GASB Accounting Update

Transcription

1 GASB Accounting Update Frank Crawford Crawford & Associates, P.C. 1 Recently Issued or Effective GASB Pronouncements 2 New Pronouncements 2004 Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans April April Technical Bulletin , Tobacco Settlement Issues April April Statement No. 44, Economic Condition Reporting: The Statistical Section May May Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits 3 Other Than Pension Plans June 1

2 New Pronouncements 2004 Technical Bulletin , 2, Recognition of Pension and OPEB Expenditures/Expense and Liabilities by Cost-Sharing Employers December Statement No. 46, Net Assets Restricted by Enabling Legislation December 4 New Pronouncements 2005 Statement No. 47, Accounting for Termination Benefits June 5 New Pronouncements 2006 Technical Bulletin , Accounting and Financial Reporting by Employers and OPEB Plans for Payments from the Federal Government Pursuant to the Retiree Drug Subsidy Provision of Medicare Part D JuneD Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra- Entity Transfers of Assets and Future Revenues September 6 2

3 New Pronouncements 2006 Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations November 7 New Pronouncements 2007 Statement No.50, Pension Disclosures- May Statement No. 51, Accounting and Financial Reporting for Intangible Assets June June Statement No. 52, Land and Other Real Estate Held as Investments by Endowments 8 Effective Dates June 30, 2008 Statement 45 Phase 1 Statement 43 Phase 2 Statement 48 Statement 50 June 30, 2009 Statement 45 Phase 2 Statement 43 Phase 3 Statement 49 Statement 52 June 30, 2010 Statement 45 Phase 3 Statement

4 Statement No. 48 Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues 10 Sales and Pledges-Scope Government receives proceeds in exchange for the rights to future cash flows from: Receivables: Delinquent property taxes Mortgages Student loans Future Revenues 11 Sales and Pledges-Scope Guidance is provided for all transactions involving the transfer of assets (sold or donated) between components of a common reporting entity, including individual funds. No new basis, carrying value is retained Difference is a transfer/subsidy 12 4

5 Sales and Pledges Is it a Sale or a Borrowing? Borrowing by default, unless you can prove otherwise, based on evaluation of Continuing involvement control Does the transferor government retain control, or is control relinquished? Criteria provided for receivables Criteria provided for future revenues (Intent of the parties, terms of the agreement are not determinative) 13 Receivables Are receivables sold or pledged? Is the transferee able to sell or pledge? Are the receivables and cash collected isolated from seller (and its creditors) Legally separate No access to cash Source and timing of payments Satisfaction of accounts Bankruptcy protection No option or ability to replace or repurchase accounts 14 Receivables If sale criteria are not met (collateralized borrowing): Pledging government: Does not de-recognize receivables Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure) Transferee government recognizes a 15 receivable 5

6 Receivables If the conditions for sale treatment are met: Selling government: De-recognizes receivables Recognizes revenue/gain (loss) in the government- wide statements or enterprise funds for the difference between proceeds and carrying value. Proceeds are recognized as revenue in governmental funds (net carrying value assumed to be zero) Purchasing government: Intra-entity entity--purchased receivables are reported at carrying value Outside of the reporting entity-- --receivables at cost 16 Future Revenues Are future revenues sold or pledged? Is the transferee able to sell or pledge? Does the transferor continue to have a active involvement in the generation of the revenues? By nature, own-source revenues involve continuing active involvement. Taxes User charges Some grants, entitlements, shared revenues, rents, royalties may meet the criteria for sale treatment, depending on active involvement Isolation similar similar to receivables 17 Future Revenues If sale criteria are not met (collateralized borrowing): Pledging government: Continues recognition of revenues pledged Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure) Transferee government recognizes a receivable 18 6

7 Future Revenues If the conditions for sale treatment are met: Selling government: Has no asset to de-recognize for future revenues Proceeds will usually be recognized as deferred revenue and amortized over the life of the agreement Deferral depends on why revenue had not been previously recognized by the seller Purchasing government: Intra-entity entity--payment to selling government for rights to future revenues is reported as a deferred charge (and amortized) Outside of the reporting entity-- --asset (rights) reported at cost Applied prospectively 19 Other assets and liabilities Assets: Residual interests subordinate subordinate note or residual certificate that represents the rights to: Excess receivable collections (probability of collection) Excess future revenues (revenue recognition event) Liabilities: Recourse and other obligations (FAS 5) 20 Sales and Pledges Disclosures Future Revenues: For direct or indirect pledges (while debt is O/S) What revenue? Purpose of the debt For how long? Significance of pledged amount Coverage For future revenues sold (year( of the sale) What revenue? For how long? Significance of amount sold Present value 21 7

8 Sales and Pledges Tax Increment Revenues Pledged The city has pledged a portion of future sales tax revenues to repay $2.8 million in sales tax increment bonds issued in June 2003 to finance the refurbishing of the Southtown business district. The bonds are payable solely from the incremental sales taxes generated by increased retail sales in the refurbished district. Incremental sales taxes are projected to produce 128 percent of the debt service requirements over the life of the bonds. Total principal and interest requirements for the bonds are $3,490,900, payable semiannually through June For the current year, principal and interest paid and total incremental sales tax revenues were $395,150 and $403,291, respectively. 22 Sales and Pledges Sale of Future Rental Revenue During the year, the city entered into an agreement with a private party under which the city relinquishes its rights to receive and retain future rental income from beachfront properties owned by the city. In July, the city received a lump-sum payment of $13.1 million in exchange for 100 percent of its rights to the rental payments through December Total rental income from the beachfront properties during that period under normal occupancy conditions is estimated to be $26.9 million. Based on this estimate, the city calculated the present value of the future rental payments to be $12.9 million at the time of the sale. 23 Effective Date For Periods Beginning After December 15, 2006 Retroactive Application, Except: Provisions for Future Revenue Sales to be Applied Prospectively 24 8

9 Statement 49 Accounting and Financial Reporting for Pollution Remediation Obligations 25 GASB s s Pollution Project Project added to research agenda in 2001 for issues not covered in GASB 18 Preliminary Views issued March respondents Public hearing Exposure Draft issued January respondents Statement November Impact of Pollution on State and Local Governments 27 9

10 Legal Liability Standards Varies by state and law Many are similar to Superfund Liable under Superfund Current and previous site owners and operators Disposers Transporters 28 Accounting for Pollution Remediation Obligations 29 Scope Pollution REMEDIATION Obligations Excludes prevention or control obligations Excludes asset retirement obligations including landfills (Statement 18) Excludes fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4) 30 10

11 Obligating Events a. Compelled to take remediation action because of pollution-caused imminent endangerment b. Violate pollution-prevention prevention permit for example, RCRA permit c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost 31 sharing) Obligating Events (continued) d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation Excludes lawsuits having no merit e. Govt. commences, or legally obligates self to commence Limited to portion legally required to complete 32 Recognition Component approach Recognize components of liability as they become reasonably estimable Recognition benchmarks Cost accumulation, not fair value Current value, not present value Expected cash flow technique 33 11

12 Two Contingencies FAS 5 Recognition Potential Payment $0 $200 Probability 60% 40% (a) x (b) $0 $80 $80 Potential Payment $0 $200 Probability 60% 40% (a) x (b) $0 $80 $80 34 Two Contingencies FAS 5 Recognition Potential Payment $0 $200 Probability 60% 40% Potential Payment Probability $0 $1 60% $200 40% Now it s 100% probable. But how much do you record? (a) x (b) $0 $80 $80 (a) x (b) $0 $80 $80 35 Two Contingencies Expected Cash Flow Permutations of Potential Contingency 1 $0 $0 $200 $200 Payments Contingency 2 $0 $200 $0 $200 Total $0 $200 $200 $400 Joint Probabilities 36% 24% 24% 16% % 12

13 Two Contingencies Expected Cash Flow Permutation math $200 X.48 = $96 $400 X.16 = $64 $160 OR Shortcut math $200 X.4 = $80 $200 X.4 = $80 $ Which Outlays? All direct outlays attributable to remediation All outlays not just incremental costs Consistent with Statement 18 Includes payroll, pension, and OPEB May include indirect outlays General overhead A matter of professional judgment 38 Capitalization Criteria: a. Cleanup to prepare property for sale (limited to fair value) b. Polluted property bought and cleaned for use (limited) c. Asset impaired and cleanup restores lost service utility (limited) d. Acquire PP&E that have future alternative use, e.g., land (limited to future service utility) For a. & b. capitalize only if incurred within reasonable period 39 13

14 Expected Recoveries from PRPs and Insurance Reduce expense (and expenditure, if available) and... If not realized or realizable Net against remediation liabilities When realized or realizable Accrete liability and report separate recovery assets (cash or receivable) 40 Recoveries example Expected outlays $10,000 Expected recoveries 3,000 Net remediation expense $7,000 If recovery not realized or realizable: Pollution remediation liability = $7,000 If recovery realized or realizable: Recovery asset (receivable) = $3,000 Pollution remediation liability = $10, Financial Reporting Display Government-wide Program cost, or Special item, or Extraordinary item No separate display of liability required Governmental funds Expenditures recognized when liquidated with expendable available resources No pollution liability, only payables for goods and services used 42 14

15 Disclosures For recognized liabilities and recoveries Nature and source of the pollution remediation obligation for example, federal or state law Liability, if not apparent on statement Methods and assumptions Potential for change in estimate Estimated recoveries reducing the liability 43 Disclosures For liabilities (or portions thereof) not yet recognized because not reasonably estimable General description of nature of the pollution remediation obligation Supersedes FAS 5 disclosure of reasonably possible 44 Effective Date & Transition Period beginning after December 15, 2007 Measure liabilities at beginning of that period so beginning net assets can be restated Apply retroactively if you have sufficient objective verifiable information to apply to prior periods Early application encouraged 45 15

16 GASB OPEB Standards Statements 45 and Statement 45 (for Employers) Subject: accounting and reporting by employers for their OPEB expenses and obligations Applies to all employers that provide OPEB (that is, the employer pays all or part of the cost of the benefits, including implicit rate subsidies) Requires accrual-basis accounting for expense and measurement and disclosure of funded status (UAAL) 47 Statement 43 (for Plans) Subject: reporting on stewardship of plan assets by A trustee or plan administrator (stand-alone alone plan reporting) or An employer or plan sponsor with a fiduciary responsibility for the plan assets that includes the plan as a trust or agency fund in its own financial report 48 16

17 Postemployment Benefits As Defined in GASB Statements Postemployment benefits benefits provided after separation from employment as part of the total compensation for services, including: Pension benefits Retirement income Other benefits (except postemployment healthcare) if provided through a defined benefit pension plan Other postemployment benefits (OPEB) Postemployment healthcare benefits Other forms (for example, life insurance) if provided separately from a defined benefit pension plan 49 OPEB Plan Predominant Meanings in Statements 45 and 43 In Statement 45 (employer reporting): Plan usually refers to an employer s s substantive commitment or agreement to provide OPEB including, for example, provisions or understandings regarding plan membership, eligibility for benefits, types of benefits, points at which benefits will begin and end, and method of financing benefits In Statement 43 (plan reporting): Plan usually refers to a trust or agency fund used to administer the financing of OPEB and the payment of benefits (that is, to assets under the stewardship of an administering entity) regardless of the financing policy 50 adopted The Substantive Plan Benefits should be projected based on the current substantive plan (the plan as understood by the employer and plan members), including changes made and communicated to plan members, at the time of the actuarial valuation and (or including) the historical pattern of sharing of costs between employer and plan members to that point Anticipated future changes in plan design should not be included in the projection of benefits A legal or contractual benefit cap (as distinguished from a cap on contributions), should be considered in the projection of benefits if the cap is deemed effective 51 17

18 Postemployment Benefits: Substance of the Transaction Postemployment benefits (pensions and OPEB) are part of the compensation for services rendered by employees; they are part of an exchange transaction between employer and employees Benefits are earned, earned, and obligations accrue or accumulate, during employment, but benefits are not taken until after employment (potentially long time lag between incurring and paying the obligation) The (accrual-basis) cost of benefits for a period is part of the total cost of government services for that period, whether or not the employer chooses to fund it concurrently 52 GASB 25/27 Measurement Approach Harmonizes accounting requirements with funding concepts and methods to the maximum extent appropriate for accrual accounting purposes Although OPEB plans generally are not funded, this approach still is funding friendly for OPEB, because an employer that chooses to fund (now or later) need not use different measures for accounting and funding purposes Statement 45 does not include any requirement with respect to an employer s s method of financing or budgeting of OPEB; for example, it does not require that an employer fund the benefits using the actuarial methods required for accounting purposes 53 Statement 45: measurement and recognition 54 18

19 Broad measurement steps Project cash outflows for benefits Discount projected benefits to present value (PV) Allocate the PV of projected benefits to periods using an acceptable actuarial cost method 55 Measurement approach illustrated Employee Age Timeline Service Period Age when hired Assumed age at retirement Present age Life Expectancy Measurement approach illustrated 1) Project Benefits $4,500 $15, $14, ) Discount 80 Actuarial Present Value 3) Actuarial cost method 19

20 Disclosure of Funded Status and Funding Progress Employers also will be required to disclose the funded status of the benefits as of the most recent valuation and to present as RSI multi-year trend information about funding progress, including the following information: Actuarial accrued liability (AAL) Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) (AAL minus plan assets) Funded ratio (actuarial value of plan assets/aal) Ratio of UAAL to covered payroll Notes to RSI regarding changes affecting the interpretation of trends in the amounts reported 58 Implicit Rate Subsidies An employer s s commitment to permit retirees to participate in the same group as active employees by paying the blended premium involves a real cost to the employer For example, if claims costs are $6,000 per retiree, and the retiree pays a blended premium of $3,600, the employer generally pays the difference, or $2,400 per retiree The preceding is a function of the significant effect of age on claims costs (that is, claims costs for retirees in a combined group generally will be significantly higher than claims costs for 59 active employees in the group) Implicit Rate Subsidies The implicit subsidy is no less real than an explicit contribution; it is a hard cash outlay (only obscured by the averaging) For example, if the preceding employer nominally pays the $3,600 blended premium for each active employee, but the cost of coverage (claims costs) for an active employee is only $2,800, the excess of $800 per active employee has nothing to do with providing coverage for active employees; it is a cash contribution by the employer toward the higher cost of coverage for retirees 60 20

21 Illustration of Funded Status Information Govt. A Unfunded (PAYG) Govt. B Partially Funded Actuarial accrued liabilities (AAL) (a) $13,500,000 $13,500,000 Actuarial value of plan assets (b) ,000,000 Unfunded actuarial accrued liabilities (UAAL) (a-b) 13,500,000 4,500,000 Funded ratio (b/a) 0.0% 66.7% Covered payroll (c) $7,600,000 $7,600,000 UAAL as a % of covered payroll (a-b/c) 177.6% 59.2% Effective Dates Staggered implementation based on a government s s phase for implementing GASB 34 Statement 45 will be effective for the employer s s fiscal year beginning after December 15, 2006 (Phase 1), 2007 (Phase 2), or 2008 (Phase 3) Statement 43 will be effective for the plan s fiscal year beginning after December 15, 2005 (if largest employer is Phase 1), 2006 (if largest is Phase 2), or 2007 (if largest is Phase 3) 62 Earlier implementation is encouraged GASB Statement No. 50 Pension Disclosures An amendment of GASB Statements No. 25 and No

22 Pension Disclosures Goal is to conform the pension disclosures with the OPEB disclosures Notes to financial statements would disclose the funded status of the plan as of the most recent actuarial valuation date. Defined benefit pension plans also would disclose actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI. 64 Effective Date Generally effective for periods beginning after June 15, Statement No. 51 Accounting and Financial Reporting for Intangible Assets 66 22

23 Background Paragraph 19 of GASB Statement 34 Capital assets include, land, improvements to land, easements,, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives that extend beyond a single reporting period (emphasis added). 67 Many Questions Should land under roads be reported if the land is not owned, but easement rights exist? Does it make a difference if the easement was donated instead of purchased? Should water rights be reported? Should internally generated computer software be reported as an intangible asset or written off? Should other internally generated intangible assets, such as patents and trademarks be reported? Should any, or all, intangible assets be amortized? 68 Overarching Question What are the intangible assets that are used in operations that are mentioned in Statement 34, paragraph 19? APB Opinion 17, Intangible Assets Issued in 1970 and had been authoritative guidance for governments prior to Statement 34 Did not define intangible assets, but listed them Patents Trademarks Copyrights 69 23

24 Description An intangible asset is an asset that possesses all of the following characteristics: Lack of physical substance Nonfinancial nature Initial useful life extending beyond a single reporting period 70 Lack of Physical Substance Intangible assets usually result from legal or contractual rights and clearly have no legal substance. Trademarks, copyrights, royalty interests What about intangible assets closely related to tangible assets? Right-of of-way easement for a road Water rights 71 Right-of of-way Easement A right-of of-way easement for a road depends on a tangible asset land land to enable a government to provide transportation services. What is the asset? The asset is not the land or the road. The asset is the right-of of-way easement (a right to use the land for a specific purpose). It is a contractual right that does not have physical substance

25 Lack of Physical Substance Accounts receivables and investment securities do not have physical substance. Are they intangible assets? 73 Nonfinancial in Nature Second characteristic of intangible assets is that they are nonfinancial in nature. Must not be in monetary form Like cash and investment securities Must be neither a claim nor a right to assets in monetary form Like receivables 74 Initial Useful Life Extending Beyond a Single Reporting Period All capital assets, not just intangible assets, must have an useful life that extends beyond one reporting period. IF NOT, expense when incurred

26 Common Types of Intangible Assets Right-of of-way easements Other types of easements Patents, copyrights, trademarks Land use rights Water rights Licenses and permits Computer software Purchased or licensed Internally generated 76 What is Not Included in Definition? Governmental powers allow a govern-ment to compel or control the actions of others Powers do not meet definition of an asset because they do not have present service capacity. Power to tax an an asset does not exist until a government exercises the power Assessing a property tax results in a receivable Power of eminent domain Power to assess fees for licenses or permits 77 Scope Exceptions Intangible assets acquired or created primarily for directly obtaining income or profit Copyrights on books or recordings given to a university so they can earn royalties Capital leases Goodwill from a combination transaction 78 26

27 Recognition An intangible asset should be recognized only if it is identifiable: Asset is separable, i.e. capable of being separated and sold, transferred, licensed, etc. -OR- Asset arises from contractual or other legal rights, regardless of whether rights are separable 79 Basic Reporting Guidance All existing authoritative guidance related to capital assets should be applied to these intangible assets Purchased intangible assets recognized at historical purchase price Donated intangible assets recognized at fair value when acquired 80 Basic Reporting Guidance All intangible assets subject to Statement should be classified as part of capital assets in government-wide, proprietary fund, and fiduciary fund statement of net assets. Because intangible assets are considered capital assets, they are reported as expenditures (not assets) in governmental fund financial statements

28 Basic Reporting Guidance Capital assets (including intangibles) that are being depreciated or amortized are reported separately from capital assets that are not being depreciated or amortized. 82 Amortization Allocation of the cost of intangible assets over their estimated useful lives. Existing guidance for depreciation of capital assets generally applies to amortizing intangible assets. Amortization expense reported for intangible assets with finite useful lives. Amortization period for contractual or legal rights limited to period of expected service capacity. 83 Amortization Example Town has a right to use water from a lake for 20 years. What is the amortization period? 20 years Same scenario, but town for a nominal amount has the right to renew the water rights for an additional 10 years. Amortization period? 30 years assuming assuming evidence exists town would seek renewal 84 28

29 Amortization No amortization for intangible assets with indefinite useful lives No factors (legal, contractual, technological, or otherwise) currently exist that limit the useful life of the asset How will a right-of of-way easement for land under a road normally be reported? Part of capital assets not being depreciated or amortized 85 Internally Generated Internally generated intangible assets (IGIA) are assets that are: Created or produced by the government or an entity contracted by the government; or Acquired from a third party but require more than minimal incremental effort to achieve expected service capacity Examples Computer software Patents Copyrights Trademarks 86 Internally Generated Statement provides a specified- conditions approach to recognizing outlays associated with IGIA Outlays incurred related to an IGIA that is considered identifiable should be capitalized only upon the occurrence of all three criteria on following slide

30 Internally Generated Three capitalization criteria Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the asset upon completion of the project; Demonstration of the technical or technological feasibility for completing the project so that the asset will provide its expected service capacity; Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset Outlays incurred prior to meeting criteria should be expensed as incurred 88 Internally Generated Computer Software Specific guidance on applying the specified- conditions approach for recognition of internally generated computer software is provided Internally generated computer software includes software developed: By government s s own employees By third party on behalf of government Commercially but requiring more than minimal incremental effort to put into operations 89 Internally Generated Computer Software Guidance generally based on development stages similar to AICPA SOP 98-1 Three stages Preliminary project stage Needs and alternatives for software developed Application development stage Design, software configuration and interfacing, coding, and testing Post-implementation/operation stage Training and software maintenance 90 30

31 Internally Generated Computer Software Outlays associated with preliminary project and post-implementation/ operation stages should be expensed as incurred. Outlays associated with application development stage should be capitalized if: Preliminary project stage complete, and Management implicitly or explicitly authorizes and commits to funding. 91 Impairment of Internally Generated Intangible Assets Stoppage during development Stopping development of computer software Impaired intangible assets reported at lower of carrying value or fair value in statement of net assets. 92 Effective Date and Transition Effective date is fiscal periods beginning after June 15, 2009 Provisions generally should be retroactively applied 93 31

32 Effective Date and Transition Exceptions for retroactively reporting intangible assets: Permitted but not required for IGIA and intangible assets with indefinite useful lives at transition Right-of of-way easements for land under roads not required to be retroactively reported. Required for all other intangible assets acquired in fiscal years ending after June 30, 1980 by phase 1 or 2 governments Encouraged but not required for all other intangible assets of phase 3 governments 94 GASB Statement No. 52 Land and Other Real Estate Held as Investments by Endowments 95 Purpose Establish financial reporting standards for land and other real estate held as investments by endowments Endowments include: Permanent and term endowments Principal generally maintained in perpetuity or for a stated period of time or until the occurrence of an event Permanent funds 96 32

33 Financial Reporting Reported at fair value in statement of net assets Changes in fair value reported as investment income Make applicable Statement 31, paragraph 15 disclosures Method to estimate fair value if not market prices 97 Effective Date For periods beginning after June 15, Fund Balance Reporting and Governmental Fund Type Definitions Exposure draft issued February 29, 2008 Comment deadline June

34 Fund Balance Components Initial distinction between nonspendable and spendable fund balance Nonspendable Fund Balance includes amounts that cannot be spent because they are either: (a) not in spendable form or (b) legally or contractually required to be maintained intact. 100 Fund Balance Components Spendable fund balance includes the following classifications: Restricted Limited Assigned Unassigned 101 Fund Balance Components Restricted Fund Balance: Amounts that are restricted to specific purposes, pursuant to the definition of restricted in paragraph 34 of Statement 34, as amended by Statement No. 46. External parties Constitution Enabling legislation

35 Fund Balance Components Limited Fund Balance: Amounts that are committed for specific purposes by formal action of the government s s highest level of decision- making authority. 103 Fund Balance Components Assigned Fund Balance: Amounts that are intended by the government to be used for specific purposes, but are neither restricted nor limited. All amounts in other governmental funds not restricted or limited. Amounts in general fund intended for specific use 104 Fund Balance Components Unassigned Fund Balance: Residual classification for the general fund Has not been assigned to other funds and is not restricted, limited, or assigned to specific purposes within the general fund. Residuals for expired purposes in other funds

36 Governmental Fund Type Definitions Special revenue funds: To account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditure for specified purposes

37 Special Revenue Funds Resolution for the ED: The restricted or limited proceeds of specific revenue sources should comprise a significant portion of the resources reported in the fund. Other resources (investment earnings and transfers from other funds, for example) may also be reported in the fund if those resources are restricted, limited, or assigned to the specified purpose of the fund. 109 Special Revenue Funds Proposed Definition: Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or limited to expenditure for specified purposes other than debt service or major capital projects. The term proceeds of specific revenue sources establishes that one or more specific restricted or limited revenues should be the foundation for a special revenue fund. Special revenue funds should not be used to account for resources held in trust for individuals, private organizations, or other governments. 110 Capital Projects Funds Proposed Definition: Capital projects funds are used to account for and report financial resources that are restricted, limited, or assigned to expenditure for the acquisition or construction of major capital facilities. Capital projects funds exclude acquisition or construction of major capital facilities financed by proprietary funds or held in trust for individuals, private organizations, or other governments

38 Debt Service Funds Proposed Definition: Debt service funds are used to account for and report financial resources that are restricted, limited, or assigned to expenditure for principal and interest payments. Debt service funds should be used to report resources if legally mandated. Financial resources that are being accumulated for principal and interest payments maturing in future years also should be reported in debt service funds. 112 Rainy-day funds The ITC pointed out that rainy-day funds do not qualify as special revenue funds because there is no revenue source and they are not restricted or legally limited to a specified purpose 113 Rainy-day funds The ED proposes: Stabilization is a specific purpose and therefore could qualify as restricted or limited Cannot be classified as assigned Will almost certainly be in the general fund Disclose details of the arrangement Minimum FB policies

39 Other Provisions in the ED Classifying fund balance amounts at year end Required disclosures: Special revenue fund usage policy Process for limitations and assignments Spending prioritization Purpose details if aggregated Encumbrances 115 Derivatives Project GASB Statement 53, Accounting and Financial Reporting for Derivative Instruments Expected in June What Is the Objective of the Derivatives Project? To establish additional financial reporting and disclosure requirements for derivatives accounting. Within the context of the governmental environment and the governmental reporting model

40 What is a Derivative for Financial Reporting Purposes? FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, definition used Hedging Activities, definition used (issued in 1998). A derivative has: One or more underlyings and one or more notional amounts Requires no (or little) net investment Net settlement 118 Examples of Derivatives Interest rate swap Variable-rate rate to fixed-rate Fixed-rate to variable-rate rate Basis swap Exchange payments based on the changes of two variable rates Swaption Gives the purchaser of the option the right, but not the obligation, to enter into an interest rate swap 119 Examples of Derivatives Commodity swap Reduce exposure to a commodity s s price risk

41 Derivatives Not In Scope Derivatives used in normal purchase and normal sales contracts Certain not exchanged traded contracts If reference rate based on climatic, geological or other physical variable If reference rate based on price or value of a nonfinancial asset 121 Reporting Requirements Derivatives in government-wide and proprietary statements Recognized at fair value Changes in fair value deferred for hedging derivative instruments Derivatives in governmental fund statements Recognized at historical cost/price 122 Hedging Derivative Instrument Hedging derivative instrument exists if Derivative instrument is associated with a hedgeable item A potential hedging derivative instrument is effective in significantly reducing an identified risk

42 Project Timetable Final standard: June 2008 Effective date: Periods beginning after June 15, 2009 FYE June 30, 2010 and thereafter 124 GASB s Periodic Table of Elements of Financial Statements A Asset Concepts Statement No. 4 L Liability Do Deferred Outflow O Outflow I Inflow Np Net Position Di Deferred Inflow 125 Purpose Continue development of conceptual framework Assist the Board in future standards setting Does not require any changes in existing reporting requirements

43 Approach Inherent characteristics Measurement focus-neutral Resource is central A supply or other means that can be drawn on when needed For government, an item that can be drawn on to provide services to the citizenry 127 Other GASB Projects Recognition and Measurement Attributes Concepts Statement AICPA Omnibus Economic Condition Reporting Electronic Financial Reporting Intergovernmental Financial Risks Pension Accounting and Reporting Reporting Units/Statement 14 Revisited Service Efforts and Accomplishments Reporting 128 Miscellaneous GASB Issues

44 Common financial reporting errors Debt defeasance Cash equivalents Major fund calculations 130 Common Reporting Errors See separate powerpoint file 131 Debt defeasance An in-substance defeasance Both current and advanced refundings usually meet the criteria for an in- substance defeasance This results in the old debt and related accounts being removed from the financial statements

45 Debt defeasance Debt defeasance made simple Remove old debt outstanding and all related accounts from the financial statements (example, as of the date of the refunding remove o/s debt balance Unamortized debt issue costs Accrued interest payable other 133 Debt defeasance Record new debt and related accounts on the financial statements (debt o/s, unamortized bond issue costs, restricted reserve accounts, etc ) Difference becomes deferred amount on refunding (formerly known as accounting gain or loss), and shown netting against or adding to the long-term debt o/s,, and is amortized over the shorter of the life of the old debt or the new debt 134 Debt defeasance Note disclosure will focus on, among other things the economic gain or loss,, using the present value of the difference between the cash flow requirements of the old debt and the new debt

46 Cash and Cash Equivalents Cash, plus Short-term, term, highly liquid investments that are both Readily available to known amounts of cash So near maturity that the risk of value changes is insignificant Generally, this category includes investments with an original maturity of 3 months or less This is the deciding factor Can be policy-driven 136 Major Funds Determining Major Funds governmental or enterprise funds, and the reporting government s s main operating fund, or total assets, liabilities, revenues, or expenditures/expenses are at least: 10% for all governmental OR enterprise funds, as appropriate AND 5% for all governmental AND enterprise funds combined, or a fund that the government s s officials believe is important 137 GASB Resources

47 GASB Website Downloads and ordering information (Exposure documents, Statements, Q&As) Summaries of standards Project pages Technical inquiry form Staff contacts 139 Questions?