Accounting Update. Airports Council International Economics and Human Capital Conference May 7, 2012 Rick Wittgren, CPA BKD, LLP

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1 Accounting Update Airports Council International Economics and Human Capital Conference May 7, 2012 Rick Wittgren, CPA BKD, LLP

2 Overview GASB 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements GASB 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position GASB 64 Derivative Instruments Application of Hedge Accounting Termination Provisions An Amendment of GASB Statement No. 53 GASB 65 Reporting Items Previously Recognized as Assets and Liabilities Preliminary Views on Economic Condition Reporting: Financial Projections 2

3 GASB Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements Effective Date = Periods beginning after December 15, Retroactive application required Early application encouraged, given GASB does not anticipate substantial changes in practice to arise from this standard Objective To incorporate into GASB literature all financial reporting guidance issued prior to November 30, 1989, which was previously included in FASB statements, Accounting Principles Board Opinions and Accounting Research Bulletins

4 GASB 62 Continued Supersedes GASB 20 Eliminates GASB 20, paragraph 7, election for proprietary funds and business-type activities Those entities can continue to apply, as other accounting literature, post-november 30, 1989 FASB pronouncements that do not conflict/contradict GASB pronouncements All FASB and AICPA pronouncements became nonauthoritative literature for private sector companies on July 1,

5 GASB 62 Continued Basis of Accounting and Financial Reporting Example Disclosure During 2012, the Airport adopted Statement of Governmental Accounting Standards Board (GASB) No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements, which supersedes GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, thereby eliminating the election provided in paragraph 7 of that Statement for business-type activities to apply post-november 30, 1989, FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements. This Statement has been applied retrospectively and had no impact on the Airport s net assets, changes in net assets or financial reporting disclosures. 5

6 GASB 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Effective Date = Periods beginning after December 15, 2011 Retroactive reclassification for all periods reported is encouraged Provides guidance for reporting of deferred outflows of resources and deferred inflows of resources GASB Concepts Statement No. 4, Elements of Financial Statements, introduced and defined deferred outflows/inflows of resources 6

7 GASB 63 Continued Requires deferred outflows of resources be presented as a separate section following assets Requires deferred inflows of resources be presented as a separate section following liabilities Introduces concept of net position, which will replace net assets in the governmental reporting model 7

8 GASB 63 Continued Encourages statement of net position presentation Assets + Deferred Outflows of Resources Liabilities Deferred Inflows of Resources = Net Position Balance sheet presentation is still acceptable Introduces concept of Net Investment in Capital Assets to replace net assets invested in capital assets, net of related debt 8

9 GASB 63 Continued Statement of Net Position Illustration 9

10 GASB 63 Continued Statement of Net Position Illustration Continued 10

11 GASB 64 Derivative Instruments Application of Hedge Accounting Termination Provisions An Amendment of GASB Statement No. 53 Effective Date = Periods beginning after June 15, 2011 Prior period restatement required if practical Amends GASB 53, 22d to clarify termination of hedge accounting and 82 to include assignment considerations Addresses situations in which a swap counterparty or counterparty s credit support provider is replaced, which were formerly considered terminating events 11

12 GASB 64 Continued Assignment An assignment occurs when a swap agreement is amended to replace an original swap counterparty or counterparty credit support provider, but ALL other terms of the swap agreement remain unchanged 12

13 GASB 64 Continued In-substance assignment occurs when all of the following criteria are met: The original swap counterparty or credit provider is replaced The original swap agreement is ended and the replacement agreement is entered into on the same date The terms that affect changes in fair value, and cash flows in the original and replacement swap agreements are identical Any differences between the exit and entry price is due to the original swap agreement s exit price being based on a computation specifically allowed in the original agreement 13

14 GASB 64 Continued Allows for hedge accounting to continue if all of the following criteria are met: 14 Collectibility of swap payment is considered probable The swap counterparty, or credit provider, is replaced with an assignment or in-substance assignment The government enters into the assignment or insubstance assignment in response to an act of default or termination event by counterparty or credit support provider If all criteria are met, the hedging relationship continues and deferred outflows/inflows continue to be reported

15 GASB 65 Reporting Items Previously Recognized as Assets and Liabilities Effective Date = Periods beginning after December 15, 2012 GASB Concepts Statement No. 4 indicated that recognition of deferred outflows/inflows should be limited to instances specifically identified in subsequent GAAP Only two such pronouncements were previously issued: GASB 53 (Derivatives) and GASB 60 (Concessionaire Service Agreements) 15

16 GASB 65 Continued Deferred outflows/inflows of resources will include (among other balances) the following items: Deferred gain/loss on current and advance refundings of debt that result in a defeasance Other changes prescribed by GASB 65 Debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred Term deferred should only be used when referring to deferred outflows/inflows of resources 16

17 GASB Preliminary Views Economic Condition Reporting: Financial Projections Released in November 2011 Identifies five components of information believed necessary to assess financial sustainability Component 1 Projections of the total cash inflows and major individual cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations in cash inflows 17

18 GASB Preliminary Views Economic Condition Reporting: Financial Projections Five components Continued Component 2 Projections of the total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of fluctuations in cash outflows Component 3 Projections of the total financial obligations and major individual financial obligations, including bonds, pensions, other postemployment benefits and long-term contracts, with explanations of the known causes of fluctuations in financial obligations 18

19 GASB Preliminary Views Economic Condition Reporting: Financial Projections Five components Continued Component 4 Projections of annual debt service payments (principal and interest) Component 5 Narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies Contemplates projections for five years forward 19

20 GASB Proposed Changes to Pension Reporting BKD has a one-hour webinar that covers this topic Learning objectives of the webcast include Recognize pension liabilities for multiemployer plans Describe changes in pension plan reporting Identify pension expense for multiemployer plans 20

21 Thank you Rick Wittgren, CPA Senior Manager BKD, LLP

22 Achieving Financial Reporting Results in Today s Environment Airports Council International Economics and Human Capital Conference May 7, 2012 Richard T. Wittgren, CPA BKD, LLP

23 Overview Common Issues Related to Financial Statement Presentation Airline Bankruptcies and Related Considerations Capital Asset Impairment Indicators Review of Depreciable Lives Capitalized Interest Operating vs. Nonoperating Revenues GFOA Presentation Checklist 23

24 Common Issues Related to Financial Statement Presentation Classified statement of net assets/position presentation GASB 34, 97, requires proprietary funds present using a classified format Restrictions on asset use should be reported when the restrictions change the availability of the asset Cash and investments held in a separate account to be used to pay debt service and cannot be used to pay other current liabilities are restricted 24

25 Common Issues Related to Financial Statement Presentation Continued Restricted asset presentation on current vs. noncurrent assets Continued GASB 62, 31, indicates that current assets should exclude (among other things) cash and claims to cash that are designated acquisition/construction of noncurrent assets or segregated for liquidation of long-term debts This can result in noncurrent cash and cash equivalents 25

26 Airline Bankruptcies and Related Going Concern Considerations GASB 56 Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards Financial statement preparers have a responsibility to evaluate whether there is substantial doubt about a government s ability to continue as a going concern for 12 months beyond the financial statement date. Moreover, if there is information that is currently known to the government that may raise substantial doubt shortly thereafter (for example, within an additional three months), it also should be considered. 26

27 Airline Bankruptcies and Related Going Concern Considerations Continued Indicators of substantial doubt include, but are not limited to, external matters The bankruptcy of a major airline could be a negative external factor Auditor s responsibility is to evaluate if there is a substantial doubt about the entity s ability to continue as a going concern for a reasonable period of time 27

28 Airline Bankruptcies and Related Going Concern Considerations Continued If substantial doubt exists, the notes to the financial statements should include: 28 Pertinent conditions and events Effects of such conditions and events Evaluation of significance of conditions and events and mitigating factors Possible discontinuance of operations Management s plan, including prospective financial information Information about the recoverability/classification of assets and liabilities

29 Airline Bankruptcies and Related Going Concern Considerations Continued Management s plan Dispose of assets? Borrow money or restructure debt? Reduce or delay expenditures? 29

30 Capital Asset Impairment Indicators and Impact on Financial Statements GASB 42 Accounting and Financial Reporting for Impairment of Capital Assets and Insurance Recoveries Impairment is defined as a significant, unexpected decline in the service utility of a capital asset Service utility is different than the level of utilization 30

31 Capital Asset Impairment Indicators and Impact on Financial Statements Continued Indicators of impairment include: Evidence of physical damage when the level of damage is such that restoration efforts are necessary to restore service utility Enactment or approval of laws or regulations or other changes in environmental factors Technological development or evidence of obsolescence A change in the manner or expected duration of use of a capital asset Construction stoppage 31

32 Capital Asset Impairment Indicators and Impact on Financial Statements Continued After identifying a factor that is indicative of an impairment, the government must determine if the impairment is both significant and unexpected Impairment losses could be considered a special item if the impairment was subject to management control, i.e., change in manner or duration of use 32

33 Review of Depreciable Lives A capital asset s useful life can decline for reasons other than a significant, unexpected decline in the service utility of the capital asset Changes in useful life should be addressed prospectively Not considered a change in accounting principle 33

34 Capitalized Interest GASB 62, 5-22 Assets qualifying for interest capitalization Assets that are constructed for the government s use Assets intended for sale or lease that are constructed as discrete projects Assets that are donated or granted to other entities Notice that interest capitalization is not restricted to those assets specifically constructed using debt proceeds 34

35 Capitalized Interest Continued Interest capitalized = interest costs incurred during construction period that could have been avoided if capital outlays for the assets were not made Governments should capitalize interest even if the construction project is not directly funded by a particular debt issue Use of weighted-average capitalization rate is appropriate 35

36 Operating vs. Nonoperating Revenues GASB 34, 102 Required to define operating revenues and expenses Such policy is required to be disclosed Generally follows GASB 9 (statement of cash flows) guidance Operating activities generally result from providing services and producing and delivering goods 36

37 Operating vs. Nonoperating Revenues Continued General Guidance If a transaction s cash flows are reported as capital and related financing activities, noncapital financing activities or investing activities = Nonoperating revenues Non-exchange and exchange-like revenues = Nonoperating revenues Fees and charges, in some cases = Nonoperating revenues (PFCs) 37

38 Operating vs. Nonoperating Revenues Continued Common revenue sources in question: Operating Grants, i.e., LEO and Canine Detection Grants Cash receipts from grants or subsidies that are not specifically for construction are noncapital financing activities (GASB 9, 21) = Nonoperating revenues Customer Facility Charges Could be operating or nonoperating revenues Look to the board resolution or rental car lease agreements for use of CFCs 38

39 GFOA CAFR Checklist 48 page disclosure checklist Useful in preparing/reviewing basic financial statements and CAFR Covers all basic requirements used to evaluate CAFR s that are submitted for the Certificate of Achievement Award Checklist.pdf 39

40 Thank you Rick Wittgren, CPA Senior Manager BKD, LLP