GAAP Update
Presented For The
GASBO
Presented by
Paul E. Glick
Glick Consulting Group
What I Shall Do
 I will touch upon:
– GASBS 60, 61, 62, 66, 67 & 68, 69 & 70
 I will show you what is coming one of
these days
3
The GASB
Current Board Members
Term Expires
2020 – single term
2016—first term
2015---first term
2019
2017
2015
2017—first term
Member
David A. Vaudt, Chair
William Fish
Michael Granof
David Sundstrom
Jan Sylvis
Marcia Taylor
Jim Brown
4
GASB Funding
 GASB is funded by a combination of
accounting support fees, subscription
and publication revenue, and
investment income
 The largest share of financial support
for the GASB comes from accounting
support fees
 Those fees are paid by municipal bond
brokers and dealers for
the GASB
4
GASB Funding
 GASB Accounting Support Fees are collected under
Section 978 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 to fund the annual
recoverable expenses (again, roughly equivalent to
operating expenses) of the GASB.
 These support fees were instituted in 2012 through an
SEC order instructing the Financial Industry Regulatory
Authority (FINRA) to establish, assess, and collect
accounting support fees from its members.
 GASB accounting support fees collected in 2012 were
$8.5 million, paid by a total of 532 broker dealers.
4
GASB Funding
 Since 2005, the FAF voluntarily has chosen not to
seek accounting support fees to fund the full
amount of the FASB’s budget.
 Similarly, beginning in 2013, the FAF is seeking
2013 GASB accounting support fees that are less
than GASB recoverable expenses.
 Instead, the FAF has chosen to fund a portion of
FASB and GASB recoverable expenses with
residual reserve funds.
 Residual reserves are those funds that are forecast
to exceed a targeted reserve balance
4
2014 GASB Budget
 Revenues:
– Accounting Support Fees
– Investment Earnings
– Total Revenues
$6,159,100
600
$6,159,700
 Expenses:
–
–
–
–
Board and Research Staff
Advisory Council
FAF Administrative
Total Expenses
Residual Reserve Funds
4
$5,893,800
28,800
3,287,500
$9,210,000
$3,050,400
What is Effective?
Effective Dates
 During 2014
– Statement 67 – Financial Reporting for Pension Plans
– an Amendment of GASBS 25 (Beginning After
6/15/2013)
– Statement 69 – Government Combinations and
Disposals of Government Operations (Beginning After
12/15/2013)
– Statement 70 – Accounting and Financial Reporting
for Nonexchange Financial Guarantees (Beginning
After 6/15/2013)
10
Effective Dates
 During 2015
- Statement 68 – Accounting and Financial Reporting
for Pensions – an Amendment of GASBS 27
(Beginning After 6/15/2014)
- Statement 71 – Pension Transition for Contributions
Made Subsequent to the Measurement Date – an
Amendment of GASB Statement No., 68
11
GASB Statement
No. 69,
Government
Combinations and
Disposals of
Government
Operations
Government Combinations
The Term Government
Combinations Includes A Variety
of Transactions Referred To As:
Mergers,
Acquisitions,
Transfers Of Operations.
13
GASBS 69
Provides Accounting and Financial
Reporting Guidance for Mergers and
Acquisitions
14
GASB
Statement No.
70
Accounting
and Financial
Reporting for
Nonexchange
Financial
Guarantees
Entities Addressed
 Providers of financial guarantees
 Recipients of financial guarantees
16
Background
Some governments extend financial guarantees for
the obligations of another government, a not-forprofit entity, or a private entity without directly
receiving equal or approximately equal value in
exchange
A government commits to indemnify the holder of
the obligation if the entity that issued the obligation
does not fulfill its payment requirements
Also, some governments issue obligations that are
guaranteed by other entities in a nonexchange
transaction
17
Guidance Two-Step Plan
 Consider Whether Qualitative Factors And
Historical Data Indicate That Payments May
Have To Be Made As A Result Of The
Guarantee And
 Report A Liability As Soon As Such
Payments Appear “More Likely Than Not”
To Occur.
18
Statement 65
Items Previously
Reported as
Assets and
Liabilities
GABS Statement No. 65
 Reclassifies, As Deferred Outflows Of Resources
Or Deferred Inflows Of Resources, Certain Items
That Were Previously Reported As Assets And
Liabilities And Recognizes, As Outflows Of
Resources Or Inflows Of Resources, Certain
Items That Were Previously Reported As Assets
And Liabilities
20
Three Important Changes
 First, it identifies which specific items should be
classified as deferred inflows of resources and
deferred outflows of resources, rather than as
assets and liabilities
 Second, it clarifies the effect of deferred inflows
of resources and deferred outflows of resources
on the determination of major funds
 Finally, it limits the use of the term deferred in
financial statements
21
GASBS’s Two-Step
Approach
 1.
Does the item meet the definition of an asset
or liability? If so, it should be reported as such
 2.
If the item does not meet the definition of an
asset or liability, does it meet the definition of a
deferred inflow of resources or a deferred outflow
of resources? If so, it should be reported as such
 It the items does not meet either of the above,
then it is reported as an inflow or outflow or
resources on the operating statement
22
Debt Refundings
 In regard to the guidance in GASBS No. 23, and
GASBS No. 62 for refunding of debt, the Board
concluded that the resulting difference from
current refundings and advance refundings does
not meet the definition of an asset or a liability as
explained in GASB Statement No. 63.
 When the value of the resources required to
refund the old bonds exceeds the net carrying
amount of the old bonds, the Board does not
believe the resulting debit amount represents an
increase in service capacity that the government
presently controls
23
Debt Refundings
 The resources cannot be exchanged for another
asset or used to directly provide present service
capacity and, therefore, do not meet the definition
of an asset.
24
Debt Refundings
 Similarly, if the value of the resources required to
refund the old bonds does not exceed the net
carrying amount of the old bonds, the resulting
credit amount does not represent an obligation to
sacrifice resources for another unavoidable and
specific purpose
 Therefore, the Board concluded that the
difference does not represent a liability of the
government.
25
Debt Refundings
 Because of its conclusion that the debit amount
or credit amount is not an asset or liability,
respectively, the Board analyzed the balances to
determine if they met the definition of a deferred
outflow of resources or a deferred inflow of
resources, respectively
 The Board concluded that reporting an
accounting ‘gain’ or ‘loss’ in the period the old
debt is refunded not only fails to report the
purpose of the transaction, but also distorts
operating results in the period the debt is
refunded and in subsequent periods
26
Debt Refundings
 The Board concluded that the difference resulting
from a current refunding, or an advance
refunding, relates to future periods and,
therefore, meets the definition of a deferred
outflow of resources or a deferred inflow of
resources, as applicable
27
One Important Change Debt Refundings
 Accounting for the debit/credit resulting from the
refunding of debt (GASBS 23):
– Report as a deferred outflow (loss) or deferred inflow
(gain) and recognize as a component of interest
expense (i.e., the amortization) over shorter of life of old
debt (i.e., the refunded debt) or new debt (i.e., the
refunding debt)
– Report separately from related bonds payable , or not
netted against the debt (a change).
28
Debt Refundings
 Accounting for the debit/credit resulting from
changes in the provisions of a lease due to a
refunding by a lessor:
– Report as a deferred outflow (loss) or deferred inflow
(gain) and recognize as a component of interest
expense over shorter of life of old debt or new debt.
29
Debt Issuance Costs
 Currently reported as a deferred charge on the
statement of net position and deferred and
amortized
 The Board concluded that most debt issuance
costs do not meet the definition of an asset,
because the costs incurred do not result in
service capacity that the government presently
controls
30
Debt Issuance Costs
 The GASB believes prepaid insurance associated
with the issuance of debt should be considered
an asset because these costs have present
service capacity that the government generally
indirectly controls.
 The GASB concluded that debt issuance costs,
other than prepaid insurance, do not meet the
definition of a deferred outflow of resources
because the costs are not applicable to a future
period
31
Debt Issuance Costs
 The GASB concluded that reporting these costs
as an asset or a deferred outflow of resources
and recognizing either balance over the life of the
related debt is contrary to the concept of
interperiod equity
 As a result, the Board concluded that these costs
should be recognized as an outflow of resources
(i.e., a current year cost) in the reporting period in
which they are incurred.
32
Debt Issuance Costs
 Several respondents to the Exposure Draft
expressed concerns with the proposed reporting
for debt issuance costs.
 In most cases, these respondents believed debt
issuance costs relate to future periods and,
therefore, should be recognized over the life of
the debt rather than expensed in the period
incurred
 However, the GASB did not concur.
33
Debt Issuance Costs
 Debt issuance costs:
– Debt issuance costs, other than prepaid insurance
costs, should be recognized as an outflow of resources
in the period incurred.
– Prepaid insurance costs reported as an asset.
34
Debt Issuance Costs
 When implementing this pronouncements, you
need to remove any deferred charges previously
reported:
– Write off in the year of occurrence
– Or report a prior period adjustment
– (note prepaid insurance work paper)
35
GASBS 33 Revenue
Classifications
 Derived Tax Revenue – Sales and Income Taxes
 Imposed Non-Exchange – Property Taxes and
Fines
 Government Mandated Non-Exchange
 Voluntary Non-Exchange
36
Nonexchange Transactions
 The GASB believes that resources received prior
to the period when the resources are required to
be used or when use is first permitted do not
meet the definition of a liability
 The Board concluded that the advancing of these
resources does not create a liability that obligates
a government to sacrifice resources, because the
government does not have to sacrifice those
resources
in
an
imposed
nonexchange
transaction
37
Nonexchange Transactions
 Rather, the Board concluded that these resources
relate to a future period (for example, when the
advance is first permitted to be used in
accordance with the imposed nonexchange
transaction) and, therefore, should be classified
as a deferred inflow of resources until such time.
38
Nonexchange Transactions
 Imposed nonexchange revenues (GASB 33):
– Report as deferred inflows (as a credit), 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.
39
Nonexchange Transactions
 The Board concluded that resources reported as
assets that do not meet the availability criterion
for recognition as revenue in governmental fund
financial statements also do not meet the
definition of a liability
 The Board believes that there is not a present
obligation to sacrifice resources at the periodend.
 However, those resources are not available for
spending in the current period and, therefore,
should be classified as a deferred inflow of
40
resources.
Nonexchange Transactions
The unavailable portion of a property tax
receivable should be matched by a deferred
inflow of resources for unavailable revenue
 When an asset is recorded in governmental fund
financial statements but the revenue is not
available, the government should report a
deferred inflow of resources until such time as
the revenue becomes available.
41
Grant Revenue Recognition
GASBS 33 distinguishes between two kinds of
stipulations on the use of resources: time
requirements and purpose restrictions
 Time requirements specify (a) the period when
resources are required to be used (sold,
disbursed, or consumed) or when use may begin
(for example, operating or capital grants for a
specific period) or (b) that the resources are
required to be maintained intact in perpetuity or
until a specified date or event has occurred.
 Time requirements affect the timing of
recognition of nonexchange transactions
42
Grant Revenue Recognition
 Purpose restrictions specify the purpose for
which resources are required to be used.
 Purpose restrictions should not affect when a
nonexchange transaction is recognized.
 However, governments that receive resources
with purpose restrictions should report resulting
net position, equity, or fund balance as restricted
43
I Asked The Expert
GASBS 65 – If a government receives
a cash advance on an expenditure
grant but they have not spent the
money yet, how should the advance
be reported?
44
I Asked The Expert
Revenue (or a deferred inflow of resources) can
be recognized only if all eligibility requirements
are met EXCEPT for a time requirement.
In the case of an expenditure-driven grant, the
key eligibility requirement (qualified spending) is
NOT met until the qualifying expenditures have
been incurred--therefore the cash advance would
be matched by a LIABILITY to the grantor
(essentially, unearned revenue), rather than a
deferred inflow of resources (i.e., revenue that is
earned, but not yet available).
45
Nonexchange Transactions
 The GASB does not believe that the advance
payments by a provider and the resources
received in advance by a recipient in governmentmandated nonexchange transactions and
voluntary nonexchange transactions, including
“reimbursement-type” or “expenditure driven”
grant programs, meet the definition of an asset
and a liability, respectively, when the only
eligibility requirement not met is a time
requirement
46
Nonexchange Transactions
 Government-mandated and voluntary
nonexchange transactions (GASB 33):
– 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
– Recipient reports as deferred inflows
47
Major Fund
Determination
 GASB Statement No. 65 clarifies that henceforth
the point of reference for this determination will
no longer be assets, but rather assets + deferred
outflows of resources.
 Likewise the determination of a major fund will
focus not just on liabilities, but rather on
liabilities + deferred inflows of resources.
 Basically no effect on the determination
48
Use of the Term Deferred
 The use of the term deferred
should be limited to items
reported as deferred outflows of
resources or deferred inflows of
resources
49
Effective Dates
GASB Statement No. 67
Accounting and Financial
Reporting For Pension
Plans (Plan Reporting)
Effective for fiscal years
beginning after June 15, 2013
GASB Statement No. 68
Accounting and Financial
Reporting for Pensions
(Employer Reporting)
Effective for fiscal years
beginning after June 15, 2014
Major Game Changers
 Placing the net pension liability on the Statement of
New Position
 Decoupling expenses from funding
 Accounting for Cost Sharing Plans
 Expanding disclosure information (notes & RSI)
51
GASB Goals and
Objectives
 Financial Reporting Focus
– GASB establishes accounting and
reporting standards – not funding
policies
– Focus on pension obligation, changes
in obligation, and attribution of expense
GCG
521
GASB Goals and
Objectives
 Long-term Nature of governments
– Cost of services to long-term operation
– “Interperiod equity” matches current
period resources and costs
GCG
531
GASB Goals and
Objectives
 Employer-Employee Exchange
– Employer incurs an obligation to its
employees for pension benefits
– Transaction is in context of a careerlong relationship
GCG
541
Types of Pensions
 Defined benefits
– Benefits defined by terms of the plan (for example,
specific dollar amount or calculated based on
factors such as compensation, age, years of
service)
 Defined contributions
– Individual accounts
– Contributions in the periods that services are
rendered
– Dependent on contributions, earnings, and
forfeitures of other employee accounts,
administrative costs
Types of Pensions
 Classification of the type of defined
benefit (DB) pension plan is based
on the number of employers and
whether pension obligations and
pension plan assets are shared
Types of Plans
 Single employer —
– Provides pensions to employees of one employer
– The government sponsors its own pension plan - like
police and fire plans
 Agent multiple-employer —
– Provides pensions to employees of more than one
employer
– Assets are pooled for investment purposes, but
separate accounts maintained for each employer
– Employer’s share of pooled assets is legally available
only for its employees
Types of Plans
 A cost-sharing multiple-employer plan – Provides pensions to employees of more than one
employer
– Employers pool or share obligations
– Plan assets can be used to pay the benefits of retirees
from any employee
– Typically a state sponsored plan
A Big Picture View of
GASBS 67 and 68
59
#1-Net Pension Liability
(NPL)
 NPL = total pension liability minus
assets at MV
 It is similar to the UAAL but using:
– Valuing at market, not smoothing
– Using only entry age normal actuarial
funding
– Possibly a “blended” discount rate
GCG
601
#1-Net Pension Liability
(NPL)
 The NPL must be reported on the
employer’s Statement of Net Position
– Currently, UAAL Is Reported as RSI
– Currently, only the NPO is reported on
the Statement of Net Position
(cumulative difference between the ARC
and actual contributions-typically a
small amount)
GCG
611
The New “Blended”
Discount Rate
 Discount rate is based on projected benefits,
current assets, and projected assets for current
members
 For projected benefits that are covered by projected
assets
– Discount using long-term expected rate of return on assets
 For projected benefits that are not covered by
projected assets
(i.e., after the “cross-over date”)
– Discount using yield on 20-year AA/Aa tax-exempt
municipal bond index
GCG
621
Pension Liability
 Provide context
– Only the accounting treatment has changed
• Nothing has changed economically
 No surprise in many cases
– Number was already being reported in the
notes and in required supplementary
information
• Single-employer and agent plans
 Not an indicator, per se, of fiscal stress
GCG
631
Blended Discount Rate
 Discount Rate – Is based on projected
benefits, current assets, and projected
assets for current members
 For projected benefits that are covered by
projected assets – discount using longterm expected rate of return on assets
 For projected benefits that are not covered
GCG
by projected assets – discount using yield
on 20-year AA/Aa tax-exempt municipal
bond index
641
#2-Decoupling Expense
and Funding
 Current Pension Expense:
 Based upon actuarially determined
funding requirement-ARC
 Normal cost plus
 Amortization of the unfunded actuarial accrued
liability (UAAL)
• Period not greater than 30 years
• Closed or open amortization period
• Level dollar or level percent of payroll
 Can be based on any of six actuarial cost
methods
GCG
651
#2-Decoupling Expense
and Funding
 Current Pension Expense:
 Based upon actuarially determined
funding requirement-ARC
– Can be based on any of six actuarial
cost methods
– Serves as a defacto funding standard
GCG
661
New Pension Expense
 It is the change in the NPL each year,
with deferred recognition of certain
elements (It specifically not intended
to be a funding standard)
GCG
671
New Pension Expense
Components
 Service cost (i.e., normal cost)
 Interest on the TPL at the beginning
of the year
 Changes in the TPL over the year
(with limited deferrals)
 Differences between actual and
projected earnings over the year
GCG
681
New Pension Expense
Components
 Projected investment returns over
the year
 Employee contributions
 Other changes in plan net position
GCG
691
Changes in TPL That Are
Recognized Immediately
 No Deferrals
– Service cost
– Annual interest on the TPL
– Projected investment returns over the
year
– All plan amendments
GCG
701
Changes in TPL That Are Not
Recognized Immediately
 Changes in actuarial assumptions
 Actuarial gains and losses
 These changes are recognized in
expense over average expected
remaining services lives of active
and in active members
GCG
711
Changes in TPL That Are
Not Recognized
Immediately
 Resulting recognition periods will be
very short (often less than ten years)
 Method must be systematic and
rational, using closed periods
GCG
721
New Pension Expense
Components
 The faster, often immediate
recognition of NPL changes will
introduce much greater volatility in
the reported expense
 This volatility is what disqualifies
this new expense as a basis for
determining a funding policy
GCG
731
#3-Proportioned Reports for
Cost Sharing Plans
 Current standards are simple
 Pension expense is contractually required
contribution
 Statement of NPL is the accumulated
difference between the contractually
required contribution and the actual
contribution
 No ARC or NPO
 Unfunded actuarial accrued liability is not
reported at all
GCG
741
Cost Sharing Treated Like a
Single Employer Plan
 Recognize proportionate share of
collective NPL and pension expense
GCG
751
Determining an employers
“proportionate share” - NPL
 Calculation must reflect any different
contribution rates associated with
different components of the
collective NPL
 A description of the basis for
GCG
determining the proportionate share
of the NPL must be disclosed in
notes
761
Determining an employers
“proportionate share” - PE
 Collective pension expense
– Amortization of items based on average
expected remaining service life of all
employees
 Proportionate share of pension
expense
 Multiply collective pension expense by
the ratio of the employer’s portion of
the NPL to collective NPL
GCG
771
Cost Sharing
Measurement Date
 Plan can determine its TPL and plan
net position (market assets) at one
date each year
– Probably the plan’s valuation date
– Each employer’s share can be as of that
same date
GCG
781
Potential for Modified
Audit Opinion
 Audit opinion is not an assessment of the
government’s underlying finances
 Not the fault of either the government or the
auditor
 Auditing standards not available in time for
implementation of the new standard
79
Potential for Modified
Audit Opinion
 Many of the records and calculations
necessary for the auditor to opine on the
net pension liability and related disclosures
are maintained only by FRS.
 The FRS’s auditor and the government’s
auditor both have responsibility
80
Potential for Modified
Audit Opinion
 The local government’s auditor is ultimately
responsible for expressing an opinion on the
financial statements and related notes disclosures
 The AICPA is currently proposing that the TMRS
auditor be engaged to issue a Service Organization
Control Report (SOC) that provides assurance that
the appropriate internal controls were both in place
and operating effectively during the reporting
period.
81
#4 - Expansion of Disclosure
Information (Notes and RSI)
 Greatly expanded employer
disclosures, including:
– Description of the plan and assumptions
– Policy for determining contributions
– Sensitivity analysis of the impact on NPL of a
one percentage point increase and decrease in
the discount rate
– Changes in the NPL for the past 10 years
GCG
821
#4 - Expansion of Disclosure
Information (Notes and RSI)
 Greatly expanded employer
disclosures, including:
Development of long-term earnings
assumption
Annual rates of investment return for
past 10 years (plan only)
GCG
831
Key Implications of New
Standards
 Shift in focus from the long-term
commitment to fund to a short-term
snapshot of funded status based on
market assets and a blended
discount rate
 Reporting the NPL on the Statement
of Net Position will add a large and
unstable element to the net position
GCG
841
Key Implications
 Having two different cost amounts,
funding and expense will be
challenging
 Cost sharing plans will have new
expense and liability reporting
GCG
851
Key Implications
 Both the timing and the scope of the
new reporting will require greater
coordination between the plan and
employer, as well as between the
actuary and the auditor
GCG
861
Key Implications
 Having the NPL on the Statement of
Net Position could mean more
involvement by the auditor in
actuarial results
GCG
871
Other GASB Current
Agenda Items
Other Major Projects in Process
 Conceptual Framework—Recognition
and Measurement (PV)
 Fair Value—Measurement and
Application
 Fiduciary Responsibilities
 Leases
 Economic Condition
 Other Post Employment Benefits
89
Practice Issues
 Comprehensive Implementation Guide – Annual
Update
 GAAP Hierarchy
 Irrevocable Charitable Trusts
 Tax Abatement Disclosures
Pre-agenda Research
 Financial Reporting Model
 Debt Extinguishments
 External Investment Pools
Monitoring Activities
 Electronic Financial
 Emerging Accounting Issues
 Pension Implementation
GCG
921
Research Projects
 Electronic Financial Reporting
 Fiduciary Responsibility
 Tax Abatement Disclosures
GCG
931
Potential Projects








GCG
2a7-Like External Investment Pools
Asset Retirement Obligations
Emission Trading (Carbon Credits)
Exchange and Exchange-Like
Financial Guarantees
Exchange Like Revenues
Financial Performance Measurements
Financial Transactions with
Characteristics of Both Loans and
Grants
In-Kind Contributions
941
Potential Projects
 Impairment of Assets Other than







GCG
Capital Assets
Interim Financial Reporting
Popular Reporting
Present Value
Preservation Method
Reporting Unit Presentations
Equity Interests in Component Units
Direct Borrowing
951
Reexamination Projects






GCG
Accounting for Prior-Period Adjustments,
Accounting Changes, and Error
Corrections
GASBS 42 - Asset Impairment
GASBS 62 – Capitalization of Interest
Costs
GASBS 16 – Compensated Absences
GASBI 2 – Conduit Debt
GASBS 32 – Deferred Compensation
Plans
961
Reexamination Projects
GASBS 21 – Escheat Property
GASBS 56 – Going Concern
GASBS 18 – Landfills
GASBS 33 & 36 - Nonexchange
Transactions
 GASBS 62 - Inventory




GCG
971
Reexamination Projects
 GASBS 62 - Nonmonetary
Transactions
 GASBS 38 & 40 – Note Disclosures
 GASBS 10 & 30, Risk Financing
 GASBS 62 – Capitalization of
Interest
 GASBS 28, Security Lending
Transactions and Reverse
Repurchase Agreements
GCG
981
Reexamination Projects
 GASBS 62 - Right of Offset
 Sales of Real Estate
 GASBS 62 - Troubled Debt
Restructurings
 Statements 62 and 65 - Regulated
Operations
 Statement 49 Pollution Remediation
Obligations
GCG
991
Reexamination Projects
 GASBS 62 – Research and
Development
 GASBS 62 - Revenue Recognition:
Exchange Transactions
 GASBS 44 - Statistical Section
 GASBS 46 – Termination Benefits
GCG
1001
We Are Finally Finished
Any Questions
pglick@mindspring.com