Government Combinations and Disposals of Government Operations

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1 What s Next?!

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3 Government Combinations and Disposals of Government Operations

4 Why issue GASB 69? Effective for periods beginning after December 15, 2015, applied on a prospective basis. Early adoption is encouraged.

5 Definitions: Merger combination of legally separate entities in which no significant consideration is exchanged and either: Two or more governments cease to exist and form one or more new governments, or One or more governments cease to exist and their operations are absorbed into one or more new governments. Acquisition When a government acquires another entity, or it s operations, in exchange for significant consideration. Transfer of operations Transfer of the operations of a government to another government.

6 How should Mergers and Transfers of Operations Be Reported? Assets and liabilities at carrying values Presumption of GAAP Mergers If a new entity is created transfer is as of the date of merger If transfers into a continuing entity Beginning of fiscal year Transfers of operations Date of transfer Adjustments Accounting principles, policies, and estimates Capital asset impairment Transaction eliminations

7 How Should Acquisitions Be Reported? Assets (and liabilities) at acquisition value GAAP applicable to state and local governments is used for recognition Market-based entry price measurements Accounting for the difference Excess paid for net assets acquired = Goodwill deferred outflow of resources Less paid for net assets acquired = contribution received or reduction of non-current assets.

8 How Should The Disposals of Government Operations Be Reported? Governments would report disposals of operations for all disposals of operations (transfers or sales). Gains and losses reported as special items Costs associated with disposals of government operations Should consider all costs associated with disposals of operations

9 Accounting and Financial Reporting for Nonexchange Financial Guarantees

10 Effective for periods beginning after June 15, 2013.

11 What Are Nonexchange Financial Guarantees? Based the same definition of nonexchange that is found in Statement 33 Excludes exchange and exchange-like transactions Some governments extend financial guarantees for the obligations of another government or other type of entity without directly receiving equal value in exchange. Entities addressed Providers of financial guarantees Recipients of financial guarantees

12 When Should The Guarantee Be Recognized? Circumstances: Entering Bankruptcy, debt violations Provider of financial guarantee When qualitative factors and historical data, if any, indicate that it is more likely than not that a government will make a payment on nonexchange financial guarantees it extended, the government should recognize a liability Recipient of financial guarantee When nonexchange financial guarantee is legally released and any related liability is transferred to the guarantor, the government should recognize revenue.

13 How Should The Guarantee Be Measured? Provider of financial guarantee Amount equal to the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee Recipient of financial guarantee Amount equal to the reduction of the guaranteed liability should be recognized

14 Required disclosures by guarantors: Legal authority and limits Relationship to the issuer(s) that are guaranteed Length of time of guarantee Arrangements for recovering payments from obligors Amount of all guarantees outstanding Cumulative payments and recoveries anticipated on guarantees for which payments have been made

15 Required disclosures by beneficiaries: Entity providing the guarantee Amount and length of time of guarantee Amount paid by guarantor cumulatively and during the reporting period Requirements to repay and amount required to repay

16 Fair Value Measurement and Application

17 Objective Further development of the definition of fair value, methods used to measure fair value, applicability to investments and other items and potential disclosures Current issues Cash and investments = large portion of assets Variety of investments Variety of guidance (GASB Nos. 3, 14, 31, 53)

18 Current practice Basic Standard is GASB No. 31 which requires nearly all investments to be reported at fair value GASB No. 53 requires derivative instruments to be reported at fair value Disclosure requirements include methods and assumptions, investment policies and other items Other disclosure requirements for deposits, derivatives, pension, OPEB

19 Accounting and reporting issues that led to this standard: Is there GASB guidance for methods and inputs to determine fair value and should a hierarchy be used? Should all investments be measured at fair value? More guidance on definition of an investment? What fair value disclosures are appropriate?

20 Definitions Definition of an investment security or other asset primarily held for the purpose of income or profit Definition of fair value would be the price received to sell an asset or paid to transfer a liability between market participants at the measurement date

21 Methods to use Fair value would be the exit price and would be determined using one of three techniques: market, cost or income approach Market = Prices involving comparable assets and liabilities Cost = Amount required to replace present service capacity Income = Using projected cash flows or income

22 Inputs for valuation Similar to FASB and IASB, guidance will require using a hierarchy of inputs Level 1 inputs Directly observable inputs such as quoted market prices Level 2 inputs Observable inputs for similar assets or liabilities Level 3 inputs Unobservable inputs. These likely begin with in internally generated data or may come from investment managers.

23 Scope Guidance applicable to most investments, including restricted investments, and interest rate swap agreements Some specific exceptions: Capital asset held for sale Money market investments Investments in 2a-7 like pools Life insurance contracts

24 Disclosures Fair value at end of reporting period Level of inputs used Description of valuation techniques used Level 3 inputs effect on investment income Certain disclosure for investments in entities that calculate net asset value per share

25 Effective date: Effective for periods ending after June 15, 2015, i.e., fiscal year 2016

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27 Objective To improve financial reporting by developing requirements on recognition and measurement for asset retirement obligations other than landfills. Current issues Inconsistent reporting Which standards to use for guidance? (GASB Statement No. 18, Statement No. 49, FASB Statement No. 143)

28 Current practice Most common issues arise from pollution or environmental remediation liabilities as a result of an enacted law, statute, ordinance or other contract Obligating event occurs Components are analyzed (legal, clean-up, enforcement) and assigned a value based on expected outlays

29 Accounting and reporting issues being discussed What constitutes an asset retirement obligation? What does the term retirement encompass? How will this be measured? What costs should be capitalized? What should be disclosed?

30 What would be considered an ARO? Definition to be based on FASB Topic 410 A legal obligation associated with the retirement of a capital asset With retirement being an other than temporary removal by sale, abandonment, recycling or disposal in some other manner

31 Legal obligations Associated with the retirement of a tangible capital asset that result from acquisition, construction or development of the asset Associated with the retirement of a tangible capital asset that result from the normal operations of the asset Require disposal of a replaced part that is a component of a capital asset

32 Items excluded from this project Obligations that arise from a plan to sell or dispose the asset Items covered by GASB No. 49 Environmental Remediation Alternative use Lease payments Asbestos removal Maintenance

33 Items excluded from this project (Cont.) Pollution prevention with respect to current operations and future remedies Landfills Conditional obligations

34 Timeline Currently still in deliberations Issue final statement in October 2016 Likely implementation would be 1-2 years after that

35 Objective Reexamination of issues related to lease accounting and whether operating leases meet the definition of assets or liabilities Current issues No liabilities are reported for commitments to make payments No assets are reported for right to receive payments

36 Current practice Determining Capital vs. Operating Lease Multiple disclosures Accounting and reporting issues being discussed What types of leases are entered into? Information for decision making? Continue with capital vs. operating? What other requirements should be considered?

37 Proposed changes Scope Lease definition contract that conveys the right to use a nonfinancial asset for a period of time in an exchange or exchange-like transaction Exclusions: rights to explore for natural resources, lease of biological assets(timber), licensing contracts, service concessions arrangements and most importantly contracts that transfer ownership

38 Proposed changes Lessee Accounting Recognize a lease liability at beginning of lease equal to the present value of payments over the term Recognize an intangible asset for the right to use the capital asset equal to the value of liability plus payments at beginning or before lease begins Recognize interest expense/expenditure Recognize amortization expense for asset

39 Proposed changes Lessee Disclosures Certain existing disclosures continue plus How variable payments are determined and other items Proposed changes Lessor Accounting Recognize lease receivable and continue to report capital asset Recognize deferred inflow of resources for receivable

40 Proposed changes Lessor Accounting Recognize interest revenue on receivable Recognize lease revenue from deferred inflow Disclosure remain consistent (i.e. future lease payments)

41 Timeline Currently still in deliberations Issue final statement in November 2016 Likely implementation would be 1-2 years after that

42 Improve accountability and transparency of financial reporting in regard to the financial effects of employer s commitments and actions related to OPEB Improve the usefulness of information for decisions or judgments of the various users of the general-purpose external financial reports of government employers and OPEB plans. Address accounting and financial reporting for postemployment benefits that are not provided through a qualified trust.

43 Assess current OPEB standards Statements No. 43 & 45 Consider Conceptual Developments Timeline Exposure drafts: Approved May 2014 Comment Period: June August 2014 Redeliberate: December 2014 March 2015 Final Statements: June 2015 Effective Date: Fiscal years beginning after June 15, 2016 (FY18)

44 What do the Exposure Drafts say? Replace requirements of GASB Nos. 45 & 57 Liability is determined through actuarial valuation <100 employees use alternative measurement method Two financial statement items record liability, expenses, and deferred inflows/outflows of resources Note disclosures Date used to determine liability Sources of changes in net OPEB liability Significant assumptions and other inputs Changes in assumptions and other inputs or benefit terms Basis for determining employer contributions to the OPEB plan Investment disclosures for OPEB Trusts

45 What do the Exposure Drafts say? Required Supplementary Information 10 most recent fiscal years Sources of changes in the net OPEB liability The components of the net OPEB liability and related ratios, including the OPEB plan's fiduciary net position as a percentage of the total OPEB liability, and the net OPEB liability as a percentage of covered-employee payroll. Actuarially determined contribution calculated for a single or agent employer, actual contributions, and related ratios

46 GAAP Hierarchy Clearly define the hierarchy of government GAAP. Where do implementation guides, AICPA pronouncements, technical bulletins, etc. fall in priority? Blending requirements of business-type activities. Healthcare sector operations have increased scrutiny of presentation of acquired legally separate entities and how those operations are blended. Focus is to consider presentation changes.

47 Fiduciary Responsibilities Develop guidance regarding the application of the fiduciary responsibility criterion in deciding whether and how governments should report fiduciary activities in their financial reports. Assessing whether additional guidance should be developed (1) to clarify the difference between a privatepurpose trust fund and an agency fund, (2) to clarify whether a business-type activity engaging in fiduciary activities should present fiduciary fund financial statements, and (3) to consider requiring a combining statement of changes in assets and liabilities for agency funds.

48 Chris Banta, CPA, CFE Audit Director Brown, Edwards & Company L.L.P. (540)