods ending after December 15, 2008,
or simultaneously with the initial implementation of
Statement 45, whichever is later
– Earlier application is encouraged
Slide 20
Statement 49
Accounting and Financial Reporting
for
Pollution Remediation Obligations
Slide 21
Obligating Events
a. Compelled to take remediation action
because of pollution-caused imminent
endangerment
b. Violate pollution-prevention permit—
for example, RCRA permit
c. Named, or evidence indicates govt.
will be named, as responsible party or
PRP for remediation (or cost sharing)
Slide 22
Obligating Events (continued)
d. Named, or evidence indicates govt.
will be named, in lawsuit to participate
in remediation
 Excludes lawsuits having no merit
e. Govt. commences, or legally obligates
self to commence
 Limited to portion legally required to
complete
Slide 23
Recognition Overview
Component recognition approach
Cost accumulation, not fair value
Current value, not present value
Expected cash flow technique
Slide 24
Capitalization Criteria:
a. Cleanup to prepare property for sale
(limited to fair value)
b. Polluted property bought and cleaned for
use (limited)
c. Asset impaired and cleanup restores lost
service utility (limited)
d. Acquire PP&E that have future alternative
use, e.g., land (limited to future service
utility)
For a. & b.—capitalize only if incurred within reasonable period
Slide 25
Expected Recoveries
Only if from PRPs or Insurance
Reduce expense (and expenditure, if
available) and . . .
– If not realized or realizable
• Net against remediation liabilities
– When realized or realizable
• Accrete liability and report separate
recovery assets (cash or receivable)
Slide 26
Effective Date
Statement 49 requires governments to
measure PROs as of the beginning of
the period in which it is implemented.
What happens if the government did
not measure at that time?
Slide 27
Statement 52
Land and Other Real Estate Held as
Investments by Endowments
Slide 28
What Does it Do?
Land and other real estate held as
investments by pension and OPEB plans,
investment pools, and deferred
compensation plans are reported at fair value
Permanent and term endowments, which
essentially serve the same function, reported
land at historical cost
Under 52, endowments will now report fair
value as well
Slide 29
Statement 51
Accounting and Financial Reporting
for Intangible Assets
Slide 30
Description
An intangible asset is an asset that
possesses all of the following
characteristics:
– Lack of physical substance
– Nonfinancial nature
– Initial useful life extending beyond a
single reporting period
Slide 31
Common Types of Intangible Assets
Right-of-way easements
Other types of easements
Patents, copyrights, trademarks
Land use rights
Licenses and permits
Computer software
– Purchased or licensed
– Internally generated
Slide 32
Basic Guidance
All intangible assets subject to Statement 51
should be classified as capital assets:
– All existing authoritative guidance related to
capital assets should be applied to these
intangible assets
– Since considered capital assets, not reported as
assets in governmental fund financial statements
Scope exceptions:
– Intangible assets acquired or created primarily
for directly obtaining income or profit
– Capital leases
– Goodwill from a combination transaction
Slide 33
Recognition
An intangible asset should be recognized
only if it is identifiable:
– Asset is separable, i.e. capable of being
separated and sold, transferred, licensed, etc.
-OR– Asset arises from contractual or other legal
rights, regardless of whether rights are separable
Slide 34
Internally Generated Intangibles
Internally generated intangible assets (IGIA)
are:
– Created or produced by the government or an
entity contracted by the government; or
– Acquired from a third party but require more than
minimal incremental effort to achieve expected
service capacity
Statement provides a specified-conditions
approach to recognizing outlays associated
with IGIA
Slide 35
Amortization
Existing guidance for depreciation of capital
assets generally applies to amortizing
intangible assets
Exception for intangible assets with
indefinite useful lives:
– No factors currently exist that limit the useful life
of the asset
– A useful life that must be estimated does not
mean indefinite useful life
• Permanent right-of-way easement vs. computer
software
Intangible assets with indefinite useful lives
should not be amortized
Slide 36
Statement 53
Accounting and Financial Reporting
for Derivative Instruments
Slide 37
What is a Derivative for
Financial Reporting Purposes?
A derivative has:
1. One or more reference rates
(underlyings) and one or more notional
amounts
2. Leverage
3. Net settlement
Slide 38
Examples of Derivatives
Interest rate swap
– Variable-rate to fixed-rate
– Fixed-rate to variable-rate
Basis swap
– Exchange payments based on the changes of two
variable rates
Swaption
– Gives the purchaser of the option the right, but not
the obligation, to enter into an interest rate swap
Commodity swap
– Reduce exposure to a commodity’s price risk
Slide 39
Excluded Instruments
Normal purchases & normal sales contracts
– Commodity e.g., gas or electricity
– Government intends to and has practice of taking
delivery or selling the commodity
– Quantity is consistent with volume used
Traditional insurance contracts
Traditional financial guarantee contracts
Non exchange-traded climate contracts,
liquidated damages, etc.
Slide 40
Basic Approach
Fair Value with Hedge Acntg.
Derivative instruments are measured on the
statement of net assets at fair value
Fair value changes are reported on the
statement of resource flows as investment
income
Exception: Effective Hedges
– Changes in fair value of derivative instruments
would be reported on the statement of net
assets as deferrals—either deferred inflows or
outflows
Scope Exclusion: Measurement of
derivatives in government funds
Slide 41
Hedges and Hedge Accounting
Two Requirements:
– 1. Association. The derivative instrument
is associated with a hedgeable item
– 2. Substantial offsets. The derivative
instrument is effective in providing
changes in cash flows or fair values that
substantially offset the cash flow or fair
value changes of the hedgeable item
If the above requirements are met,
hedge accounting is required
Slide 42
Hedgeable Items
Single asset or liability
Groups of similar assets or liabilities that
have same risk exposure
Expected transaction—occurrence should be
probable
Specific risks of financial instruments, such
as interest rate risk
Transactions within the primary government
do not qualify for hedge accounting
No hedge accounting for investments
Slide 43
Methods of Evaluating Effectiveness
Effectiveness is determined by using
a specified method of evaluating
hedges
Qualitative method
– Consistent critical terms
Quantitative methods
–
–
–
–
Synthetic instrument
Linear regression
Dollar offset
Other method – see characteristics
Slide 44
4 Key Things to Know about
Hedge Accounting
Potential hedging derivative
instruments failing the consistent
critical terms test should be evaluated
with one or more quantitative methods
If a potential hedging derivative
instrument fails one of the quantitative
methods, a government may use
another, but is not required to
Slide 45
4 Key Things to Know about
Hedge Accounting
Effectiveness is evaluated at end of
every reporting period
If, in later reporting periods, one
method finds a derivative instrument to
be ineffective, then another method
may be used
Slide 46
Hedge Terminations
Recognize deferral amount in income if:
– The hedging derivative instrument is no
longer effective
– The government is reexposed to the hedged
risk
– The likelihood of the expected transaction is
no longer probable
– The hedging derivative instrument is
terminated
Slide 47
Hybrid Instruments
Composed of an embedded derivative
instrument and a companion
instrument
Example: In an interest rate swap, a
government agrees to pay an abovemarket fixed rate, generating an upfront payment to the government
Slide 48
Accounting for Hybrid Instruments
Bifurcate the embedded derivative
from the companion instrument
– The embedded derivative instrument
should be measured at fair value
– The companion instrument should be
measured and reported consistent with its
substance, such as debt
Slide 49
Note Disclosures
Summary of derivative instrument
activity by:
1) Governmental activities, business-type
activities, and fiduciary activities
2) Then by fair value hedges, cash flow
hedges, and investment derivatives
3) Then by type:
•
•
•
Notional amount
Fair values & changes and where reported
Fair values & amounts reclassified from
hedge to investment
Slide 50
Note Disclosures
Disclosures for HEDGING derivatives
– Application of TB-2003 disclosures
– Significant terms
– Risks: Credit, Interest Rate, Basis, Termination,
Rollover, Market-access, Foreign Currency
– If an “other evaluation method” is used, the
identity of that method and its critical values
Disclosures for INVESTMENT
derivatives
– Risks: Credit, Interest Rate, Foreign
Currency (Statement 40 disclosures)
Slide 51
Note Disclosures
Contingencies (e.g., collateral
postings)
Synthetic guaranteed investment
contracts
– Description and nature
– Fair values
• Wrap contract
• Underlying investments
Slide 52
Statement 54
Fund Balance Reporting
and
Governmental Fund Type Definitions
Slide 53
New Fund Balance Classifications
Essentially
what is now
reserved
Essentially
what is now
unreserved
Nonspendable
Restricted
Committed*
Assigned
Unassigned
Essentially
what is now
designated
Slide 54
Questions?
(203) 956-5272
◦ wagalloway@gasb.org
www.gasb.org
Slide 55