RE: Project No. 33-2ED, Proposed Implementation Guide of the Governmental Accounting Standards Board

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1 December 30, 2014 Mr. David R. Bean Director of Research and Technical Activities Governmental Accounting Standards Board PO Box 5116 Norwalk, Connecticut Via RE: Project No. 33-2ED, Proposed Implementation Guide of the Governmental Accounting Standards Board Dear Mr. Bean: Moss Adams LLP appreciates the opportunity to share our views on the Governmental Accounting Standards Board s (GASB) Exposure Draft (ED) of its proposed Implementation Guide No. 20XX-1. Our observations are included in the attached table, which is structured as follows: Identification of the specific number. Comments, including in some instances suggested alternative wording for the respective. Categorization by type of observation, indicating the end result we are seeking with respect to each comment. Our review team found these categories useful as we compiled our comments, and they may also be useful to you in reading our comments. The following types were used: o Add new o existing o Eliminate existing o Other We hope that you find our comments and suggestions meaningful. If you would like to discuss our comments or require further information regarding our response, please contact Erica Forhan in our Professional Practice Group at or by at Erica.Forhan@mossadams.com. Respectfully,

2 Page 1 Chapter Appendices In each chapter, if the appendix provides examples or illustrations related to specific questions in the guide, consider adding references to the relevant questions and answers. Adding such references might enhance the use of the appendix and prompt appendix readers to consider specific discussion that they would not have otherwise been aware of This states that the internal investment pools are a government's own cash and investments, and the component unit should report its pro rata share. How should component units report the risk disclosure requirements of GASB Statements No. 3 and 40 in their separate, stand-alone financial statements? We have noted a divergence in practice in some instances. Sometimes component units disclose their equity in the primary government's internal investment pool, with a reference to the primary government's financial statements with respect to the risk disclosure requirements. In other instances, component units participating in the primary government's internal investment pool will include all of the risk disclosure requirements in their own component unit stand-alone financial statements. For a component unit's stand-alone financial statements, it would be helpful for the guide to clarify how that component unit should report its position in the related primary government s internal investment pool, and what the required minimum risk disclosures in those stand-alone financial statements are We sometimes see primary governments maintaining an overall bank account in their name, and the overall account includes a number of individual bank accounts that identify separate component units in the account names. This states that holding securities in a government's name indicates the government's rights in the securities. Does "government's name" refer to the primary government maintaining the overall account, or the component units with individual account names and numbers within the account maintained by the primary government? We recommend that the GASB consider providing a new to clarify the rights to securities between primary governments and component units Governmental enterprises often report restricted cash as a separate line item in the statement of net position. (Examples include debt proceeds restricted for future capital expenditures or cash required to be set aside for future debt service.) Paragraphs 51 and 52 of GASB Statement No. 9 state that restricted cash, regardless of its nature or whether it is determined to be a current or noncurrent asset on the statement of net position, should be included in the definition of cash and cash equivalents for purposes of the cash flow statement. This guidance is not in line with FASB, and although we understand that FASB guidelines shouldn't necessarily dictate GASB standards, the nature of restricted cash for a government reporter is not so different from a FASB reporter that it warrants different accounting and reporting treatment. Also, we note that Paragraphs 11 and 52 of Statement No. 9 do permit governments to treat restricted cash as investments, subject to clear policy disclosure in the footnotes. Other Add

3 Page 2 However, in many circumstances this conclusion contradicts Statement No. 9's definition of cash and cash equivalents, which states that cash equivalents both a) are readily convertible to known amounts of cash, and b) have a maturity of 3 months or less. For example, if a governmental entity reports restricted cash for debt service, or for future capital projects, that may not be spent until after 90 days, how could that be considered liquid cash and cash equivalents to an entity? Further, the option to classify or treat something as an 'investment' seems to be misleading, since although an entity may recognize interest income from restricted cash, the business purpose of the restricted cash in our example has little or nothing to do with recognizing investment earnings. At the very least, treating restricted cash as an 'investment' is confusing from a terminology standpoint and 3.60 We encourage GASB to 1) revisit the conclusion that restricted cash, by default, is considered a cash and cash equivalent for cash flow statement purposes, and 2) provide clarity in situations where restricted cash is not treated as a cash and cash equivalent (as determined by the government's policy), as to whether the net change in restricted cash for a period should always be an "investing activity", or if there are circumstances where it could or should be deemed a "capital and related financing activity" (such as cash set aside for debt service or capital debt proceeds restricted for a capital project). These s do not provide much guidance about what should and should not be discounted. There is an example given of structured settlements which seems to imply there are certain criteria that would make discounting a more correct answer in certain circumstances. It would be helpful for the GASB to better define in its standards or the implementation guide the circumstances for which discounting should be considered Discounting is discussed for structured settlements. The underlying guidance in GASB Statement 10, paragraph 25, could be more specific about how to select a rate. The investment rate of the pool is hard if not impossible to determine for many pools, which then leads to the term "settlement rate", or the rate at which a monetary liability with uncertain terms can be settled or a monetary asset (receivable) with uncertain terms can be sold. That is not clear for a financial statement user either, since most preparers are not involved with selling these pooled liabilities The guidance in GASB 10 paragraph 49, and later in , states that societal factors used in estimating liabilities should be disclosed, along with the effects of inflation and economic factors used. Additional guidance or examples would be helpful to clarify how a preparer would apply "societal" factors in developing an estimated liability The answer to this indicates that "the requirements of this Statement [14] apply at all levels to all state and local governments." We propose that this reference also include Indian Tribal governments, as they do not fit under the definition of either a state or local government. For example: "The requirements of this Statement apply at all levels to all state, local, and Indian tribal governments."

4 Page The answer does not include a discussion of the option provided in GASB Statement No. 14, paragraph 55, which allows for certain entities to be presented as investments. We propose that the following be added at the end of the answer: "Additionally, certain organizations are allowed to be presented as investments if they meet the criteria of GASB Statement No. 14, paragraph 55, and as further described in " The answer states that "The organization would be reported in the same manner as departments or agencies of the primary government." There are many smaller governments that don't utilize departments or agencies and are focused more on funds. We believe that increased clarity could be achieved for these smaller governments if the term "fund" was included. For example: "The organization would be reported in the same manner as funds, departments, or agencies of the primary government." This discusses whether an organization that is not legally separate should be considered a potential component unit. The answer indicates No, and concludes that they should be reported in the same manner as departments or agencies of the primary government. There are many smaller governments that don't utilize departments or agencies and are focused more on funds. We believe that increased clarity could be achieved for these smaller governments if the term "fund" was included. For example: "No. An organization that is not legally separate, as defined by Statement 14, should not be considered a potential component unit. It should be reported in the same manner as funds, departments, or agencies of the primary government that holds the organization's corporate powers." The question provides examples that indicate the imposition of will by the primary government on a potential component unit. We suggest that the list of examples include the ability to require profit distributions or other transfers back to the primary government. In our Tribal government practice, we frequently see that a Tribal Council (primary government) requires its for-profit discretely presented component units to provide profit distributions/transfers back to the Tribe. We would propose that a bullet f. be added as follows: "The ability to require distributions or transfers of cash or other assets to the primary government." The example states that " a gaming enterprise that shares its revenues through transfers to the primary government would be considered to have a financial benefit relationship." It is odd to use the word "transfers" when discussing transactions between a primary government and a component unit, as discrete component units don't technically have transfers with the primary government. We recommend the GASB consider the following wording instead: " a gaming enterprise that shares its revenues through transfers, profit distributions, or other methods to the primary government would be considered to have a financial benefit relationship." This answer states that " most component units should be discretely presented". The use of the word "most" does not seem appropriate, as that may bias people to presume that discrete is generally the correct answer, instead of basing it on the facts and

5 Page 4 circumstances of the potential component unit. We recommend replacing the term "most" with "many" Similar to , this answer states that " most component units should be discretely presented". Similar to our previous comment, we recommend replacing the term "most" with "many" This answer contains a bad reference. The answer references , but was eliminated and should not be referenced here. Content reads "(However, see Question about including fund financial statements of a component unit that does not issue separate financial statements." This answer and example state that " significant transactions and receivable/payable balances between the university and the foundation should be eliminated from the aggregated totals that would be carried forward for discrete presentation in the state's financial statements." It would be helpful to be more specific on "significant transactions", as it is not clear that this is discussed elsewhere. For example, would the preparer eliminate grants to departments, or only internal balance/transfer type items? This is an area where we've seen "eliminations" similar to those required in a consolidated FASB statement, but "double counting" is inherent to fund accounting. Consider providing additional guidance as to what type of transactions may be included in "significant transactions". Other Also, we recommend the GASB consider adding guidance on other circumstances where eliminations may also be appropriate (for example, between two enterprise funds, between two discrete component units, between a component unit and the primary government, etc.) The first sentence of this answer refers to GASB Statement No. 34, paragraph 14, and states that a total column for the entire reporting entity may be presented but is not required. However, this reference is not applicable to the issue in the question, which is referring to the elimination of significant activity between a discretely presented component unit and its fund-raising foundation that are presented together in the primary government's financial reporting entity. The specific requirements of GASB Statement No. 61, paragraph 61, which indicate that the equity interest would be eliminated and only the discretely presented component unit's financial statement information would remain, needs further explanation. This optional approach in GASB Statement No. 61, paragraph 61, may require a separate elimination column within the government-wide financial statements. Eliminations between a primary government and its discretely presented component units are not discussed in the guide. When a total column for the reporting entity is presented, the guidance in GASB Statement No. 61, paragraph 61, would require further explanation. Consider adding a separate addressing how significant activity between a primary government and a discretely presented component unit are eliminated when the optional total column for the reporting entity is presented. and Add

6 Page This discusses preparing a combining statement, including major component units, for the total of discrete component units. We recommend that the guidance on the combining schedule indicate a statement that eliminations of significant transactions and receivable/payable balances between the component units be made. This is an area where there is a lack of guidance, and therefor diversity in practice, on whether transactions between two separate discrete component units should be eliminated when presenting total aggregate discretely presented component units in the primary government's financial statements. More guidance should be given on the types of balances or transactions to eliminate, and the preferred presentation or disclosure of such eliminations This answer gives different options for presenting this schedule, but assumes that all of the entities included in the combining schedule would be business-type component units. We recommend GASB provide guidance for when some of the discretely presented component units are governmental-type component units. We've observed instances in which preparers struggle to discretely present a component unit that follows the governmental statement format and into the enterprise fund operating statement, which is a little cumbersome and may be misleading. Consider providing guidance for how this might be presented, when some of the discretely presented component units are governmental-type component units, or there is a mixture of both governmental-type and business-type component units The guidance in this implies that each fund of a blended component unit should be separately evaluated for inclusion in the primary government statements. However, we do not believe this level of integration is necessary for a blended component unit that is a separate legal entity and issues its own financial statements. In our opinion, governments should have the option to include just the consolidated total of the component unit as a single fund, similar to discretely presented component units. In our experience, some preparers do not understand why each fund of a blended component unit comes over, and why it makes sense for a blended component unit s general fund to potentially be a major fund in the reporting entity financial statements, when that blended component unit already issues stand-alone financial statements with information on each of its major funds. We ask the GASB to consider whether it would be appropriate to allow inclusion of blended component units as a single fund in the primary government's financial statements It might be helpful to include a definition of what a "nongovernmental component unit" is. We see governmental entities confuse this with component units that are businesstype activity reporters, and conclude they are non-governmental, while others believe that this would be something outside the government (like a foundation). Consider adding guidance, giving examples, or referencing existing guidance to better define a "nongovernmental component unit".

7 Page The example limits this to situations where the government has acquired stock. There are several types of ownership interest methods, and we've observed situations where governmental reporters were unsure how to apply this guidance when the ownership was not through a stock purchase, but rather some other type. This answer would benefit from consistency with the language used elsewhere, which includes "stock of an explicit measurable right to the entity net resources." For example: " the stock or other equity acquisition The guidance does not include information about (1) how and when to dispose of deferred outflow balances recorded for contributions and (2) transitional guidance for GASB Statement No. 68 implementation (Year 1) compared to subsequent periods. Employers are not provided with clear guidance related to moving these balances out of deferred outflows, similar to the guidance provided for other deferred outflow amounts required under GASB Statement No. 68. We recommend that GASB: 1) clarify the wording or provide additional guidance in to explain the timing and entries to dispose of contributions amounts recorded as deferred outflows; 2) provide information on recording these amounts in the year of GASB Statement No. 68 implementation (as discussed in GASB Statement No. 71) vs. recording these amounts in subsequent periods; and 3) provide examples to illustrate the timing of contributions that would apply relative to the measurement date and example entries for recognition and disposing of deferred outflows. Chapter 5, Illustration 5 Required Supplementary Information (RSI) examples provided in the financial statement illustrations in Illustration 5 & 6 appear inconsistent. GASB Statement No. 67, paragraph 32(b), requires a 10-year RSI schedule of Net Pension Liability with related ratios. The financial statement example provided for Single Employer Plans (Illustration 5) does not include this schedule while the example for Cost Sharing Plans (Illustration 6) does include this schedule. The required 10-year RSI schedule of Changes in Net Pension Liability for each type of plan appears to include the information required in the Schedule of Net Pension Liability, but no explanation is provided about the required/preferred presentation or why the schedule is omitted in the Single Employer Plan example. We recommend that GASB provide clarification about whether each of the RSI schedules listed in GASB Statement No. 67, paragraph 32, are required separately, or whether the required disclosures can be aggregated in one RSI schedule. In addition, it would be helpful to explain why the Schedule of Net Pension Liability is omitted from the illustration for Single Employer plans, and whether this is due to a characteristic of those types of plans or whether this is an optional presentation The Answer in includes the phrase "Research for this project revealed that the nature of a pool s operations and portfolio was not always evident in materials that were distributed to participants, including financial reports. These disclosures will Eliminate

8 Page 7 provide that information to pool participants and other users of pool financial statements, permitting them to make more informed decisions about the pool". We don't believe these two sentences are relevant to the question, or provide specific accounting guidance. In addition, they include the unnecessary reference to this project to draft the implementation guide. We recommend that GASB delete these two sentences, or alternatively, if these two sentences are considered necessary to describe the rationale for the disclosure, create a new question along the lines of "Why is this disclosure necessary?" The question posed is "Is title to an asset always equivalent to ownership?" The last two sentences in the answer state "There may be instances in which title is held by one entity, yet some rights of ownership are held by another entity. For example, the lessee reports assets under a capital lease although the lessor holds title." It would be helpful to add other examples where this is the case to further explore the question. For example, additional scenarios could delve into what it takes to demonstrate all of the rights and obligations of ownership, and situations related to intergovernmental agreements, easements, etc., where the title may be held by one party, yet another party is able to demonstrate the rights of ownership of the asset. Add We observe scenarios with preparers in which an argument could be made that a party has the rights and obligations of ownership of an asset, despite not having title. One example is an intergovernmental agreement between a park district within a County and a local jurisdiction within the County who owns a park. Another example is a City that has an easement on a landowner's property where trees have been planted to create shade to decrease water temperature for the benefit of a separate water district. We suggest that GASB provide other definitive examples, if any, to augment and clarify the answer It is difficult to understand the question that is being answered, so clarified wording may be appropriate. We believe the question is addressing whether hedge accounting MUST be applied, or whether it is an option. Consider changing the word "should" in the answer to "is required". Or rephrase the question by replacing " is the application of hedge accounting an option with something like "... is the application of hedge accounting required. Alternative wording to consider: "Question: If a derivative instrument is effective in significantly reducing an identified financial risk, is it permissible to not apply hedge accounting? Answer: No. Hedge accounting is required to be applied to determine if the derivative instrument is effective in significantly reducing an identified financial risk." We believe the point being conveyed in this is that a governmental entity cannot apply regulatory accounting until it knows whether an income statement impact actually exists. This can't be accomplished until the government determines whether the contract is effective. We believe this could be clearer. A potential wording edit

9 Page 8 for the answer: "Yes. In order to apply the provisions of regulatory accounting of Statement 62, the utility is required to determine the amount that otherwise should be recorded as revenue or expense. That determination occurs only after consideration of whether a derivative instrument is a hedging derivative instrument, i.e., only after the derivative instrument is determined to be effective in significantly reducing an identified financial risk." The fair value increase or decrease associated with termination of derivatives is considered investment income or expense. This is consistent with GASB standards, but we have observed many preparers having significant issues with this classification because they look at their power or fuel supply as a portfolio concept. Many power and fuel utilities hedge several forms of risk with derivatives products due to the fact that these entities generally look at power supply as a portfolio, rather than individual trades. As such, termination of derivatives is more common and serves the overall benefit of the utility and rate payers. Considering these terminations as investment income/expense does not give a utility a true representation of power supply. We recommend that GASB consider allowing power and fuel utilities to account for terminations that are within the normal course of business to be reported as operating revenue/expense. N/A add to chapter 10 N/A add to chapter 10 Interest rate caps include a 'fixed payment' by the cap purchaser at inception. While Chapter 10 provides guidance on how to account for the fair value of the underlying cap, as well as an example of how to determine effectiveness, it does not address fees incurred at the start of the agreement. It would be useful to clarify whether those should be expensed as an interest/financing expense up front, or capitalized and amortized over the life of the agreement. In light of other GASB guidance with respect to debt issue costs, many conclude that these should be expensed, but clarifying guidance from GASB would be beneficial. Depending on the size and nature of the interest rate cap agreement, fees incurred to enter into these agreements can be significant. Absent clear financial reporting guidelines, governments may be tempted to choose the approach (capitalize vs. expense) that best meets their political and/or financial needs. We recommend that GASB provide a new to clarify the proper accounting for fees incurred at the inception of an interest rate. Premiums on put and sale options not associated with debt are generally time value type of assets. The premiums expire over the contract period. If an additional question and answer on interest rate caps is included in the guide (see previous comment) we also believe that one for commodity put and sale options should be included. The guidance on this appears to be tied to the time value, therefore it would be treated consistent with a prepaid asset and amortized over the life of the option, with the balance recorded to revenue or expense if the option is called. We recommend that GASB provide a new to clarify the proper accounting for premiums incurred at the inception of a commodity put or sale option. Other Add Add

10 Page 9 Z.42 GASB Statement No. 42 requires that the carrying value of "impaired idle assets" be disclosed. A question arises in practice that could benefit from GASB guidance: Should assets set aside as 'idle', whether impaired or not, that are intended to be put in use again in the future, continue to be depreciated while idle? While the answer may depend on the nature of the asset, an asset secured in storage arguably has a prolonged useful life. This may require a common sense determination to be made on a case by case basis. We recommend the GASB consider whether this question warrants a new to clarify its views. Add