Please note that all board decisions are tentative until a final pronouncement is issued.

Transcription

1 MEMORANDUM TO: FROM: All NASACT Members and Other Interested Parties R. Kinney Poynter, Executive Director DATE: January 25, 2018 SUBJECT: January 23-24, 2018, GASB Meetings Gerry Boaz, CPA and CGFM, Technical Manager, State of Tennessee, is attending the meetings of GASB as an observer on behalf of NASACT. These comments are not an official statement, but represent Gerry s summary of the board s actions. All board members and the director of research were present for all or a portion of the January 23-24, 2018, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered 1. Revenue and Expense Recognition 2. Debt Disclosures, including Direct Borrowing 3. Financial Reporting Model Reexamination 4. Conduit Debt Obligations Please note that all board decisions are tentative until a final pronouncement is issued. Revenue and Expense Recognition Randy Finden, Pam Dolan, and Paulina Haro, project managers; Ken Schermann, consultant; and Courtney March, Taylor Lemke, Rebecca Cessna, and Jacqueline Roberts, postgraduate technical assistants, presented the board with a ballot draft of an Invitation to Comment (ITC). For Chapter 1 7, Mr. Granof wanted to explain why other standard setters were going to a performance obligation approach. Mr. Sundstrom preferred a principles-based approach. Mr. Caputo agreed with Mr. Sundstrom. For 9, staff suggested a new sentence clarifying that only the accrual basis of accounting was used. For Chapter 2 11(revenues), staff did not want earnings to be based on collectability. Mr. Brown believed collectability was a matter of measurement, not recognition. For Chapter 3 8 (distinct goods or services), Mr. Previdi believed there was another criterion that needed to be added was that the distinct goods or services had to be separately identifiable in the arrangement. He also wanted to add to the example why the summer soccer camp was a distinct good or service (i.e., The term distinct goods or services refers to the ability of those goods or services to benefit a recipient individually or in combination with resources controlled at present by the recipient. Distinct goods or services would be evaluated from the beneficiary s perspective, and whether they can be separately identified in the arrangement. For example, a summer soccer camp for children provided by a township s parks and recreation department would be a distinct service. ). Staff agreed to add the clarifications. One significant edit that staff discussed was for 16 (recognition process). The edit related to the point in time when revenue or expense was recognized under the performance obligation recognition approach. Staff inserted a requirement that would necessitate, in addition to satisfying a performance obligation, that the transaction be applicable to the reporting period. The board did not object to issuance of the ITC.

2 Debt Disclosures, including Direct Borrowing Scott Reeser and Lisa Parker, project managers; Ken Schermann, consultant; Taylor Lemke and Rebecca Cessna, postgraduate technical assistants, presented the board with issue papers that discussed separation of disclosures related to direct borrowings and direct placements from other debt, the transition and effective date, cost/benefit considerations, and the GASB scope of authority. In its deliberations that led to the Exposure Draft (ED), the board discussed (1) whether additional disclosures related to debt should only be proposed for direct borrowings and direct placements and (2) whether disclosures related to direct borrowings and direct placements should be presented separately from disclosures related to other debt. The board tentatively determined that the additional disclosures provided essential information regardless of the way debt was issued. The board also tentatively determined that the distinction between direct borrowings and direct placements and other types of debt also was essential information. Respondents that disagreed with this conclusion did not believe the distinction between direct borrowings and direct placements and other types of debt was essential information. These respondents expressed the view that the way the debt was incurred was not relevant; instead, the information required to be disclosed in relation to the debt was the essential information needed by government financial statement users. Staff recognized that the determination of whether information was essential to a user was a subjective process. However, staff continued to believe separating the debt disclosures related to direct borrowings and direct placements from other types of debt provided essential information because it informed users as to whether debt securities were publicly issued and thus information might be publicly available. Accordingly, staff recommended that separation of the disclosures should be required in the final statement. In its deliberations that led to the ED, the board also considered whether to define the terms direct borrowings and direct placements. Rather than defining the terms, the board decided to provide examples in ED 2. Staff did not believe the terms direct borrowings and direct placements needed to be further defined. Staff believed the examples provided in ED 2 distinguished these borrowings from other types of debt for which securities were issued indirectly to investors. Regarding the recommendation that the requirements for presentation of information related to direct borrowings and direct placements not be required to be presented for short-term debt, the board tentatively decided in its ED deliberations, that this information was essential regardless of the length of time for which debt was incurred. Staff also believed the length of time for which debt was incurred did not negate the belief that presenting information related to direct borrowings and direct placements separately from other debt provided essential information. As a result, staff did not recommend amending the requirement in the final statement to exclude short-term debt from that requirement. Therefore, staff recommended carrying forward the requirement, not defining the terms direct borrowings and direct placements, and not excluding short-term debt from the requirement to separately present information in debt disclosures related to direct borrowings and direct placements of debt from other types of debt in the final Statement. Mr. Previdi wanted to clarify the difference between direct borrowings and direct placements by adding clarifying explanations and examples. Mr. Knight supported Mr. Previdi s suggested definition. Mr. Brown preferred not to include a definition because it would be facts and circumstances dependent and not concise enough to be broadly applicable, which was more basis for conclusions (BFC). Mr. Brown indicated that excluding short-term debt from the requirement to separately present information in debt disclosures related to direct borrowings and direct placements of debt from other types of debt was the case regardless of the maturity of the debt (i.e., short-term or longterm). The board agreed with staff s recommendations and Mr. Previdi s clarifying definition language. Next, the board discussed the transition and effective date. Based on the current project timeline, it was anticipated that a final Statement resulting from the project on debt disclosures, including direct borrowing, would be voted on at the board s teleconference meeting on March 26, Staff believed the effective date of the proposed standard should provide sufficient lead time to allow governments to prepare for implementation. Although some governments were not currently disclosing the proposed information in notes to financial statements, staff believed the information should be readily available for those governments. Therefore, staff recommended carrying forward the effective date of reporting periods beginning after June 15, 2018, to the final Statement. Staff also believed the proposal to encourage earlier application of the requirements should be carried forward to the final Statement. In regard to a respondent - 2 -

3 request that implementation guidance should be provided for component units with different fiscal yearends, staff noted that this issue was not unique to this project and did not believe it was appropriate to consider providing such guidance in a narrow-scoped project such as this one. Being legally separate entities, component units applied the effective date and transition provisions of authoritative literature based on their year-end and were rolled-up into the primary government s financial statements regardless of whether the component units had implemented the same reporting standards as the primary government. Staff believed the transition requirements to apply the disclosure requirements to all periods presented or, if not practicable, to disclose that fact, should be carried forward to the final Statement. Thus, staff recommended carrying forward the effective date and transition requirements as proposed in the ED to the final Statement. The board agreed with staff. Mr. Brown believed at some point the board would have to address the component unit aspect of this. Regarding the costs/benefits considerations, staff believed additional debt disclosures were beneficial to a variety of user types for assessing government accountability and for making economic, social, and political decisions. Additional debt disclosures should result in greater consistency in financial reporting, clarify and improve application, and enhance the usability of information about the outstanding debt of governments. Staff believed the provisions of the proposed Statement could generally be implemented by governments with minimal effort and cost. Staff also believed the intended benefits of the final Statement justified the anticipated costs of implementation and ongoing compliance. The board agreed with staff. For the GASB scope of authority discussion, staff believed the accounting and financial reporting requirements to be included in the debt disclosures proposed Statement met all the characteristics in Group 1. Governments of many types and sizes might enter into debt transactions involving issues addressed in the project scope. The project considered the effectiveness of general disclosure requirements related to debt contained in GASBs 34 and 38, Certain Financial Statement Note Disclosures. Staff s research indicated that the existing standards were conceptually sound, generally operational, and met user needs. However, staff found that improvements could be made to debt disclosures to improve overall financial reporting information. In addition, certain transactions that appeared to be substantially like debt transactions recognized as liabilities were not always disclosed as debt transactions. Staff believed the proposed definition of debt for disclosure purposes better met user needs because it provided consistent disclosures related to debt by clarifying which liabilities were subject to those disclosures. Additionally, the proposed disclosures relating to the financial-related contractual provisions governments were subject to because of their debt obligations provided information to stakeholders. Furthermore, disclosure related to debt results from economic or financial events affecting users assessment of governmental reporting entities. The underlying events addressed in this project were transactions for which the government had obligated itself to repay using cash, or other assets the government might use in lieu of paying cash, that met the proposed definition of debt. The information provided by the proposed disclosure requirements assisted users in assessing the ability of the government to meet debt obligations and the effects meeting debt obligations had on the government meeting its other obligations, including providing governmental services. Governmental financial reporting objectives were summarized in 76 of Concepts Statement No. 1, Objectives of Financial Reporting. Staff noted during preagenda research that a variety of users considered the disclosures related to debt important for a variety of purposes. Staff believed these responses indicated that the information presented in the financial statements under the proposed guidance would assist users in assessing accountability and making economic, social, and political decisions because it better reflected the economics of the events. For users to make decisions and assess government accountability, staff believed they needed consistent information about debt transactions of governments. Presenting disclosures for debt transactions in a consistent and transparent manner accomplished the objectives. Under the proposed guidance for general purpose financial reports, additional disclosures were required for transactions meeting the definition of debt for disclosure purposes. Staff believed the proposed definition resulted in presentation of useful information about debt transactions, and that the proposed disclosures were essential to understanding that information. By requiring additional disclosures and reducing inconsistencies in current practice with a consistent definition of debt for disclosure purposes in the notes, staff believed users had the information they needed to understand the debt transactions of state and local governments and assess the - 3 -

4 accountability of those governments. Therefore, staff believed the proposed financial reporting requirements to be included in the Debt Disclosures proposed Statement met all the characteristics in Group 1. The board agreed with staff. Financial Reporting Model Reexamination Roberta Reese, Lisa Parker, and Scott Reeser, project managers; and Laura Beth Harville, Pureun (Blue) Kim, Jacqueline Roberts, and Christian Romanelli, postgraduate technical assistants, presented the board with issue papers that discussed the Preliminary Views (PV) recognition approach for governmental fund financial statements, potential small government considerations based on tentative board decisions to date, and the recognition conceptual framework. The objective was to consider language and illustrations for the recognition approach for governmental funds to be presented in the PV. At the December 2017 board meeting, the board tentatively decided that the recognition approach for governmental funds to be presented in the PV would be based on a combination of the near-term financial resources and short-term financial resources recognition approaches proposed in the ITC, Financial Reporting Model Improvements: Governmental Funds with the following characteristics: one-year (operating cycle) recognition timeframe; accrued interest would be recognized when payable and normally due within one year, which might not necessarily align with the recognition of principal payments on the related debt; recognition of tax and revenue anticipation notes as liabilities; and exclusion of the recognition of the current portion of long-term assets and liabilities. At the prior meeting, the board tentatively decided the definition of financial resources should be cash, resources that are expected to be converted to cash, and resources that are consumable in lieu of cash. Staff proposed language that described the messages conveyed by the recognition approach, the recognition concepts, features of the recognition approach, and the approach s relationship with the objectives of financial reporting. The language presented was based on the discussion of the near-term financial resources and short-term financial resources recognition approaches provided in the ITC. The discussion of messages conveyed by governmental fund financial statements referred to information about spending, as did the near-term approach in the ITC, to maintain the linkage with budgetary information the government s spending plan. Spending was defined within the discussion of outflows of resources. One aspect of the discussion different from what was proposed in the ITC was the consideration of whether a transaction was normally considered to be short-term or long-term in nature. That consideration served as the basis of whether assets and liabilities were recognized when receivable or payable or whether they were recognized when they mature. Considering when payment normally was due was now part of the determination of whether a transaction was short-term or long-term. Another difference from what was proposed in the ITC for the near-term financial resources and short-term financial resources recognition approaches related to the use of the term resource. Where this term previously was used to refer to assets or net assets, it was now replaced with the term asset. The term resource was used in the discussion of the recognition approach for governmental funds for many years, continuing to some extent with the use of the term current financial resources. With the issuance of Concepts Statement No. 4, Elements of Financial Statements, it was made clear that the term resource included both those with present service capacity and those, such as the power to tax, that did not have present service capacity. The use of the term resource was appropriate when referencing items recognized in the resource flows statement. However, use of the term resource to refer to assets recognized in the balance sheet was imprecise and failed to acknowledge that resources must both have present service capacity and be controlled by the government to be assets. Next, staff identified several alternatives for the name of the recognition approach to be proposed in the PV, including near-term, short-term, and current financial resources. Although some of the concepts included in this approach were derived from concepts presented for the near-term approach in the ITC, staff believed this name was misleading. The recognition timeframe for assets and liabilities was no longer near-term in nature. There were several advantages to the name short-term. The recognition timeframe was one-year (an operating cycle), which was a short-term timeframe. The fundamental principle separating the recognition of certain assets and liabilities was whether they were short-term in nature. As such, the name short-term might be useful for stakeholders to understand the recognition principles. Use of the name short-term made it clear to stakeholders that the recognition concepts applied were different from the - 4 -

5 existing current financial resources measurement focus. A drawback to the name was potential confusion between the short-term financial resources recognition approach proposed in the ITC and this recognition approach, if it were to be called the short-term recognition approach. There were significant differences between the recognition approaches, particularly with the recognition of long-term transactions. There were several advantages to the name current financial resources. The use of the term current was consistent with the recognition timeframe. Use of this name conveyed that the recognition approach had significant similarities to the existing presentation of governmental funds, though it had a conceptual foundation that the existing model lacked. Stakeholders wanted to avoid changing language unnecessarily, and consequently, the recognition approach might more easily gain acceptance. A drawback to the name was that despite the familiarity with the term, stakeholders might not fully understand what was meant by current financial resources. Without using a different name, stakeholders might assume that there had been no change to recognition in governmental fund financial statements. Therefore, staff recommended that the recognition approach be called current financial resources. The major advantages were acknowledgement that the approach had strong similarities to current practice, but with a conceptual foundation, and the potential to gain greater acceptance from stakeholders. Mr. Granof was concerned with financial. Mr. Previdi suggested annual financial resources. He preferred using a completely different term expressed by short-term. Mr. Brown believed the title was very important. He indicated that the board was trying to develop a conceptual basis for its decisions in this project, rather than just rearranging items. He was concerned with the title because current was defined differently for assets and liabilities as opposed to this application. He suggested short-term financial resources or modified short-term financial resources. Mr. Sundstrom believed modified had too much baggage and wanted to eliminate its use. He had no problem using short-term. He believed current would cause confusion because current could be measured from the transaction date, as well as the balance sheet date; it could be a longer period than expected. Mr. Knight believed current conveyed exactly what the board wanted to say. Mr. Caputo agreed with Mr. Brown and Mr. Sundstrom. He agreed with using short-term and explaining the difference because the suggested term was different. Mr. Vaudt agree with using short-term for the same reasons Mr. Caputo expressed. He believed short-term was a completely different term. The board supported using short-term. Regarding selected transactions, staff presented the board with a table of selected transactions under the proposal and provided a comparison to how those transactions would be recognized in existing current financial resources financial statements. Mr. Previdi believed short-term transactions was an important concept that needed more explanation and definition (i.e., Financial statements prepared using this recognition approach would provide information about spending for the period and inflows of resources from short-term transactions as they occur and from long-term transactions as they mature, as well as period-end balances from short-term transactions. ). Mr. Brown was concerned that the board was implying that there was or could be any comparability of budgetary information. Staff suggested changing comparable to the concept that readers could evaluate the budgetary information (i.e., Further, because the approach presents a shorter time perspective and excludes items of a long-term nature, it provides financial results that may be comparable to budgetary information, which usually relates to shorter periods of time as well. ). Mr. Bean indicated that GASB 34 eliminated the purchases method for inventories in GASB 34, except for name only. He indicated that this project would eliminate it completely. He indicated that the examples were not all-inclusive. Mr. Brown was concerned about not illustrating the result for the purchases method (i.e., If the consumption method is elected, recognize an asset when inventory is purchased and an expenditure when inventory is consumed. ). He believed the answer was flawed because of the elected. Mr. Caputo suggested stating Under the consumption method, The board agreed with Mr. Caputo s suggestion. For the hedging derivative instrument example, Mr. Brown wanted to change the fact set to indicate that the hedging derivative instrument was an interest rate swap that was effective at hedging the interest portion of long-term debt. He believed this was necessary to clarify that hedges were specific to the debt instrument which could be either long-term or short-term based on the facts and circumstances. For the discussion of small government considerations, the tentative board decisions to date could be grouped into four categories including: (1) budgetary comparison information, (2) business-type activities and proprietary funds, (3) format of the statement of activities and schedule of natural classifications, and - 5 -

6 (4) measurement focus and basis of accounting for the governmental fund financial statements. Staff noted that, if the board moved forward in considering the financial reporting model within the context of small governments, a definition for those governments needed to be agreed upon. However, staff did not believe the tentative board decisions reached to date on the first three categories provided opportunities to develop in the PV specific proposals for small governments. First, the board discussed budgetary comparison information at the December 2016 meeting. Some task force members stated at the November 2016 video conference meeting that retaining flexibility in where the budgetary comparison information was reported was important for smaller governments with limited resources. The task force member concerns related to smaller governments focused on the costs associated with preparing and auditing the information. Staff believed the only way to avoid costs was not to require small governments to report budgetary comparison information at all. Based on the value placed on this information by GASB stakeholders in the pre-agenda research, especially by smaller governments, the option of not reporting budgetary comparison information was not within the project scope. Auditors on the task force stated that budgetary comparison information was audited for compliance regardless of whether it was included in a basic financial statement or RSI, but not at the same level of assurance. Further, the pre-agenda research showed that most governments reported a variance column in their budgetary comparisons. Budgetary comparison information was rated by research participants as being very valuable. When asked what might make the information more valuable, some participants provided the response of additional detail about budget variances. Task force members who expressed a view on this issue believed all governments, regardless of size, should be required to present specific budget variances as part of the budgetary comparison schedule. Those task force members believed reporting variance information increased a government s accountability related to legal compliance and how well a government was managed. Both issues were just as important for smaller governments. Staff considered the possibility of not requiring smaller governments to report the variance between the original budget and the final budget but did not believe this was an onerous requirement that would provide for significant relief. As a result, staff believed the tentative board decisions reached to date related to budgetary comparison information did not provide an opportunity to develop specific PV proposals for small governments. Next, the classification of operating and nonoperating revenues and expenses in business-type activity (BTA) and proprietary fund financial statements was discussed at the December 2016, January 2017, May 2017, and June 2017 meetings. Staff believed the board s tentative decision to define operating and nonoperating revenues and expenses (including subsidies) would benefit all governments, regardless of their size. It would assist governments of all sizes by providing clearer guidance on how to classify revenues and expenses, which increased the consistency and comparability in how this information was reported. Staff also believed these proposals were not as likely to be applicable to smaller governments because many of them did not report business-type activities and proprietary funds. As a result, staff believed the tentative board decisions reached to date related to business-type activities and proprietary funds did not provide an opportunity to develop specific PV proposals for small governments. Finally, the format of the statement of activities and schedule of natural classifications was discussed at the February 2016, March 2016, and September 2017 meetings. Staff believed the existing format more readily provided information meeting the objectives of financial reporting for governments of all sizes, specifically those linking the costs of current-period services to current-period revenues, as well as providing information about how a government financed its activities. The perceived challenges of maintaining the presentation of the existing format could be alleviated through additional education efforts. Expense information by natural classification provided insight for users in making assessments about a government s expenses into the future, regardless of their size. The ease with which changes might be made to future expenses might vary for different natural classifications. For example, personnel and benefit expenses might be governed by bargaining contracts, which would not allow for flexibility in the level of expenses. Staff considered the possibility of proposing that the provision addressing the presentation of a schedule of expenses by natural classification would not apply to smaller governments. However, because the board tentatively decided that supplementary information was the appropriate communication method for this schedule, most small governments were not affected by this requirement, unless they were preparing a Comprehensive Annual Financial Report (CAFR). As a result, staff believed the tentative board decisions reached to date related to the format of the statement of activities and schedule of natural - 6 -

7 classifications did not provide an opportunity to develop specific PV proposals for small governments. Mr. Brown believed there was some opportunity for governments with single BTAs or special purpose districts engaged in only one activity and the natural classification for governmental funds flows statement. He agreed with Mr. Granof. Mr. Granof did not want to make exceptions to small governments unless there was compelling reason to do so. Mr. Caputo supported some relief for small governments but supported staff s recommendation. Mr. Previdi agreed with Mr. Granof and saw no areas here for meaningful relief. The board agreed with staff s recommendations. For the discussion of the conceptual framework recognition project, the issue was whether the PV on recognition concepts for governmental funds needed to be reissued in conjunction with an upcoming PV of the financial reporting model reexamination project. Staff provided a brief project history and then presented and analyzed the differences between the recognition concepts in 2011 PV (CF PV), Recognition of Elements of Financial Statement and Measurement Approaches, and the recognition approach the board tentatively agreed to propose in the financial reporting model reexamination PV (FRM PV). There were three significant differences between the CF PV approach and the FRM PV approach. First, regarding assets and liabilities, a principal feature of the CF PV approach was the concept of recognizing assets and liabilities when receivable or payable at period-end and normally due within the near-term. Alternatively, the FRM PV approach based recognition on whether the transaction was short-term or long-term in nature. The concept of normally being due with the recognition window is part of determining whether the transaction was short-term or long-term in nature. Second, the period of availability/recognition window changed from what was described as near-term in the CF PV approach to one year in the FRM PV approach. Third, the definition of financial resources (more precisely, financial assets) was broader in the FRM PV approach with the addition of assets that are consumable in lieu of cash. The differences related to outflows of resources, inflows of resources, deferred outflows of resources, and deferred inflows of resources were primarily conforming in nature. Staff believed the differences were sufficiently significant that it was appropriate to reissue a PV related to recognition concepts. Mr. Caputo believed the additional feedback would be beneficial. The board agreed with staff s recommendation. Assuming agreement with the staff recommendation, two approaches could be taken to reissue the PV on recognition concepts for governmental funds in conjunction with upcoming PV of the financial reporting model reexamination project. One alternative was to issue a single combined PV document, identifying in the title that preliminary views on both projects were included and presenting the recognition preliminary views in an easily identifiable way such as a separate chapter. The second alternative was to issue two separate PV documents. Regardless of the presentation of preliminary views, the ED for each project needed to be issued because the final documents were different one was a concepts statement and the other was a statement of accounting standards. Issuing separate PV documents made it clearer that the proposals would lead to two separate final documents. However, there were several advantages of issuing a combined PV. The understandability of the recognition concepts was enhanced when presented in conjunction with proposals related to the presentation of governmental fund financial statements, in keeping with the reasons for linking the conceptual framework project and the financial reporting model reexamination project. Issuing a single document promoted greater feedback on the recognition concepts. Staff s experience showed that some stakeholders found it challenging to understand concepts without additional understanding of how those concepts were implemented and therefore might be reluctant to provide feedback to a proposal that exclusively presented concepts. Staff believed a single PV document should be issued with a clear distinction that both recognition concepts and financial reporting model issues were addressed. Mr. Brown disagreed with staff. He believed there should be two documents because one document led to an authoritative standard and the other to a nonauthoritative concept statement. He also indicated that the concept statement proposal had broader application and a potential longer life. He preferred two PVs and cross-referencing between the two, if necessary. Mr. Bean agreed with Mr. Brown because the concepts were different and there was potential for confusion because one PV was a proposed concept statement. He indicated that together the perception could be that the board was developing concepts to fit the standards, rather than the reverse. Mr. Vaudt agreed with Mr. Brown. Mr. Caputo originally agreed with staff but ultimately agreed with Mr. Brown. The board agreed with Mr. Brown s suggestion and disagreed with staff

8 Conduit Debt Obligations Randy Finden and Jialan Su, project managers; Ken Schermann; and Blue Kim and Rebecca Cessna, postgraduate technical assistants, presented the board with an issue paper that discussed housing-related financings. The purpose of this discussion was to consider housing-related financings conduit debt obligations (CDOs) or potential CDOs entered into by housing finance authorities (HFAs). After summarizing the findings of the staff s research, staff concluded that housing-related CDOs in general had identical characteristics as the CDO the board was considering in this project. The terms financings and debt obligations were used interchangeably without the intention for them to mean different things. Both terms were used by HFAs to refer to debt-related financings. At previous board meetings, the board discussed the key components of the CDO definition and tentatively agreed that CDOs should have the following characteristics: 1) a CDO had at least three participants: the government issuer, the third-party obligor, and the debt holder(s); 2) the third-party obligor and the issuer were not within the same financial reporting entity; and 3) issuers commitments to CDOs varied. Many issuers made commitments limited to the resources provided by the third-party obligors on whose behalf the CDOs were issued. Other issuers made commitments beyond the resources provided by the third-party obligors. In addition, the board also tentatively agreed that for all CDOs, issuers should not recognize CDOs as liabilities. The recognition and measurement criteria for loss contingencies associated with issuers commitments in CDOs should be when a payment was more likely than not, similar to the recognition and measurement criteria described in GASB 70, Accounting and Financial Reporting for Nonexchange Guarantees. Staff noted that among multifamily housing-related financings, some financings were reported as HFAs own obligations while others were accounted for as CDOs. Paragraph 4 of Interpretation No. 2, Disclosure of Conduit Debt Obligations, allowed issuers to report CDOs as the issuers liabilities along with related assets on the face of the financial statements. Consequently, some HFAs reported multifamily housing-related CDOs as their own liabilities, while other HFAs only disclosed them in the notes to the financial statements. The diversity in reporting multifamily housing-related CDOs was no different from the diversity in reporting CDOs in general. The study of housing-related debt obligations used by HFAs led staff to draw the following two conclusions: 1) what differentiated a HFA s own debt obligation from a CDO was not whether that debt obligation was associated with single family housing or multifamily housing; and 2) despite some unique features associated with housing-related debt obligations, the key characteristics of CDOs identified through this project so far and that distinguished governments own debt obligations from their CDOs were equally applicable in the housing sector in which HFAs were the government issuers. In other words, using the key characteristics of CDOs in general, one was able to distinguish the housingrelated CDOs from HFA s own debt obligations. Staff identified similarities between the housing-related CDOs and CDOs in general. For example, in housing-related CDOs, 1) the minimum of three parties generally were the HFA, a third-party obligor that also was the developer of the housing project, and the debt holder(s) or the bank that provided the privately placed bank loan; 2) the HFA and the third-party obligor that also was the housing developer were not within the same reporting entity; 3) the HFA did not receive the bond proceeds or the money from privately placed bank loans (i.e., the sole direct financial payment to the HFA was limited to a fee for facilitating that financing); 4) generally, the HFA s commitment was limited to the third-party obligor s resources pledged to secure payment of principal of and interest on the bonds or the privately placed bank loans; and 5) some HFAs made additional commitments similar to those commitments other government issuers made, which supplemented the resources provided by the third-party obligors. On the other hand, some of the features of housing-related debt obligations were unique to HFAs own debt obligations rather than CDOs in general. Staff believed those features provided details for consideration as future implementation guide items, which helped stakeholders identify housing-related financings that were not CDOs. Examples of those featured included, but were not limited to, the following: 1) the HFA acquired loans receivable or held mortgage-backed securities associated with the debt obligation; 2) the HFA established reserve funds, such as bond and insurance reserves; 3) the debt obligations worked as revolving loan programs (a. the interest rates on qualified loans could be slightly higher than the HFA s cost of funds; and b. the HFA had an element of equity in the programs financed by - 8 -

9 those debt obligations, supporting the HFA s activities); 4) the HFA agreed to participate in risk-sharing; and 5) the debt obligations provided for parity or cross-collateralization. Therefore, staff believed it was unnecessary to separate housing-related CDOs from CDOs in general, or to develop separate distinguishing characteristics for housing-related CDOs. Mr. Previdi believed the big difference was if the HFA supported the housing program with its own resources. He questioned that the HFA debt should be off-balance sheet. He wanted specific guidance explaining how these transactions were not conduit debt. He believed the single vs. multiple obligor characteristic was an important differentiation and believed most would be single. Mr. Brown believed for many of these transactions that the single obligor characteristic would address most of these. He saw nothing special in an HFA that would require a carve out. Mr. Bean envisioned a little broader view of conduit debt. Mr. Granof wanted very clear guidance that was principlesbased in the standards first before providing additional guidance in the Q&A. Mr. Knight agreed that additional clarity was needed to achieve consistency. The board generally agreed with staff s recommendation