David Vaudt Michele Mark Levine Todd Buikema Stephen Gauthier James Falconer Zhikuan (Kuan) Hu Tony Boras Jim Phillips Melinda Gildart

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2 2 Speakers David Vaudt, CPA Chairman, Governmental Accounting Standards Board (GASB) Stephen Gauthier, CPA Former Director, Technical Services Center, Government Finance Officers Association (GFOA) Tony Boras, CPA, Senior Manager, Crowe LLP Melinda Gildart, CPA, MBA Controller, Chicago Public Schools, Chicago, IL. Michele Mark Levine, CPA Director, Technical Services Center (TSC), GFOA Todd Buikema, CPA Assistant Director for Publications, TSC, GFOA James Falconer, CPA Senior Manager, TSC, GFOA Zhikuan (Kuan) Hu, Manager, TSC, GFOA Jim Phillips, Senior Program Manager, TSC, GFOA Qun (Tren) Wang, Manager, TSC, GFOA

3 Program Overview

4 4 Topics I. GASB Projects and Pre-Agenda Research Activities Update II. New Final GASB Statements GASB Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period GASB Statement No. 90, Accounting and Financial Reporting for Majority Equity Interests

5 5 Topics (cont.) III. New GASB Implementation Guidance Guide No , Implementation Guidance Update-2018 BREAK # 1 IV. GASB Due Process Documents Conduit Debt Obligations - Exposure Draft Financial Reporting Model Improvements - Preliminary Views Recognition of Elements of Financial Statements - Preliminary Views

6 6 Topics (cont.) V. GASB Upcoming Implementation Guides For GASB Statement No. 84, Fiduciary Activities For GASB Statement No. 87, Leases Comprehensive implementation guide annual update BREAK # 2 VI. Auditing Update New Yellow Book 2018 Single Audit Compliance Supplement Uniform Guidance Procurement Grace Period

7 7 Topics (cont.) VI. Auditing Update (continued) SAS 133, Auditor Involvement with Exempt Offering Documents AICPA Technical Questions & Answers on Definition of a Government VII.Common CAFR Deficiencies Panel END Please Note: Review Questions Will Be Asked Throughout the Agenda.

8 8 Question # 1- Warm-up What title best describes your current primary position? A) Government employee/official accounting B) Government employee/official audit C) Other government employee/official D) Independent auditor E) Educator or student F) Other

9 I. GASB Projects and Pre- Agenda Research Activities

10 10 Overview Disclosure Framework: Note Disclosures Revenue and Expense Recognition Public Private Partnerships Subscription based IT Arrangements Pre agenda Research

11 Disclosure Framework: Note 11 Disclosures Added to Agenda: Summer 2018 Key Issue: What disclosures are needed for complete understanding? Timing: Initial document expected in early 2020

12 Revenue and Expense 12 Recognition Initial document issued: ITC in early 2018 Key issue: How revenue and expense should be recognized in FRM Timing: Preliminary Views anticipated in mid 2020

13 13 Public-Private Partnerships Added to agenda: Spring 2018 Key issue: Is additional guidance needed to address application issues? Timing: Exposure Draft expected in mid 2019

14 Subscription-based IT 14 Arrangements Added to agenda: Spring 2018 Key issue: Additional guidance is needed Timing: Exposure Draft expected in Spring 2019

15 15 Pre-Agenda Research Going Concern: Board to discuss research memo in mid 2020 Compensated Absences: Board to discuss research memo in mid 2019

16 For More Information 16

17 Review Questions

18 18 Question # 2 Which of the following is NOT an objective of the Disclosure Framework project? A. To identify what disclosures need to be made to offer a complete understanding of the financial reporting model and the related concepts B. To set standards updating some current note disclosures C. To complement the Financial Reporting Model Improvements & Comprehensive Revenue and Expense Recognition Model projects D. To establish criteria for the Board to use in evaluating potential note disclosure requirements in future projects E. All of the above ARE purposes of this project

19 19 Question # 3 Which existing GAAP standards have been compared to Subscription-Based IT Arrangements? A. Long-term construction-type contracts B. Lending activities C. Costs associated with internally generated computer software D. All of the above E. A and B only

20 II. New Final GASB Statements

21 GASB Statement No. 88 Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements Issued: March 2018 Effective Date: Periods beginning after June 15, 2018.

22 22 Background Concerns raised about debt arrangements entered into by governments that could pose additional risks to their credit profile Inconsistency in disclosures, therefore Difficult to assess the risks Clarity needed as to which long-term liabilities constitute debt for disclosure purposes.

23 23 Definition of Debt Debt is defined as 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. The definition excludes leases (except those that transfer ownership) and accounts payable.

24 24 Definition of Debt (cont.) Fixed at the date the obligation is established Variable rate debt and capital appreciation bonds still considered debt, because principal amount is fixed Liabilities not in scope Leases covered in GASB Statement 87 Accounts payable o May meet definition of debt, but are short-term in nature Contracts that require future performance o Employment contract for city manager Pension/OPEB, pollution remediation, landfills o Payments are not fixed when liability is recognized

25 25 New Debt Disclosures Statement 88 requirements are in addition to previous required note disclosures for debt Debt related items to be included in notes to financial statements (If applicable) Amount of unused lines of credit Assets pledged as collateral for debt Terms specified in debt agreements related to significant: o Subjective acceleration clauses o Events of default with finance-related consequences o Termination events with finance-related consequences

26 26 New Debt Disclosures (cont.) Information about direct borrowings and direct placements should be separate from other debt Changes in long-term debt Repayment schedules Assets pledged as collateral for debt Events of default with finance-related consequences Termination events with finance-related consequences Subjective acceleration clauses

27 27 Changes in debt Disclosure Examples Balance Balance Due Beginning End Within of the Year Additions Deletions of the Year One Year Governmental Activities G.O. Bonds $ 1,500,000 $ 500,000 $ 75,000 $ 1,925,000 $ 200,000 Notes Payable Direct Borrowings 250,000 25, ,000 50,000 Total $ 1,750,000 $ 500,000 $ 100,000 $ 2,150,000 $ 250,000 Business type Activities Revenue Bonds $ 650,000 $ $ 100,000 $ 550,000 $ 150,000 Notes Payable Direct Placements 300,000 25, ,000 25,000 Total $ 950,000 $ $ 125,000 $ 825,000 $ 175,000

28 28 Disclosure Examples (cont.) Events of default with finance related consequences The government s outstanding notes from direct borrowings related to governmental activities of $225,000 contain a provision that in an event of default, outstanding amounts become immediately due if the government is unable to make payment. Subjective acceleration clause The government s outstanding notes from direct placements related to business type activities of $275,000 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. Amount of unused lines of credit The government has an unused line of credit in the amount of $2,000,000.

29 GASB Statement No. 89 Accounting for Interest Cost Incurred before the End of a Construction Period Issued: June 2018 Effective Date: Periods beginning after December 15, 2019

30 30 Background GASB 20 Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting Froze private-sector GAAP that did not conflict with GASB standards as of 11/30/1989 as the foundation of governmental GAAP for business type entities (BTAs) and proprietary funds GASB 34 Basic Financial Statements and Management s Discussion and Analysis for State and Local Government Economic resources measurement focus reporting for governmental activities No interest capitalization for general governmental assets in government-wide financial statements

31 31 Background GASB 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989, FASB and AICPA Pronouncements Approach: adopt applicable to pre-november 30, 1989, FASB and AICPA pronouncements Carried forward FASB guidance from 1979 and 1982

32 32 Pre-GASB 89 GAAP Inconsistent interest capitalization within government financial statements prepared on an economic resources measurement focus Capitalize interest incurred for assets in enterprise funds and business-type activities Don t capitalize in governmental activities

33 33 GASB Concepts Statement 4 Assets are resources with present service capacity that the government presently controls Is interest incurred prior to construction completion an asset? ono; interest doesn t meet criteria on its own Are financing costs inseparable from the asset (like ancillary charges)? ono; financing is a separate transaction

34 Interest Costs Incurred Prior to 34 the End of Construction GASB 89: No Capitalization Economic Resources Expense in the period interest cost incurred Current Financial Resources Expenditure when due and payable

35 Exception for Regulatory 35 Accounting As with all period costs, interest cost may be capitalized as a regulatory asset if The government qualifies as a regulated operation, The government has elected to apply regulatory accounting, and Interest costs will be recovered through future rates

36 36 Implementation Effective - periods beginning after December 15, 2019 Early implementation is encouraged Prospective from beginning of period implemented No need to back-out previously capitalized interest

37 GASB Statement No. 90 Accounting and Financial Reporting for Majority Equity Interests Issued: August 2018 Effective Date: Periods beginning after December 15, 2018

38 38 Background GASB 72, Fair Value Measurement and Application issued in December 2015 Stakeholders with majority equity interests requested guidance on whether to apply standards to component units (CUs) or to investments if the holding met both sets of requirements Objective: clarify when a government should report a majority equity interest in a legally separate organization as either a component unit (CU) or an investment

39 39 Pre-GASB 90 GAAP Government s intent in acquiring majority equity interest (MEI) determines if reported as component unit (CU) or an investment Unclear which should be used if intent was to both provide services and earn income When entity was reported as a discretely presented CU, the government also recognized an asset of the government or fund, measured using the same approach as for holdings in joint ventures

40 40 GASB 90 - Equity Interest An equity interest is A financial interest, In a legally separate organization, Represented by shares of stock or otherwise having an explicit, measurable right to net resources of organization, that is Usually based on an investment of financial or capital resources by a government

41 41 Equity Interest (cont.) A government has an explicit, measurable right to net resources of an entity if the Government has a present or future claim to net resources, and Government s share is determinable Clarification Excludes residual interests in assets that may revert to a government upon dissolution of an entity

42 42 Investment Determination Investment asset criteria Government holds primarily for income or profit, and Has a present service capacity based solely on ability to generate or be sold for cash Example: Public hospital (BTA) has two MEIs A majority partnership interest in a real estate investment partnership is held in an endowment fund investment asset A holding of 60% of the voting capital stock of medical imaging facility providing services to patients noninvestment asset

43 43 Report Investment MEI Investment asset of the government or fund that holds MEI Do NOT also report entity as a CU Measure using the equity method, except use fair value if investment is held by a designated kind of government or fund Special-purpose government engaged only in fiduciary activities (pension/opeb) Fiduciary fund Endowment (term or permanent) Permanent fund

44 44 Report: Non-investment MEI Non-investment asset of the government or fund that holds MEI A CU because MEI = financial accountability o Blended or discrete If blended, eliminate asset and CU net position

45 45 Non-investment MEI (cont.) Measurement based on measurement focus: Economic Resources MF Measure using equity method (for all kinds of holder governments and funds) Current Financial Resources Report only current financial resources (payables & receivables between government and entity) Special rules for a 100% interest

46 46 100% Equity Interest in CU Follows guidance for government acquisitions (Cod. Co10, GASB 69) CU measures assets, deferred outflows, liabilities, and deferred inflows at acquisition value as of acquisition date Acquisition value = Price that would be paid for acquiring similar assets, with similar service capacity, or discharging the liabilities assumed as of acquisition date Acquisition date = Date on which the government acquires 100% equity interest

47 47 100% Equity Interest in CU (cont.) Total consideration paid by government includes all net resources exchanged to complete the acquisition, whenever paid, including related deferred outflows Net position acquired by government (non-investment MEI asset & deferred outflows) = net position of CU after remeasurement CU flows statement includes only postacquisition activity

48 48 Implementation Effective - periods beginning after December 15, 2018 Early implementation is encouraged Retroactive implementation - restatement of beginning net position of First period presented, or Earliest period restated and explain reason for not restating earlier period(s)

49 III. New GASB Implementation Guidance

50 GASB Implementation Guide No , Implementation Guidance Update-2018 Issued: May 2018 Effective Date: Periods beginning after June 15, 2018

51 51 Overview Nine new questions and answers Pensions and OPEB Statistical section Regulated operations Tax abatements Eight amendments to previously issued questions and answers Wording changes intended to improve clarity The substance of the answers remain the same

52 Employer Pension Reporting Determining average expected service lives of employees Clarifies that each plan member at the measurement date is counted as one in the calculation of average expected remaining service lives for measuring pension expense, not on a weighted basis

53 OPEB Plan Reporting RSI schedule of changes in net OPEB liability Change in ad hoc postemployment benefit for inactive members previously not part of OPEB liability because not substantively automatic An ad hoc postemployment benefit change for inactive members should be reported in the schedule of changes in net OPEB liability as a change of benefits

54 Statistical Section Government retires debt Clarifies that debt capacity schedules should include all types of debt that were outstanding in each of the 10 years presented, even if the debt has been subsequently retired

55 Regulated Operations Utility qualifies and elects to use regulatory accounting Rate plan includes period costs (i.e. conservation program for low-flow shower head for customers) recoverable in future periods with future rates If period costs incurred by the utility that will be recovered by future rates meet the criteria for capitalization, then the utility should record a regulatory asset

56 Regulated Operations Utility wants to apply regulatory accounting to individual programs within a service Conservation program within the water utility The utility cannot apply the regulated operations guidance just to certain programs; the guidance must be applied to an entire line of service (e.g., electric, water, sewer)

57 and 4.9 Tax Abatements Government has agreement with a developer to construct building for economic development Developer will receive property taxes for amounts above a predetermined baseline for the geographic area After building is constructed, it will become an asset of the government Does not qualify as a GASB Statement 77 tax abatement The incremental revenue provided to the developer is equivalent to financing the construction of the government s asset Government is not forgoing any taxes If arrangement were an abatement, government would disclose in the notes total amount forgone from all property owners in the geographic area (Question 4.9)

58 Tax Abatements Government has agreement with an owner of a landmark property Government will freeze the property s assessed value for ten years Property owner will not change the property s purpose during the 10-year period Qualifies as a GASB Statement 77 tax abatement The action to maintain the property (make no changes) creates a beneficial outcome for the government and the citizens

59 Tax Abatements State entered agreements to provide tax credits which qualified for disclosure under GASB Statement 77 Individuals or entities that received tax credits can use or sell or transfer the credits to other individuals or entities Tax credits earned by individuals and entities that qualified as GASB Statement 77 tax abatements would still be considered GASB Statement 77 tax abatements if the tax credits are sold/transferred to other individuals or entities, since the government would still be forgoing tax revenues

60 Review Questions

61 61 Question # 4 Which of the following is NOT within the scope of GASB 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements? A. Variable rate debt B. Leases C. Pollution remediation obligations D. General obligation bonds payable E. Neither B nor C is within scope

62 62 Question # 5 Which of the following is NOT a disclosure required in accordance with GASB 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements? A. Events of default with finance-related consequences B. Reasons for use of private placement C. Subjective acceleration clauses D. Amounts of unused lines of credit E. Assets pledged as collateral for debt

63 63 Question # 6 Which of the following is a TRUE statement regarding GASB 89, Accounting for Interest Cost Incurred before the End of a Construction Period? A. It requires retroactive implementation B. It changes the timing of when construction period interest is recognized as an expense in businesstype activities C. It changes the timing of when construction period interest is recognized as an expense in governmental activities D. None of the above is true

64 64 Question # 7 In accordance with GASB 90, Accounting and Financial Reporting for Majority Equity Interests, a majority equity interest in a legally separate entity can take the form of which of the following? A. A common stock holding B. A joint venture interest C. A partnership interest D. All of the above E. A and C only

65 65 Question # 8 In accordance with GASB 90, Accounting and Financial Reporting for Majority Equity Interests, an equity interest in a legally separate entity gives the holding government a right to the entity s net resources that is which of the following? A. Explicit B. Measurable C. Residual D. All of the above E. A and B only

66 66 Question # 9 Implementation Guide indicates that which of the following should NOT be disclosed as a tax abatement? A. The owner of an historic building receives a property tax freeze in exchange for agreeing not to alter its use B. A developer receives incremental property taxes from surrounding properties in exchange for constructing a building that will become an asset of the government C. A tax credit agreement which otherwise meets the definition of an abatement and in which the credits earned may be used or sold by the initial recipient D. All of the examples SHOULD be disclosed as abatements

67 Question # Which of the following is a TRUE statement based on Implementation Guide ? A. An ad hoc postemployment benefit change for inactive members should be reported in the Schedule of Changes in Net OPEB Liability as a change of benefits B. The debt capacity schedules in the statistical section of a CAFR should include only types of debt that remain outstanding at the FYE C. Period costs may never be capitalized D. A and C are both true

68 BREAK # 1

69 IV. GASB Due Process Documents

70 GASB Exposure Draft of a proposed Statement on Conduit Debt Obligations Issued: July 30, 2018 Comment Period Ends: November 2, 2018 Proposed effective date: Periods beginning after December 15, 2020

71 71 GASB Interpretation 2 Current Guidance Certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer s financial reporting entity. Although conduit debt obligations bear the name of the governmental issuer, the issuer usually has no obligation for such debt beyond the resources provided by a lease* or loan with the third party on whose behalf they are issued. Disclosures in notes to the financial statements Government has option to report liability and the asset * Now referred to as associated arrangements in GASB ED, and excluded from GASB 87, Leases

72 72 Why the ED? Need for single method for reporting of conduit debt Eliminate diversity in how to account for additional commitments made by issuing government associated with the conduit debt Issuer commits to support the debt payments if third-party cannot

73 73 New Definition New proposed definition of conduit debt: Debt instrument issued in the name of a state or local government but is for the benefit of a third party that is primarily liable for the repayment of the debt instrument Conduit debt has to have all of these characteristics 1. At lease three parties involved: (a) Issuer (b) Third party obligor (c) Debt holder or debt trustee 2. Issuer and third party obligor are not within same financial reporting entity 3. The debt is not a parity bond of issuer and not cross collateralized with other debt of issuer 4. Third party obligor, not the issuer, ultimately receives the proceeds from the debt issuance 5. Third party obligor is primarily obligated for all the debt service payments 6. Issuer s commitment to make debt service payments is limited (moral obligation or appropriation pledge, guarantee, pledging assets or revenue, requesting appropriations)

74 74 Liability Recognition Start with premise that issuer does not recognize liability for conduit debt Liability would be recognized if any qualitative factors would indicate it is more likely than not (likelihood>50%) issuer would have to pay debt service payments. Qualitative Factors include Third-party obligor initiating bankruptcy, missing or late with debt payments, not complying with conduit debt covenants Third-party obligor financial difficulty: using reserves for debt payments, loss of major revenue source, significant investment losses, or under financial supervision of another government Project used to generate funds for debt payments terminated Litigation that negatively impacts the project Issuer concerned over access to markets if conduit debt goes into default Issuer has fulfilled additional commitments, voluntarily made debt service payments in past Issuer needs to evaluate factors at least annually while debt is outstanding

75 75 Liability Recognition (cont.) If liability is recognized by issuer (economic resources measurement focus) Measured at present value of estimated future payments If cannot determine estimated future payment Use low end of estimated range of payments, then discount to present value Current financial resources measurement focus Recognize with due and payable

76 76 Associated Arrangements Issuers and third-party obligors may have arrangements in addition to conduit debt Referred to as leases, with following characteristics Construction/acquisition of capital asset with proceeds of debt issuance Issuer retains title to capital asset from beginning of arrangement Third-party obligor makes debt service payments for entire amount to debt holder/trustee The lease payment and debt service payments are scheduled to coincide

77 77 Associated Arrangements (cont.) Do not account for arrangements as leases Arrangements should be classified into one of three categories Category 1 - Issuer relinquishes title at end of arrangement, conduit debt has generally been paid off Category 2 Issuer retains title; third-party obligor has exclusive use of entire capital asset during arrangement Category 3 - Issuer retains title; third-party obligor has exclusive use of portions of capital asset during arrangement Arrangements in all three categories must have the characteristics described in previous slide

78 78 Accounting for Arrangements Category 1 - Issuer relinquishes title at end of arrangement Issuer does not recognize Liability for conduit debt Capital asset Receivable for payments related to the arrangement

79 79 Accounting for Arrangements (cont.) Category 2 - Issuer retains title and third-party obligor has exclusive use of entire capital asset for the duration of the arrangement During the term of the arrangement, issuer does not recognize Liability for conduit debt Capital asset Receivable for payments related to the arrangement At end of arrangement, issuer recognizes capital asset at acquisition value

80 80 Accounting for Arrangements (cont.) Category 3 - Issuer retains title and third-party obligor has exclusive use of portions of capital asset Issuer recognizes at inception of arrangement Capital asset total value, at acquisition value Deferred inflow of resources Recognize revenue over life of arrangement Issuer does not recognize Liability for conduit debt Receivable for payments related to the arrangement

81 81 Note disclosures Organized by type of commitment General description of issuer s conduit debt obligations and commitments Principal outstanding by commitment type If issuer recognized a liability for conduit debt Schedule of changes in conduit debt for the year Cumulative principal payments made on conduit debt If any amounts will be recovered

82 GASB Preliminary Views Documents: Financial Reporting Model Improvements Recognition of Elements of Financial Statements Issued: September 12, 2018 Comment Period Ends: February 15, 2019

83 Two Preliminary Views 83 Documents Recognition of Elements of Financial Statements Project to develop new concepts Scope includes Recognition hierarchy Short-term financial resources measurement focus Economic resources measurement focus Financial Reporting Model Improvements Project to develop new standards Scope includes proposed changes Recognition and reporting in governmental funds Proprietary funds Budgetary reporting Other items

84 Two Preliminary Views 84 Documents Recognition of Elements of Financial Statements Project to develop new concepts Scope includes: Recognition hierarchy Short-term financial resources measurement focus Economic resources measurement focus Financial Reporting Model Improvements Project to develop new standards Scope includes: Recognition and reporting in governmental funds Proprietary funds Budgetary reporting Other items

85 85 Recognition PV Background Project background Research began on measurement focus in December 2003; and recognition in August 2005 June 2011 Preliminary Views Recognition of Elements of Financial Statements and Measurement Focus issued Based on feedback, the Board separated the projects Issued Concepts Statement 6, Measurement of Elements of Financial Statements, in March 2014 Recognition / measurement focus placed on hold pending the reexamination of the financial reporting model Due to significant differences between the proposed recognition in the 2011 PV and what the Board is now proposing, Board felt that a new PV should be issued

86 86 Recognition PV Objectives Measurement Focus (MF) Determines what is being recognized in financial statements Inconsistencies with current financial resources MF Availability periods differ across governments; inconsistent treatment of inventory and prepaids; long-term receivables are assets; and a lack of conceptual consistency inhibits development of accounting guidance for complex transactions Need to recognize elements using two measurement focuses Economic resources MF government-wide, proprietary fund, and fiduciary fund financial statements Short-term financial resources MF governmental fund financial statements (replaces current financial resources MF)

87 87 Recognition PV Topics 1. Hierarchy of Recognition 2.Recognition Concepts: Short-term Financial Resources Measurement Focus 3.Recognition Concepts: Economic Resources Measurement Focus 4. Alternative views

88 88 Recognition PV Hierarchy of Recognition Hierarchy of Recognition - for both measurement focuses, an item is evaluated based on definitions of each element Meets definition of asset or liability? If yes, recognize as such. Meets definition of deferred outflow/inflow of resources? If yes, recognize as such. Meets definition of outflow/inflow of resources? If yes, recognize as such. If no to all don t recognize in financial statements

89 Recognition Concepts: Short-term 89 Financial Resources Measurement Focus Short-term financial resources measurement focus incorporates Short-term financial assets and liabilities,* Deferred outflows and deferred inflows of short-term financial resources,* and Inflows and outflows of short-term financial resources* Recognition occurs when both criteria are met: Item meets definition of an element of financial statements (GASB Concepts Statement #4) within context of the short-term measurement focus Item sufficiently reflects qualitative characteristics of information in financial reports (relevance, reliability, comparability, and consistency) * Discussed with Reporting Model Improvements PV

90 Recognition Concepts: Economic Resources Measurement Focus 90 Economic resources measurement focus incorporates: All assets and liabilities, All deferred outflows and deferred inflows of resources, and All inflows and outflows of resources Recognition occurs when both criteria are met: Item meets definition of an element (GASB Concepts Statement #4) Item sufficiently reflects qualitative characteristics of information in financial reports (relevance, reliability, comparability, and consistency)

91 Reporting Model PV Background 91 and Objectives Project background GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Government was issued June 1999, largely kept governmental fund reporting unchanged Routine reexamination of GASB 34 began in August 2013 Invitation to Comment, Financial Reporting Model Improvements Governmental Funds, was issued in December 2016 Project Objective Enhance effectiveness of the reporting model in providing information that is essential for decision making and assessing a government s accountability, and To address certain application issues identified during research

92 92 Reporting Model PV Topics 1.Recognition concepts and applications for governmental funds 2.Presentation in governmental fund financial statements 3. Proprietary fund financial statements 4. Budgetary comparison information 5. Other issues 6. Alternative views

93 Short-term Transactions and 93 Other Events Different recognition for items arising from short-term v. long-term transactions and other events Items that arise from short-term transactions and other events are those that are Normally due to convert to or generate cash (or other financial resources), or require use of cash (or other financial resources) within one year from inception

94 Long-term Transactions and 94 Other Events Items that arise from long-term transactions and other events are those that are Normally due to convert to or generate cash (or other financial resources), or require use of cash (or other financial resources) in periods that extend beyond one year from inception

95 Governmental Funds - 95 Short-term Financial Resources Short term Financial Resources Normally due to convert to or generate cash (or other financial resources), or require use of cash (or other financial resources) within one year from inception Arising from Short term transactions and other events Long term transactions and other events Recognize when occur Recognize when due

96 96 Short-term Financial Resources Financial assets Cash Assets convertible to cash Assets consumable in lieu of cash Clarification Prepaid items and inventory are financial assets

97 97 Include Short-term Assets Cash and investments (including restricted) Accounts receivable* Property taxes receivable* Prepaid items and inventory Notes and other long-term receivables that have come due Exclude Notes and other long-term receivables that have not come due Capital assets * Note that receivables still must be available or deferred

98 98 Short-term Liabilities Include Accounts payable Accrued payroll Accrued interest payable Tax and revenue anticipation notes (all) Unpaid balances on general obligation and other long-term debt that came due during the period

99 99 Short-term Liabilities (cont.) Exclude these unless due and unpaid Compensated absences Pension and OPEB liabilities Asset retirement obligations Lease obligations (other than short-term leases) General obligation and other long-term debt

100 Inflows of Short-term Financial 100 Include Resources Property taxes levied for the period Sales, income and other taxes related to the period Grants related to the period Repayments from lending activities that matured during the period Proceeds from long-term borrowings Proceeds from sales of capital assets

101 Inflows of Short-term Financial 101 Exclude Resources (cont.) Repayments from lending activities due in subsequent periods Proceeds from tax anticipation and revenue anticipation notes (all)

102 Outflows of Short-term Financial Include Resources Salaries and wages earned during the period Use of goods (including inventory) and services (other than employees ) Long-term lending activities Interest accrued during the period on borrowings (all) Principal payments on long-term borrowings that mature in the period 102

103 Outflows of Short-term Financial Resources (cont.) Include (continued) Payments related to other long-term transactions and other events, such as postemployment benefits and compensated absences, that mature in the period Capital outlays 103

104 Outflows of Short-term Financial 104 Exclude Resources (cont.) Payments for goods and services to be received in future periods Purchases of inventory Depreciation Principal payments on tax anticipation and revenue anticipation notes (all)

105 Deferred Outflows and Deferred Inflows of Short-Term Financial Resources Concept of available for spending Used to determine when inflows are applicable to future periods (unchanged) Deferred outflows of resources* Outflows of resources that do not meet the definition of an asset and are inherently related to future spending Deferred inflows of resources* Inflows of resources that do not meet the definition of a liability and can only be used for future spending * Limited to those instances identified by GASB 105

106 106 Reporting Model PV Topics 1.Recognition concepts and applications for governmental funds 2.Presentation in governmental fund financial statements 3. Proprietary fund financial statements 4. Budgetary comparison information 5. Other issues 6. Alternative views

107 Presentation in Governmental 107 Fund Financial Statements New terminology emphasizing short-term New names for fund financial statements New explanatory language on statements New names for fund financial statement elements New format for flows statement Current and noncurrent activity format

108 Presentation in governmental 108 fund financial statements (cont.) Statement of position = short-term financial resources balance sheet Short-term assets Short-term liabilities Deferred outflows of short-term financial resources Deferred inflows of short-term financial resources Short-term financial resources fund balance

109 109

110 Presentation in governmental 110 fund financial statements (cont.) Flows statement = statement of shortterm financial resource flows Inflows of short-term financial resources for current activities Outflows of short-term financial resources for current activities Net flows of short-term financial resources for noncurrent activities New format separating flows from noncurrent transactions or events; no more other financing sources and uses

111 111

112 112 Reporting Model PV Topics 1.Recognition concepts and applications for governmental funds 2.Presentation in governmental fund financial statements 3. Proprietary fund financial statements 4. Budgetary comparison information 5. Other issues 6. Alternative views

113 Proprietary Fund Financial 113 Statements Operating revenues and expenses Anything other than nonoperating Nonoperating revenue and expenses include Subsidies received and provided Revenues and expenses related to financing [excluding program (purpose) loans] Investment income and expenses Resources from disposal of capital assets and inventory

114 Proprietary fund financial 114 Statements (cont.) Definition of subsidies Resources provided by another party or fund to keep rates lower than otherwise would be necessary to support the level of goods and services to be provided

115 Proprietary Fund Financial 115 New subtotal for statement of revenues, expenses and changes in fund net position Statements (cont.) Operating income (loss) and noncapital subsidies

116 116 Reporting Model PV Topics 1.Recognition concepts and applications for governmental funds 2.Presentation in governmental fund financial statements 3. Proprietary fund financial statements 4. Budgetary comparison information 5. Other issues 6. Alternative views

117 117 Budgetary comparison Remove option for basic financial statement presentation Required supplementary information (RSI) Require presentation of variances Final budget v. actual Original budget v. final budget

118 118 Reporting Model PV Topics 1.Recognition concepts and applications for governmental funds 2.Presentation in governmental fund financial statements 3. Proprietary fund financial statements 4. Budgetary comparison information 5. Other issues 6. Alternative views

119 Other Issues in Reporting 119 Model PV Major component units Report in separate columns on face of government-wide statements, or Include combining financial statements in basic financial statements following fund financials Removes option for note disclosure only Government-wide schedule of expenses by natural classification required as part of (other) supplementary information for governments that prepare a CAFR

120 Additional Topics for Reporting 120 Model Exposure Draft Management s discussion and analysis Enhance analysis Eliminate boiler-plate Clarify guidelines about currently known facts expected to effect financial position or results Debt service fund presentation Additional information Extraordinary and special items Improve consistency Continue to consider alternatives to improve timeliness and reduce complexity

121 GASB Board Members' Alternative Views Financial Reporting Model Improvements & Recognition of Elements of Financial Statements

122 122 Alternative Views Some members concerned the PV sections for government funds are Too complex Too focused on when an asset/liability arose and original purpose of asset/liability o Focus should be on when an item is received or paid May result in oreduced reliability and completeness oincreased implementation and continuing costs for preparers, auditors, and users

123 123 Alternative Views (cont.) Add current portion of L/T financial assets and liabilities One year from date of financial statements, not transaction Replace concept of normally Stated or contractual maturities, if any, or Best estimate of when receipt or payment will occur Addition of government-wide statement of cash flows

124 Alternative Views: Short-term 124 Financial Assets PV Normally due to convert to or generate cash within one year from inception AV All financial assets representing cash or expected to be converted to cash or other fund financial resources within one year of date of financial statements

125 Alternative Views: Short-term 125 Liabilities PV Normally require use of cash within one year from inception AV The portion of all financial liabilities that matures or is otherwise expected to be paid in cash or other financial resources within one year from the date of the financial statements In addition to portion already due

126 Review Questions

127 Question # Based on the Exposure Draft, which of the following would NOT be a characteristic of conduit debt? A. At least three parties are involved, including 1) an issuer, 2) a third-party obligor, and 3) a debt holder or trustee B. The obligor and issuer cannot be in same reporting entity C. Obligor is primarily responsible for all debt service payments D. The issuer, not the obligor, ultimately receives the proceeds from the debt issuance E. All of the above would be characteristics of conduit debt.

128 Question # Based on the Exposure Draft, an issuer government would NOT recognize a capital asset for which of the following types of conduit debt associated arrangement? A. The obligor has exclusive use of the entire asset during the arrangement and issuer retains title at the end of the arrangement B. The obligor has exclusive use of only portions of the asset during the arrangement and the issuer retains title at the end of the arrangement C. The issuer relinquishes title at the end of the arrangement D. The issuer would recognize a capital asset in all of the above situations

129 Question # As proposed in the Recognition Preliminary Views document, at what point in time would items arising from long-term transactions and events be recognized in governmental funds? A. When they are due B. When they occur C. Never D. Either A or B, depending on their place in the recognition hierarchy

130 Question # As proposed in the Reporting Model Preliminary Views document, which of the following would be nonoperating revenues and expenses of a proprietary fund? A. Subsidies received and provided B. Investment income and expenses C. Anything other than operating revenue and expenses D. All of the above E. A and B only

131 V. GASB Upcoming Implementation Guide Exposure Drafts

132 GASB Implementation Guide No. 201X-X, Fiduciary Activities Exposure Draft Expected: December 2018 Final IG Expected: May 2019 Effective Date of Statement 84: Reporting Periods Beginning After December 15, 2018

133 133 Fiduciary Activities Background GASB Statement No. 84, Fiduciary Activities Issued January 2017 Effective for Periods Beginning After December 15, 2018 Set standards Identifying fiduciary activities Classifying fiduciary activities into fund types Reporting fiduciary activities in fiduciary fund financial statements

134 134 Expected Q & A WARNING DO NOT RELY ON THE SLIDES THAT FOLLOW Based on initial draft of the implementation guide discussed by GASB s during its October meeting Only a selection of topics from draft Questions and answers are subject to change

135 135 Fiduciary Component Units GASB 84, paragraph 6 An organization that meets the component unit criteria in Statement 14, as amended [Cod. Sec. 2100] GASB 84, paragraph 7 a primary government is considered to have a financial burden if it is legally obligated or has otherwise assumed the obligation to make contributions to the pension plan or OPEB plan.

136 136 Identifying Fiduciary CUs Component unit (CU) criteria of GASB Cod. Sec. 2100, Defining the Financial Reporting Entity (GASB 14, as amended) Financial accountability for a separate legal entity Board appointment Fiscal dependency Financial benefit or burden Ability to impose will Financial benefit or burden

137 137 Expected Q & A (cont.) Subject of Questions When should a PEB plan be reported as CU? Expected Approach to Answers If the primary government (PG) is financially accountable, based on CU criteria (GASB Cod. Sec. 2600/GASB 14 as amended): Re: Financial Burden A consistent pattern of contributions would demonstrate that a government has assumed the obligation to contribute to the plan Re: Appointing Board Majority A government s performance of the duties of governing board in the absence of such a board is equivalent to government appointing a majority of the board Re: Fiscal Dependence Plan s authority to determine employer required contributions is equivalent to it having the authority to levy taxes or set rates

138 138 Control of Assets GASB 84, paragraph 10; PEB If they are not component units, the following pension and OPEB arrangements are fiduciary activities if the government controls the assets of the arrangement (as described in paragraph 12) GASB 84, paragraph 11; Other fiduciary For activities not addressed in paragraphs 6 10, the activity is a fiduciary activity if all of the following criteria are met: a. The assets associated with the activity are controlled by the government (as described in paragraph 12) [Emphasis added]

139 139 Control of Assets (cont.) GASB 84, paragraph 12 A government controls the assets of an activity if the government (a) holds the assets or (b) has the ability to direct the use, 4 exchange, or employment of the assets 5 in a manner that provides benefits to the specified or intended recipients. Restrictions from legal or other external restraints that stipulate the assets can be used only for a specific purpose do not negate a government s control of the assets. 4, 5 See footnotes on next slide

140 140 Control of Assets (cont.) GASB 84, footnote 4 For purposes of this Statement, a government uses an asset when it expends or consumes that asset for the benefit of individuals, organizations, or other governments, outside of the government s provision of services to them. GASB 84, footnote 5 When a government appoints a designee to act on its behalf, the designee is performing the government s fiduciary duties and not assuming them. Thus, appointing a designee to act on its behalf does not alter the government s ability to direct the use, exchange, or employment of the assets.

141 141 Expected Q & A (cont.) Subject of Question(s) When does a government have control over ABLE plan assets? [ABLE plans allow individuals with disabilities to save for medical and other qualified disability related expenses, per IRC 529a] Expected Approach to Answers The sponsoring government establishes a legally separate master trust that is not a CU of the government to hold investments (v. being held by the government) o Government would NOT have control even if government is a member of the trust There is an independent trustee (v. the government or its official serving as trustee) o Government would NOT have control Participants direct funds to different investment portfolios o Government would NOT have control, even if government participates in decisions on underlying investments that comprise the portfolios

142 142 Expected Q & A (cont.) Subject of Question(s) When does a sponsoring government have control of tuition savings plan assets? Expected Approach to Answers If a third party administrator holds the assets and the participants choose among several investment portfolios o The government does not control, even if the government selected the investments

143 Administrative or Direct 143 Financial Involvement GASB 84, paragraphs 8.b. and 11.c.(2) The assets are for the benefit of individuals and the government does not have administrative involvement with the assets or direct financial involvement with the assets. 3 In addition, the assets are not derived from the government s provision of goods or services to those individuals. GASB 84, paragraph 11.b.(2) with the exception of pass-through grants for which the government does not have administrative involvement or direct financial involvement. 3 See next slide for footnote

144 Administrative or Direct 144 Financial Involvement (cont.) GASB 84, footnote 3 For purposes of this provision, a government has administrative involvement with the assets if, for example, it (a) monitors compliance with the requirements of the activity that are established by the government or by a resource provider that does not receive the direct benefits of the activity, (b) determines eligible expenditures that are established by the government or by a resource provider that does not receive the direct benefits of the activity, or (c) has the ability to exercise discretion over how assets are allocated. A government has direct financial involvement with the assets if, for example, it provides matching resources for the activities.

145 145 Expected Q & A (cont.) Subject of Question(s) When does a government (school district) have administrative involvement or direct financial involvement with student raised/ contributed student activity funds? Expected Approach to Answers Dependent on whether the government establishes policies for spending or a representative of the district (faculty advisor) must approve spending Example: Student club, not legally separate, raises money that is deposited with district Students approve spending No administrative involvement Parents approve spending No administrative involvement District has policies on spending, or a faculty member approves spending Administrative involvement District approves fees charged by student clubs to members No administrative involvement District matches amounts raised by students Direct financial involvement

146 146 Expected Q & A (cont.) Subject of Question(s) When does a government (college or university) have administrative involvement with contributed scholarships funds? Expected Approach to Answers Based on whether government selects recipients and monitors compliance Example: Funds controlled by college are provided by a donor for scholarships for students in business related major with financial need. Students must maintain 3.5 GPA. College selects recipients and monitors GPAs administrative involvement; Donor selects recipients, monitors compliance, and directs college to apply scholarship funds to recipients accounts no administrative involvement

147 147 Expected Q & A (cont.) Subject of Question(s) When does a government (corrections) have administrative involvement with inmate earned / contributed funds? Expected Approach to Answers Administrative involvement if government or official has authority to determine how an inmate may use funds in their own accounts No administrative involvement when government or official s approval is limited to enforcing laws and regulations (preventing contraband)

148 148 Own-source Revenue GASB 84, paragraph 11 For activities not addressed in paragraphs 6 10, the activity is a fiduciary activity if all of the following criteria are met b. The assets associated with the activity are not derived either: (1) Solely from the government s own-source revenues (as described in paragraph 13) GASB 84, paragraph 13 Own-source revenues are revenues that are generated by a government itself. They include exchange and exchange-like revenues (for example, water and sewer charges) and investment earnings. Derived tax revenues (such as sales and income taxes) and imposed nonexchange revenues (such as property taxes) also are included. [Emphasis added]

149 149 Expected Q & A (cont.) Subject of Question(s) Is holding student activity fees (college/university) a fiduciary activity? Is holding revenue sharing resources a fiduciary activity? Is a prepaid tuition plan a fiduciary activity? Expected Approach to Answers If college approves the fee, and evaluates students funding proposals and authorizes expenditures, it is an own source revenue (not fiduciary) If a government has a revenue sharing agreement in which fees (from licenses) are shared (60%/40%) with another government, fees collected are an own source revenue (not fiduciary) Prepaid tuition plan assets are an own source revenue (not fiduciary)

150 Identifying Fiduciary 150 Activity - Other GASB receiving inquiries about several common situations where governments could be seen as holding money for others, including Payroll tax withholding Contractor deposits, bonds, and retainage

151 151 Expected Q & A (cont.) Subject of Question(s) Is holding of payroll deductions (withholdings) a fiduciary activity? Expected Approach to Answers Government has a legal liability for withheld federal taxes, and likely monitoring and compliance responsibilities for other withheld employee deductions which would constitute administrative involvement (not fiduciary) Is holding contractor deposits, retainage, or performance bonds a fiduciary activity? A government holds a cash deposit or retains a % of progress payments made pending return to contractor upon satisfactory performance or forfeiture to government. These assets are held as the result of an exchange transaction (not fiduciary) A performance bond held by a government is a contingent asset and not recognized.

152 GASB Implementation Guide No. 201X-X, Leases Exposure Draft Expected: February 2019 Final IG Expected: June 2019 Effective Date of Statement 87: Reporting Periods beginning after December 15, 2019

153 153 Leases Background In June 2017, the GASB issued Statement 87, which establishes revised standards on lease accounting and financial reporting. Effective for reporting periods beginning after December 15, Earlier application is encouraged.

154 154 Lease Accounting Inception of the lease Lessee Lessor Lease liability Intangible rightto use asset Lease receivable Deferred inflow of resources Lessor continues to report the leased capital asset

155 155 Lease Accounting (cont.) Subsequent accounting Lessee Lessor Lease payments made Reduction of liability Interest expense Lease payment received Reduction of receivable Interest revenue Amortization of lease asset Shorter of lease term or useful life of underlying asset Reduction of deferred inflow of resources revenue Over term of the lease Systematic and rational manner Governmental funds if available

156 156 Definition of a lease Scope A contract that conveys the right to use another entity s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction No more capital or operating leases

157 157 Scope (cont.) Excluded from scope of GASB 87 Leases for intangibles (including computer software) o Exception - Sublease of intangible right-to-use leased tangible asset Leases for biological assets Leases for inventory Leases where underlying asset financed with conduit debt o Exception - underlying asset and conduit debt reported by lessor Service concession agreements Supply contracts power purchase agreements Other exclusions Short-term leases (12 months or less) Contracts that ultimately transfer ownership of the underlying asset to the lessee

158 158 Exclusions of nonexchange transactions Determining whether a contract contains a lease Discussion of the absence of substantive right of substitution notion in Statement 87 What are the differences between supply contracts and leases? Are easements leases? Scope (cont.) Possible Questions How should agreements involving hunting, grazing, and farming rights be treated? How should leases associated with certificates of participation be treated? How should agreements involving cell phone towers and antenna placement be treated? Are contracts for energy efficient equipment leases if payments are based on energy saved? Effect of holdover periods on short term leases

159 159 Lease Term Plus: Plus: Noncancelable right to use underlying asset Any periods of time that the lessee or lessor has a sole option to extend the lease, if it is reasonably certain the option will be exercised by either party Any periods of time that the lessee or lessor has a sole option to terminate the lease, if it is reasonably certain the option will not be exercised by either party Equals: Lease Term

160 160 Lease Term (cont.) Possible Questions How do month to month holdover periods affect the determination of the lease term? Should a lease term include periods in which both parties have the option to cancel? How does a bargain renewal option, such as a 20 year lease with an option to renew the lease for $1 for 5 additional years, affect the lease term? If a lease contract allows either party to cancel the lease at any time, but also provides for cancellation penalties, is that considered to be a cancelable period as discussed in paragraph 12?

161 161 Lease Liability Lease liability is the present value of the payments that will be made to the lessor over the lease term The value of the lease liability would be based on the following items, if applicable, at the beginning of the lease term: Fixed lease payments made during the lease term Variable payments that are fixed in substance Variable payments based on a rate or index Payments for terminating the lease Any lease incentives due from lessor (decrease in liability) If reasonably certain that the lessee would have to make any payments relating to: residual value guarantees; exercise of a purchase option; or any other payments to the lessor

162 162 Lease Liability (cont.) Possible Questions How do you measure a liability if lease payments of renewal periods included in the lease term are not specified in the contract? What are some examples of variable payments that depend on an index or rate? A lease does not specify the discount rate. May the fair value of the lease asset be used in determining the implicit discount rate of the lease? Are in kind payments included in the lease liability? Reporting leases with only variable payments How should a requirement of a minimum supplies purchase be reported if the lessee is required to pay a set amount regardless of whether supplies are purchased?

163 163 Lease Liability (cont.) Possible Questions If a government installs physical assets on land that it has leased, and is required to remove those assets and restore the land to pre lease condition at the end of the lease, should the lessee report an ARO under Statement 83 or should the obligation to remove the assets be included in the lease liability? Paragraph 21f states that measurement of the lease liability should include payments for penalties for terminating the lease, if the lease term reflects the lessee exercising (1) an option to terminate the lease or (2) a fiscal funding or cancellation clause. Does the word term refer to the provisions of the contract broadly or does it refer to the lease term as defined in paragraphs 12 15?

164 164 Lease Asset Lessee records an intangible asset, right to use underlying asset, at inception of the lease Value of initial lease liability Plus: Plus: Less: Equals: Any lease payments made before the beginning of the lease term Any costs to put the leased asset into service Any lease incentives received from lessor before beginning of the lease term Initial value of right to use intangible asset

165 165 Lease Asset (cont.) Possible Questions Reporting the change in form of the asset when a leased asset is purchased, resulting in the lease being terminated The intersection of the guidance for full or partial lease terminations and the guidance for impairment of a lease asset A government leases land and amortizes the lease asset. How should the land be measured if the government subsequently determines it is reasonably certain it will exercise an option to purchase the leased land? Should the installation services component of the lease contract be reported as a separate service contract? The relationship between the capitalization threshold for individual leased assets and the related lease liabilities

166 166 Lease Receivable Lease receivable is the present value of the payments that will be received from the lessee over the lease term. The value of the lease receivable would be based on the following items, if applicable, at the beginning of the lease term: Fixed lease payments to be received during the lease term Variable payments that are fixed in substance Variable payments based on a rate or index Any lease incentives due to lessee Any fixed residual value guarantee payments due from lessee

167 167 Lease Receivable (cont.) Possible Questions What are examples of fixed in substance payments? Application of the requirement in Paragraph 49 to remeasure a lease receivable if certain changes individually or in the aggregate are expected to significantly affect the amount of the lease receivable since the previous measurement. Paragraphs 45 and 46 state that variable payments based on future performance and residual value guarantees that are not fixed in substance should not be included in the measurement of the lease receivable. Do those paragraphs require reporting of a receivable separate from the leases receivable?

168 168 Other Topics Notes to Financial Statements Lessees Can the leases notes be combined with the capital assets notes? Lease Modifications and Terminations What are examples of lease terminations and modifications? If a lease contract allows for the lease to be extended provided that both the lessor and the lessee agree, is that an extension option or is it a new lease when both parties agree? Lease Incentives How should leasehold improvements be reported? Possible Questions Certain Regulated Leases What are examples of leases that are and are not regulated? Contract Combinations Can an entity s procurement process provide evidence for assessing whether contracts are negotiated as a package? How master vendor agreements work with multiple components and contract combinations Sale Leaseback Transactions How should the sale and lease portions of a saleleaseback transaction be reported? Contracts That Transfer Ownership Treatment of contracts that require a purchase by either the lessee or a constituent of the lessee (for example, personal computers leased by school for students)

169 169 Other Topics (cont.) Contracts with Multiple Components Does a lessor s intent to donate a building at the end of the lease change the reporting of the lease? Possible Questions Leases of Assets That Are Investments What are examples of instances in which a lessor leases an asset that is held as an investment? Lease Leaseback Transactions Paragraph 87 requires lease leaseback transactions to be reported as net transactions. Which elements or flows should be netted? Intra Entity Leases How should leases between funds be reported? Leases between Related Parties Paragraph 90 states that the nature and extent of leasing transactions with related parties should be disclosed. Is this disclosure required for leases between a primary government and its component units? Effective Date and Transition For existing capital leases, should the lease asset and lease liability be reported at the same amounts previously reported before implementation of Statement 87, or may a government update the measures so that the lease asset equals the lease liability at the time of implementation?

170 170 Effective date Periods beginning after December 15, 2019 Apply retroactively Facts and circumstance of the lease in period of implementation GASB 87 (not inception of the lease) o Use remaining lease payments at beginning of period Restate beginning net position in period of implementation Begin analysis now Need to accumulate all lease contracts Potential issues with debt limits, compliance with debt covenants, and statutes

171 GASB Implementation Guide No. 201X-X, Implementation Guidance Update -201X Exposure Draft Expected: November 2018 Final IG Expected: April 2019 Effective Date Expected: TBA

172 Implicit Rate Subsidy - OPEB 172 Employer Reporting Deferred outflow of resources Employer contributions to OPEB plan (administered through a trust) subsequent to measurement date and before end of employer s fiscal year (GASB Cod. Sec. P50.140,.167,.207/GASB 75 p44, 68, 105) Employer payments to OPEB plan (not administered through a trust) as benefits that come due subsequent to measurement date and before end of employer s fiscal year (GASB Cod. Sec. P52.127,.173/GASB 75 p159, 199)

173 173 Expected Q & A (cont.) Subject of Questions Expected Approach to Answers If benefit payments to plan members for OPEB are implicit in amounts paid by the employer for active employee benefits ( implicit rate subsidy ), should the amount of deferred outflows for contributions/amounts paid by employer as benefits come due subsequent to measurement date but before end of employer s fiscal year include the amount of the employer s implicit payments? Yes, the deferred outflows of resources should include the amount of employer s implicit payments. Consistent with projection of benefit payments in GASB 75

174 Discount Rate 174 Pension/OPEB 20-year tax-exempt general obligation municipal bonds with an average rating of AA/Aa or higher to be used to discount projected future benefit payments not covered by plan s fiduciary net position The single blended rate is an input into determining the pension/opeb liability.

175 175 Expected Q & A (cont.) Subject of Questions Expected Approach to Answers Can an average of index rates from different points in time be used? No, the rate is used to determine the (collective) total pension/opeb liability For pension/opeb plan reporting the rate used should be the date of the plan s fiscal year end For employer reporting the rate used should be as of the measurement date of the (collective) total pension/opeb liability

176 Nonexchange Transactions 176 Natural Disasters When should assets and revenue be recognized for federal domestic assistance provided for natural disasters? Large amount of expenditures are incurred prior to grant agreements (project worksheets) being executed

177 177 Expected Q & A (cont.) Subject of Questions City with June 30 fiscal yearend. Natural disaster occurred on May 30, 20X8. President declared a natural disaster and approved funding. City applied for federal funding and received notice of award on July 31, 20X8 Can the City recognize voluntary nonexchange revenue in its June 30, 20X8 financial statements for expenditures incurred related to the natural disaster? Expected Approach to Answers No, without a grant agreement, there can be no revenue recognized by the City Standards for voluntary nonexchange transactions require that qualifying expenditures need to be incurred under the provider s program in order to qualify for resources from the provider The grant agreement would establish what are allowable expenditures Since the grant agreement was not approved until July, the City cannot recognize a receivable and revenue for expenditures incurred

178 178 Insurance Recoveries Impaired assets insurance recoveries Governmental funds other financing source Economic Resources netted against impairment loss Recoveries related to debris cleanup expenditures for storm damage? Other financing source, or Net against expenditures

179 179 Expected Q & A (cont.) Subject of Questions Should insurance recoveries related to clean up costs for storm damage be netted against related clean up expenditures? Expected Approach to Answers Clean up costs associated with storm damage should be reported as expenditures in governmental funds. If insurance proceeds are realized/realizable for storm damage expenditures in the year expenditures incurred, net against expenditures If insurance proceeds recognized in subsequent years, report as an other financing source, or, if requirements are met, as an extraordinary item

180 180 Tax Abatements Disclose the gross amount of taxes that were reduced during the year as a result of the agreement, accrual basis Governments entering into Fee in Lieu of Taxes (FILOT) agreements with individuals or entities, qualify as GASB 77 tax abatements Amount of taxes reduced to disclose = taxes government would have received without the FILOT, less the amount of FILOT received during the year State has a separate economic development program, but cannot receive if part of a FILOT program Some governments believe amount of taxes reduced to disclose = amount entitled to for the economic development program exemption (zero) and the amount received from FILOT; therefore not taxes forgone, no disclosure

181 181 Expected Q & A (cont.) Subject of Questions How should the government compute the amount of taxes forgone for governments in the FILOT program who are ineligible for state incentive program? Expected Approach to Answers Gross amount of taxes reduced to disclose is difference between amount of tax revenue the government was entitled to, absent any incentive or agreement and amount the government was entitled to with the FILOT agreement Governments should not factor other agreements a individual or entity could have received, only ones entered into. GASB 77 does not allow for alternative agreements that were available but not entered into by individuals or entities

182 Review Questions

183 Question # Which of the following is a true statement? A. GASB 84, Fiduciary Activities, is effective for periods beginning after December 15, 2018 B. GASB 87, Leases, is effective for periods beginning after December 15, 2018 C. Both A and B are true statements D. Neither A nor B is a true statement

184 BREAK # 2

185 Audit Update

186 Government Auditing Standards 2018 Revision [The New Yellow Book] Issued: July 2018 Effective Date: Audits of financial statements for periods ending on or after June 30, 2020

187 187 Background Government Auditing Standards/ Generally Accepted Government Auditing Standards (GAGAS)/ Yellow Book Issued by United States Government Accountability Office Provides standards and requirements for auditor and audit organizations o Independence o Continuing professional education o Quality control o Peer reviews o Reporting State and local governments who require a single audit are subject to the requirements of the Yellow Book

188 188 Background (cont.) Yellow Book last updated in 2011 Exposure draft of revised document including proposed changes issued in April 2017 Final updated version issued in July 2018

189 189 Key Changes/Elements New format that differentiates requirements from application guidance Expanded independence standard Addition of CPE requirements application guidance Revised peer review requirements New guidance related to waste and abuse Updated internal control guidance for performance audits

190 190 New Format Reorganized from seven chapters to nine chapters Chapter 1: Foundation and Principles for the Use and Application of Government Auditing Standards Chapter 2: General Requirements for Complying with Government Auditing Standards Chapter 3: Ethics, Independence, and Professional Judgment Chapter 4: Competence and Continuing Professional Education Chapter 5: Quality Control and Peer Review Chapter 6: Standards for Financial Audits Chapter 7: Standards for Attestation Engagements and Reviews of Financial Statements Chapter 8: Fieldwork Standards for Performance Audits Chapter 9: Reporting Standards for Performance Audits

191 191 New Format (cont.) Supplemental Guidance incorporated 2011 Yellow Book 2018 Yellow Book Individual Chapters

192 192 New Format (cont.) Requirements differentiated from related application guidance

193 193 Independence Significant Threat Impairment Threat 3.18 In all matters relating to the GAGAS engagement, auditors and audit organizations must be independent from an audited entity.

194 194 Independence (cont.) Yellow Book identifies three nonaudit services that impair auditor independence [3.87] Independence impaired Determining or changing journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management s approval Authorizing or approving the entity s transactions Preparing or making changes to source documents without management approval

195 195 Independence (cont.) Significant threat to auditor independence [3.88] Not prohibited, but auditors should (presumptively mandatory requirement) document the threats and safeguards applied to eliminate and reduce threats to an acceptable level or decline to provide the services Significant threat Preparing financial statements based on information in the trial balance or underlying accounting records

196 196 Independence (cont.) Threats to auditor independence [3.89] Auditors should identify as threats to independence any services related to preparing accounting records and financial statements, other than those defined as impairments to independence and significant threats. These services include Threats Recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity s general ledger Posting entries that have been approved by an audited entity s management to the entity s trial balance Preparing account reconciliations that identify reconciling items for the audited entity management s evaluation Preparing certain line items or sections of the financial statements based on information in the trial balance

197 197 Independence (cont.) Threats to auditor independence [3.89] 3.90 Auditors should evaluate the significance of threats to independence created by providing any services discussed on the previous slide and should document the evaluation of the significance of such threats Factors that are relevant in evaluating the significance of any threats created by providing these services include The extent to which the outcome of the service could have a material effect on the financial statements The degree of subjectivity involved in determining the appropriate amounts or treatment for those matters reflected in the financial statements The extent of the audited entity s involvement in determining significant matters of judgment Providing clerical assistance, such as typing, formatting, printing, and binding financial statements, is unlikely to be a significant threat

198 Independence (cont.) 198

199 Independence (cont.) 199

200 Independence (cont.) 200

201 201 CPE CPE hour requirement remains unchanged Exposure Draft Auditors who plan, direct, perform engagement procedures for, or report on an engagement conducted in accordance with GAGAS should complete the GAGAS Qualification requirements as part of developing and maintaining their professional competence. GAGAS Qualification requires auditors to complete at least 4 hours of CPE in GAGAS topics.

202 202 CPE (cont.) 4.19 The continuing competence of the audit organization s personnel depends, in part, on an appropriate level of CPE so that auditors maintain the knowledge, skills, and abilities necessary to conduct the GAGAS engagement. Obtaining CPE specifically on GAGAS, particularly during years in which there are revisions to the standards, may assist auditors in maintaining the competence necessary to conduct GAGAS engagements.

203 203 CPE (cont.) Auditor: Specialist: An individual assigned to planning, directing, performing engagement procedures, or reporting on GAGAS engagements (including work on audits, attestation engagements, and reviews of financial statements) regardless of job title. Therefore, individuals who may have the title auditor, information technology auditor, analyst, practitioner, evaluator, inspector, or other similar titles are considered auditors under GAGAS An individual or organization possessing special skill or knowledge in a particular field other than accounting or auditing that assists auditors in conducting engagements. A specialist may be either an internal specialist or an external specialist

204 CPE (cont.) 204

205 205 CPE (cont.) Not auditors and not subject to the GAGAS CPE requirements External specialists Internal specialists assisting on a GAGAS engagement who are not involved in planning, directing, performing engagement procedures, or reporting on a GAGAS engagement Auditors subject to the GAGAS CPE requirements Internal specialists who are performing work in accordance with GAGAS as part of the engagement team including planning, directing, performing engagement procedures, or reporting on a GAGAS engagement

206 206 Peer Review 5.61 Audit organizations affiliated with one of the following recognized organizations should comply with the respective organization s peer review requirements and GAGAS peer review requirements. American Institute of Certified Public Accountants Council of the Inspectors General on Integrity and Efficiency Association of Local Government Auditors International Organization of Supreme Audit Institutions National State Auditors Association

207 207 Peer Review (cont.) GAGAS peer review requirements if affiliated with a recognized organization Assessment of Peer Review Risk Peer Review Report Ratings Availability of the Peer Review Report to the Public

208 208 Peer Review (cont.) GAGAS peer review requirements if not affiliated with a recognized organization Assessment of Peer Review Risk Peer Review Report Ratings Availability of the Peer Review Report to the Public Peer Review Scope Peer Review Intervals Written Agreement for Peer Review Peer Review Team Report Content Audit Organization s Response to the Peer Review Report

209 209 Waste and Abuse The 2011 Yellow Book Includes auditor requirements related to abuse when an auditor becomes aware of abuse The 2018 Yellow Book The discussion of abuse is included in application guidance and adds the perspective of waste

210 210 Waste and Abuse (cont.) Waste Definition The act of using or expending resources carelessly, extravagantly, or to no purpose Can include activities that do not include abuse and does not necessarily involve a violation of law Relates primarily to mismanagement, inappropriate actions, and inadequate oversight

211 211 Waste and Abuse (cont.) Abuse Definition A behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances Excludes fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements Includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate

212 212 Waste and Abuse (cont.) Evaluating internal control in a government environment may also include considering internal control deficiencies that result in waste or abuse Because the determination of waste and abuse is subjective, auditors are not required to perform specific procedures to detect waste or abuse in financial audits. However, auditors may consider whether and how to communicate such matters if they become aware of them Auditors may also discover that waste or abuse are indicative of fraud or noncompliance with provisions of laws, regulations, contracts, and grant agreements Paragraphs 6.22 & 6.24 provide examples of waste and abuse

213 213 Performance Audits Obtain an understanding of internal control that is significant to the audit objectives Assess and document the assessment of internal control to the extent necessary to address the audit objectives Evaluate and document the significance of identified internal control deficiencies within the context of the audit objectives Consider internal control deficiencies when developing the cause element of findings Identify in the audit report which internal control components and principles are significant

214 214 Effective Date The 2018 revision of Government Auditing Standards is effective for Financial audits, attestation engagements, and reviews of financial statements for periods ending on or after June 30, 2020 Performance audits beginning on or after July 1, 2019 Early implementation is not permitted Note that 2018 Yellow Book independence provisions would apply for audit periods that begin on July 1, 2019 Use this 2018 release as an opportunity to also revisit sections of the Yellow Book that haven t changed

215 Other Audit Topics Update

216 Single Audit - Compliance Supplement 2018 Compliance Supplement issued in May content/uploads/2018/05/2018-compliance- Supplement.pdf Effective for fiscal years beginning after June 30, 2017 Issued in a different format than prior years in that OMB only provided significant updates and changes NOTE: Auditors must use the 2018 Supplement and the 2017 Supplement together

217 Single Audit - Procurement Grace Period The Federal government provided a grace period after the Uniform Guidance effective date for non-federal entities to comply with the procurement standards Grace period is three full fiscal years after the effective date of the UG, which was December 26, 2014 (implementation for fiscal years beginning on or after December 26, 2017) The non-federal entity must document whether it is in compliance with the old or new standard, and must meet the documented standard

218 218 Procurement Grace Period (cont.) For example, for a non-federal entity with a June 30 year end, implementation would be required during the year ending June 30, 2019 The Single Audit Compliance Supplement instructs auditors to review procurement policies and procedures based on the entity s documented standard. For future fiscal years, all non-federal entities will be required to comply fully with the Uniform Guidance

219 SAS No. 133, Auditor Involvement with Exempt Offering Documents SAS 133 governs the auditor s responsibilities when the auditor is involved with an exempt offering 219 The Standard is effective for exempt offering documents with which the auditor is involved and that are initially distributed, circulated, or submitted on or after June 15, 2018 This Standard is codified as AU-C Section 945

220 SAS No. 133, Auditor Involvement with Exempt Offering Documents (cont.) 220 Applies when an auditor is involved with an exempt offering Typically, involvement with an offering occurs when The auditor s report is included in the exempt offering document, and One or more of the following activities is performed with respect to the exempt offering document o Assists the entity in preparing information included in the document (this includes providing written or oral comments on the document) o Reads a draft of the document at the entity s request (even if no comments are provided) o Issues a comfort or similar letter or an AUP report in lieu of a comfort or similar letter, under the relevant audit standards o Participates in due diligence discussions with underwriters, placement agents, broker-dealers or other financial intermediaries related to the offering o Issues a practitioner s attestation report on information relating to the offering o Provides written agreement for the use of the auditor s report in the document o Updates an auditor s report for inclusion in the document

221 SAS No. 133, Auditor Involvement with Exempt Offering Documents (cont.) 221 If auditor is involved, the following procedures are required Obtain specific updated written representations from management Perform procedures designed to identify events occurring after the audit report date and before the date of the offering that may have impacted the auditor s report and understand management s evaluation thereon Follow AU C section 720, Other Information in Documents Containing Audited Financial Statements in order to identify and address information included or incorporated by reference in the offering document that could undermine the credibility of the financial statements and the auditor s report thereon Ensure that the description of the auditor s role in the offering document does not imply greater responsibility than the auditor intends

222 222 TQAs on Definition of a Government GASB Entity/ Component Special Purpose Framework FASB

223 AICPA State and Local Government (SLG) Audit and Accounting Guide 223 Public corporations and bodies corporate and politic are governmental organizations. Other organizations are governmental if they have one or more of the following characteristics Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization's governing body by officials of one or more state or local governments The potential for unilateral dissolution by a government with the net assets reverting to a government The power to enact and enforce a tax levy Definition has been cleared by GASB, therefore considered to be category (b) GAAP

224 224 TQAs on Definition of a Government (cont.) Should a NFP component report under GASB? Can an entity meeting the SLG definition report under a special purpose framework (SPF)? Can an entity meeting the SLG definition report under FASB and call it a SPF? Can an auditor report on an Indian tribe that meets the SLG definition but reports under FASB? Refer to definition Auditor should determine acceptability before excepting engagement No. FASB doesn t meet the definition of a SPF Yes. One report with two opinions, one under GASB and one under FASB

225 225 TQAs on Definition of a Government (cont.) The AICPA has issued nonauthoritative questions and answers Section 9160, Other Reporting Issues, questions.31 through.35 Entities are governmental or nongovernmental for accounting, financial reporting, and auditing purposes based solely on the application of the definition of a state or local government. Other factors are not determinative. For example, the fact that an entity is incorporated as a not for profit entity and exempt from federal income taxation under the provisions of IRC Section 501 is not a criterion in determining whether an entity is governmental or nongovernmental for accounting, financial reporting, and auditing purposes.

226 226 AICPA Code of Professional Conduct New interpretation, Hosting Services (ET Section ) Hosting services are nonattest services that involve an auditor accepting responsibility for the following: o Acting as the sole host of a financial or non-financial information system of an attest client o Taking custody of or storing an attest client s data or records whereby, that data or records are available only to the attest client from the member, such that the attest client s data or records are otherwise incomplete o Providing electronic security or back-up services for an attest client s data or records By providing hosting services, the auditor is maintaining the attest client s internal control over its data or records, thus independence would be impaired Effective on July 1, 2019 Proposed Interpretation ET Section Entities included in State and Local Government Financial Statements Guidance to determine when a member needs to be independent of SLG entities for which he or she is not providing financial statement attest services Clarify who at a firm and which immediate family members the interpretation should extend to and if the interpretation should contain any exceptions

227 Review Questions

228 Question # In accordance with the 2018 Yellow Book, an auditor s independence might NOT be impaired with respect to a government if the auditor did which of the following? A. Prepared the government s financial statements based on information in the government s trial balance B. Authorized or approved the government s transactions C. Determined account codes for journal entries without management s approval D. Classified transactions without management s approval E. All of the above would impair the auditor s independence

229 Question # In accordance with the 2018 Yellow Book, which of the following is true regarding waste and abuse? A. An auditor must report waste and abuse when the auditor becomes aware of it B. Fraud and noncompliance with laws are considered to be abuse C. Misuse of authority for personal financial gain is considered to be abuse D. Waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight E. All of the above are true F. C and D only

230 Question # In accordance with SAS No. 133, an auditor is involved with an exempt offering if the auditor s report is included in a government s offering document and the auditor also does which of the following? A. Reads the offering document at the government s request B. Participates in due diligence discussions C. Issues a comfort or similar letter D. Any of the above E. B and C only

231 Common Reporting Deficiencies Roundtable

232 232 Roundtable Discussion James Falconer Qun (Tren) Wang Moderator: Stephen Gauthier Zhikuan (Kuan) Hu Jim Phillips

233 Pension / OPEB Reporting and Disclosure Deficiencies

234 234 Pension-related Deficiencies Comprise four of the top ten most common deficiencies Comprise twelve of the top fifty most common deficiencies

235 Financial Statement 235 Recognition In government-wide financial statements, the employer s net pension/opeb liability (or collective net pension/opeb liability) should be reported with noncurrent liabilities due in more than one year Noncurrent Liabilities Due within one year 10,403,155 Due in more than one year 92,154,790 Unless a pension/opeb plan s fiduciary net position is less than the amount expected to be paid within one year

236 Disclose Funds that Liquidate 236 Pension and OPEB liabilities The notes to the employer s financial statements should disclose what funds typically have been used in prior years to liquidate pension/opeb (and other longterm) liabilities

237 237 Fiduciary fund display In fiduciary fund financial statements, all pension (and other employee benefit) trust funds are reported in a single column Pension (and Other Employee Benefit) Trust Funds Investment Trust Funds Private Purpose Trusts Custodial (formerly Agency) Funds Net position restricted for: Pensions 29,897,802 OPEB 12,813,343 Pool participants 2,075,946 Individuals, organizations, and o other governments 886,024 99,842

238 Note Disclosures Aggregate 238 Aggregate total for all plans through which the employer provides benefits Pension/OPEB liabilities Pension/OPEB assets Deferred outflows of resources Deferred inflows of resources Pension/OPEB expense/expenditures Other note disclosures by plan Including employer balances of deferred inflows and outflows for each plan

239 Employer Aggregate Pension 239 Disclosure

240 Disclose Post-measurement 240 Date Contributions to Plans The notes to the employer s financial statements should disclose pension/opeb contributions made after the measurement date but before period end: The amount of such contributions (which are reported as deferred outflows of resources), That they will not affect expense in subsequent years (as will other deferred items), and That they will be recognized as a reduction of net pension liability/collective net pension liability in the subsequent reporting period

241 241 Schedule of Deferred Items The notes to the employer s financial statements should include a schedule that presents, for each plan, the net amount of deferred outflows and inflows of resources that will be recognized in the employer s pension expense for each of the subsequent five years and, at a minimum, in the aggregate for subsequent years

242 Ten-year schedules of RSI 242 Changes in the NPL (measurement date) Ratios (measurement date) Information on contributions (most recent reporting date) Actuarial contribution, if determined Statutory or contractual contribution, if applicable and there is no actuarial contribution determined Payroll-related measure is covered payroll, not covered employee payroll.

243 Review Questions

244 Question # Which is the correct presentation in fiduciary fund financial statements for a government with multiple pension and OPEB plans that meet GASB criteria as trusted plans and meet the criteria to be reported as component units in the basic financial statements? A. Report each major plan in a separate column B. Report all the pension plans in total in one column and all OPEB plans in total in a separate column C. Report all pension and OPEB plans in a single column D. B or C, depending on the circumstances

245 Question # Which of the following does NOT need to be disclosed in total for all pension plans? A. Pension assets B. Pension liabilities C. Pension related deferred inflows of resources D. Pension plan fiduciary net position E. All of the above must be disclosed in total for all pension plans

246 246 SAVE THE DATE! Please plan to join us for the November 7, 2019 Rebroadcasts scheduled for December 5, 2019 January 16, 2020 All broadcasts 1:00 to 5:00 pm EDT

247 247 For More Information Government Finance Officers Association Technical Services Center GFOA.org