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Government Finance Officers AssociationNovember 7, 2013
1
Final GASB pronouncements◦ Government Combinations and Disposals of
Government Operations GASB Statement No. 69◦ Accounting and Financial Reporting for
Nonexchange Financial Guarantees GASB Statement No. 70
2
GASB due-process documents◦ Pension Transition for Contributions Made
Subsequent to the Measurement Date Exposure Draft (ED) of proposed GASB Statement June 2013
◦ Measurement of Elements of Financial Statements ED of proposed GASB Concepts Statement June 2013
◦ Fair Value Measurement and Application Preliminary Views (PV) June 2013
3
GASB implementation guidance◦ GASB Comprehensive Implementation Guide Annual update 2013-2014 Financial Reporting for Pension Plans
4
Other implementation issues◦ Identifying deferred outflows and deferred inflows of
resources GASB Statement No. 65 Issued March 2012/Implementation date: FYE December
2013◦ Employer accounting for pensions GASB Statement No. 68 Issued June 2012/Implementation date: FYE June 2015
◦ Technical corrections GASB Statement No. 66 Issued March 2012/Implementation FYE December 2013
5
GASB technical agenda◦ Oversight initiative of Financial Accounting
Foundation (FAF) GASB’s Scope of Authority: Proposed Changes to
Agenda-Setting Process Request for Comment (RFC) February 2013
GASB Scope of Authority: Consultation Process Revised Proposal (RP) August 2013
◦ GASB Technical Plan Common financial reporting deficiencies
6
GASB Statement No. 69GASB Statement No. 70
7
GASB Statement No. 69
8
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
9
An entity loses its separate legal identity◦ Result of being included as part of a completely
new entity (A + B = C)◦ Result of being absorbed into an existing entity (A + B = B+)
A specific operation is moved to a separate legal entity◦ Including the “spinoff” of an operation as a separate
legal entity of its own
10
Mergers, acquisitions, and transfers of operations◦ An entity loses its separate legal identity Exchange of significant consideration? No = merger Yes = acquisition
◦ A specific operation is reassigned from one legally separate entity to another Transfer of operations
11
Need to 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”◦ The transferred operation must continue to
provide essentially the same services
12
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
13
Two possible situations◦ Merger date = reporting date of merged entity Carrying value as of merger/reporting date◦ Merger date ≠ reporting date of merged entity What carrying value would have been as of the
reporting date
14
To make consistent with GASB standards To enhance consistency in internal application
of accounting policies◦ Exception = no adjustment to the amounts initially
reported to reflect a change in estimate
15
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
16
Transactions and balances between merging entities◦ Regular rules for consolidation
17
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
18
Measurement = acquisition value
19
Market-based entry price◦ Price to acquire similar assets having similar service
capacity
20
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
21
Normally carrying value Exceptions◦ Effective hedges Deferred amount adjusted as of acquisition date Difference between acquisition value and carrying value
◦ Previously reported “goodwill” Not carried forward
22
To make consistent with GASB standards◦ May require reporting financial statement elements
not previously reported
23
Amount of consideration ◦ Assets remitted + liabilities incurred
Contingent amounts◦ Report as liability when probable and measurable
24
Deferred outflow of resources ◦ Recognized in operations in a systematic and
rational manner consistent with the circumstances of the acquisition
25
Form of economic assistance?◦ Yes Difference = contribution◦ No Reduce acquisition values assigned to noncurrent
assets (other than financial assets) Excess = special item
26
Recognize when services received
27
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
28
Government reporting continuing operations◦ Treated like a merger
Transferring government◦ Treated like a disposal (Gain or loss = special item )
Include Cost directly associated with disposal Benefits for involuntary terminations Contract termination costs Fees for professional services
Exclude Adjustments Costs associated with normal operating activities to
measurement date
29
Brief description Dates Primary reasons
30
Amounts ◦ Total assets Distinguish current/capital/other◦ Total deferred outflows of resources◦ Total liabilities Distinguish current/long-term◦ Total deferred inflows of resources◦ Total net position By component
Brief description of significant adjustments◦ Initial amounts recognized, if different
31
Brief description of consideration Total amount of net position acquired Brief description of contingent
consideration
32
Operations transferred or sold Facts and circumstances leading to disposal Total expenses ◦ Distinguishing operating from nonoperating
Total revenues◦ Distinguishing operating from nonoperating
Total governmental fund revenues and expenditures
33
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
34
GASB Statement No. 70
35
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 pursuant to the
obligation◦ Guarantor
36
Private sector◦ Financial guarantees almost always arise from
exchange transactions Public sector◦ Financial guarantees frequently arise independently
(nonexchange financial guarantees)
37
Excludes◦ Obligations related to revenue-supported debt◦ Obligations related to special assessments◦ “Joint and several” obligations◦ Obligations that are not legally binding
38
Two-step approach◦ Consider qualitative factors and historical data that
indicate likelihood of payments ◦ Point of recognition = “more likely than not” to
occur
39
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
40
Example = student loan receivables Treatment ◦ May need to consider qualitative factors and
historical data from perspective of group as a whole
41
“More likely than not” Likelihood as little as 51 percent
Contrast with normal treatment of contingencies “Probable” Likelihood well in excess of 50 percent
42
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
43
Report an expenditure only when due and payable◦ Classify in the same manner as grant/financial
assistance payments
44
Description◦ Legal authority for extending guarantees◦ Limits on extending guarantees◦ Types of obligations guaranteed◦ Relationship of guarantor to issuers◦ Length of guarantees◦ Arrangements for recovering payments from issuers
Total guarantees outstanding
45
If liability recognized or payments made◦ Description of Timing of recognition Measurement of liability◦ Changes in liabilities Beginning balances Increases (including initial recognition) Adjustments that increase estimates Payments Adjustments that decrease estimates Ending balances◦ Cumulative payments on outstanding guarantees◦ Amounts expected to be recovered from issuers
46
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
47
If guaranteed obligations outstanding◦ Name of guarantor◦ Amount of guarantee◦ Length of guarantee◦ Amount paid during the current period◦ Cumulative amount paid on outstanding obligations◦ Requirement to repay the guarantor Outstanding amounts to be repaid
48
If payments made by guarantor during the current period (even if obligation is no longer outstanding)◦ Amount paid during the current period◦ Cumulative amount paid by the guarantor on
guaranteed obligations outstanding◦ Requirements to repay guarantor Outstanding amounts to be repaid
49
FYE 6/30/14◦ Earlier application encouraged
Application generally retroactive◦ Exception Prospective disclosure for cumulative payments Disclose starting date
50
Pension TransitionMeasurement of Financial Statement Elements
Fair Value Measurement and Application
51
Exposure DraftProposed GASB StatementJune 2013
52
Transition guidance (employers) for pension-related deferred outflows/inflows of resources (paragraph 137)◦ Beginning balances Reporting not required if impractical Must report all balances or none at all
53
Potential situation◦ Employer makes contribution for year prior to
transition following the measurement date Result if the employer contribution is not
reported as a deferred outflow of resources◦ Significant understatement of Beginning net pension liability Pension expense
54
Eliminate “all or nothing” approach◦ Report a deferred outflow of resources for employer
contributions for the prior year made after the measurement date◦ Do not report any other pension-related deferred
outflows or inflows of resources, if impractical to do so for all.
Expected release of final standard◦ November 2013
55
Exposure DraftProposed GASB Concepts StatementJune 2013
56
Concepts Statement◦ Does not set GAAP today◦ Will affect development of future standards
57
Definition◦ Assignment of a dollar amount to a financial
statement element Practical effect limited to assets and liabilities
Deferred outflows/inflows of resources and net position are calculated indirectly
58
Initial amounts◦ Based on value when asset acquired/liability
incurred May change over time (depreciation/amortization)
Remeasured amounts◦ Based on value at financial reporting date
59
Definition◦ Particular characteristic of an asset or liability that
is being measured
60
Four possibilities◦ Historical cost Amount based on an actual exchange transaction◦ Fair value Amount based on a market exit price◦ Replacement cost Amount based on a market entry price◦ Settlement amount Amount based on realization or liquidation value in the
absence of a market
61
Historical cost◦ Relevant only for initial amounts
Fair value◦ Relevant for both initial and remeasured amounts
Replacement cost◦ Relevant for both initial and remeasured amounts
Settlement amounts◦ Relevant for both initial and remeasured amounts
62
Relative advantage◦ Remeasured amounts Better information on service potential◦ Initial amounts Better information on cost of services Normally most relevant in public sector
63
GASB Preliminary ViewsJune 2013
64
Definition of fair value◦ Consistent with other standard-setting bodies
Measurement of fair value Application to specific assets and liabilities
65
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date
Key elements◦ Exit price vs. entry price◦ Market-related◦ Measurement date
66
Principal market◦ Greatest volume and level of activity Typically the market in which the government normally
would enter into a transaction No principal market?◦ Most advantageous market
67
Fair value = highest and best use◦ Considerations Physically possible Legally permissible (current zoning) Financially feasible
68
Today◦ Fair value of investments reduced by anticipated
transaction costs Proposal◦ Fair value of investments unaffected by anticipated
transactions costs Reported as expense when transaction occurs
69
Market approach Cost approach Income approach
70
Based on market transactions involving identical or comparable assets and liabilities◦ Quoted prices from an active market◦ Matrix pricing
71
Based on amount required currently to replace service capacity of an asset
72
Based on related future amounts converted to a single amount◦ Present value of projected cash flows◦ Option pricing models
73
Quality of underlying data (inputs) Hierarchy◦ Level 1 – (highest quality)◦ Level 2 ◦ Level 3 – (lowest quality)
Key factor – Observable vs. unobservable
74
Directly observable◦ Unadjusted market prices in active markets for
identical assets or liabilities
75
Directly or indirectly observable◦ Derived from observable market data◦ Corroborated by observable market data
Example: quoted prices for similar assets or liabilities
76
Unobservable◦ Example: Estimate of fair value of mortgage-backed
securities based on internally generated assumptions
77
Basic principles◦ Maximize use of higher-level inputs◦ Use level 3 inputs only if level 1 and level 2 inputs
are not available
78
Fair value = amount necessary to transfer liability to another party as of the measurement date◦ Assumes party will continue to fulfill obligation Not the amount to settle or otherwise extinguish
79
80
Application of Fair Value
Generally fair value Some exceptions
81
A security or other asset that a government holds primarily for the purpose of income or profit, and its present service capacity is based solely on its ability to generate cash, to be sold to generate cash, or to procure services for the citizenry
Key elements◦ Held primarily for income or profit◦ Service capacity limited to Generating cash Procuring services
82
Investments generally exclude◦ Student loan receivables◦ Mortgage loan receivables◦ Property held to preserve the natural environment Even if related rights sold to generate income
83
Money market investments and participating interest-earning investment contracts with a remaining maturity at purchase of one year or less ◦ For entities other than external investment pools
Investments in 2a7-like pools Investments in life insurance◦ Other than investments in life settlement
contracts
84
Investments in common stock that meet the criteria for applying the equity method of accounting
Nonparticipating interest-earning investment contracts
Unallocated insurance contracts, and Synthetic guaranteed investment contracts
that are fully benefit responsive
85
Investments without a readily determinable fair value◦ May use net asset value per share (or its equivalent) Example: member units in partners’ capital
86
Fair value = exit price Acquisition value = entry price
87
Capital assets ◦ Received in a nonexchange transaction Donated Including works of art, historical treasures, and similar
assets◦ Received in a service concession arrangement
Nonmonetary assets acquired in an exchange when the value of the asset received is used to measure the cost of the asset acquired
88
Fair value - end of the reporting period Level of inputs used◦ Including valuation techniques and inputs
Description of valuation techniques and inputs◦ Including any change and reason (if significant)
89
Reasons for the measurement
90
Level 3 inputs◦ Quantitative information about significant
unobservable inputs ◦ Description of the sensitivity of fair value
measurements to changes in unobservable inputs (if changes might result in significantly higher or lower fair value measurements)
91
Certain specific disclosures for investments in entities that calculate a net asset value per share (or its equivalent)
92
Parts 1 & 2
93
Which of the following would qualify as a government combination?
A. MergerB. AcquisitionC. Transfer of operationsD. All of the aboveE. Both A and B
94
A government combination always involvesA. At least one entity losing its separate legal
identityB. The creation of a new legal entityC. Both A and BD. None of the above
95
Which of the following always involves the exchange of significant consideration?
A. MergerB. AcquisitionC. Transfer of operationsD. All of the aboveE. Both A and B
96
Which of the following is a precondition for a transfer of operations?
A. The operation must provide identifiable services with associated assets or liabilities
B. The transferred operation must continue to provide the same services
C. There must be a significant exchange of consideration
D. All of the aboveE. Both A and B
97
If a merged entity is absorbed into a continuing government, when does reporting begin?
A. As of the merger dateB. As of the start of the merging government’s fiscal
periodC. Either A or B
98
An entity obtains a capital asset through a merger. It intends to dispose of the asset eventually, but meanwhile plans to use it. When would the entity need to assess whether a capital asset impairment had occurred?
A. When the capital asset is first obtainedB. At the time of disposal
99
In an acquisition, how should financial statement elements be measured?
A. Fair valueB. Acquisition valueC. Disposal valueD. Either A or B
100
Acquisition value is based onA. Historical entry priceB. Historical exit priceC. Market-based entry priceD. Market-based exit price
101
Deferred outflows/inflows of resources in a merger areA. Always reported at carrying valueB. Normally reported at carrying valueC. Sometimes reported at carrying valueD. Never reported at carrying value
102
Consideration includesA. Assets remittedB. Liabilities incurred C. Both A and B
103
In an acquisition, how should a disparity between the amount of consideration given and the net position acquired be treated?
A. Deferred outflow of resourcesB. ContributionC. Reduction in amount reported for noncurrent
assetsD. Special itemE. All of the above
104
Acquisitions within the financial reporting entity may involve some assets being reported at carrying value rather than at acquisition value.
A. TrueB. False
105
At a minimum, a financial guarantee involves how many parties?
A. TwoB. ThreeC. Four
106
Guarantors should recognize a liability when the likelihood of making payments is
A. Reasonably possibleB. More likely than notC. Probable
107
When should an issuer cease to report a guaranteed obligation?
A. When it is probable that payments will be made by the guarantor
B. When it is more likely than not that payments will be made by the guarantor
C. When the issuer is legally released as an obligor by the guarantor
D. None of the above
108
When should a guarantor report an expenditure for a guarantee in a governmental fund?
A. When it is probable that payments will be made by the guarantor
B. When it is more likely than not that payments will be made by the guarantor
C. When the issuer is legally released as an obligor by the guarantor
D. None of the above
109
If a guarantor reports a liability because payment is considered to be more likely than not, the issuer should
A. Always recognize a receivableB. Sometimes recognize a receivable C. Never recognize a receivable
110
How should an issuer report its legal release as an obligor on guaranteed debt?A. ReclassificationB. RevenueC. Either A or B
111
In the year of transition to the new pension standard, an employer must report all beginning balances of pension-related deferred outflows/inflows of resources or none at all.A. TrueB. False
112
Which approach to measurement normally would be expected to provide better information on cost of services?A. Initial amountsB. Remeasured amounts
113
The measurement of fair value should focus on which of the following?A. Exit priceB. Entry priceC. Either A or B
114
Today, the fair value of investments sometimes is affected by anticipated transaction costs.A. TrueB. False
115
The GASB believes that donated capital assets should be reported at fair valueA. TrueB. False
116
Level 1 inputs are observable, whereas level 2 inputs are unobservable.A. TrueB. False
117
15 minutes
118
GASB Implementation Guidance
119
2013-2014 Update
120
New questions
121
Situation◦ A portion of a sponsoring school district’s property
tax levy is allocated to a charter school based on the number of students
Question◦ Does the school district have the ability to approve
the charter school’s budget (a criterion for fiscal dependency)?
Answer◦ No. The charter school has no tax levy Indication of financial burden rather than fiscal
dependence
122
Situation◦ State financing authority Issues debt for facilities for itself (75%) and for local
school districts (25%) State appoints board State has pledged taxes to repay all outstanding debt
Question◦ Blended or discretely presented?
Answer◦ Blended because state will repay debt
123
Situation◦ Same as described previously, except school districts
will repay their own debt Question◦ Blended or discretely presented?
Answer◦ Discretely presented Does not meet the debt repayment criterion for
blending Does not meet the almost exclusive service criterion
124
New questions
125
Question◦ Valuation?
Answer◦ Sometimes fair value Most investments of pension and OPEB plans Most investments of external investment pools Most investments of IRC Section 457 plans Real estate held as an investment by an endowment Most derivative instruments Exception fully benefit-responsive synthetic guaranteed
investment contracts
126
Answer (cont.)◦ Sometimes not fair value Equity interests in organizations GASB Statement No. 14
Mortgage loans held for sale Lower of cost or fair value
Life insurance (postemployment benefit plans) Cash surrender value
Common stock (with some exceptions) that does not have a readily determinable fair value Equity method
127
Question◦ How to apply fair value reporting to zero-coupon
bonds? Answer◦ Fair value at the reporting date Any change in fair value = change in net position Ultimately fair value = face value
128
New questions
129
Situation◦ Primary government = several enterprise funds◦ Financing authority blended component unit Loan receivable/payable in separate financials Internal balances in primary government financials
Question◦ Which obligations are capital-related?
Answer◦ Internal payable to financing authority = yes Because legally separate◦ Bonds payable in financing authority = no Related capital asset reported elsewhere
130
Situation◦ PERS administers 2 defined benefit + 1 defined contribution pension plan 1 active employee and 1postemployment healthcare plan
Question◦ Are combined financial statements required?
Answer ◦ Special-purpose government – only fiduciary activities No government-wide financial statements Separate columns or combining statements for individual
defined benefit pension and OPEB plans
131
New questions
132
Situation◦ Interest rate swap (pay-fixed, receive variable) Effective 5% pay-fixed leg◦ Later amended (for payment) 3% pay-fixed leg
Question◦ Termination?
Answer◦ Yes. Fixed-rate leg is a critical term, and a change
in critical term terminates the original hedge.
133
Situation◦ Partial refunding of bonds◦ Notional amount unchanged
Question◦ Effect on hedge?
Answer◦ Hedge = only amount related to outstanding debt◦ Reclassify portion related to refunded amount as an
investment (vs. hedging) derivative Adjustment to investment income
134
Situation◦ Interest-rate swap Effective hedge for mortgage-backed bonds Notional amount based on schedule prepared using best
estimates for prepayments Actual prepayments vary
Question◦ Effect on hedge?
Answer◦ Under hedging? No problem ◦ Over hedging? May bifurcate (as in previous question)
135
Situation◦ Interest-rate swap Effective hedge for mortgage-backed bonds Call option allows adjustment of notional amount
Question◦ Termination because change in critical term if
option exercised? Answer◦ No. Option itself was part of the negotiated fixed
rate◦ Consider possibility of over/under hedging Answer to previous question
136
New questions
137
Situation◦ Board sets aside a portion of fund balance to pay
appropriated expenditures at beginning of the next fiscal year (prior to revenue collections)◦ Cannot be used for any other purposes
Question◦ Committed fund balance?
Answer◦ No. A limitation focuses on the object of spending,
not the circumstances.
138
Situation◦ GAAP require that the transferor determine or have
the ability to modify or approve What services are provided To whom
Question◦ Does the agreement itself need to be specific?
Answer◦ Not if the nature of the activity makes it unnecessary Golf course Toll road
139
Situation◦ Deferred outflows and inflows of resources related
to similar, but separate, underlying transactions Example: hedging arrangements
Question◦ May amounts be combined?
Answer◦ No. Netting is only appropriate if there is a specific
right of offset.
140
Situation◦ Requirement to disclose changes in long-term
liabilities Question◦ Applicable to deferred outflows/inflows arising
from debt refundings? Answer◦ No No effect on carrying value of refunded debt Deferred amounts are not themselves liabilities
141
Situation◦ Government dissolves◦ Operations form basis for new government◦ No significant consideration
Question◦ Treatment?
Answer◦ Transfer of operations Not a merger because only one existing entity is
involved Transferor government does not have to continue to
exist
142
Situation◦ Township merges into village◦ Some capital assets of township will not be used by
village Question◦ How to report impairment?
Answer◦ Disclosure only Carrying value prior to merger Impairment adjustment Explanation
143
Implementation Guide
144
Issuance of stand-alone report not required(5.60.1)
Detailed notes and required supplementary information (RSI)◦ Not needed in sponsor report if separately issued
plan report Provide information on how to obtain (5.60.2)
Applicable to unfunded plans (5.60.3) Applicable to closed plans (5.60.4)
145
Plan not administered through trust or equivalent arrangement◦ GASB Statement No. 25 and GASB Statement No. 50
applicable (5.60.5)
146
Reversionary interest◦ Upon payment of all obligations Yes - meets “irrevocability test” (5.61.1)◦ If funded status reaches specified level No - does not meet “irrevocability test” Apply provisions of GASB Statement No. 25 and GASB
Statement No. 50 (5.61.2)
147
Three criteria for DC plan1. Individual account for each plan member2. Employer contribution defined3. Benefit depends solely on Actual earning Forfeitures of contributions (other plan members) Administrative costs
Otherwise DB plan
148
Fixed interest rate◦ Situation Specified employer contributions Interest credited at 5% rate◦ DB plan Not actual earnings (5.62.1)
Interest rate based on index◦ DB plan unless index mirrors investments in
employee accounts Not actual earnings (5.62.2)
149
Life annuity◦ Situation Balance at retirement converted to life annuity Interest rate established by plan
Payments continue even if life assumption incorrect◦ DB plan The amount of benefit does not depend on actual
earnings (5.62.3) Life expectancy Interest rate established by plan vs. actual earnings
(5.62.3)
150
Option to purchase life annuity◦ Situation Option to use account balance to purchase annuity
contract with a third party◦ DC plan Purchase of annuity contract is a separate transaction Benefit limited to account balance (5.62.4)
151
Single-employer plan Multiple-employer plans◦ Agent Employer-specific assets and liabilities Assets legally segregated
◦ Cost-sharing All assets legally available to pay any member benefit
152
Separate rates for separate classes◦ Situation System serves 3 employer governments Separate valuations for separate classes of employees Rates based on class of employees Plan assets legally available to pay any member◦ Cost-sharing plan No legal segregation of assets (5.63.1)
153
Separate valuations and rates for individual employers◦ Situation Separate valuations and different rates for individual
employers Allocation of assets to each employer No legal segregation of assets
◦ Cost-sharing plan No legal segregation of assets (5.63.2)
154
Single system for state and component units◦ Situation Assets legally available for any benefit◦ Single-employer plan Primary classification factor = number of employers Primary government + component units = 1 employer (5.63.3)
155
Single system ◦ Situation State Component units Other governments◦ Multiple-employer plan Limitation on availability of assets = agent plan Example 1: each participating employer as such, or Example 2: State and component units vs. each other
government No limitation = cost-sharing plan (5.63.4)
156
Single system – “pool” and “nonpool” members◦ Two separate multiple-employer plans Nonpool members Separate asset accounts with legal limitation Agent plan
Pool members No legal limitation on availability of assets Cost-sharing plan (5.63.5)
157
Healthcare OPEB◦ Provided through a pension trust Separate reporting required GASB Statement No. 43 applicable to OPEB (5.64.1)
◦ Administered through a pension plan Separate reporting required Healthcare always classified as OPEB (5.64.2)
158
Presentation of OPEB administered by DB pension plan◦ GASB Statement No. 43 applies Stand-alone report Separate columns, or Combining statements (basic financial statements)
Sponsor trust fund Reporting by fund type Reference GAAP stand-alone report If no stand-alone report Accompanying notes and RSI Separate financial statements in notes (5.64.3)
159
Pension plan as cash conduit for OPEB◦ Situation Collects employer contributions for healthcare OPEB Remits to separate agency Unremitted amounts = liability
◦ Treatment GASB Statement No. 43 not applicable to cash conduit Presentation as liability Alternative = agency fund (5.64.4)
160
Single-employer plan with multiple classes◦ All assets available for all classes? One plan One set of financial statements + notes + RSI◦ Assets limited by class? Multiple plans Separate financial statements + notes + RSI (5.66.1)
161
Single trust with limitations on asset availability◦ Situation: 2 classes Limitation by class Multiple employers in each class◦ Treatment: Two multiple-employer plans (5.66.2)
162
Separate reserves, funds, or accounts◦ One trust, but separate account to fund cost-of-
living adjustments Assets in account available for all retirees◦ Not a separate pension plan Assets available for all retirees (5.66.3)
163
No specialized deferred outflows or inflowsfor pension plans ◦ Derivatives guidance not unique (5.68.1)
Receivables from cost-sharing employers for contractually required contributions◦ Legally enforceable (5.70.1)
No receivables from agent employers based on appropriation◦ An appropriation is not legally enforceable (5.70.2)
164
Receivable for full amount of installmentpayments related to the current year’s contractually required contribution (5.70.3)◦ Disclose terms and outstanding balance
Noninterest-bearing loan receivable ◦ Full contract value ◦ Discounted present value (5.70.4)
Receivable/payables - trade-date accounting◦ Do not net No right of offset (5.70.5)
165
Receivable for installment payments due from participating cost-sharing employers resulting from early retirement incentive◦ Additional contribution requirement Contributions receivable Addition (in the year agreement becomes effective) Disclose terms and outstanding balances (5.70.6)
166
Purchase of service credits◦ Death or termination prior to payment in full Service credit for payments made Contribution receivable Allowance for cancellations
Addition (5.70.7) No service credit unless paid in full Same treatment Accrual accounting (5.70.8)
167
Debt securities to be held to maturity◦ Management policy, legal restriction May not be reported at cost (5.71.1)
Commissions and normal sales costs of investments should be determinable◦ If not, disclosure is recommended (5.71.2)
Reporting principal components when almost all investments are in mutual funds and external investment pools◦ No “look through” to components (5.71.3)
168
Report long-term liabilities that are not related to benefit payments◦ Contrast: liability for benefit payments only when
due (5.72.1) Liability for deferred retirement option plan
(DROP) payments only when due and payable◦ When distribution required Disclose balance and terms of DROP (5.72.2)
169
Report assets credited to individual member DROP accounts◦ By definition, DROP accounts are within the DB
pension plan Disclose information on plan and amounts (5.73.1)
170
Operating expense paid to investment pool◦ Report as investment expense Vs. administrative expense (5.74.1)
Movement of member asset balances◦ External transactions (not transfers)◦ Separate lines additions/deductions (5.74.1)
Employer makes plan member contribution◦ Recorded as salary expense? Employee contribution◦ Not recorded as salary expense? Employer contribution (5.75.1)
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Investment income◦ Do not display realized gains/losses separately
from unrealized gains and losses Separate disclosure permitted (5.76.1)◦ No requirement to report net increase (decrease) in
fair value for separate principal components(5.76.2)◦ If interest reported separately, report at stated rate
of interest No amortization of bond premiums and discounts
(5.76.3)
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Investment income (cont.)◦ Pooled investment vehicles that report only net
change in investor accounts Plan may report as such Investment-related expenses are not “readily separable”
(5.76.4)
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Investment expense◦ Investment-related expenses included in
administrative expense should be extracted if readily separable Examples: Investment staff salary, payroll taxes,
hardware and software purchases, subscriptions, data services, supplies (5.77.1)
◦ Allocation of salary and fringe benefits between investment expense and administrative expense Significant and relatively stable = allocate Insignificant or highly variable = professional
judgment (5.77.2)
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Only special requirement for a closed plan = the fact that the plan is closed (5.80.1)
Two potential disclosures for investment concentration (>5%)◦ Pension-specific = all investments◦ GASB Statement No. 40 = credit risk on fixed-
income investments (5.86.1) Mutual funds are not subject to investment
concentration disclosure (5.86.2)
175
Calculation of money-weighted rate of return(ROR) on investments◦ Not limited to amount reported in investments line Include cash and investment-related balances (5.87.1)◦ Investment expense for this purpose Includes investment management fees, custodial fees,
other significant investment-related costs If separable from administrative expense Related to any item included in calculation of ROR (5.87.2)
176
Calculation of money-weighted rate of return (ROR) on investments (cont.)◦ Exclude cash flows for investment expense Beginning and ending balances of investments reflect
investment income Investment income includes related expense (5.87.3)◦ Include cash flows associated with administrative
expense (5.87.4)
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Calculation of money-weighted rate of return (ROR) on investments (cont.)◦ Monthly information on external cash flows Method used must be representative of the pattern of
the plan’s external cash flows For example Beginning of the month (1.0 weight) Middle of the month (0.5 weight) End of the month (zero weight) (5.87.5)
178
Single-employer and cost-sharing plans◦ Most recent fiscal year-end = reporting date of the
current year (5.92.1)
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Single-employer and cost-sharing plans (cont.)◦ Separate schedules for separate tiers Neither required nor permitted (5.97.1)◦ No percentage of covered payroll required for
volunteer firefighters (5.97.2)
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Single-employer and cost-sharing plans (cont.)◦ Proceeds of pension obligation bonds Schedule of changes in net pension liability Normally Addition – plan net position Reduction - net pension liability
Separately financed liability Reduction of employer receivable (5.97.3)
Schedule of employer contributions Only portion related to actuarially determined contribution Exclude amount to pay separately financed liability (5.97.4)
181
Single-employer and cost-sharing plans (cont.)◦ Changes in net pension liability Total service cost is always the same, regardless of who
funds it Employer, plan member, nonemployer contributor (5.98.1)
Service cost can be based on the actuarial valuation used to determine the beginning net pension liability Interest on service cost (required) included in amount
reported as interest on the total pension liability (5.98.2) Amount based on beginning total pension liability, adjusted
for projected service cost and actual benefit payments (5.98.3)
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Single-employer and cost-sharing plans (cont.)◦ Changes in net pension liability (cont.) Ad hoc cost-of-living (COLA) adjustment that is not
substantively automatic = change in benefits (5.98.4) COLA that is substantively automatic, but not provided in
current year = difference between expected and actualexperience (5.98.5)
COLA that had been substantively automatic (during the year), but no longer is so = difference between expected and actual experience (5.98.6)
183
Single-employer and cost-sharing plans (cont.)◦ Changes in net pension liability (cont.) Effect of a change in assumptions that directly results
from a change in plan terms should be included as part of the latter (5.98.7)
Purchase of allocated insurance contract Reduction of fiduciary net position/total pension liability Difference between amount paid and actuarial present value =
difference between expected and actual experience (5.98.8)
184
Single-employer and cost-sharing plans (cont.)◦ Schedule actuarially determined contributions Contribution rate should be the one available at the time
the contribution was adopted Even after subsequent valuation (5.100.1)
If employer has a different fiscal year than the plan Report based on plan year Aggregate of overlapping employer contributions Example: 6 months one rate/6months the other (5.100.2)
Present each year even if biennial valuations (5.100.3) Actuarially determined contribution = calculated in
conformity with Actuarial Standards of Practice (5.100.4)
185
Single-employer and cost-sharing plans (cont.)◦ Schedule actuarially determined contributions (cont.) An actuarial determined contribution may involve a
“smoothed” actuarial value of assets (5.100.5) “…measured in accordance with the requirements of
this Statement” means only in a manner consistent with Actuarial Standards of Practice (5.100.6)
Contributions do not include installment receivables or payments to liquidate them (5.100.7)
Reflect both employer and nonemployer contributors if rate calculated for both (5.100.8)
186
Single-employer and cost-sharing plans (cont.)◦ Schedule actuarially determined contributions (cont.) Plan member contributions should not be included Not discretionary (5.100.9)
If rate based on projected payroll is applied to actual payroll Report actuarial amount based on actual payroll (5.100.10)
187
Timing and frequency of valuations◦ No specific procedures prescribed for updating
from the valuation date to the reporting date Sometimes a “rolling forward” with few adjustments
(5.106.1)◦ Situations where serious adjustment may be
required include changes in Benefit terms, size or composition of covered group,
discount rate, or fiduciary net position (5.106.2)◦ If biennial valuation, update required in intervening
year (5.106.3)
188
Projection of benefit payments◦ Include overtime assumption if relevant to pension
formula (5.107.1)◦ Include COLA that applies if the investment earnings
rate exceeds the actuarially assumed rate (5.107.2)◦ A COLA that needs board approval is not automatic,
but could be substantively automatic (5.107.3)◦ Recognize benefit increase when agreement takes
effect, even if benefits accrue only later (5.107.4)◦ Exclude benefit changes that occur after the
reporting date (5.107.5)
189
Discount rate◦ Situation Valuation date earlier than reporting date No change in assumption used for long-term rate of
return at reporting date◦ Discount rate still must be evaluated for significant
changes Other factors at play For example, change in municipal bond yield (5.108.1)
190
May project using actuarially determined contribution rate, depending on circumstances◦ Remove projected payments related to future (vs.
current) employees (5.109.1) Options for a given period once net fiduciary
position is expected to be insufficient◦ Different rates (funded vs. unfunded)◦ Unfunded rate (5.109.2)
Alternatives to evaluating the sufficiency of future plan fiduciary net position are a matter of professional judgment (5.109.3)
191
Long-term expected rate of return◦ Assumption – as of valuation date
Municipal bond yield or index rate◦ Not an assumption – as of plan reporting date
(5.110.1) Multiple exit ages used to attribute projected
benefit payments to periods ◦ Based on probability of occurrence (5.111.1)
192
If an inactive member is expected to return to service, attribute actuarial present value of projected benefit payment through future periods (5.111.2)
Attribute based on all periods of member service regardless of cap on service credit (5.111.3)
193
Primary government and component units not separate employers◦ Principal participating employers (5.112.1)
194
Financial statements are required for DC plans ◦ Based on GASB Statement No. 34 (5.113.1)
195
Restate comparative financial statements if practical (5.114.1)
Derecognition of employer receivable (based solely on formal commitment)◦ Reduce beginning plan fiduciary net position (5.114.2)
Schedule of change in the net pension liabilityrequired in year of implementation (5.114.3)
196
May use single valuation for both beginning and closing balances (with update) if timing requirement met (5.114.4)
May use end of year valuation for bothbeginning and closing balances ◦ With rollback (5.114.5)
197
Part 3
198
Investments that are not subject to GASB Statement No. 31 should A. Always be reported at fair valueB. Sometimes reported at fair valueC. Never reported at fair value
199
A borrowing from another fund can qualify as capital-related debtA. TrueB. False
200
A partial refunding terminates the related hedge.A. TrueB. False
201
Setting aside an amount to cover appropriated expenditures early in the subsequent period would be reflected asA. Committed fund balanceB. Assigned fund balanceC. Either A or BD. None of the above
202
By definition, a transfer of operations must involve two existing entities.A. TrueB. False
203
A guaranteed rate of interest is incompatible with classification as a defined contribution plan.A. TrueB. False
204
A multiple-employer plan is considered to be of the cost-sharing variety to the extent that all assets may be used to pay any benefit.A. TrueB. False
205
Deferred outflows and inflows of resourcesTechnical corrections
Employer’s accounting for pensions
206
GASB Statement No. 65
207
Effective 12/31/13 fiscal year end Definitions◦ Assets = resources with present service capacity
that the government presently controls◦ Liabilities = Present obligations to sacrifice
resources that the government has little or no discretion to avoid.
Practical challenge leading to new guidance◦ Debits ≠ assets◦ Credits ≠ liabilities
208
Asset -> deferred outflow of resources◦ Refunding deferral◦ Grant provided in advance of time requirement
Asset -> outflow of resources◦ Debt issuance costs Other than insurance (asset)
Liability -> deferred inflow of resources◦ Nonexchange revenues received before related
period◦ Grants received in advance of time requirement◦ Unavailable revenue (governmental funds)
209
Application of formula for major funds◦ Assets + deferred outflows◦ Liabilities + deferred inflows
Use of term deferred limited to deferred outflows/inflows of resources◦ Appropriate for unavailable amounts (governmental
funds)◦ Not appropriate for unearned amounts
Cumulative effect = restatement of beginning net position
210
GASB Statement No. 66
211
Effective 12/31/13 fiscal year end New standards raise conflicts with existing
standards◦ GASB Statement No. 54 vs. GASB Statement No. 10 Use of special revenue fund for risk financing activities◦ GASB Statement No. 62 (legacy guidance) GASB Statement No. 13 Potential limitation on use of fair value method
GASB Statement No. 48 Loan purchases Servicing fees related to mortgage loans
212
Basic rule = later guidance prevails◦ GASB Statement No. 54 over GASB Statement No. 10◦ GASB Statement No. 13 over GASB Statement No. 62 GASB Statement No. 62 is earlier guidance◦ GASB Statement No. 48 over GASB Statement No. 62 GASB Statement No. 62 is earlier guidance
213
GASB Statement No. 68
214
Explaining the change Pension funding guidelines Audit implications Action by Moody’s
215
Underlying facts have not changed◦ Not a surprise to rating agencies Similar information already provided
Key issue = funding◦ Comparison to funding college for a small child
Pension expense ≠ employer contribution◦ Refer to RSI
216
Challenge◦ End of link to funding◦ End of GASB parameters
Development of pension funding guidelines◦ Three core elements of pension funding policy Actuarial cost method Asset smoothing Amortization◦ Principles and objectives for making decisions
related to those core elements
217
Principles and objectives1. Contributions should be based on an actuarially
determined contribution (ADC)2. The ADC should balance two goals Stable contributions Equitable allocation over active employee service
3. Full funding of ADC Transition may be necessary
4. Transparency Provide information needed to assess funding progress
218
Assurance regarding amounts reported in employer report◦ Agent plans◦ Cost-sharing plans
219
Modification of GASB numbers Potentially three sets of pension numbers◦ GASB◦ Funding method◦ Moody’s
220
Part 4
221
Which of the following could properly be described as deferred revenue?A. Unearned rental incomeB. Advance related to an expenditure-driven grantC. Property taxes collected in advance of year being
fundedD. All of the aboveE. None of the above
222
How should bond issuance costs be classified?A. AssetB. Outflow of resourcesC. Either A or B
223
15 minutes
224
Scope of GASB JurisdictionGASB Technical Agenda
225
Financial Accounting Foundation
226
Financial Accounting Foundation (FAF) responsible for GASB oversight
Issue◦ Independence◦ Scope of jurisdiction
FAF response◦ Request for Comment (RFC):GASB’s Scope of
Authority: Proposed Changes to Agenda-Setting Process (February 2013)◦ Revised Proposal (RP):GASB Scope of Authority:
Consultation Process (August 2013)
227
Three groups of information1. Clearly within the scope of the GASB’s jurisdiction2. Not clearly within the scope of the GASB’s
jurisdiction3. Clearly outside the scope of the GASB’s
jurisdiction Proposal: ◦ Direct involvement by FAF oversight committee in
the GASB’s agenda-setting process◦ Evaluate whether specific projects were “in scope”
228
Same three groups of information Modification of original proposal◦ Pre-agenda consultation GASB and FAF oversight committee◦ Focus of consultation General topics vs. individual projects
Ultimate decision = FAF
229
Final Four Months 2013
230
Fiduciary responsibilities (new)◦ Pre-agenda research
Conceptual Framework – recognition and measurement (discussed earlier)◦ Exposure draft 6/13◦ Final Concepts Statement 3/14
Economic condition reporting – financial projections◦ On hold pending resolution of FAF scope initiative
231
Fair value measurement and application (discussed earlier)◦ Preliminary views 6/13◦ Exposure draft 5/14
Leases OPEB◦ Exposure draft 4/14
Practice issues◦ GAAP hierarchy Exposure draft 1/14
232
Financial reporting model (reexamination) Tax abatement disclosures
233
Certificate of Achievement for Excellence in Financial Reporting Program
234
Reserved fund balance, unreserved fund balance, designated fund balance, undesignated fund balance◦ in MD&A and notes
Invested in capital assets net of related debt◦ Net investment in capital assets
235
Voluntary nonexchange revenue from perspective of recipient◦ Intergovernmental revenue vs. taxes◦ Often qualify as program revenue
236
Specific revenues should comprise a substantial portion of inflows
Should not include significant expenditures for capital outlays
237
Combining and individual fund statements◦ Surplus of unassigned fund balance in funds other
than the general fund◦ Inappropriate deficit in unassigned fund balance Deficit incompatible with positive balance in assigned
fund balance
238
Specific purposes should be displayed or disclosed
Inadequate or incorrect disclosures for committed fund balance◦ Formal action taken Normally one possibility, not two Budget is not relevant
239
Government-wide◦ Capital grants and contributions
Proprietary fund◦ Nonoperating revenues
240
Which governmental funds typically have been used in prior years to liquidate the liability
Incomplete disclosure of actuarial assumptions◦ Failure to separately disclose (general) inflation rate
241
“Legal” special revenue funds that are included in the general fund under GAAP◦ Perspective difference◦ Include budgetary comparison in subsection
242
Total debt service/total noncapital expenditures◦ Include in denominator Noncapitalized capital outlays Capital projects funds
Debt service expenditures ◦ Exclude from denominator Exclude capitalized amounts in general fund
243
Total collections to date should not exceed total levy for year◦ Exclude penalties and interest from total collections
to date Or report adjusted levy
Delinquent taxes should be reported by levy year rather than collection year
244
Include◦ All debt of the primary government Both governmental and business-type activities Net of premiums and discounts Do not net against sinking funds
Exclude ◦ Short-term debt◦ Non-debt long-term liabilities
245
Both governmental and business-type activities◦ Include debt supported by enterprise funds
Netting should not exceed related amount reported as restricted net position
246
All long-term debt◦ Not just general bonded debt◦ Not just governmental activities
Reported amounts◦ Net of premiums and discounts
Explanation of method used to calculate overlap
247
Parts 5 & 6
248
From a recipient perspective, shared taxesA. Always are program revenueB. Sometimes are program revenueC. Never are program revenue
249
If a fund is legally designated as a special revenue fund, but must be reported as part of the general fund pursuant to GAAP, how should its budgetary comparison be presented?A. Integral part of general fund budgetB. Treated as special revenue fund in combining
and individual fund statementsC. No budgetary comparison required
250
December 5
251
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SEE YOU NEXT YEAR!
