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: June 4, 2015 SUBJECT: April 21-23, 2015, 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 actions of the board. All board members and the director of research were present for all or a portion of the April 21-23, 2015, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered 1. Postemployment Benefits Accounting and Financial Reporting 2. GAAP Hierarchy 3. External Investment Pools 4. Fiduciary Responsibilities 5. Tax Abatement Disclosures 6. Leases 7. Technical Plan Please note that all board decisions are tentative until a final pronouncement is issued. Postemployment Benefits Accounting and Financial Reporting Scott Reeser and Michelle Czerkawski, project managers, Emily Clark, assistant project manager, and Hannah Bliss and Zachary Goodman, postgraduate technical assistants, presented the board with preballot drafts of final Statements, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68; Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans; and Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. First, staff noted the following: 1) the title had been changed from the Exposure Draft (ED) to reflect that certain requirements applied to assets accumulated for purposes of providing pensions not within the scope of GASB 68, rather than to pension plans not administered through trusts meeting the specified criteria; 2) paragraph numbering and codification instructions have not been completed. In paragraph 6 and throughout the document, the determination of a special funding situation was modified to be circumstances in which a nonemployer contributing entity had a legal obligation to make benefit payments directly to the employees of another entity as the benefit payments came due. At the March 2015 board meeting, the board tentatively agreed to staff s recommendation to clarify that assumptions about salary changes and ad hoc cost of living adjustments (COLAs) should be disclosed only when relevant to the projection of benefits. Staff now proposed making no changes to the wording in 39, 44O, 44P, and 68 because (1) assumptions related to salary changes were also used in the attribution of the actuarial present value of projected benefit payments and (2) assumptions related to ad hoc COLAs would not need to be disclosed if there were no assumptions related to these types of benefit changes. For governmental nonemployer contributing entities that recognized a less-than-substantial portion of the collective total pension liability, staff proposed to remove the requirement in 73 to include the amount paid by the governmental nonemployer contributing entity as the benefits came due during the governmental

2 nonemployer contributing entity s fiscal year in the 10-year schedules of required supplementary information (RSI). Staff noted that this information was not proposed to be presented for governmental nonemployer contributing entities that recognized a substantial portion of the collective total pension liability. In 95, staff proposed modifying the clarification for circumstances in which there was a separately financed specific liability by using examples rather than requirements. For 25 (significant assumptions), Mr. Brown was concerned about the guidance ( For purposes of this Statement, a deviation from the guidance in an Actuarial Standard of Practice should not be considered to be in conformity with Actuarial Standards of Practice. ). He believed actuaries would use reporting of the deviation as an excuse not to follow the GASB s intent. Mr. Vaudt preferred to address this issue in the Comprehensive Implementation Guide (CIG) for all three pension standards and keep the language in for OPEB. Staff indicated that the Basis for Conclusions (BFC) also provided some clarity. The board agreed with Mr. Vaudt. For B12 (measurement of the total pension liability), Mr. Brown suggested deleting reference to auditing information because the board could not require an audit of this information. Mr. Sundstrom disagreed because if the information could not be audited, this posed a problem. Mr. Granof agreed with Mr. Sundstrom. The board, except Mr. Sundstrom and Mr. Granof, agreed to delete reference to auditing. At the March 2015 board meeting, the board also tentatively agreed to staff s recommendation that the final Employer, Plan, and Pension Statements not require the disclosure of changes in the net OPEB liability, total OPEB liability, or total pension liability, as applicable, to separately include (a) the effects of contributions from inactive employees receiving benefits and (b) the effects of administrative costs. Staff stated that the recommendation only should have included (a) for all three Statements because the effects of administrative costs were in the changes in the net OPEB liability due to their effect on OPEB plan fiduciary net position. Accordingly, 33a(11) was not amended in the preballot draft to exclude the effects of administrative costs. For the glossary, Mr. Granof believed the discount rate definition was more than just a definition; it was also an explanation of how to calculate it. For B57 (other projection issues), Mr. Brown believed the resulting calculation could be an understatement. Staff clarified the guidance to indicate, However, the Board believes that not including the effects of changes in healthcare costs in the projection of benefits would result in a measurement that does reflect the cost expected to be paid in the future for the postemployment healthcare provided. For B75, Mr. Fish suggested Other of those respondents expressed their belief that the entry age actuarial cost method is biased toward losses in circumstances in which employees who remain entitled to OPEB leave service before the last period to which service cost is attributed. Mr. Brown was concerned that the respondent s comment was asserting a fact when staff research appeared to prove otherwise (i.e., Still other respondents believe that the projected unit credit actuarial cost method should be required for financial reporting purposes because it is used more often for funding measurements of OPEB than other actuarial cost methods and is easier to understand and explain. ). For B88 (alternative measurement method and its threshold for use), Mr. Granof wanted to focus more on the cost/benefit rationalization rather than discussing the imprecision. Mr. Brown agreed with Mr. Granof related to focusing on the cost/benefit. Mr. Vaudt indicated that even if an actuarial valuation was performed on a small group (under a population of 100), the result was still imprecise ( The Board believes that the greater the population of employees participating in an OPEB plan, the more likely the probability theory of the law of large numbers will result in less deviation between estimated and actual results. Conversely, the lower the population of employees participating in an OPEB plan, the more likely deviations will occur between estimated and actual results. Although the Board recognizes the threshold of 100 employees is arbitrary, the Board is concerned that the estimated results of applying the alternative measurement method to populations of 100 or greater may be outside of an acceptable range of deviation from actual results. Therefore, the Board concluded that only employers that provide OPEB to 100 or fewer employees (active and inactive) should be allowed to apply the alternative measurement method. ). For B174 (considerations related to benefits and costs), Mr. Brown suggested including discussion about the sensitivity analysis. Mr. Sundstrom suggested clarifying the difference between covered payroll and covered-employee payroll because he believed this would be confusing since there was an intended difference. Staff indicated that covered-employee payroll was broader. GAAP Hierarchy Michelle Czerkawski, Ken Schermann, senior technical advisor, and Susannah Baney, Monica Harrison, and Stephen Morales, postgraduate technical assistants, presented the board with an issue papers that discussed a definition of a government in the Exposure Draft (ED), The Hierarchy of Generally Accepted Accounting Principles [GAAP] for State and Local Governments; and an ED, Implementation Guide 20XX-1, additional proposed modifications. 2

3 The purpose of the first discussion was to address concerns expressed by two respondent groups about the expected status of the criteria currently applied in the determination of whether an entity was governmental (i.e., whether the criteria, currently identified in Appendix C of the AICPA Audit and Accounting Guide, State and Local Governments (SLG Guide), as category (b) GAAP, was intended to retain that status in the GAAP hierarchy). Appendix C of the SLG Guide listed the extant category (b) guidance and included 1.01 and footnote 4 in that listing. The concerns expressed by the respondents resulted from the inadvertent omission of that category (b) guidance from the Codification Instructions in Appendix C of the ED. The instructions for Section 1000, The Hierarchy of Generally Accepted Accounting Principles, should have included a requirement to insert the material into.801 under the heading, AICPA Literature Cleared by the GASB. The omission from the Codification instructions in the ED was not intended as an indication that the board was proposing to exclude the current definition of government from the category (b) GAAP as AICPA literature cleared by the GASB. There was no uncertainty about whether the definition was cleared by the GASB. Including instructions in Appendix C of the ED for codifying the definition would not have constituted an invitation for comments from respondents about the definition itself, but rather only indicated how the definition would be inserted into the Codification as category (b) GAAP. Because the definition was developed and cleared by both the GASB and the FASB, neither board could unilaterally modify it, thus, any potential argument that the definition should have been exposed for comment in the ED was without merit. Similarly, respondents recommendations for the GASB to develop an authoritative definition of a governmental entity were beyond the project scope and could not be done at the GASB s sole discretion. Staff intended that the Codification instructions for the final Statement would include the requirement to insert the definition into its appropriate place in Section 1000, and the concern expressed by those respondents would be addressed in the BFC. The board agreed with staff. The board next discussed additional proposed modifications in the CIG ED, Implementation Guide 20XX- 1). At the March 2015 board meeting, the board evaluated comments from stakeholders in response to the ED, Implementation Guide 20XX-1 (Exposure Draft). For Q.# (i.e., What are loss deductibles and self-insured retentions (SIRs), and how should be accounted for by a pool? ), the discussion of loss deductibles was removed. Staff proposed incorporating the tentative decision as follows: Loss deductibles and SIRs are that portion of a claim for which a pool participant is responsible and for which risk has not been pooled if there is no deductible arrangement. For example, a pooling agreement may stipulate that all participants are responsible in some manner for the first $100,000 of all claims submitted. The way that the $100,000 is handled differentiates a deductible from an SIR. If the participants are required to pay the first $100,000 before the pool is obligated to pay on claims or if the participants are required to deposit with the pool all or part of the $100,000 at the inception of the policy, there is an SIR arrangement. However, if the pool pays entire claims and then collects the $100,000 from participants or reimburses the participants for an amount net of the $100,000, there is a deductible arrangement. Furthermore, when deductibles are used, the pool generally is responsible for claim adjustment on the claims covered by deductibles, whereas a pool generally is not responsible for claim adjustment on the claims covered by SIRs. If the pooling agreement provides for SIRs, the pool needs only to consider, but not report, the amount of claims that are to be paid directly by the participants (or with participant deposits) in calculating claims liabilities in accordance with paragraphs of Statement 10, as amended. (See the example in Illustration 2 of nonauthoritative Appendix 3-4.) The board agreed with staff s recommended modifications. At the March 2015 meeting, the board tentatively agreed to retain Q.# After further consideration, staff concluded that the issue for which the AICPA literature was cited in the answer to Q.# was addressed in GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, 209, regarding application of the equity method. Further, staff noted that the current question asked about only those investments included within the scope of GASB 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, as amended. Thus, staff proposed the following modifications Q How does Statement 31 address should investments with impaired values? How should these investments be reported? A For investments that are reported at fair value, that valuation already considers potential impairments. For other investments that are covered by Statement 31, as amended, and that are reported using cost-based measures, valuation should consider whether the fair value of the investment is significantly affected by the impairment of the credit standing of the issuer or by other factors. Although Statement 31 implies that the unrealized loss represented by the impairment should be recognized, it does not specifically require it. In fact, paragraph 76 of the Basis for Conclusions states that when there is an impairment, the costbased measure should be reevaluated. Therefore, professional judgment should be applied in determining the amount and timing of a write-down. For investments that are accounted for using the equity method, paragraph 209 of Statement 62 requires that a decline in the value of an investment that is other than temporary be accounted for in the same manner as a loss in value of other long-term assets. For investments that are not covered by 3

4 Statement 31, as amended, the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, State and Local Governments, provides guidance. It states: If declines in the fair value of investments are reported using cost-based measures, an unrealized loss may have to be recorded if the decline is not due to a temporary condition. For example, a government s liquidity needs may require the sales of investments at losses after the reporting date. That circumstance may represent a subsequent event that might be recognized in the current-period financial statements. The board agreed with staff s recommended modifications. At the March 2015 meeting, the board also tentatively agreed to modifications to Q.#7.8.3 to incorporate conforming changes for GASB 68, Accounting and Financial Reporting for Pensions. After further consideration, staff believed the modifications proposed at that meeting were incomplete. Therefore, staff recommended the following additional modifications: Q A government that provides pensions to its employees through a singleemployer plan issues tax-supported general obligation bonds to fund the pensions provided to its employees. How should the pension obligation bonds be reported? A The pension obligation bonds should be reported as a governmental activities liability (bonds payable) in the statement of net position. If the pensions are within the amended scope of Statement 27, the government now recognizes a long-term accounting liability (bonds payable) where no long-term pension-related liability ne was quantified or recognized before. (The unfunded actuarial liability under Statement 27 is not an accounting liability.) If the pensions are within the scope of Statement No. 68, Accounting and Financial Reporting for Pensions, to the extent that the contribution is reported as an addition to the pension plan s fiduciary net position, the net pension liability would be reduced by the amount of the bond proceeds remitted to the pension plan through the measurement date and a deferred outflow of resources related to pensions would be reported for the amount of proceeds remitted to the pension plan subsequent to the measurement date. If the proceeds are instead used to satisfy a payable to the defined benefit pension plan, the payable would be reduced by amounts remitted to the pension plan through the employer s fiscal year-end. Under either Statement 27 or Statement 68, if any proceeds of the bonds have not been remitted to the pension plan, they should be included in the governmental activities assets. The board agreed with staff s recommended modifications. For Q.#Z.23.1, staff believed additional clarification of the question was needed. Staff proposed the following modifications: Q A city government plans to advance refund its debt issuance the day before its accrued interest payment is due. The city intends to place the amount owed for the accrued interest in an escrow account to include the accrued interest amount in calculating the reacquisition price for advance refunding (footnote 3 of Statement 23, as amended). Should the accrued interest on the old debt before the advanced refunding be included in the reacquisition price for advance refunding? A Any interest accrued up until the date of refunding represents a liability that is separate from the refunding of the old debt and, thus, should be recorded in interest expense. Accrued interest on the old debt may be included in the reacquisition price for advance refunding. If that is done, the net carrying amount (footnote 4 of Statement 23, as amended) should include a like amount. Alternatively, the government could omit in the reacquisition price any amounts placed in an escrow account that pertain to the interest accrued on the old debt before the advanced refunding. Only the amount placed in the escrow account, including future interest earnings, that is necessary to pay interest and principal on the old debt and the call premium once the debt is advance refunded would be included in the reacquisition price. If this alternative is selected, the net carrying amount would not include a like amount. The board agreed with staff s recommended modifications. Next, the board discussed questions affected by GASB 72, Fair Value Measurement and Application. Implementation Guide will be effective for financial reporting periods beginning after June 15, The requirements of GASB 72 also will be effective at that date. Certain questions and answers in the Implementation Guide will be affected by the GASB 72requirements. However, because of the timing of the issuance of the Exposure Drafts (ED) for GASB 72 and the Implementation Guide, modifications to existing Implementation Guide questions and answers were not exposed for public comment. Therefore, staff proposed excluding from the final Implementation Guide those questions and answers affected by the GASB 72 requirements. Revisions to those questions and answers that continue to provide useful guidance would be proposed for inclusion in the next Implementation Guide, which was scheduled to be exposed for public comment later this year. Mr. Brown wanted to ensure that the effects of subsequently issued pronouncements were properly conformed in the CIG. The board agreed with staff s recommendation to exclude from the final Implementation Guide the questions and answers identified. Staff indicated that those questions would be included in next year s CIG. In regard to questions affected by GASB 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, the requirements of GASB 73 that amend GASBs 67, Financial Reporting for 4

5 Pension Plans, and 68, Accounting and Financial Reporting for Pensions, also would be effective for financial reporting periods beginning after June 15, However, because of the timing of the issuance of the EDs for GASB 73 and the Implementation Guide, modifications to existing Implementation Guide questions and answers were not exposed for public comment. Therefore, staff proposed excluding from the final Implementation Guide Q.# (A county issued pension obligation bonds and used the proceeds to make higher-than-usual contributions to its single-employer pension plan. How should the plan report the amount received from the employer as a result of the bond proceeds in the schedule of changes in the net pension liability and in the schedule that presents the employer s contributions as compared to actuarially determined contributions? ). The board agreed with staff s recommendation to exclude from the final Implementation Guide Q.# Next, the board discussed a preballot draft of the final Implementation Guide With regard to the draft, staff noted the following: 1) in addition to the removal of certain Appendices included in the ED for purposes of facilitating stakeholder review of the proposal, the following structural changes were made to the document: a) the list of sources, the list of Codification cross-references, and the table of contents at the beginning of each chapter were removed to more closely reflect the document structure anticipated to be used for future Implementation Guides; b) the questions and answers from each chapter in the ED were organized into a separate paragraph (e.g., 4 of this Implementation Guide presented the questions and answers from Chapter 1 of the ED); c) glossary definitions were retained only when the definitions were not also presented in a GASB Statement; glossary materials that remained for each chapter in the ED were presented in a paragraph following the related questions and answers (e.g., the terms retained from the glossary presented in Chapter 1 of the ED were presented in 5 of this Implementation Guide); and d) nonauthoritative appendices from each chapter in the ED were relocated to the end of the guide and presented in a single nonauthoritative appendix (Appendix B); 2) the illustration in nonauthoritative Appendix 7-4 was not updated for the effects of GASB 68; staff planned to make revisions to the illustration, and the updated illustration would be presented in the ballot draft; and 3) in the Codification Instructions (Appendix C), material from Sections P20, P21, and C010 was relocated but the move of that material was not marked as a change in order to more clearly present the edits made to each section. For Attachment M (nonauthoritative illustrations), Mr. Fish pointed out that a few of the illustrations (e.g., illustration 6) presented federal government agency debt as triple A (AAA) when its rating had not been AAA for many years. Mr. Brown s concern was using a specific date in the illustrations that was prior to the standard s effective date. The board generally supported using generic dates in the illustrations, instead of specific dates. External Investment Pools Deborah Beams, Jialan Su, Randy Finden, Liesl Seiser and Hannah Bliss, postgraduate technical assistants, presented the board with issue papers that discussed liquidity fees and redemption gates, disclosures, and effective date and transition. At the March 2015 meeting, the board considered whether an external investment pool should have the ability to impose liquidity fees and redemption gates in order to qualify for the amortized cost exception. The board requested additional research before making a tentative decision. Staff s research, including legal restrictions on fees and gates, participant feedback on fees and gates, and other redemption management methods, shed new light on several of the issues previously discussed in the board s analysis of this potential criterion. At the March 2015 meeting, the board also tentatively decided that the basis for evaluating potential criteria for the amortized cost exception should be whether a proposed criterion reduced the risk that a pool s investment portfolio measured on an amortized cost basis did not closely approximate fair value. Staff noted that having the ability to impose a liquidity fee or gate did not directly affect the fair value of the investment pool; rather, a fee or gate was a tool used by management to prevent an overwhelming run of withdrawals in the event of a liquidity crisis. Another important consideration in this issue was the difference between the respective roles of the SEC and the GASB. As a regulator, the SEC fittingly set its conditions in a way that affected operational policy (e.g., procedures to prevent a run on the pool) in an attempt to protect investors from loss and encourage management preparation for extreme circumstances. As a financial reporting standard setter, however, staff continued to believe the GASB should focus on whether or not the requirements reduced the risk that amortized cost did not closely approximate fair value for financial reporting purposes. Staff also noted that requiring pools to have the ability to impose fees and gates made the GASB standard more stringent than the 2014 amendments to Rule 2a7. Staff believed a GASB standard requiring a pool to have the ability to impose fees and gates would surpass even the SEC in its prescription of management operations. 5

6 In regard to the liquidity criterion defined in Rule 2a7 (and tentatively agreed to by the board at the March meeting), the use of a liquidity gate or fee was triggered at levels at which the pool had already violated other amortized cost reporting criteria. The board tentatively decided that, in order to qualify for an amortized cost exception, the following portfolio liquidity limits should be met: 1) a pool could not acquire any illiquid security if, immediately after the acquisition, the pool invested more than five percent of its total assets in illiquid securities; 2) a pool could not acquire any security other than a daily liquid asset if, immediately after the acquisition, the pool invested less than ten percent of its total assets in daily liquid assets; and 3) a pool could not acquire any security other than a weekly liquid asset if, immediately after the acquisition, the pool invested less than thirty percent of its total assets in weekly liquid assets. The 2014 amendments stated that a pool could institute a fee or gate if the fund invested less than thirty percent of total assets in weekly liquid assets. A pool could not make a purchase if the purchase caused the pool to fall below this threshold and no longer met the liquidity requirement. As pools generally made trades every day, this effectively meant a pool needed to maintain this liquidity level every day in order to meet the liquidity criterion. As such, requiring fees or gates as an additional criterion did not necessarily provide additional benefits. In addition, pool sponsors and participants were opposed to the idea of being required to have the ability to impose liquidity fees. Some pool sponsors indicated that they would move to fair value reporting rather than implement the liquidity fees criterion. Pools seemed somewhat more receptive to the idea of redemption gates, but staff still believed the ability to impose these did not affect the risk that fair value deviated from amortized cost. While staff acknowledged the board s preference for fair value reporting, this also narrowed the number of governments to which this exception applied even further than the dozen or so that currently reported as 2a7-like. Staff reanalyzed Rule 2a7 s fees and gates requirements and determined that, above all, this type of criterion was of operational nature and did not address the risk that amortized cost deviated from fair value. Therefore, staff continued to believe liquidity fees and redemption gates should not be a proposed criterion for pools seeking to report using amortized cost. Staff recommended that the ability to impose redemption gates and liquidity fees not be proposed criteria. Mr. Sundstrom did not believe fees should be a requirement but other features could be helpful to approximate fair value. He believed redemption gates had an indirect effect on fair value. Mr. Fish agreed that fees and gates should not be required and governments should have the flexibility to impose such fees and gates if allowed by law. Mr. Brown believed the governmental environment lacked a regulator in this area and lacked a profit motive. He wanted to focus on the accounting rather than the operational area. He found liquidation fees more of a deterrent or disincentive to investors. He saw liquidity fees as a potential criterion when deviating from amortized costs, but he would not require liquidity fees as a criterion. Ms. Sylvis indicated that the board should focus on the accounting and financial reporting, instead of the operational area. The board agreed with staff s recommendations. Next, the board discussed fair value disclosures. External investment pools reporting at fair value were required to disclose the elements addressed in GASB 72. As the external investment pools addressed in this project were reporting at amortized cost, these pools were not subject to these fair value disclosure requirements. Despite this, staff acknowledged that GASB 31 required the disclosure of the fair value of investments, even if they were not measured that way in the statement of net position. Even though GASB 72 did not apply to fair value amounts that were disclosure-only, staff believed users should have the same information about any fair value measurements reported. Staff believed external investment pools reporting at amortized cost should not be exempt from providing these disclosures and that information surrounding the required fair value measurement included in the notes was essential information, regardless of the measurement used for reporting purposes. As such, staff recommended that pools reporting at amortized cost also be subject to the disclosure requirements prescribed by GASB 72. Staff expected that external investment pools, by virtue of their operations and the proposed criteria they had to meet in order to report at amortized cost, would only have Levels 1 and 2 recurring measurements and not be subject to any extensive disclosures such as those for investments in entities that calculated net asset value (NAV) per share (GASB 72 82). Staff recommended that pools reporting at amortized cost also should be required to report the disclosures prescribed by GASB 72 with respect to the disclosed fair value measurements. Mr. Brown disagreed with staff because this proposal defeated the relief provisions when the likelihood of being outside limited predefined boundaries was remote. He found many of these disclosures to be nonessential information other than the GASB 31 fair value investments to compare to the amortized costs (difference should be immaterial) to ensure compliance. He believed that if the board was going to allow amortized costs, a government should get a pass on the fair value disclosures other than the fair value of the investments (GASB 31). His biggest concern was how these additional disclosures were essential to understanding the information in the financial statement. Mr. Granof questioned whether all of these disclosures were necessary. Mr. Fish believed 6

7 these disclosures were important to users when amortized costs should be very near fair value. Ms. Sylvis believed these disclosures were essential from a stewardship perspective. Mr. Sundstrom believed the importance of the disclosures was for the pool participants. The board, except Mr. Brown and Ms. Taylor, agreed with staff. In regard to current and historical amounts of liquid assets, one of the website disclosures required by the SEC, once its 2014 amendments to Rule 2a7 take effect, was a schedule or chart containing the percentage of total assets invested in daily liquid assets and weekly liquid assets updated at the end of each business day for the preceding six months. Staff considered a disclosure of the historical amounts of liquid assets throughout the year (e.g., at the end of each month) as well as the current amount of liquid assets at the reporting date. Given the board s tentative decisions, pools would be required to monitor liquidity each time an investment purchase was made. Therefore, it would be implicit that the amount of liquid assets be within the appropriate limit if the pool was reporting at amortized cost. Staff did not believe there would be enough incremental value to disclosing the actual percentages of daily and weekly liquid assets to justify this disclosure. In addition to these considerations, staff noted that GASB 40 already addressed disclosure requirements related to interest rate risk. Investments in longer-term maturities made pools less liquid because the pool s cash was invested in a security versus held onhand to meet redemptions. Longer-term securities were also more susceptible to interest rate risk because the longer a security s term, the greater the effect of interest rate changes on a security s fair value. By disclosing information about interest rate risk, users could better understand a pool s ability to liquidate investments and the maturity of investments. Because of these reasons, staff recommended that pools reporting at amortized cost should not be required to disclose the current and historical amounts of daily and weekly liquid assets. The board agreed with staff. For current and historical shadow prices, the board tentatively agreed that a proposed criterion for a pool to report at amortized cost should be that the shadow price must be within 0.5 percent of the amortized cost at the end of each calendar month. As the 2014 amendments to Rule 2a7 required that a fund perform and report daily shadow prices on its website, staff also considered what disclosure requirements might be appropriate for shadow pricing. If a pool s shadow price deviated greater than 0.5 percent during any monthly shadow pricing, a pool would be unable to report using amortized cost in the annual financial statements. Because of this requirement, staff believed the actual shadow price of the pool at the reporting date, or at any month end within the reporting period, did not need to be disclosed. If a pool was reporting at amortized cost, it was implicit that the pool s shadow price had not deviated by 0.5 percent or greater at any of those dates. While disclosure of the actual value indicated how close a pool came to the limit, staff believed the deviation limit was small enough that such disclosure caused unnecessary concern among users. Under these considerations, staff did not believe providing additional information about shadow pricing was essential information to financial statement users and therefore did not recommend any further disclosure requirements be proposed. It was implicit that by meeting the criteria for amortized cost reporting, the pool had a shadow price consistent with the amortized cost of the pool twelve times during the year. Staff considered whether it would be relevant or valuable information to require a pool to disclose if they performed shadow pricing more than twelve times a year, but was not convinced that this information warranted financial statement presentation. Therefore, staff recommended that a pool not be required to disclose the actual shadow prices as of the reporting date and each month end during the reporting period and how often it performed shadow pricing. The board agreed with staff. However, Mr. Fish preferred to require disclosure of how often shadow pricing was performed. He believed shadow pricing should be performed more than once per month and demonstrated the quality of pool management in achieving goals. He disagreed with staff. Mr. Brown did not believe the frequency of shadowing pricing was essential information. Next, the SEC currently required a fund to report the weighted average maturity (WAM) and the weighted average life (WAL) on the fund s website. The fund also must report the maturity date used to calculate the WAM and the WAL. Staff noted that, similar to the amounts of daily and weekly liquid assets, the WAM and WAL must be within certain limits in order for the pool to report at amortized cost. If a pool was reporting investments at amortized cost, it should be assumed that the WAM and WAL were within those limits. GASB 40 currently required pools to disclose information about interest rate risk; one of the options for governments to address this risk was to disclose the WAM. Staff considered requiring all pools reporting at amortized cost to disclose this information, but determined that GASB 40 disclosures were effective in assessing the risks. Along with this, pools that were reporting at amortized cost could be assumed to be maintaining the maturity levels defined by this proposed Statement, and as such, providing the actual numerical value appeared extraneous. Given these considerations, staff did not recommend requiring pools reporting at amortized cost to disclose the WAM and the WAL outside of how they were addressing interest rate disclosures required by GASB 40. Mr. Fish disagreed because he supported this sensitivity analysis disclosure. The board, except Mr. Fish, agreed with staff. 7

8 Rule 2a7 required a fund to post online, on a monthly basis, a list of investments along with information about the principal amount, the coupon or yield, the CUSIP number (Committee on Uniform Securities Identification Procedures, CUSIP numbers were unique numbers assigned to individual securities) and other investment-related information. Given the board s tentative decisions, a pool was not required to do this as a criterion for reporting at amortized cost. Staff believed it should be considered whether this information would be essential for disclosure in the financial statements. Staff noted that extensive disclosures were required for investments, and they were disaggregated already by investment type. Staff did not believe there was enough incremental benefit to listing every individual security to justify the volume of information added to the notes. Therefore, staff recommended that this list not be a proposed disclosure requirement. However, many pools provided a schedule of investments voluntarily, whether on their website, in periodic reports other than the financial statements, or direct distribution to pool participants upon request. Staff considered whether pools should disclose the fact that this information was available elsewhere and included the method of providing the information and the frequency of this reporting. However, staff believed this could cause concerns from auditors by making references to unaudited information and therefore, did not recommend proposing this reference as a note disclosure. Mr. Fish disagreed with staff. He preferred detailed disclosure to ensure against undue shareholder risks. Mr. Brown did not find this information essential for understanding the amounts in the financial statements. The board, except Mr. Fish, agreed with staff. However, the board agreed with staff s recommendation that a pool should not be required to disclose the information regarding the method and frequency of the dissemination of that information. When a downgrade occurred, the SEC required that a money market fund s board of directors reassess the security s credit risk and take appropriate action related to the event. In the event of a default, the fund must dispose of the security as soon as practicable unless such action was not in the pool s best interest. The fund also must notify the SEC of such an event. Staff noted that if a pool experienced a significant default, it could cause a pool to break the buck and no longer qualify for amortized cost reporting. Even if the pool reported at amortized cost, a defaulted security could cause a realized loss if it was disposed of during the period, or if it was still held at the reporting date, a pool might recognize an impairment loss. If a pool was well-diversified, though, it might experience a default and still maintain the requirements necessary for the amortized cost exception. Staff believed it was essential information to financial statement users if a security held by an investment pool experienced a significant default during the period, but noted that disclosures were already required under GASB Staff believed this adequately covered default events and therefore did not recommend proposing additional disclosure requirements related to defaults. Staff also considered a disclosure requirement for security downgrades, but did not believe this information rose to the level of disclosure requirement. Most importantly, these events were impounded in the fair value of the securities (if they were still held by the pool), and this was reflected in the shadow price measured at the reporting date. Therefore, staff recommended that additional information about significant defaults and downgrade events should not be included as proposed disclosure requirements for pools reporting at amortized cost. The board agreed with staff. In regard to stress testing, the 2014 amendments to Rule 2a7 increased the stress testing requirements for money market funds. These changes required a fund to illustrate the fund s ability to have invested at least ten percent of its total assets in weekly liquid assets and the fund s ability to minimize principal volatility and maintain a stable NAV under hypothetical adverse events (e.g., increases in short-term interest rates in combination with shareholder redemptions, downgrades and defaults, widening of credit spreads, and other relevant events that adversely impacted the funds if they actually occurred). Staff believed stress testing was an appropriate monitoring tool used by pools to observe the solvency of the investments and to monitor a pool s ability to maintain an amortized cost that approximated fair value, but did not believe it was appropriate for an accounting standards-setting body to prescribe how a pool performed its stress testing. Disclosure of stress testing could cause significant confusion by financial statement users, potentially resulting in less demanding hypothetical events placed on the pool during the tests. Pre-agenda research indicated that many pools were already performing stress testing as an internal control and monitoring activity. Staff also considered whether stress testing met the guidance outlined in Concepts Statement Given the use of stress testing for investments held by external investment pools, this procedure could be considered a subjective assessment at this point. Therefore, it would not meet the Concept Statement 3 threshold. Based upon the results of the research and the criteria outlined in Concepts Statement 3, staff did not believe disclosure information should be proposed at this time for stress testing. Therefore, staff recommended that pools reporting at amortized cost should not be required to disclose information about stress testing. Mr. Fish preferred disclosure of how often stress testing was performed but did not believe the results should be disclosed. The board generally agreed with staff. 8

9 For the issue of management of the pool, a disclosure suggestion provided during the March meeting with the Governmental Accounting Standards Advisory Council (GASAC) was to require external investment pools to disclose information about the fund s management including the identity of the manager, the structure of the pool, and other management information users might need for sufficient analysis. There was currently no disclosure requirement for pools reporting as 2a7-like. Staff considered this requirement, noting that GASB had similar disclosure requirements in GASB 67, which required disclosure of a pension plan s board and composition. Staff also evaluated whether this information warranted financial statement disclosure under Concepts Statement Although the information might assist a user in learning about the management of the pool, staff did not feel that providing this information as it related to investment pools was directly correlated to amounts recognized in the statements. Staff did not believe that providing information about the management of the pool rose to the level of essential information in the financial statements, and therefore recommended not including it as a proposed disclosure requirement. Mr. Fish believed this optional disclosure could be useful but would not require it. The board agreed with staff. In regard to fees and gates, withdrawal limits, and waiting periods, a second disclosure recommendation provided during the GASAC meeting was to require disclosures about the limitations on withdrawals including redemption gates in place, the ability to charge liquidity fees, waiting periods for withdrawals, and any other limiting factors on pool participants. Staff believed this information was important for pool participants. However, staff also believed disclosures regarding the ability to charge liquidity fees, waiting periods for withdrawals, and any other limiting factors on pool participants did not directly impact the pool valuation. If the board was satisfied that the proposed criteria for the application of amortized cost adequately addressed the risk that fair value could significantly deviate from fair value, the disclosure of this information had no clear and demonstrable relationship to information in the financial statements and, therefore, would not be considered essential to a user s understanding of those financial statements. Therefore, staff did not recommend the information about withdrawal restrictions as a proposed disclosure requirement. Mr. Brown disagreed with staff because the participant was the prime user of the plan financial statements and thus an essential piece of information that participants would need to know in order for participants to disclose such information. Mr. Granof believed this was essential information and directly impacted the pool s ability to withstand runs on the pool. Mr. Vaudt agreed with Mr. Brown and Mr. Granof. Mr. Fish disagreed with staff because this information informed participants and investors. Ms. Taylor agreed with staff and saw this information as more appropriate in a prospectus. The board, except Ms. Sylvis, Ms. Taylor, and Mr. Sundstrom, disagreed with staff. For the record keeping and retention issue, the board had tentatively agreed that the SEC s record keeping and record retention requirements should not be a proposed criterion for pools to qualify to report at amortized cost. The board acknowledged that these activities were important controls and best practices for external investment pools and noted that further consideration needed to be given to including such information in the form of a note disclosure. After further study, staff did not believe it could prescribe what was appropriate for record keeping and retention (what must be retained and for how long), but considered whether disclosing a description of the fund s record-keeping policy and activities and who was responsible for overseeing the recordkeeping activities was appropriate. Staff reviewed guidance from Concepts Statement 3 and found no convincing argument to how this information would meet the provisions outlined. Concepts Statement 3 indicated that a description of an accounting-related policy could be a note disclosure, but this information must be relevant to the underlying amounts recognized in the financial statements ( 35). Staff also acknowledged that adequate record retention and oversight was a critical operational procedure, but did not correlate to the assessment of values in the financial statements. Therefore, staff recommended that a pool not be required to disclose a description of its record-keeping policy and activities and who was responsible for such. The board agreed with staff. Next, the board discussed procedures to stabilize net asset value (NAV) per share. The SEC required that the board of directors of a money market fund using the amortized cost method must establish written procedures designed to stabilize the NAV per share, taking current market conditions into consideration. The SEC did not provide specific instructions about how to do this procedure nor require any external communication about them. The board tentatively decided not to include the establishment of such procedures as a criterion for reporting at amortized cost, however mention was made during the discussion of a potential disclosure requirement related to it. Staff considered the guidance in Concepts Statement 3 stating that notes might provide descriptions of certain accounting-related policies underlying amounts in the statements. Ultimately, staff did not believe simply having a policy about establishing written procedures to stabilize the NAV per share justified disclosure in the notes to the financial statements or was essential information to users. Staff considered that the disclosure requirement could require that the written procedures be included in the financial statements, but staff 9