GASB Update. South Carolina Association of CPAs Fall Fest November 16, 2018 Columbia, SC

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1 GASB Update

2 Life Changed in June What Happened in June 1999? It Was 403 Pages of Good Stuff. That Was 56 GASB s Ago And It Was GASB 34. Jack Says That s CRAZY!!! 3 GASB s per Year!!

3 June 30, ) Statement 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions 2) Statement 85 Omnibus ) Statement 86 Certain Debt Extinguishment Issues June 30, ) Statement 83 Certain Asset Retirement Obligations 5) Statement 88 Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements December 31, ) Statement 84 Fiduciary Activities 7) Statement 90 Major Equity Interests December 31, ) Statement 87 Leases 9) Statement 89 Capitalized Interest Good Time to Contemplate Retirement

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5 GASB 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions Effective for periods beginning after June 15, 2017 (fiscal years 6/30/18 and 12/31/18) **************** Goal is to Make Financial Reporting More Fun!!!

6 Highlights & Lowlights Similar to Pensions = GASB 68. Supercedes GASB 45. All OPEB, including those not through a trust (unlike GASB 68, but like GASB 73 = consistency). Recognize: OPEB liability; OPEB expense; and, deferred inflows & outflows. Liability is recognized net or gross depending if administered through a trust? Yes recognize net OPEB liability (total OPEB liability, net of OPEB plan fiduciary net position) No recognize total OPEB liability

7 Highlights & Lowlights Components of OPEB (GASB 75) == Pensions (GASB 68): Measurement date concept Valuation date timing and rollforward allowed Valuations at least every 2 years Measurement approach Entry Age Normal actuarial approach Discount rate determination Accounting for fiduciary net position of the Plan Cost-sharing plan allocations Accounting for proportionate share Special funding situations

8 Discount Rate Determination Method of rate determination is the same as GASB 68. Expectation is with OPEB Plan s funded percentages being far lower than pension (and in many cases pay as you go funded): If funded to some degree, use of blended rate (such as the LTeROR with 20 year Muni bond rate); If Pay As You Go funded, then discount rate should equal the yield or index rate for 20-year, tax-exempt general obligation municipal bond rated AA/Aa or higher.

9 Pay As You Go Funding If no trust fund is utilized for OPEB (which is typical when funded on a pay as you go basis): Then the pay as you go claims represent contributions AND The total OPEB liability would be allocated to the activities or funds (full accrual) making the claim payments. Reminder / Note: these claims should NOT be run through a self insurance internal service fund, as the retirees are not internal to the government.

10 Note Disclosures and RSI Predominately the same as GASB 68 (meaning your footnotes continue to grow and speak in terms most people do not understand). Assumptions include additional items: Healthcare cost trend rate Sharing of benefit-related costs Discount rate disclosure will require information on it s determination and the municipal bond rate used.

11 GASB 83 Other Asset Retirement Obligations Effective for periods beginning after June 15, 2018 (fiscal years 6/30/19 and 12/31/19) **************** Does not cover landfills (continue to use GASB Statement 18).

12 Within Scope & Definitions Asset retirement obligation (ARO) Legally enforceable liability associated with retirement of a tangible capital asset Retirement of a tangible capital asset Permanent removal of a capital asset from service (such as from sale, abandonment, recycling, or disposal) Includes: Nuclear power plant decommissioning Coal ash pond closure Sewer facilities closure Contractually required land restoration, such as removal of wind turbines Removal / disposal of x-ray machines Other similar obligations

13 Scope does not include: Outside of Scope Sell / Disposal: obligations that arise solely from a plan to sell or otherwise dispose of a tangible capital asset Alternative Use: obligations associated with the preparation of a tangible capital asset for an alternative use Pollution Remediation: obligations for pollution remediation (such as asbestos removal). G-49. Maintenance: obligations associated with maintenance, rather than retirement, of a tangible capital asset Replacements: cost of a replacement part that is component of a tangible capital asset Closure / Postclosure: landfill closure and postclosure. G-18.

14 Initial Recognition Recognition & Measurement ARO Liability Record liability when incurred and reasonably estimable. Incurrence manifested by both external and internal obligating events. Measured based on the best estimate of the current value of outlays expected to be incurred. Deferred Outflow Record deferred outflow of resources = same amount = the liability Dr. Deferred Outflow Cr. Liability Subsequent Recognition At least annually: - adjust for general inflation or deflation; - evaluate relevant factors to determine if there is a significant change in the estimated outlays; - re-measure liability when significant. An outflow of resources (such as expense) in a systematic and rational manner over the estimated useful life of capital asset. Dr. Expense Cr. Def. Outflow & Dr. Liability Cr. Cash

15 Disclosures General description of ARO & associated tangible capital assets Include source of AROs (federal, state, or local laws and regulations, contracts, or court judgments) Methods and assumptions used to measure ARO liabilities Estimated remaining useful life of tangible capital assets How financial assurance requirements, if any, are being met Amount of assets restricted for payment of ARO liabilities, if not separately displayed in financial statements. If a government has an ARO (or portions of an ARO) that is incurred but not yet recognized because it cannot be reasonably estimated, then share that fact and the reasons therefor.

16 GASB 84 Fiduciary Activities Effective for periods beginning after December 15, 2018 (fiscal years 12/31/19 and 6/30/20) ************* Impacts inclusion and reporting of any government s fiduciary activities.

17 Fiduciary Activities Component Units that Are Fiduciary Non-Component Units that PG Has Control Are Fiduciary Pension & OPEB Plans Trust (Pghs 3 - G ) Benefits Others - Private Purpose Trusts? Pension & OPEB Plans & Def. Contrib. Plans Custodial (Agency-like) * * If no control (union managed, etc), then may have footnotes (like a 457 Plan does)

18 When Is a Government Controlling Assets? A government controls the assets of an activity if: The government holds the assets, or The government has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended beneficiaries. If the above, then you may have to report in the DB, OPEB & DC in the financial statements. Or you may have custodial funds (agency-like).

19 Fiduciary Fund Statements All fiduciary funds (including custodial funds) report the following statements: Statement of Fiduciary Net Position Full accrual accounting. Includes assets, liabilities, deferred outflows of resources, deferred inflows of resources, and fiduciary net position Statement of Changes in Fiduciary Net Position Full accrual accounting. Includes additions to and deductions from fiduciary net position. This means that current agency funds will have to report a statement of changes...

20 Stand-Alone Business-Type Activities The Biggest Change / News: A stand alone BTA s fiduciary activities should be reported in separate fiduciary fund financial statements separate from other financial statements in a BTA s financial report. Scope of BTA audit just grew!!! Statement of Net Position Statement of Changes in Net Position Statement of Cash Flows Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position DB / OB / DC DB / OB / DC

21 School Districts Student Activity Funds (Clubs, Etc.) Determine if activities should be reported in: Special Revenue Funds Custodial Funds, or Not At All. Consider: EIN or SSN on Accounts: If SSN, then possibly not reported; Who s in Control?? If EIN, then consider control by teacher, parent or student: If controlled by teacher, may be special revenue fund. If controlled by parent/student, may be custodial fund.

22 GASB 85 Omnibus

23 GASB 85 Omnibus Effective for periods beginning after June 15, 2017 (fiscal years 6/30/18 and 12/31/18) ************* Omnibus projects are used to address issues in multiple pronouncements that, individually, would not justify a separate project or pronouncement.

24 Standard Addresses the Following Component units: must meet a criterion for blending in paragraph 53 of Statement 14, as amended Government combinations. Reclassify existing goodwill as deferred outflows of resources; and, include existing negative goodwill as part of restatement of beginning net position. Certain money market investments (and participating interest-earning investment contracts) may be measured at amortized cost. Recognition of on-behalf payments for pensions or OPEB in employer financial statements requires recognition of revenues and expenditures in governmental funds. 24

25 GASB 86 Certain Debt Extinguishment Issues Effective for periods beginning after June 15, 2017 (fiscal years 6/30/18 and 12/31/18) ************* Addresses: cash defeasance accounting using the same logic as accounting for a refunding (GASB #23); gain or loss on refunding will all be taken in year of transaction (with no deferral).

26 GASB 87 Leases Effective for periods beginning after December 15, 2019 (fiscal years 12/31/20 and 6/30/21) ************* Capital vs. Operating Leases === Thoughts from the Past

27 FASB 13 GASB 87 - Leases Amends GASB 62 lease guidance (which was from FASB Statement 13) The existing standards had been in effect for decades without review to determine if they remain appropriate and continue to result in useful information; FASB and IASB conducted a joint project to update their lease standards; opportunity to increase comparability and usefulness of information and reduce complexity for preparers GASB 87 is predominately consistent with new FASB lease accounting requirements < Yaaa hoooo!!

28 New Standard and Definition of a Lease Standard is applied to any contract that meets the definition of a lease: A lease is a contract that: conveys control of the right to use another entity s nonfinancial asset for a period of time in an exchange or exchange-like transaction. GASB 87 creates obligation (liability) for all leases (no longer distinguish between capital and operating leases).

29 Scope and Approach (continued) Statement does NOT apply to leases that transfer ownership - A lease contract that transfers ownership of the underlying asset to the lessee at or before the end of the lease and does not contain termination options should be reported as a financed purchase of that asset. Statement does NOT apply to leases less than 12 months. Lease Term The period during which a lessee has a noncancelable right to use an underlying asset, plus the following periods, if applicable covered by a lessee s option to: Extend the lease if it is reasonable certain that the lessee will recognize that option; and, Can contain a fiscal funding clause.

30 Scope and Approach (continued) This Statement does NOT apply to: Lease contracts for intangible assets (including lease contracts for the right to explore for natural resources such as gas, oil, and minerals and similar non-regenerative resources; licensing contracts for motion picture films, video recordings, plays, manuscripts, patents, and copyrights; and licensing contracts for computer software) other than sublease contracts for intangible right-to-use lease assets Lease of biological assets, including timber Service concession arrangements Leases in which the underlying asset is financed with outstanding conduit debt, unless both the underlying asset and the conduit debt are reported by the lessor.

31 Examples Are these Leases? Contract to utilize a car for 3 years Contract to utilize software for 3 years Yes No Contract to utilize cafeteria under parameters of costs to be charged No = SCA = Follow GASB 60 Contact to manage convention center It Depends Contract to utilize a building for the next 40 years with no transfer of ownership Yes Contract to utilize a building for the next 40 years with transfer of ownership Purchase = Treat as Old Type Capital Lease

32 Initial Reporting ASSETS LIABILITY DEFERRED INFLOW Lessee Asset = 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, less any incentives Liability = Present value* of future lease payments (including fixed payments, variable payments based on index or rate, reasonably certain residual guarantees, etc. Def Inflow = N/A Lessor Assets: 1) Lease receivable (generally including same items as lessee liability) 2) Continue to report leased asset Liability = N/A Def Inflow: 1) Equal to lease receivable plus 2) Any cash received up front * To calculate the PV, the lessee would use a discount rate that reflects the rate the lessor charges the lessee, (may be the rate implicit in the lease). If that cannot be determined, the lessee would use the incremental borrowing rate.

33 Subsequent Reporting ASSETS LIABILITY DEFERRED INFLOW Lessee Amortize the intangible asset over shorter of useful life or lease term. Amortization expense may be combined with depreciation expense related to other capital assets for reporting purposes. Reduce by lease payments (less amount for interest expense) N/A Lessor Reduce receivable by lease payments (less payment needed to cover accrued interest) Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) N/A Recognize revenue over the lease term in a systematic and rational manner

34 GASB 88 Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements Issued in April 2018 Effective for periods beginning after June 15, 2018 (fiscal years 6/30/19 and 12/31/19) ************* Defines debt, and addresses note disclosures related to debt.

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36 Debt Defined A liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. Fixed (in my simple mind) means scheduled. Variable interest does not preclude a debt to be fixed. Debt does not include accounts payable or leases, except for contracts reported as a financed purchase of an underlying asset.

37 Debt (as previously defined) Scope and Applicability Direct borrowings: a government entering into a loan agreement with a lender. Direct placements: a government issuing a debt security directly to an investor. Direct borrowings and placements have terms negotiated with the lender or investor, and are not offered for public sale.

38 Notes to Financial Statements Additional to other requirements, a government should disclose summarized information about the following: 1) Amount of unused lines of credit 2) Assets pledged as collateral for the debt 3) Terms specified in debt agreements related to: Events of default with finance-related consequences; Termination events with finance-related consequences; and Subjective acceleration clauses. Should separate debt disclosures for direct borrowings and placements from other debt.

39 Example Changes in long-term obligations for the year ended June 30, 2019, are as follows: Balance as of July 1, 2018 Balance as of June 30, 2019 Due Within One Year Increases Decreases Governmental Activities: General obligation bonds $ 21,500,000 $ $ 8,970,000 $ 12,530,000 $ 7,050,000 Notes from direct borrowings and direct placements 1,412, , , ,959 Total $ 22,912,877 $ - $ 9,440,959 $ 13,471,918 $ 7,520,959 Business-Type Activities: Notes from direct borrowings Total $ 76,800 $ $ 6,400 $ 70,400 $ 6,400

40 Example (Continued) The County s outstanding notes related to governmental activities contain a provision that in the event of default, outstanding amounts become immediately due if the County is unable to make payment. The County s outstanding notes from direct borrowings related to business-type activities are secured with collateral of an undeveloped lot zoned for commercial use, and contain: (1) a provision that in the event of default, the timing of repayment of outstanding amounts become immediately due if pledged revenues during the year are less than 120% of debt service coverage due in the following year, and (2) a provision that if the County is unable to make payment, outstanding amounts are due immediately. The same notes contain a subjective acceleration clause that allows the lender to accelerate payment of the entire principal amount to become immediately due if the lender determines that a material adverse change occurs. The County also has an unused line of credit in the amount of $1,500,000.

41 Example (Continued) = Maturities Schedule Debt service requirement on long-term debt as of June 30, 2019 are as follows: Governmental Activities Business-Type Activities Bonds Notes from Direct Borrowings and Direct Placements Notes from Direct Borrowings Principal Interest Principal Interest Principal Interest Year Ending June 30, 2020 $ 7,050,000 $ 497,700 $ 470,959 $ 30,024 $ 6,400 $ 2, ,880, , ,959 10,008 6,400 2, ,000 21, ,400 2, ,000 19, ,400 1, ,000 17, , ,000 52, , ,000 17, , $ 12,530,000 $ 841,400 $ 941,918 $ 40,032 $ 70,400 $ 15,840

42 GASB 89 Accounting for Interest Costs Incurred Before the End of a Construction Period Issued in June 2018 Effective for periods beginning after December 15, 2019 (fiscal years 12/31/20 and 6/30/21) ************* NO LONGER CAPITALIZE INTEREST No Restatement and Early Adoption is Permitted

43 GASB 90 Majority Equity Interests Issued in August 2018 Effective for periods beginning after December 15, 2018 (fiscal years 12/31/19 and 6/30/20) ************* Defines a majority equity interest, and specifies how to measure the interest.

44 Equity Interest Defined An equity interest is: a financial interest in a legally separate organization by the ownership shares of the organization s stock, or by otherwise having an explicit, measurable right to the net resources of the organization that is usually based on an investment of financial or capital resources by a government. An equity interest is explicit and measurable if: the government has a present or future claim to the net resources of the entity, and the method for measuring the government s share of the entity s net resources is determinable.

45 Reporting If the interest is deemed to be an investment under GASB 72, para. 64, then the interest should be reported as an investment and measured using the equity method. If the interest is held by a special-purpose government engaged in fiduciary activities, a fiduciary fund, or an endowment or permanent fund, then amount should be measured at fair value. If interest is 100% of entity, then it is a component unit.

46 Other Projects Financial Reporting Model Re-Examination How is GASB 34 doing? Gov t-wide F/S new format for the statement of activities? Gov t fund F/S Modified vs. Full-Accrual. Where should budget reporting be (financial statements or RSI)?

47 Other Projects Revenue and Expense Recognition - Trying to develop a comprehensive application model for recognition of revenues and expenses from non-exchange, exchange, and exchange-like transactions. - Very early in the process of research/review.

48 Other Projects Conduit Debt Obligations What is the definition of conduit debt? Should an asset and, or a liability for these be reported (ever)? What information should government-issuers disclose?

49 GASB Update Thank You!!!