GASB Update. Presentation Overview 3/23/2016. Biography. Gerry Boaz, CPA, CGFM, CGMA

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1 GASB Update AGA SEPDT March 29-30, 2016 Gerry Boaz, CPA, CGFM, CGMA TN State Audit, Technical Manager Jerry Durham, CPA, CGFM, CFE TN LGA, Assistant Director The opinions and views expressed in this presentation are our own and do not collectively represent the positions of the TN Comptroller of the Treasury or the TN Division of State Audit. Official positions are determined only after due process and deliberation. Biography Gerry Boaz, CPA, CGFM, CGMA Gerry has been with the Tennessee Comptroller of the Treasury, Division of State Audit, since January He is a Certified Public Accountant and a Certified Government Financial Manager (CGFM). He was a Legislative State Auditor for five years before becoming State Audit s Technical Manager. As a Legislative State Auditor, he served as an audit in-charge for three of the five years primarily on college and university audits. As the Technical Manager, he is primarily responsible for monitoring GASB, FASB, AICPA, OMB, and GAO accounting, auditing, and compliance standards relating to financial statement and financial-related audits. He reviews financial statement audits for adherence to the above principles and standards, as well as to AICPA auditing standards. He is responsible for responding to all due process documents of the above standard setters, as applicable. He serves as a representative of the National Association of State Auditors, Comptrollers, and Treasurers (NASACT) by observing and writing an account of the Governmental Accounting Standards Board (GASB) meetings. He is a member of the AICPA s Auditing Standards Board for a three-year term (January 2015-December 2017). He served as a member of the Government Finance Officers Association's (GFOA) Committee on Accounting, Auditing, and Financial Reporting (CAAFR) for two three-year terms ( ) and serves on the Special Review Committee for its certificate of achievement program. He represents State Audit on the National State Auditors Association s Single Audit Committee and Auditing Standards and Reporting Committee (ASRC). He has served as a Vice Chair for both the Single Audit and ASRC committees. He is also an active member in the Association of Government Accountants (AGA). He was president of the Nashville AGA chapter for the program year. He served on AGA s Professional Certification Board (PCB) for seven years ( ) and as the Chair of the PCB for four of those years. He was also a member of AGA s National Executive Committee as a result of being the Chair of the PCB. He currently serves on AGA s Governance Committee. As of July 1, 2014, he is serving as AGA s Southeast Regional Vice President. He is also a 2011 alumni of the Tennessee Government Executive Institute. Biography Jerry E. Durham, CPA, CGFM, CFE Jerry is an Assistant Director for the State of Tennessee, Comptroller of the Treasury, Division of Local Government Audit. The division has statutory responsibility for audits of local governments in Tennessee. A 30-year veteran of the division, Jerry has served as an auditor, audit supervisor, training instructor, technical manager, and assistant director. Jerry is a Certified Public Accountant (CPA), Certified Government Financial Manager (CGFM), and a Certified Fraud Examiner (CFE). In his role as assistant director, he is responsible for developing professional compliance procedures and monitoring the division s quality performance under GASB, AICPA, OMB, and GAO accounting and auditing standards. Jerry also has responsibility for the supervising the contract review process within the division. Most recently, Jerry assisted the division in implementing the new GAsB Pension standards. In addition, Jerry teaches training classes for the Tennessee Department of Audit (Yellow Book and Audit Findings) and has made training presentations for several other professional organizations including the Tennessee Society of Certified Public Accountants; Tennessee Government Finance Officers Association; National Association of State Auditors, Comptrollers and Treasurers; Association of Government Accountants; County Technical Assistance Service; Southeastern Intergovernmental Audit Forums, and various county official s associations. He has served the National State Auditors Association External Peer Review program as a reviewer, team leader, and concurring reviewer and serves on the Special Review Committee for GFOA s Certificate of Achievement for Excellence in Financial Reporting program. Jerry has also provided training for the New York City Comptroller s Office and state auditors in Arkansas, Kentucky, Minnesota, Montana, North Dakota, Idaho, North Carolina, and West Virginia. In addition to these duties, Jerry currently serves on the state sinteragencycash Flow Committeewhich operatesunder the authorityofthe TennesseeStateFundingBoard. Jerry was a partner in the accounting firm of Crosthwaite Durham and Associates. He also served as controller for Rural Healthcare of America, Inc., and taught accounting as a member of the adjunct faculty for Columbia StateCommunityCollegeand Austin PeayStateUniversity. Jerry received his accounting degree from the University of Tennessee at Martin. He is a member of the American Institute of Certified Public Accountants (AICPA); the Association of Government Accountants (AGA) where he served as chair of the CGFM committee for the Nashville chapter; the Tennessee Government Finance Officers Association (TGFOA) where he serves as state liaison to the Board of Directors; and the Association of Certified Fraud Examiners (ACFE). Jerry is also a graduate from the Tennessee Government Executive Institute (TGEI) which is a training program for government leaders through the University of Tennessee. Jerry is married and has three children and two grandchildren. 3 Presentation Overview Pronouncements currently being implemented Proposals available for public comment Projects currently being deliberated by the Board GASB News All GASB pronouncements are available free on the website, including Statements, Concepts Statements, Interpretations, Technical Bulletins, and Implementation Guides Online version of GARS now available through website - Basic view is free 4 Effective Dates June GASB 68 pension accounting for employers and nonemployer contributing entities GASB 69 government combinations GASB 71 pension transition 2016 GASB 72 fair value measurement and application GASB 73 amendments to Statements 67 and 68 GASB 76 GAAP hierarchy GASB 79 certain external investment pools* 2017 GASB 73 pensions not within the scope of 67/68 GASB 74 financial reporting by OPEB plans GASB 77 tax abatement disclosures GASB 78 certain multiple-employer pension plans 2018 GASB 75 OPEB accounting for employers and nonemployer contributing entities 5 Effective Dates December GASB 68 pension accounting for employer and nonemployer contributing entities GASB 71 pension transition 2016 GASB 72 fair value measurement and application GASB 73 amendments to Statements 67 and 68 GASB 76 GAAP hierarchy GASB 77 tax abatement disclosures GASB 78 certain multiple-employer pension plans GASB 79 certain external investment pools* 2017 GASB 73 pensions not within the scope 67/68 GASB 74 financial reporting by OPEB plans 2018 GASB 75 OPEB accounting for employers and nonemployer contributing entities 6 1

2 Fair Value Measurement and Application: Statement 72 Overview What: The Board issued Statement 72 to update the existing standards on fair value (primarily GASB 31) issued February 2015 Why: Review of existing standards found opportunities to improve the measurement of resources available to governments, and to increase comparability and accountability When: Effective for fiscal years beginning after June 15, Fair Value Definition The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. An exit price Other characteristics of fair value Market-based Based on a government s principal or most advantageous market Fair value is not an option 9 10 Fair Value definition (cont.) Fair Value Assumes highest and best use: Physically possible Legally permissible Financially feasible Valuation Techniques & Inputs Apply valuation technique(s) that best represents fair value in the circumstances market approach, cost approach, and income approach Inputs (observable vs. unobservable): Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities, most reliable Level 2: quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other than quoted prices that are observable Level 3: unobservable inputs, least reliable Maximize use of relevant observable inputs and minimize use of unobservable inputs (apply consistently with some exceptions) 11 Valuation Techniques Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets and liabilities. 12 2

3 Valuation Techniques Cost Approach reflects the amount that would be required to replace the present service capacity of an asset. Income Approach converts future amounts to a single current amount. Fair Value of Liabilities Measurement of the fair value of a liability assumes that the liability is transferred to a market participant at the measurement date Exceptions to Applying Valuation Techniques Consistently New markets develop New information becomes available Information previously used is no longer available Valuation techniques improve Market conditions change Fair Value Measurement Exceptions Type of Investments Measurement Applicable Guidance Investments in nonparticipating interest-earning investment contracts Investments in unallocated insurance contracts Money market investments and participating interest-earning investment contracts with maturity of < one year and are held by government other than external investment pools Cost-based measure Statement 31, par. 8 Interest-earning investment contracts Statement 31, par. 8 Statement 59, par. 4 Amortized cost Statement 31, par Fair Value Measurement Exceptions Type of Investments Measurement Applicable Guidance Investments held by 2a7-like external investment pools Fully benefit-responsiveness synthetic guaranteed investment contracts Investments in life insurance contracts Amortized cost Contract value Cash surrender value 17 Statement 31, par. 16 Statement 53, par. 67 Investments and Fair Value Assets that meet the definition of an investment generally should be measured at fair value Existing exceptions to fair value (such as money market investments and investments in 2a7-like pools) would remain Definition of an investment: A security or other asset that a government holds primarily for the purpose of income or profit and with a present service capacity that is based solely on its ability to generate cash or to be sold to generate cash Held primarily for income or profit acquired first and foremost for future income and profit Service capacity refers to a government s mission to provide services 18 3

4 Investments A government is permitted in certain circumstances to establish the fair value of an investments that does not have a readily determinable fair value by using the net asset value per share (or its equivalent) 19 Disclosures The following information for each class or type of assets and/or liabilities measured at fair value should be disclosed: The fair value measurement at the end of the reporting period and for nonrecurring fair value measurements, the reasons for the measurement The level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3) A description of the valuation technique(s) Additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). 20 Other Postemployment Benefits: Statements 74 & Overview What: The Board issued GASBs 74 (plans) and 75 (employers), making OPEB accounting and financial reporting consistent with the pension standards in GASBs 67 and 68 Why: Pension and OPEB standards were updated subsequent to a review of the effectiveness of the standards objective was to establish a consistent set of standards for all postemployment benefits, providing more transparent reporting of the liability and more useful information about the liability and costs of benefits When: Effective for periods beginning after June 15, 2016 (plans) and June 15, 2017 (employers) 22 Plan and Asset Reporting Scope includes defined benefit and defined contribution OPEB plans administered through trusts that meet specified criteria Also addresses assets accumulated for purposes of providing OPEB through defined benefit OPEB plans that are not administered through trusts that meet the criteria Assets reported as assets in employer s governmental/ proprietary funds Assets held for other government reported in an agency fund Few changes from GASB 43 for financial statement recognition Notes/RSI changes primarily to reflect changes in 23 measurement of defined benefit liabilities of employers Employer Scope & Applicability Applies same definition of OPEB as used in GASB 45 All postemployment healthcare benefits Other forms of postemployment benefits not provided through a pension plan Addresses both defined benefit OPEB and defined contribution OPEB Applies to employers and nonemployer contributing entities that have a legal obligation to make contributions directly to an OPEB plan or to make benefit payments as those payments come due Special funding situations Other circumstances 24 4

5 Liability to Employees for OPEB Based on total OPEB liability the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee service Is OPEB administered through a trust that meets the specified criteria? Yes recognize net OPEB liability (total OPEB liability, net of OPEB plan fiduciary net position) No recognize total OPEB liability Employer s liability to employees for OPEB measured as of a date no earlier than the end of the employer s prior fiscal year and no later than the employer s current fiscal year Based on an actuarial valuation obtained at least biennially no more than 30 months and 1 day earlier than the employer s most recent fiscal year-end Measurement of the Total OPEB Liability General Approach Three broad steps Project benefit payments Discount projected benefit payments to actuarial present value Attribute actuarial present value to periods Methods and assumptions Generally, assumptions in conformity with Actuarial Standards of Practice Single attribution method entry age, level percentage of pay Measurement of the Total OPEB Liability: Projections of OPEB Payments Based on claims costs or age-adjusted premiums approximating claims costs, in accordance with ASOP Not reduced by amounts expected to be received for making benefit payments unless payments are providing Medicare benefits Consider legal or contractual benefit caps if determined to be effective Alternative measurement method may be applied if fewer than 100 employees (active and inactive) are provided benefits through plan as of the beginning of the measurement period Generally, same simplifications to assumptions in GASB 45 can be used Reference to U.S. Office of Personnel Management regarding age-based turnover experience rather 27 than default tables Changes in Liability Recognize most changes in liability for the current reporting period as OPEB expense immediately, except: Changes in total OPEB liability: Differences between expected and actual experience with regard to economic and demographic factors in the measurement of the total OPEB liability Changes of assumptions in the measurement of the total OPEB liability For OPEB administered through trust in which specified criteria are met: Difference between projected and actual earnings on OPEB plan investments Employer contributions 28 Cost-Sharing Employers Relevant only for OPEB administered through trust in which specified criteria are met Recognize proportionate shares of collective net OPEB liability, OPEB expense, and deferred outflows of resources/deferred inflows of resources related to OPEB Proportion (%) Basis required to be consistent with contributions Use of relative long-term projected contribution effort encouraged Consider separate rates related to separate portions of collective net OPEB liability Collective measure proportion = proportionate share of collective measure 29 Notes and RSI Similar to those required for pensions Disclosure of effect on net OPEB liability of a discount rate +/- 1 percent Disclosure of effect on net OPEB liability of a healthcare cost trend rate +/- 1 percent Single and agent employers: 10-year RSI schedules for changes in the net OPEB liability, ratios, and actuarially determined contributions (statutorily or contractually determined contributions, if no actuarially determined contribution is calculated) Cost-sharing employers: 10-year RSI schedules of proportions and ratios, and statutorily or contractually determined contributions 30 5

6 The GAAP Hierarchy GAAP Hierarchy: Statement What: In June, the Board issued Statement 76 and cleared a revised Comprehensive Implementation Guide Why: The GAAP hierarchy was incorporated (by Statement 55) from the auditing literature essentially as is this project simplifies the hierarchy and explains how to identify the relevant literature within the hierarchy When: Effective for periods beginning after June 15, Categories of Authoritative GAAP Category Sources Due Process A GASB Statements Formally approved by the Board for the purpose of creating, amending, superseding, or interpreting standards, AND exposed for a period of public comment B GASB Technical Bulletins and Implementation Guides; AICPA literature specifically cleared by GASB Cleared by the Board, specifically made applicable to state and local governmental entities, AND exposed for a period of public comment Comprehensive Implementation Guide (CIG) Now classified as Category B authoritative GAAP Revised due process Public exposure of new Q&A guidance going forward Will continue to issue Guides to individual pronouncements (such as Statements 74 and 75 on OPEB) and annual updates with new Q&As on various pronouncements Board clearance of the final Implementation Guides Tax Abatement Disclosures Tax Abatement Disclosures: Statement 77 What: The Board issued Statement 77, which requires disclosures about a government s tax abatement agreements Why: Information about revenues that governments forgo is essential to understanding financial position and economic condition, interperiod equity, sources and uses of financial resources, and compliance with finance related legal or contractual requirements When: Effective for periods beginning after December 15,

7 Definition and Scope Does not include all transactions that reduce tax revenues Emphasis is on the substance of the arrangement meeting the definition, not on its name or form Would apply only to arrangements meeting this definition: A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. 37 General Disclosure Principles A government would disclose separately (a) its own tax abatements and (b) tax abatements that are entered into by other governments and reduce the reporting government s taxes Disclose own tax abatements by major program Disclose those of other governments by the government and specific tax abated May disclose individual tax abatements above quantitative threshold established by the government Disclosure would commence in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires, unless otherwise 38 specified Required Disclosures Brief Descriptive Information Name of program Purpose of program Name of government Government s Own Abatements Other Government s Abatements Tax being abated Authority to abate taxes Eligibility criteria Abatement mechanism Recapture provisions Types of recipient commitments 39 Other Disclosures Required Disclosures Government s Own Abatements Other Government s Abatements Dollar amount of taxes abated Amounts received or receivable from other governments associated with abated taxes Other commitments by the government Quantitative threshold for individual disclosure Information omitted due to legal prohibitions 40 Certain Multiple-Employer Pension Plans: Statement 78 Pension Benefit Issues What: The GASB has proposed revisions to Statements 67 and 68 on pensions to address concerns raised by stakeholders during the implementation process Why: The Board addresses requests to revisit existing standards when the concerns are significant and raise new issues When: Comment deadline is November 16,

8 Certain Multiple-Employer Plans Governments with employees who are provided defined benefit pension benefits through federally sponsored or private multipleemployer pension plans (such as Taft-Hartley plans) The nature of the relationship between the government and pension plan prevents the government from obtaining information required by Statement Certain Multiple-Employer Plans GASB 78 provides an exception to the general requirements of GASB 68, to be replaced with reporting of required contributions and descriptive note disclosures The Statement should be applied only to pensions benefits provided to employees of state or local governmental employers through a cost-sharing multiple-employer defined benefit pension plan that meets all three of the following criteria: It is not a state or local governmental pension plan It is used to provide defined benefit pensions both to employees of state or local governments and to employees of employers that are not state or local governmental employers It has no predominant state or local governmental 44 employer Certain Multiple-Employer Plans Governments applying Statement 78 should present an RSI schedule of required contributions for the past 10 years, similar to what is required in Statement 68 for legally or contractually required contributions Effective for periods beginning after December 15, 2015 Certain External Investment Pools and Pool Participants: Statement Certain External Investment Pools and Pool Participants What: The GASB has revised the accounting and financial reporting standards for 2a7-like investment pools Why: Securities and Exchange Commission changes to Rule 2a7 would make it difficult for external investment pools to meet the criteria to continue to report as 2a7-like When: Effective for periods beginning after December 15, a7-like Pools An external investment pool that is not registered with the SEC as an investment company, but nevertheless has a policy that it will, and does, operate in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940 (17 Code of Federal Regulations 270.2a-7). Rule 2a7 allows SEC-registered mutual funds to use amortized cost rather than market value to report net assets to compute share prices if certain conditions are met amendments to Rule 2a7 significantly increased the stringency of those conditions without changes to the accounting standards, 2a7-like pools would have had to meet the new conditions The Statement replaces the existing concept of a 2a7-like pool in GASB 31, as amended. 48 8

9 Criteria and Disclosures A pool should meet the following in order to report investments at amortized cost: Transact with participants at stable net asset value per share Meet certain portfolio maturity requirements Meet certain portfolio quality requirements Meet certain portfolio diversification requirements Meet certain pool liquidity requirements Meet shadow price requirements Pools and pool participants that report at amortized cost should disclose information about withdrawal restrictions, such as withdrawal thresholds, limits, and waiting periods that can be imposed 49 Consequences of Noncompliance Noncompliance with a criterion may not prevent a pool from using amortized cost for that reporting period or in future reporting periods, given the following considerations: If the noncompliance was out of the control of management The significance of the noncompliance If noncompliance is an isolated event The promptness of the pool to return to compliance If the noncompliance significantly diluted the pool or presented unfair results Any change in credit rating to the pool If a pool received financial or other support from a sponsoring government 50 Effective Date and Transition Effective for reporting periods beginning after June 15, 2015, except for requirements that are more stringent than SEC Rule 2a7 before the 2014 amendments, which are effective for periods beginning after December 15, Changes made to comply with the proposed Statement should be applied on a prospective basis. Proposed Standards for Public Comment Exposure Draft, Fiduciary Activities Fiduciary Activities What: The GASB has proposed standards that clarify when a government has a fiduciary responsibility and is required to present fiduciary fund financial statements Why: Existing standards require reporting of fiduciary responsibilities but do not define what they are; use of private-purpose trust funds and agency funds is inconsistent; business-type activities are uncertain about how to report fiduciary activities When: Comment deadline is March 31,

10 Proposal: When Is a Government a Fiduciary? An activity is a fiduciary activity of a government if (1) the government controls the assets of the activity, (2) those assets are not derived solely from the government s own-source revenue, and (3) one of the following is met: The assets result from a pass-through grant for which the government does not have administrative or direct financial involvement in the program The assets are administered through a trust agreement or equivalent arrangement in which the government itself is not a beneficiary The assets are to be used for the benefit of individuals that are not required to be residents or recipients of the government s good and services as a condition of being a beneficiary The assets are to be used for the benefit of organizations or other 55 governments that are not part of the financial reporting entity Proposal: When Is a Government Controlling Resources? A government controls the assets of an activity if: The government holds the assets. The government has the ability to administer the use, exchange, or employment of the present service capacity of the assets. The government has the ability to direct the use, exchange, or employment of the present service capacity of the assets. 56 Proposal: Other Scope Issues An entity determined to be a component unit under Statement No. 14, The Financial Reporting Entity, would be reported as a fiduciary fund if it meets one of the four criteria discussed previously. Government does not need to be controlling the assets; the component unit criteria take precedence A government that controls pension (and other employee benefit) assets, and administers the assets through an arrangement that is within the scope of existing GASB guidance, should report those assets in accordance with the existing guidance. 57 Proposals: Fund Types and Stand- Alone BTAs Fiduciary fund types: New definitions for pension trust funds, investment trust funds, and private-purpose trust funds that focus on the resources that should be reported within each. Trust agreement or equivalent arrangement should be present for an activity to be reported in a trust fund. Custodial funds would report fiduciary activities for which there is no trust agreement or equivalent arrangement. A stand alone BTA s fiduciary activities should be reported in separate fiduciary fund financial statements. 58 Other Proposals Governments engaged in fiduciary activities should be required to present additions disaggregated by source and, if applicable, to separately display investment income and investment costs Governments engaged in fiduciary activities should be required to present deductions disaggregated by type and, if applicable, to separately display administrative costs Applies to statement of changes in fiduciary net position for all fiduciary funds except custodial funds held for three months or less For these custodial funds, governments would be allowed to report total additions and total deductions in the aggregate, as long as the descriptions of the totals are sufficient to indicate the nature of the resource flows 59 Project Timeline Pre-Agenda Research Starts April 2010 Added to Current Technical Agenda August 2013 Preliminary Views Approved November 2014 Exposure Draft Issued December 2015 Final Statement Expected October

11 Pension Benefit Issues Exposure Draft, Pension Issues What: The GASB proposed revisions to Statements 67 and 68 on pensions to address concerns raised by stakeholders during the implementation process Why: The Board addresses requests to revisit existing standards when the concerns are significant and raise new issues When: The comment deadline is February 12, Proposals Would return to the use of covered payroll as previously defined for the required supplementary information schedules The term covered-employee payroll in GASBs 67 and 68 is synonymous with total payroll and differs from covered payroll (which is defined differently in GASBs 25 and 27) Concerns were raised about the ability to obtain information consistent with the definition of the new term Would clarify that a deviation from the guidance in ASOPs, as the term is used in ASOPs, is not considered to be in conformity with the requirements of GASBs 67, 68, or 73 for the selection of assumptions in determining the TPL 63 Proposals Accounting for employee contributions made by employers If these contributions are recognized by the employers as salary expense, Statements 67 and 68 require that they be reported as employee contributions; otherwise, they are employer contributions Concerns have been raised about the implications for determining a cost-sharing employer s proportionate share and a plan s reporting of employer contributions The GASB is proposing that payments made by an employer to satisfy plan member contribution requirements should be classified as plan member contributions for purposes of Statement 67 and as employee contributions for purposes of Statement 68 Also would require that an employer s expense and expenditures for those amounts be included in salaries and wages of the period for which the contribution is assessed 64 Project Timeline Added to Current Technical Agenda September 2015 Exposure Draft Issued December 2015 Final Statement Expected March 2016 Exposure Draft, Certain Asset Retirement Obligations

12 Asset Retirement Obligations (ARO) What: The GASB has proposed accounting and financial reporting standards for legal obligations to retire certain capital assets, such as nuclear power plants Why: Existing standards (Statement 18) address only municipal landfills but governments have retirement obligations for other types of capital assets. There is diversity in practice for these other types. When: Comment deadline is March 31, Proposals: Scope Asset retirement obligation A legal obligation associated with the retirement of a capital asset Retirement of a tangible capital asset The other-than-temporary removal of a capital asset from service (such as from sale, abandonment, recycling, or disposal) Includes: Nuclear power plant decommissioning Coal ash pond closure (those that are not landfills) Contractually required land restoration such as removal of wind turbines Other similar obligations Excludes: Landfills (GASB 18) Pollution remediation obligations from abnormal operation (GASB 49) Conditional obligations to perform asset 68 retirement activities, such as most asbestos removal Proposals : Initial Recognition ARO meets the definition of a liability Initial recognition of an ARO liability would happen when the liability is incurred and is reasonably estimable Incurrence generally would be based on internal and external obligating events Corresponding debit meets definition of a deferred outflow of resources Deferred outflow would be subsequently recognized as an expense in a rational, systematic manner over a period equal to the remaining useful life of the related asset 69 Proposals: Measurement Measurement attribute Settlement amount Measurement technique Current cost 70 Project Timeline Pre-Agenda Research Started December 2013 Added to Current Technical Agenda August 2014 Exposure Draft Issued December 2015 Current Technical Agenda Projects Final Statement Expected October

13 Leases 73 Preliminary Views on Leases What: The GASB is redeliberating its proposed revisions to existing standards on lease accounting and financial reporting (primarily Statement 62) based on public comments received on the November 2014 Preliminary Views Why: The existing standards have been in effect for decades without review to determine if they remain appropriate and continue to result in useful information; FASB and IASB have been conducting a joint project to update their lease standards; opportunity to increase comparability and usefulness of information and reduce complexity for preparers 74 When: Exposure Draft expected first quarter 2016 Scope and Approach Applied to any contract that meets the definition of a lease: A lease is a contract that conveys the right to use a nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction. Leases are financings of the right to use an underlying asset Therefore, single approach applied to accounting for leases with some exceptions, such as shortterm leases 75 Lessee Lessor Initial Reporting Assets Liability Deferred Inflow Intangible asset (right to use underlying asset) value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in use Lease receivable (generally including same items as lessee liability) Continue to report leased asset Present value of future lease payments (incl. fixed payments, variable payments based on index or rate, reasonably certain residual guarantees, etc.) NA 76 NA Equal to lease receivable plus any cash received up front that relates to a future period Lessee Lessor Subsequent Reporting Assets Liability Deferred Inflow Amortize over shorter of useful life or lease term Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) Reduce receivable by lease payments (less payment needed to cover accrued interest) Reduce by lease payments (less amount of interest expense) 77 NA NA Recognize revenue over the lease term on a systematic and rational basis Short-Term Leases At beginning of lease, maximum possible term under the contract is 12 months or less Lessees recognize expenses/expenditures based on the payment provisions of the contract Do not recognize assets or liabilities associated with the right to use the underlying asset for short-term leases Lessors recognize lease payments as revenue based on the payment provisions of the contract Do not recognize receivables or deferred inflows associated with the lease 78 13

14 Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical Agenda April 2013 Preliminary Views Approved November 2014 Financial Reporting Model Reexamination of Statement 34 Exposure Draft Expected January 2016 Final Statement Expected December Financial Reporting Model Research What: In September 2015, the Board decided to add a project to examine the effectiveness of the financial reporting model Statements 34, 35, 37, 41, and 46, and Interpretation 6 Why: The GASB is committed not only to establishing standards but also to ensuring that they continue to be effective; most of the requirements of Statement 34 became effective between 2002 and 2004; the provisions related to reporting existing general infrastructure assets were fully effective in 2006 and 2007 When: Initial due process document expected at the end of 2016 Research Activities During 2013 the following activities were conducted: 11 research roundtables in 8 cities, focusing on either general purpose or special-purpose governments, consisting of a mix of financial statement preparers, auditors, and users Primary purpose was to identify any major, overarching issues that have arisen since Statement 34 was implemented During 2014 the following activities were conducted: Broad surveys of financial statement preparers, auditors, and users, as well as an additional survey of preparers using the modified approach for reporting infrastructure Archival research with annual financial reports Literature review Primary purpose was to identify how Statement 34 has been implemented in practice and to explore further the issues raised in the roundtables 82 Topics to Be Addressed Management s Discussion and Analysis (MD&A) options for enhancing the financial statement analysis component, eliminating requirements that are boilerplate and no longer necessary for understanding the financial reporting model, and clarifying guidance for presenting currently known facts, decisions, or conditions Government-Wide Financial Statements explore alternatives for the format of the statement of activities and consider whether a government-wide statement of cash flows should be required Major Funds explore options for providing additional information about debt service funds, either individually or in aggregate in the financial statements or the notes 83 Topics to Be Addressed (continued) Governmental Fund Financial Statements explore a conceptually consistent measurement focus and basis of accounting and a presentation format consistent with that measurement focus and basis of accounting Proprietary Fund and Business-Type Activity (BTA) Financial Statements explore operating performance measure alternatives in conjunction with evaluating the guidance for the separate presentation of operating and nonoperating revenues and expenses. Extraordinary and Special Items explore options for clarifying the guidance for more consistent reporting 84 14

15 Topics to Be Addressed (continued) Fiduciary Fund Financial Statements explore where these financial statements should be presented in the basic financial statements Budgetary Comparisons explore the appropriate method of communication (either as basic financial statements or required supplementary information) and which budget variances, if any, should be required to be presented 85 Project Timeline Pre-Agenda Research Started August 2013 Added to Current Technical Agenda September 2015 Deliberations to Begin October 2015 Initial Due Process Document Expected 86 December 2016 Blending Requirements Blending Requirements for Certain Component Units What: The GASB has proposed revising the standards regarding how certain component units should be presented in the financial statements of the primary government Why: There is diversity in practice, with some component units When: An Exposure Draft was issued in June 2015; a final Statement was issued in January 2016 as GASB Reporting Entity Standards Most component units should be included in the financial reporting entity by discrete presentation. Currently, the blending presentation is used only under the following circumstances: Primary government and component unit have substantively the same governing body AND A financial benefit/burden relationship exists, OR Management (below the elected official level) of the primary government has operational responsibility for the activities of the component unit Services of the component unit exclusively benefit the primary government Debt of the component unit is expected to be repaid entirely or almost entirely with resources of the primary government 89 Reporting Entity Issue Many healthcare entities have asked whether blending is appropriate for certain component units These legally separate entities (mostly not-for-profit corporations) generally: Do not have boards composed of the primary government Provide services directly to the community Are expected to pay for their own debt The healthcare entities are usually the sole corporate member of these not-for-profit corporations and hold specific corporate powers 90 15

16 Board Proposals The Board has proposed an additional blending criterion: A component unit that is incorporated as a not-for-profit corporation, in which the primary government is the sole corporate member, should be included in the reporting entity financial statements using the blended method. Would be effective for reporting periods beginning after June 15, 2016 The Board is considering developing implementation guidance clarifying the relationship between being sole corporate member of an LLC, in which there is not a separate governing board, and substantively the same board. 91 Irrevocable Split-Interest Agreements 92 Irrevocable Split-Interest Agreements What: The GASB has proposed standards for reporting split-interest agreements, which are particularly prevalent among public colleges and universities Why: Limited guidance exists for split-interest agreements in which the government acts as trustee (and is one of the beneficiaries); no guidance exists for situations in which a third party is the trustee and the government is one of the beneficiaries; users need information about these arrangements When: An Exposure Draft was issued in June 2015; a final Statement is expected in March Scope Irrevocable split-interest agreements for which the government is the intermediary (trustee or agent) and a beneficiary Donor gives resources to government that also is a beneficiary in the agreement Lead interest: payments during the life of the agreement, generally to non-governmental beneficiary (donor or donor s relative) Remainder interest: assets remaining at termination of the agreement; generally goes to government Beneficial interests in resources held and administered by 3rd parties Refers to the right to receive resources in a future reporting period, from resources administered by a 3 rd party 94 Proposal: Irrevocable Split-Interest Agreements with Resources Held by Government Measurement Asset Liability Deferred Inflow Initial Subsequent Resources measured at fair value Investments remeasured at fair value; changes are investment income For benefit of nongovernmental beneficiary: Lead interest measure directly at settlement amount Distributions to lead interest beneficiaries reduce the liability For government s benefit in resources: Remainder interest residual amount (trust assets less income benefit) Proposal: Reporting Beneficial Interests in Resources Held by Others Asset recognition is required if all of the following criteria are met: Legal document specifies government by name as beneficiary Government has unconditional beneficial interest Donation agreement is irrevocable Donor has not granted variance power Intermediary is not under the control of the donor Assigning beneficial interests is not subject to approval of the intermediary Attempt to assign beneficial interests does not terminate the agreement

17 Proposal: Irrevocable Split-Interest Agreements with Resources Held by Third Party Measurement Asset Deferred Inflow Initial Subsequent Resources initially measured at fair value Changes in fair value of resources are investment income For government s benefit in resources: Initially measured at fair value Debt Extinguishments 97 Debt Extinguishments (including refundings) What: In September 2015, the Board added a project to consider whether guidance is needed for debt refundings that use a government s current resources Why: Research found that Statements 7 and 23 on debt refundings and Statement 62 on debt extinguishments are working effectively, but that standards may be needed for refundings with current resources When: Deliberations are schedule to begin in February 2016 Topics to Be Considered When a government places only existing resources with an escrow agent for the purpose of an early extinguishment of debt, should the old debt be derecognized as in a refunding? Should the difference between the net carrying value of the old debt and the reacquisition price be deferred? Should governments be allowed to defer in entirety the difference between the net carrying value of the old debt and its reacquisition price, irrespective of what portion of the refunding was completed with the government s existing resources? Should additional information be disclosed when debt is 100 extinguished using existing resources? Project Timeline Pre-Agenda Research Started August 2013 Questions? Visit Technical inquiry system Added to Current Technical Agenda September 2015 Deliberations to Begin February 2016 Exposure Draft Expected August 2016 Final Statement Expected May

18 Pre-Agenda Research Activities Going Concern Disclosures: Reexamination of Statement Going Concern Disclosures What: A review of existing standards related to going concern considerations, which were incorporated into GASB literature mostly as-is from the AICPA literative in Statement 56 Why: As it is currently defined, going concern may not be meaningful for governments, which hardly ever go out of business; AICPA and others have asked the GASB to examine the issue When: The Board added the pre-agenda research in April 2015 Topics to Be Considered Are the current going concern indicators presented in note disclosures appropriate for state and local governments, in light of the fact that, even under severe financial stress, few governments cease to operate even when encountering such indicators? What other criteria might better achieve the objective of disclosing severe financial stress uncertainties with respect to governments? What information do financial statement users need with respect to the disclosure of severe financial stress uncertainties? 106 Debt Disclosures, including Direct Borrowing Debt Disclosures What: A review of existing standards related to disclosures of debt, including provisions in Statements 34, 38, and 62 Why: Stakeholders have raised concerns about the consistency and quality of notes about debt activity; particular concern has been expressed about disclosure of bank loans, which is increasing in frequency When: The Board added the pre-agenda research in April

19 Topics to Be Considered What transactions constitute debt for financial reporting purposes and, therefore, would be subject to debt-related disclosures? What information about a government s outstanding debt is essential to users? Is that information currently available to users from the notes to the financial statements or other sources? What specific user needs exist regarding covenants (such as acceleration or subordination clauses) in debt transactions? Focus on disclosures related to debt in general; not disclosures related to specific debt transactions that are the subject of other projects, research, or potential topics Exchange and Exchange-Like Revenues 109 Revenue Recognition What: A review of existing standards related to recognition of revenues from exchange transactions in Statement 62 and consider specific guidance for exchange-like transactions Why: Stakeholders have raised questions about how to account for revenues from transactions that are neither fully exchange or nonexchange; the revenue recognition standards incorporated in Statement 62 have not been revised for governments in nearly 50 years When: The Board added the pre-agenda research in September 2015 Topics to Be Considered What issues have arisen in practice with regard to recognition of exchange and exchange-like revenues? What transactions constitute exchange-like revenue? What types of revenue transactions having single elements do governments generally engage in for exchange and exchange-like arrangements, and how do governments account for them? What types of revenue transactions having multiple elements do governments generally engage in for exchange and exchange-like arrangements, and how do governments account for them? 112 Topics to Be Considered (continued) Do governments generally engage in exchange and exchange-like transactions such as those specifically addressed in FASB Topic 606, such as unexercised rights, warranty options, bill-and-hold arrangements, customer options, variable consideration, stand-ready obligations, discount allocations, and sales with financing (other than leases)? How prevalent are sales with a right of return in the governmental environment? Should paragraphs of Statement 62 be applicable to all governments? What specific user needs exist regarding revenue recognition for exchange and exchange-like revenue?

20 Website Resources Free download of Statements, Interpretations, Concepts Statements and other pronouncements Free access to the basic view of the Codification Free copies of proposals Up-to-date information on current projects Articles and Fact Sheets about proposed and final pronouncements Form for submitting technical questions Educational materials, including podcasts Electronic newsletter and other resources for users Plain-Language Materials The GASB is committed to communicating in plain language with constituents about its standards and standards-setting activities. Plain-language articles accompany major proposals and final pronouncements Fact Sheets are prepared for complex projects to answer commonly raised questions Series of 8 fact sheets on Statements 67 & 68 on pensions Gerry Boaz, CPA, CGFM, CGMA Technical Manager TN Division of State Audit Gerry.Boaz@cot.tn.gov (615) Questions Jerry Durham, CPA, CGFM, CFE Assistant Director TN Division of Local Government Audit Jerry.Durham@cot.tn.gov (615)