Give Me Leases or
Give Me Fiduciary
Responsibilities!
Patrick Henry 1775
What the GASB’s Preliminary Views
May Mean to Your State
Marcie Handy, CPA, Assistant State Comptroller –
State of Utah
Eric S. Berman, MSA, CPA, Partner – Eide Bailly LLP
www.eidebai lly.com
Leases—Biggest Deals
•
Single approach—right of use
•
No classification of leases into operating/capital or
other categories
• Potentially develop some exceptions
• Underlying assumption that leases are financings
•
Practicality exception—short-term lease
•
Lease that, at the beginning of the lease, has
maximum possible term under the contract, including
any options to extend, of 12 months or less
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Leases
•
Lessees – Recognition and Measurement
•
•
Intangible asset for the right to use the underlying
asset and
Liability for future payments
•
Day 0 liability =
•
•
•
•
•
•
Fixed payments over lease term
Variable payments based on an index / rate in effect at that date
Variable payments that are in-substance fixed
Residual value guarantees that are probable of being required
Termination penalties if based on the determination of the lease
term, the termination option is probable of being exercised
Liability does not include lease payments that are dependent
on a lessee’s performance or usage of an underlying asset
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So What is the Right of Use Model?
Right to Use Asset
Lessor
Lease Agreement
Lessee
Lease Payments
A lease contract conveys the right to use an asset (the
underlying asset) for a period
of time in exchange for consideration
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33
Leases
•
May have multiple components
•
Lease principle and interest
• Maintenance
• Utilities
• Security
• Other
•
Should separate lease and non-lease
components or multiple lease components if
practical
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44
Leases
•
Governmental lessor
•
•
Board is proposing symmetry
Lessor would recognize receivable for the right to
receive payments
•
•
•
•
•
Payments discounted by the rate charged lessee
No de-recognition of underlying asset
No recognition of performance liability (e.g. security)
Deferred inflow of resources is credit = [receivable +
cash received]
Lease revenue recognized systematically & rationally
over lease term (e.g. effective interest method)
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55
Leases
•
Governmental lessor
•
Receivable includes
•
•
•
•
•
Residual value guarantees
Purchase options
Termination penalties (if measured, exercised and unpaid)
Direct costs expensed (just like GASB-65)
Sub-lease situations
•
2 separate transactions
• Do not net
• Apply all applicable guidance
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66
Leases
State of Utah – Field Test
• Evaluated Lessee Perspective Only
•
Primary Governmental Activities Only
•
•
•
•
•
325 Leases
Mainly office space/buildings
10 Capital Leases, $24.9M Net Assets, $21.8M Liability
225 Operating Leases, $67.7M Future Minimum Lease
Payments, $27.7M Expenditures
Use Excel Spreadsheet to Maintain/Track Each Lease
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77
Leases
State of Utah – Field Test
• Field Test - Issues
•
Time Consuming – Have to Reexamine Each Lease
•
•
•
•
•
•
•
Renewal, Termination Clauses
Non-lease or Multiple Lease components
Subleases
Measure Underlying Asset at Historical Cost
Determine Current Lease Liability
Recalculate the Net Present Value
Determined Will Take 1 Hour Per Lease, so….
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88
Leases
State of Utah – Field Test
• We Ignored Lease Payments < $100K
•
Eliminated the Evaluation of 90 Leases
•
•
We Grouped Leases by Dollars
•
Leases Between $100K - $200K Evaluated as a
Group and Applied Patterns
•
•
$3.1M or 2% of $157M in Future Minimum Lease Payments
Most Leases have a term of 5 years or less
Going Forward Will Evaluate All New Leases
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99
Fiduciary Responsibilities—Where The
Board Has Been
•
Fiduciary definition
•
A government is a fiduciary and has a fiduciary
responsibility when it controls assets
•
From a pass-through grant for which the government does not
have administrative or direct financial involvement
• In accordance with a trust agreement or equivalent arrangement
in which the government itself is not a beneficiary
• For the benefit of individuals that are not required to be part of
the citizenry, as a condition of being a beneficiary, or
organizations or other governments that are not part of the
financial reporting entity.
•
•
Custodial funds—A new fund type that includes any
fiduciary arrangement that is not governed by a
formal trust agreement or equivalent arrangement
Fiduciary activities continue to be reported as basic
financial statements
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1010
When Does a Government Control Assets
– putting it all together
•
Government Might Have Control IF
•
It is directly holding the assets, regardless of its
responsibility for administering the exchange of those
assets
• It is directly responsible for administering the exchange of
assets, regardless of the legal structures that might
separate the government and the entity that is holding the
assets
• It has assigned its responsibility for administering the
exchange of assets (for example, to an asset manager)
but maintains the ability to reassign that responsibility,
regardless of the legal structures that might separate the
government and the entity that is holding the assets.
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1111
When Does a Government Control Assets
– putting it all together
•
Government Might NOT Have Control IF
•
It is acting as a trustee for assets and has no
responsibility for administering the exchange of
assets even though it may have the ability to establish
parameters (for example, providing a selection of
investment options) for those that have the responsibility
• It is neither directly holding nor acting as a trustee for
assets and has no responsibility for administering the
exchange of assets even though it may have the
ability to establish parameters for those that have the
responsibility
• It is not directly holding assets and has no responsibility
for administering the exchange of assets.
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1212
In other words…
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1313
So What are the Board’s Views?
•
Fiduciary funds would continue to be reported
in the basic financial statements
•
•
•
No change in full accrual
Classification within fiduciary funds based on the
presence or absence of a trust agreement or
equivalent
No change in investment trust / private purpose trusts
with trust agreements or equivalent if
•
•
Trust assets are dedicated to providing benefits to recipients
in accordance with the benefit terms
Trust assets are legally protected from the creditors of the
government that is acting as the trustee
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1414
But There’s Something New…
•
Custodial Funds
•
Would report fiduciary activities for which
there is no trust agreement or equivalent
arrangement. Including:
•
•
Certain funds previously classified as agency funds
The portion of certain funds previously classified as pension
(and other employee benefit) trust funds that is held for the
benefit of employees of another government, but for which
there is no trust agreement or equivalent arrangement
• Could include things like rate stabilization reserves for future
pension contributions held at employers
•
Certain funds previously classified as investment trust funds
or private-purpose trust funds, but for which there is no trust
agreement or equivalent arrangement.
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1515
Other Aspects of the PV
•
Reporting of fiduciary funds would continue
•
•
•
•
•
Additions disaggregated by source
Net investment income
Deductions disaggregated by type
Administrative costs (if applicable)
Fiduciary component unit reporting
•
Inconsistent at best, especially with IRC 457, 403(b) and
401 plans
• Proposal is to present combined fiduciary component
units of fiduciary component units
•
•
Example - Combine plans before presentation in a general
government’s pension trust funds
Business-type activities with fiduciary activities would now
present fiduciary funds
•
Examples – Hospitals, Higher Education
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1616
State of Utah – Field Test
•
State Has Approximately 400 Funds
•
Evaluated 24 Private Purpose Trust Funds
• Evaluated 69 Agency Funds
• Evaluated 2 Investment Trust and OPEB Funds
• Did Not Evaluate Pension Trust funds
• Results
•
•
•
•
No Change to Investment Trust Funds or OPEB Trust Funds
Reclassified 7 Funds PPT, 5 to Custodial, 2 to Governmental
5 PPT Are Custodial = No Trust Agreement/Equivalent
Arrangement
2 PPT Are Governmental = Assets Are Not Fiduciary
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1717
State of Utah – Field Test
•
Field Test - Issues
•
Trust Agreement or Equivalent Arrangement Where
Trust Assets:
•
•
•
Are dedicated to providing benefits to recipients
Are legally protected from the creditors of the government
No Examples of Equivalent Arrangement
•
•
•
Implied/inferred from previous actions?
Statute?
Court cases?
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1818
State of Utah – Field Test
•
Field Test - Issues
•
Recognition of a Liability in Fiduciary Funds
•
•
•
•
“Present obligations to sacrifice resources that the
government has little or no discretion to avoid”
When an event has occurred that compels the government to
disburse the fiduciary resources.
When no further action or condition is required by beneficiary
Need Further Clarification – When to Recognize a
Liability
•
•
•
Utah has a PPT that has an annual actuary valuation
Liability is recorded based on results of the actuary report
No longer be reported in PPT?
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1919
What Does This All Mean?
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20
Questions!
Eric S. Berman, MSA, CPA, CGMA
Marcie L. Handy, CPA
Partner
Eide Bailly LLP
Assistant State Comptroller
State of Utah
877 W. Main St., Ste. 800
Boise, ID 83702-5858
350 North State Street, Salt Lake City, UT 84114
T 801.538.1678
E mhandy@utah.gov
www.utah.gov
12 Stedman Street #2
Brookline, MA 02446
T 208.424.3524
M 626.375.3600
E eberman@eidebailly.com
www.eidebailly.com
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