2014 FINANCIAL ACCOUNTING AND REPORTING ISSUES SEMINAR (AND GAAP UPDATE) Presented by Paul E. Glick, Glick Consulting Group

Transcription

1 2014 FINANCIAL ACCOUNTING AND REPORTING ISSUES SEMINAR (AND GAAP UPDATE) Presented by Paul E. Glick,

2 Primary Seminar Objectives Review the GASB Pronouncements Becoming Effective in The Near Future Emphasis the Practical Application of Implementation 2

3 Agenda 1. The GASB A Quick Review 2. GASB Statements No. 63 and 65: Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position 3. GASB Statement No. 60 Service Concession Arrangements 4. GASB Statement 61: The Financial Reporting Entity: Omnibus 5. GASB Statement 66: Technical Corrections 3

4 Agenda 6. A Few Financial Reporting Issues 7. GASB Statement No. 69, Government Combinations and Disposals of Government Operations 8. GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees 9. GASB Statements 67 & 68, Pension Accounting and Financial Reporting 4

5 THE GASB

6 Current Board Members MEMBER David A. Vaudt, Chair William Fish Michael Granof David Sundstrom Jan Sylvis Marcia Taylor Jim Brown TERM EXPIRES 2020 single term 2016 first term 2015 first term first term 4 6

7 GASB Funding GASB is funded by a combination of accounting support fees, subscription and publication revenue, and investment income The largest share of financial support for the GASB comes from accounting support fees Those fees are paid by municipal bond brokers and dealers for the GASB 4 7

8 GASB Funding GASB Accounting Support Fees are collected under Section 978 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to fund the annual recoverable expenses (again, roughly equivalent to operating expenses) of the GASB. These support fees were instituted in 2012 through an SEC order instructing the Financial Industry Regulatory Authority (FINRA) to establish, assess, and collect accounting support fees from its members. GASB accounting support fees collected in 2012 were $8.5 million, paid by a total of 532 broker dealers. 4 8

9 GASB Funding Since 2005, the FAF voluntarily has chosen not to seek accounting support fees to fund the full amount of the FASB s budget. Similarly, beginning in 2013, the FAF is seeking 2013 GASB accounting support fees that are less than GASB recoverable expenses. Instead, the FAF has chosen to fund a portion of FASB and GASB recoverable expenses with residual reserve funds. Residual reserves are those funds that are forecast to exceed a targeted reserve balance 4 9

10 2014 GASB Budget Revenues: Accounting Support Fees $6,159,100 Investment Earnings 600 Total Revenues $6,159,700 Expenses: Board and Research Staff $5,893,800 Advisory Council 28,800 FAF Administrative 3,287,500 Total Expenses $9,210,000 Residual Reserve Funds $3,050,

11 WHAT IS EFFECTIVE?

12 Effective Dates During 2014 Statement 67 Financial Reporting for Pension Plans an Amendment of GASBS 25 (Beginning After 6/15/2013) Statement 69 Government Combinations and Disposals of Government Operations (Beginning After 12/15/2013) Statement 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees (Beginning After 6/15/2013) 12

13 Effective Dates During 2015 Statement 68 Accounting and Financial Reporting for Pensions an Amendment of GASBS 27 (Beginning After 6/15/2014) Statement 71 Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No., 68 13

14 FEEL DEPRESSED? IT COULD GET WORSE

15 A GASB Pre-Agenda Research Project The Financial Reporting Model A Reexamination of GASBs 34, 35, 37, 41 and 46 15

16 A GASB Pre-Agenda Research Project MD&A G-W Financial Statements Fund Financial Statements Capital Asset Reporting Budgetary Comparisons Special Purpose Government Reporting Related Note Disclosures 16

17 Deferred Inflows and Outflows Why and What GASBS 63 & 65 17

18 Examples We Will Review Some Examples At The End Of This Section. 18

19 Statement 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

20 Background Traditionally, All Debit Balances Reported On A Statement Of Net Position/Balance Sheet Of A Government Were Described As Assets. Similarly, All Non-equity Credit Balances Reported On That Same Statement Were Described As Liabilities. GASBS 63 Changes all of This 20 20

21 GASB Statement No. 63 This Statement Distinguishes Assets From Deferred Outflows Of Resources and Liabilities From Deferred Inflows Of Resources

22 Concepts Statement No. 3 (Communication Methods) CONS 3 identifies four ways to present financial information: Recognition In Basic Financial Statements Disclosure In Notes To Basic Financial Statements Presentation As Required Supplementary Information Presentation As Supplementary Information 22

23 Concepts Statement No. 3 The First Of These Communication Methods Is Limited To Items That Meet The Definition Of One Of The Financial Statement Elements, Such As Assets And Liabilities. 23

24 Concepts Statement No. 4 (Elements of Financial Statements) When The GASB Was In The Process Of Developing Its Definition Of The Various Financial Statement Elements, It Became Clear That Substantial Differences Existed Among Various Items Classified As Assets And Among Various Items Classified As Liabilities. 24

25 Concepts Statement No. 4 Most items traditionally reported as liabilities, for instance, involve the eventual outflow of resources (for example, vendor payables, debt, claims and judgments, and compensated absences). However, some items also traditionally reported as liabilities actually involve inflows rather than outflows of resources (for example, unearned revenues, grants and property taxes related to future fiscal periods). 25

26 Concepts Statement No. 4 The Only Reason These Latter Items Are Reported At All In The Statement Of Financial Position, Rather Than In The Statement Of Resources Flows, Is To Defer Their Recognition As Revenue Because They Relate To A Future Period. 26

27 Concepts Statement No. 4 Given The Very Different Character Of These Two Traditional Types Of Liabilities, The GASB Elected To Separate Them Into Separate Categories, Reserving The Term Liabilities For The Former, And Inventing A New Term, Deferred Inflows Of Resources, For The Latter. 27

28 Concepts Statement No. 4 Most Items Traditionally Reported As Assets Offer Future Service Capacity To The Government. However, Other Items Also Traditionally Reported As Assets Provide No Future Benefit To The Government Itself (For Example, A Grant Made To Another Government For The Subsequent Fiscal Year) 28

29 Concepts Statement No. 4 The Only Reason These Latter Items Are Reported At All In The Statement Of Financial Position, Rather Than In The Statement Of Resources Flows, Is To Defer Their Recognition As Expense/Expenditure Because They Relate To A Future Period. 29

30 Definitions Assets - Are Resources With Present Service Capacity That The Government Presently Controls. A Deferred Outflow Of Resources - Is A Consumption Of Net Assets By The Government That Is Applicable To A Future Reporting Period. 30

31 Definitions Liabilities - Are Present Obligations To Sacrifice Resources That The Government Has Little Or No Discretion To Avoid. A Deferred Inflow Of Resources - Is An Acquisition Of Net Assets By The Government That Is Applicable To A Future Reporting Period. 31

32 Reclassifications The GASB Expressly Reserved For Itself The Determination Of Which Specific Items Traditionally Reported As Assets Or Liabilities Should Be Reclassified As Deferred Outflows Of Resources Or Deferred Inflows Of Resources, Which Explains The Later Issuance Of GASB Statement No

33 Benefits The Difference Between A Liability And A Deferred Inflow Of Resources Is Nothing Less Than The Difference Between Whether Resources Are Coming In (Deferred Inflow Of Resources) Or Eventually Going Out (Liability). That Is, A Liability Involves The Eventual Surrender Of Resources, Whereas A Deferred Inflow Of Resources Does Not 33

34 Benefits Likewise, An Asset Offers Future Benefit To The Government, Whereas A Deferred Outflow Of Resources Does Not. Clearly A Failure To Make Such Distinctions Could Lead To Serious Misunderstandings. 34

35 Display Requirements Report each of the financial position elements in a separate section in the statements of financial position in the following order: Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows of Resources, and Net position. 35

36 Display Requirements Deferred outflows should be reported in a separate section following assets Similarly, deferred inflows should be reported in a separate section following liabilities Net position components resemble net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows Net Investment In Capital Assets Restricted Unrestricted Governmental funds continue to report fund balance 36

37 Display Requirements Allowed to report subtotals for: Combination of assets and deferred outflows of resources, and Combination of liabilities and deferred inflows 37

38 Financial Statement Reporting Format Economic Resources Measurement Focus Preferred reporting format is: assets + deferred outflows liabilities deferred inflows = net position. Traditional balance sheet format is permitted: Assets + deferred outflows = liabilities + deferred inflows + net position. Governmental Fund Financial Statements Required reporting format is: assets + deferred outflows = liabilities + deferred inflows + fund balance. 38

39 Disclosures Provide Details Of Different Types Of Deferred Amounts If Components Of The Total Deferred Amounts Are Obscured By Aggregation On The Face Of The Statements If The Amount Reported For A Component Of Net Position Is Significantly Affected By The Difference Between Deferred Inflows Or Outflows And Their Related Assets Or Liabilities provide An Explanation In The Notes 39

40 GASBS 63 Effective Date For Periods Beginning After December 15, 2011 Strongly Recommend You Implement GASBS 65 (Years Beginning After December 15, 2012) At The Same Time as GASB 63 40

41 Statement 65 Items Previously Reported as Assets and Liabilities

42 GASBS Statement No. 65 Reclassifies, As Deferred Outflows Of Resources Or Deferred Inflows Of Resources, Certain Items That Were Previously Reported As Assets And Liabilities And Recognizes, As Outflows Of Resources Or Inflows Of Resources, Certain Items That Were Previously Reported As Assets And Liabilities 42

43 Three Important Changes First, it identifies which specific items should be classified as deferred inflows of resources and deferred outflows of resources, rather than as assets and liabilities Second, it clarifies the effect of deferred inflows of resources and deferred outflows of resources on the determination of major funds Finally, it limits the use of the term deferred in financial statements 43

44 GASB s Two-Step Approach 1. Does the item meet the definition of an asset or liability? If so, it should be reported as such 2. If the item does not meet the definition of an asset or liability, does it meet the definition of a deferred inflow of resources or a deferred outflow of resources? If so, it should be reported as such It the items does not meet either of the above, then it is reported as an inflow or outflow or resources on the operating statement 44

45 Debt Refundings In regard to the guidance in GASBS No. 23, and GASBS No. 62 for refunding of debt, the Board concluded that the resulting difference from current refundings and advance refundings does not meet the definition of an asset or a liability as explained in GASB Statement No. 63. When the value of the resources required to refund the old bonds exceeds the net carrying amount of the old bonds, the Board does not believe the resulting debit amount represents an increase in service capacity that the government presently controls 45

46 Debt Refundings The resources cannot be exchanged for another asset or used to directly provide present service capacity and, therefore, do not meet the definition of an asset. 46

47 Debt Refundings Similarly, if the value of the resources required to refund the old bonds does not exceed the net carrying amount of the old bonds, the resulting credit amount does not represent an obligation to sacrifice resources for another unavoidable and specific purpose Therefore, the Board concluded that the difference does not represent a liability of the government. 47

48 Debt Refundings Because of its conclusion that the debit amount or credit amount is not an asset or liability, respectively, the Board analyzed the balances to determine if they met the definition of a deferred outflow of resources or a deferred inflow of resources, respectively The Board concluded that reporting an accounting gain or loss in the period the old debt is refunded not only fails to report the purpose of the transaction, but also distorts operating results in the period the debt is refunded and in subsequent periods 48

49 Debt Refundings The Board concluded that the difference resulting from a current refunding, or an advance refunding, relates to future periods and, therefore, meets the definition of a deferred outflow of resources or a deferred inflow of resources, as applicable 49

50 One Important Change Debt Refundings Accounting for the debit/credit resulting from the refunding of debt (GASBS 23): Report as a deferred outflow (loss) or deferred inflow (gain) and recognize as a component of interest expense (i.e., the amortization) over shorter of life of old debt (i.e., the refunded debt) or new debt (i.e., the refunding debt) Report separately from related bonds payable, or not netted against the debt (a change). 50

51 Debt Refundings Accounting for the debit/credit resulting from changes in the provisions of a lease due to a refunding by a lessor: Report as a deferred outflow (loss) or deferred inflow (gain) and recognize as a component of interest expense over shorter of life of old debt or new debt. 51

52 Debt Issuance Costs Currently reported as a deferred charge on the statement of net position and deferred and amortized The Board concluded that most debt issuance costs do not meet the definition of an asset, because the costs incurred do not result in service capacity that the government presently controls 52

53 Debt Issuance Costs The GASB believes prepaid insurance associated with the issuance of debt should be considered an asset because these costs have present service capacity that the government generally indirectly controls. The GASB concluded that debt issuance costs, other than prepaid insurance, do not meet the definition of a deferred outflow of resources because the costs are not applicable to a future period 53

54 Debt Issuance Costs The GASB concluded that reporting these costs as an asset or a deferred outflow of resources and recognizing either balance over the life of the related debt is contrary to the concept of interperiod equity As a result, the Board concluded that these costs should be recognized as an outflow of resources (i.e., a current year cost) in the reporting period in which they are incurred. 54

55 Debt Issuance Costs Several respondents to the Exposure Draft expressed concerns with the proposed reporting for debt issuance costs. In most cases, these respondents believed debt issuance costs relate to future periods and, therefore, should be recognized over the life of the debt rather than expensed in the period incurred However, the GASB did not concur. 55

56 Debt Issuance Costs Debt issuance costs: Debt issuance costs, other than prepaid insurance costs, should be recognized as an outflow of resources in the period incurred. Prepaid insurance costs reported as an asset. 56

57 Debt Issuance Costs When implementing this pronouncements, you need to remove any deferred charges previously reported: Write off in the year of occurrence Or report a prior period adjustment (note prepaid insurance work paper) 57

58 GASBS 33 Revenues Classifications Derived Tax Revenue Sales and Income Taxes Imposed Non-Exchange Property Taxes and Fines Government Mandated Non-Exchange Voluntary Non-Exchange 58

59 Nonexchange Transactions The GASB believes that resources received prior to the period when the resources are required to be used or when use is first permitted do not meet the definition of a liability The Board concluded that the advancing of these resources does not create a liability that obligates a government to sacrifice resources, because the government does not have to sacrifice those resources in an imposed nonexchange transaction 59

60 Nonexchange Transactions Rather, the Board concluded that these resources relate to a future period (for example, when the advance is first permitted to be used in accordance with the imposed nonexchange transaction) and, therefore, should be classified as a deferred inflow of resources until such time. 60

61 Nonexchange Transactions Imposed nonexchange revenues (GASB 33): Report as deferred inflows (as a credit), resources received or recognized as receivables before: The period for which the taxes are levied for property taxes. The period when resources are required to be used or when use is first permitted for all other imposed nonexchange transactions for which time requirements are specified. 61

62 Nonexchange Transactions The Board concluded that resources reported as assets that do not meet the availability criterion for recognition as revenue in governmental fund financial statements also do not meet the definition of a liability The Board believes that there is not a present obligation to sacrifice resources at the period-end. However, those resources are not available for spending in the current period and, therefore, should be classified as a deferred inflow of resources. 62

63 Nonexchange Transactions The unavailable portion of a property tax receivable should be matched by a deferred inflow of resources for unavailable revenue When an asset is recorded in governmental fund financial statements but the revenue is not available, the government should report a deferred inflow of resources until such time as the revenue becomes available. 63

64 Grant Revenue Recognition GASBS 33 distinguishes between two kinds of stipulations on the use of resources: time requirements and purpose restrictions Time requirements specify (a) the period when resources are required to be used (sold, disbursed, or consumed) or when use may begin (for example, operating or capital grants for a specific period) or (b) that the resources are required to be maintained intact in perpetuity or until a specified date or event has occurred. Time requirements affect the timing of recognition of nonexchange transactions 64

65 Grant Revenue Recognition Purpose restrictions specify the purpose for which resources are required to be used. Purpose restrictions should not affect when a nonexchange transaction is recognized. However, governments that receive resources with purpose restrictions should report resulting net position, equity, or fund balance as restricted 65

66 I Asked The Expert GASBS 65 If a government receives a cash advance on an expenditure grant but they have not spent the money yet, how should the advance be reported? 66

67 I Asked The Expert Revenue (or a deferred inflow of resources) can be recognized only if all eligibility requirements are met EXCEPT for a time requirement. In the case of an expenditure-driven grant, the key eligibility requirement (qualified spending) is NOT met until the qualifying expenditures have been incurred--therefore the cash advance would be matched by a LIABILITY to the grantor (essentially, unearned revenue), rather than a deferred inflow of resources (i.e., revenue that is earned, but not yet available). 67

68 Nonexchange Transactions The GASB does not believe that the advance payments by a provider and the resources received in advance by a recipient in government-mandated nonexchange transactions and voluntary nonexchange transactions, including reimbursement-type or expenditure driven grant programs, meet the definition of an asset and a liability, respectively, when the only eligibility requirement not met is a time requirement 68

69 Nonexchange Transactions Government-mandated and voluntary nonexchange transactions (GASB 33): Resources received/provided in advance of one of the eligibility requirements being met other than time requirements: Provider reports as an asset Recipient reports as a liability Resources received/provided in advance of time requirements being met (all other eligibility requirements are met): Provider reports as deferred outflows Recipient reports as deferred inflows 69

70 Sales of Future Revenues In a sale of future revenues, the transferor government should report the proceeds as a deferred inflow of resources in both the government-wide and fund financial statements except for instances wherein recognition as revenue in the period of sale is appropriate 70

71 Other Items Not Discussed Today Initial Direct Costs of Operating Leases Sale-Leaseback Transactions Acquisition Costs Related to Insurance Activities Lending Activities Mortgage Banking Activities Regulated Industries 71

72 Items Where the Classification was NOT Changed In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as an asset: Prepayments Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33). 72

73 Items Where the Classification was NOT Changed In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as an asset: The purchase of future revenues from a government outside the financial reporting entity (paragraphs of Statement 48). Circumstances in which a pension plan s net position exceeds the total pension liability 73

74 Items Where the Classification was NOT Changed In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as a liability (i.e., unearned revenue): Resources received in advance in relation to a derived tax revenue (sales taxes) nonexchange transaction (paragraph 16 of Statement 33). Resources received in advance in relation to a governmentmandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33). Resources received in advance of an exchange transaction (paragraph 23 of Statement 62). 74

75 Major Fund Determination GASB Statement No. 65 clarifies that henceforth the point of reference for this determination will no longer be assets, but rather assets + deferred outflows of resources. Likewise the determination of a major fund will focus not just on liabilities, but rather on liabilities + deferred inflows of resources. Basically no effect on the determination 75

76 Use of the Term Deferred The use of the term deferred should be limited to items reported as deferred outflows of resources or deferred inflows of resources 76

77 LET S LOOK AT A COUPLE EXAMPLES

78 A FEW FINANCIAL REPORTING ISSUES

79 Restricted Assets The term current assets is used to designate cash and other assets or resources commonly identified as those that are reasonably expected to be realized in cash or sold or consumed within a year The nature of current assets contemplates the exclusion from that classification of such resources as (a) cash and claims to cash that are restricted as to withdrawal or use for other than current operations 79

80 Restricted Assets Even though not actually set aside in special accounts, resources that are clearly to be used in the near future for the liquidation of long-term debts, payments to sinking funds, or for similar purposes also should, under this concept, be excluded from current assets. However, where such resources are considered to offset maturing debt that has properly been set up as a current liability, they may be included within the current asset classification. 80

81 Restricted Assets Therefore, current liabilities payable from restricted assets should equal current restricted assets. Customer deposits and customer deposits payable could be reported as restricted assets and liabilities payable from restricted assets. Therefore non-current restricted assets should include bond proceeds for capital construction. 81

82 Capital Asset Transfers From Governmental to Proprietary Fund Level: Governmental fund no entry Proprietary fund DR Capital assets, CR accumulated depreciation, CR contributions (Book value) At the GW level: Governmental fund DR transfers out (Book value), DR accumulated depreciation, CR capital assets Proprietary fund DR capital assets, CR accumulated depreciation, CR transfers in (Book value) 82

83 Capital Asset Transfers From Governmental to Proprietary This transfer should be reported as a reconciling item on both reconciliations Some governments just report the total change in capital assets instead of the detail of the transfer of capital assets The transfer would need to be in the noncash schedule on the cash flows statement 83

84 Capital Asset Transfers The guidance is as follows: Capital assets of the general government reassigned to an enterprise fund would be shown on the government-wide statement of activities as a transfer between governmental activities and business-type activities. Such a transfer is not possible, however, at the fund level, because governmental funds did not report the capital assets being reassigned to begin with. Instead, the reassignment would be reflected at the fund level solely in the recipient enterprise fund, which would report a capital contribution. (GAAFR, page 52; Comprehensive Implementation Guide, Question ) 84

85 Capital Asset Transfers From Governmental to Proprietary Fund Level: Governmental fund no entry Proprietary fund DR accumulated depreciation, DR Loss on disposition of capital assets (Book value) CR Capital assets At the GW level: Governmental fund DR capital assets, CR accumulated depreciation, CR transfers in (Book value), Proprietary fund DR transfers out (Book value), DR accumulated depreciation, CR capital assets 85

86 Capital Asset Transfers From Governmental to Proprietary This transfer should be reported as a reconciling item on both reconciliations Some governments just report the total change in capital assets instead of the detail of the transfer of capital assets The transfer would need to be in the noncash schedule on the cash flows statement 86

87 Flood in City Hall All Flood Related Costs Would Be Reported As A Special Item, I Think. The Insurance Recovery Would be Reported As Such As An Other Financing Source 87

88 An Ice Storm All Related Costs Would Be Reported As A Special Item, I Think. Any FEMA Recovery would be reported as an Intergovernmental Revenue 88

89 Statement 69 Government Combinations and Disposals of Government Operations

90 Government Combinations The Term Government Combinations Includes A Variety of Transactions Referred To As: Mergers, Acquisitions, Transfers Of Operations. 90

91 Government Mergers Government mergers include combinations of legally separate entities without the exchange of significant consideration and either: 1. Two or more governments (or one or more governments and one or more nongovernmental entities) cease to exist as legally separate entities and are combined to form one or more new governments 91

92 Government Mergers Government mergers include combinations of legally separate entities without the exchange of significant consideration and either: 2. One or more legally separate governments or nongovernmental entities cease to exist and their operations are absorbed into, and provided by, one or more continuing governments 92

93 Government Acquisitions Government acquisitions are transactions in which a government acquires another entity, or its operations, in exchange for significant consideration The consideration provided should be significant in relation to the assets and liabilities acquired 93

94 Government Transfers A transfer of operations is a government combination involving the operations of a government or nongovernmental entity, rather than a combination of legally separate entities, in which no significant consideration is exchanged 94

95 Values In a government mergers requires the use of carrying values to measure the assets and liabilities This Statement requires measurements of assets acquired and liabilities assumed generally to be based upon their acquisition values 95

96 Government Fund Acquisition Report as a Special Item 96

97 Note Disclosures All Combinations a) A brief description of the government combination, including identification of the entities involved in the combination and whether the participating entities were included within the same financial reporting entity b) The date of the combination c) A brief description of the primary reasons for the combination 97

98 Mergers and Transfers Disclosures The amounts recognized as of the merger date or the effective transfer date as follows: 1. Total assets distinguishing between current assets, capital assets, and other assets 2. Total deferred outflows of resources 3. Total liabilities distinguishing between current and long-term amounts 4. Total deferred inflows of resources 5. Total net position by component 98

99 Mergers and Transfers Disclosures b) A brief description of the nature and amount of significant adjustments made to bring into conformity the individual accounting policies or to adjust for impairment of capital assets resulting from the merger or transfer c) The initial amounts recognized by the new or continuing government, if different from the values in (a) and the differences that arise from modifying the carrying values in (a) by the adjustments in (b). 99

100 Government Acquisition Disclosures a) A brief description of the consideration provided b) The total amount of net position acquired (based on the provisions set forth in paragraphs of this Statement) as of the date of acquisition c) A brief description of contingent consideration arrangements, including the basis for determining the amount of payments that are contingent 100

101 Effective Date Effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013, and should be applied on a prospective basis. Early application is encouraged. 101

102 Statement 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

103 Entities Addressed Providers of financial guarantees Recipients of financial guarantees 103

104 Background Some governments extend financial guarantees for the obligations of another government, a not-for-profit entity, or a private entity without directly receiving equal or approximately equal value in exchange A government commits to indemnify the holder of the obligation if the entity that issued the obligation does not fulfill its payment requirements Also, some governments issue obligations that are guaranteed by other entities in a nonexchange transaction 104

105 Guidance Two-Step Plan 1. Consider whether qualitative factors and historical data indicate that payments may have to be made as a result of the guarantee and 2. Report a liability as soon as such payments appear more likely than not to occur. 105

106 Guidance The statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data, if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee The amount of the liability to be recognized should be the discounted present value of the best estimate of the future outflows - minimum amount 106

107 Qualitative Factors Initiation of the process of entering into bankruptcy or financial reorganization Breach of a debt contract in relation to the guaranteed obligation, such as failure to meet rate covenants, failure to meet coverage ratios, or default or delinquency in interest or principal payments 107

108 Qualitative Factors Indicators of significant financial difficulty, such as failure to make payments to paying agents or trustees on a timely basis; Drawing on a reserve fund to make debt service payments; Initiation of a process to intercept receipts to make debt service payments; Debt holder concessions; 108

109 Qualitative Factors Significant investment losses; Loss of a major revenue source; Significant increase in noncapital disbursements in relation to operating or current revenues; Or commencement of financial supervision by another government. 109

110 More Likely Than Not Requires that a guarantor government recognize a liability as soon as it is considered more likely than not (that is, a likelihood as little as 51 percent) that payments will have to be made pursuant to the guarantee 110

111 How Should the Guarantee Be Measured? Provider of financial guarantee: Amount equal to the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee If there is no best estimate, the discounted present value of the minimum amount in that range should be recognized 111

112 The Recipient This Statement requires a government that has issued an obligation guaranteed in a nonexchange transaction to recognize revenue to the extent of the reduction in its guaranteed liabilities This Statement also provides additional guidance for intraentity nonexchange financial guarantees involving blended component units 112

113 Extending Guarantee Disclosures - Guarantor A description of the nonexchange financial guarantee, identifying: 1. The legal authority and limits for extending the guarantees and types of obligations guaranteed 2. The relationship of the government to the issuer or issuers of the obligations that are guaranteed 3. The length of time of the guarantees 4. Arrangements for recovering payments from the issuer or issuers of the obligations that are guaranteed The total amount of all guarantees extended that are outstanding at the reporting date. 113

114 Extending Guarantee Disclosures If Liability Assumed A brief description of the timing of recognition and measurement of the liabilities and information about the changes in recognized guarantee liabilities, including the following: 1. Beginning-of-period balances 2. Increases, including initial recognition and adjustments increasing estimates 3. Guarantee payments made and adjustments decreasing estimates 4. End-of-period balances 114

115 Extending Guarantee Disclosures If Liability Assumed Cumulative amounts of indemnification payments that have been made on guarantees extended that are outstanding at the reporting date Amounts expected to be recovered from indemnification payments that have been made through the reporting date. 115

116 Receiving Guarantee Disclosures (The Other Side) a. The name of the entity providing the guarantee b. The amount of the guarantee c. The length of time of the guarantee d. The amount paid, if any, by the entity extending the guarantee on obligations of the government during the current reporting period e. The cumulative amount paid by the entity extending the guarantee on outstanding obligations of the government f. A description of requirements to repay the entity extending the guarantee g. The outstanding amounts, if any, required to be repaid to the entity providing the guarantee. 116

117 Receiving Guarantee Disclosures a. The amount paid by the entity that extended the guarantee on obligations of the government during the current reporting period b. The cumulative amount paid by the entity that extended the guarantee on outstanding obligations of the government c. A description of requirements to repay the entity that extended the guarantee d. The outstanding amounts, if any, required to be repaid to the entity that provided the guarantee 117

118 Effective Date The requirements of this Statement are effective for financial statements for reporting periods beginning after June 15,

119 SESSION 3 GASBS 67 AND 68, PENSIONS

120 Effective Dates GASB Statement No. 67 Accounting and Financial Reporting For Pension Plans (Plan Reporting) GASB Statement No. 68 Accounting and Financial Reporting for Pensions (Employer Reporting) Effective for fiscal years Effective for fiscal years beginning after June 15, 2013 beginning after June 15,

121 Major Game Changers Placing the net pension liability on the Statement of New Position Decoupling expenses from funding Accounting for Cost Sharing Plans Expanding disclosure information (notes & RSI) 121

122 GASB Goals and Objectives Financial Reporting Focus GASB establishes accounting and reporting standards not funding policies Focus on pension obligation, changes in obligation, and attribution of expense 122

123 GASB Goals and Objectives Long-term Nature of governments Cost of services to long-term operation Interperiod equity matches current period resources and costs 123

124 GASB Goals and Objectives Employer-Employee Exchange Employer incurs an obligation to its employees for pension benefits Transaction is in context of a career-long relationship 124

125 Types of Pensions Defined benefits Benefits defined by terms of the plan (for example, specific dollar amount or calculated based on factors such as compensation, age, years of service) Defined contributions Individual accounts Contributions in the periods that services are rendered Dependent on contributions, earnings, and forfeitures of other employee accounts, administrative costs 125

126 Types of Pensions Classification of the type of defined benefit (DB) pension plan is based on the number of employers and whether pension obligations and pension plan assets are shared 126

127 Types of Plans Single employer Provides pensions to employees of one employer The government sponsors its own pension plan - like police and fire plans Agent multiple-employer Provides pensions to employees of more than one employer Assets are pooled for investment purposes, but separate accounts maintained for each employer Employer s share of pooled assets is legally available only for its employees 127

128 Types of Plans A cost-sharing multiple-employer plan - Provides pensions to employees of more than one employer Employers pool or share obligations Plan assets can be used to pay the benefits of retirees from any employee Typically a state sponsored plan 128

129 A BIG PICTURE VIEW OF GASBS 67 AND 68

130 #1-Net Pension Liability (NPL) NPL = total pension liability minus assets at MV It is similar to the UAAL but using: Valuing at market, not smoothing Using only entry age normal actuarial funding Possibly a blended discount rate 130

131 #1-Net Pension Liability (NPL) The NPL must be reported on the employer s Statement of Net Position Currently, UAAL Is Reported as RSI Currently, only the NPO is reported on the Statement of Net Position (cumulative difference between the ARC and actual contributions-typically a small amount) 131

132 The New Blended Discount Rate Discount rate is based on projected benefits, current assets, and projected assets for current members For projected benefits that are covered by projected assets Discount using long-term expected rate of return on assets For projected benefits that are not covered by projected assets (i.e., after the cross-over date ) Discount using yield on 20-year AA/Aa tax-exempt municipal bond index 132

133 Pension Liability Provide context Only the accounting treatment has changed Nothing has changed economically No surprise in many cases Number was already being reported in the notes and in required supplementary information Single-employer and agent plans Not an indicator, per se, of fiscal stress 133

134 Blended Discount Rate Discount Rate Is based on projected benefits, current assets, and projected assets for current members For projected benefits that are covered by projected assets discount using long-term expected rate of return on assets For projected benefits that are not covered by projected assets discount using yield on 20-year AA/Aa tax-exempt municipal bond index 134

135 #2-Decoupling Expense and Funding Current Pension Expense: Based upon actuarially determined funding requirement-arc Normal cost plus Amortization of the unfunded actuarial accrued liability (UAAL) Period not greater than 30 years Closed or open amortization period Level dollar or level percent of payroll Can be based on any of six actuarial cost methods 135

136 #2-Decoupling Expense and Funding Current Pension Expense: Based upon actuarially determined funding requirement-arc Can be based on any of six actuarial cost methods Serves as a defacto funding standard 136

137 New Pension Expense It is the change in the NPL each year, with deferred recognition of certain elements (It specifically not intended to be a funding standard) 137

138 New Pension Expense Components Service cost (i.e., normal cost) Interest on the TPL at the beginning of the year Changes in the TPL over the year (with limited deferrals) Differences between actual and projected earnings over the year 138

139 New Pension Expense Components Projected investment returns over the year Employee contributions Other changes in plan net position 139

140 Changes in TPL That Are Recognized Immediately No Deferrals Service cost Annual interest on the TPL Projected investment returns over the year All plan amendments 140

141 Changes in TPL That Are NOT Recognized Immediately Changes in actuarial assumptions Actuarial gains and losses These changes are recognized in expense over average expected remaining services lives of active and in active members Resulting recognition periods will be very short (often less than ten years) Method must be systematic and rational, using closed periods 141

142 New Pension Expense Components The faster, often immediate recognition of NPL changes will introduce much greater volatility in the reported expense This volatility is what disqualifies this new expense as a basis for determining a funding policy 142

143 #3-Proportioned Reports for Cost Sharing Plans Current standards are simple Pension expense is contractually required contribution Statement of NPL is the accumulated difference between the contractually required contribution and the actual contribution No ARC or NPO Unfunded actuarial accrued liability is not reported at all 143

144 Cost Sharing Treated Like A Single Employer Plan Recognize proportionate share of collective NPL and pension expense 144

145 Determining An Employers Proportionate Share - PE Collective pension expense Amortization of items based on average expected remaining service life of all employees Proportionate share of pension expense Multiply collective pension expense by the ratio of the employer s portion of the NPL to collective NPL 145

146 Cost Sharing Measurement Date Plan can determine its TPL and plan net position (market assets) at one date each year Probably the plan s valuation date Each employer s share can be as of that same date 146

147 Potential for Modified Audit Opinion Audit opinion is not an assessment of the government s underlying finances Not the fault of either the government or the auditor Auditing standards not available in time for implementation of the new standard Many of the records and calculations necessary for the auditor to opine on the net pension liability and related disclosures are maintained only by FRS. 147

148 Potential for Modified Audit Opinion The FRS s auditor and the government s auditor both have responsibility The local government s auditor is ultimately responsible for expressing an opinion on the financial statements and related notes disclosures The AICPA is currently proposing that the TMRS auditor be engaged to issue a Service Organization Control Report (SOC) that provides assurance that the appropriate internal controls were both in place and operating effectively during the reporting period. 148

149 #4-Expansion of Disclosure Information (Notes and RSI) Greatly expanded employer disclosures, including: Description of the plan and assumptions Policy for determining contributions Sensitivity analysis of the impact on NPL of a one percentage point increase and decrease in the discount rate Changes in the NPL for the past 10 years Development of long-term earnings assumption Annual rates of investment return for past 10 years (plan only) 149

150 Key Implications of New Standards Shift in focus from the long-term commitment to fund to a short-term snapshot of funded status based on market assets and a blended discount rate Reporting the NPL on the Statement of Net Position will add a large and unstable element to the net position 150

151 Key Implications Having two different cost amounts, funding and expense will be challenging Cost sharing plans will have new expense and liability reporting Both the timing and the scope of the new reporting will require greater coordination between the plan and employer, as well as between the actuary and the auditor Having the NPL on the Statement of Net Position could mean more involvement by the auditor in actuarial results 151

152 NOW WE SHALL ADD A BIT MORE SPECIFICITY

153 GASBS 67

154 GASBS 67 Plan Reporting GASB Statement No. 67, Financial Reporting for Pension Plans, replaces GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and GASB Statement No. 50, Pension Disclosures, for pension trusts and equivalent arrangements 154

155 GASBS 67 Plan Reporting Statement of Plan Net Position (end of period) Assets (e.g., contributions receivable) Deferred Outflows of Resources Liabilities (e.g., benefits due and payable to members) Deferred Inflows of Resources Net Position 155

156 GASBS 67 Plan Reporting Statement of Changes in Plan Net Position (over period) Additions (e.g., net investment income, contributions Deductions (e.g., benefits paid, administrative expenses) Net Increase (Decrease) in Plan Net Position 156

157 GASBS 67 Primary Disclosures Most Everything will come from the Actuary Descriptive Information (e.g., benefits provided to members, classes of members covered, etc.) Investment Information (e.g., plan investment policies, concentrations of investments over 5% of plan net assets, rates of return) Other Information (e.g., contributions, reserves, allocated insurance contracts, etc.) 157

158 GASBS 67 RSI Single-employer and cost-sharing pension plans are required to present in required supplementary information the following information for each of the 10 most recent fiscal years about employer and nonemployer contributing entity obligations for pensions provided through the pension plan Sources of changes in the net pension liability Information about the components of the net pension liability and related ratios, including the pension plan s fiduciary net position as a percentage of the total pension liability, and the net pension liability as a percentage of coveredemployee payroll 158

159 GASBS 68

160 GASBS 68 Employer Reporting GASB Statement No. 68, Accounting and Financial Reporting for Pensions, will replace GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers and GASB Statement No. 50 for employers that offer pension benefits through a pension trust or an equivalent arrangement 160

161 Changes GASB Statement No. 68 will significantly change how employers in all three types of defined benefit pension plans account for the cost of the pension benefits they offer to their employees. Conversely, the new guidance leaves essentially unchanged the existing accounting and financial reporting for employers that participate in defined contribution pension plans. 161

162 Single Employer and Agent Employer Plans Employer accounting and financial reporting are essentially the same for governments in single-employer plans and governments in agent multiple-employer plans. The balance of the slides relate to these plans until we get to cost-sharing plans We shall compare GASBS 27 and GASBS

163 Employer Liability GASB Statement No An employer now reports a liability only for the difference between its actuarially determined annual required contribution (ARC) and its actual contribution (net pension obligation - NPO). GASB Statement No. 68. An employer will have to report a net pension liability (NPL) for the difference between the present value of projected benefits for past service (total pension liability TPL) and restricted resources held in trust for the payment of benefits (plan net position - PNP). For example, if the employer s total pension liability was $100, and related plan net position amounted to $90, the employer would report net pension liability of $

164 Employer Expense GASB Statement No An employer now reports pension expense equal to the amount of the employer s annual required contribution, adjusted for the effects of any prior over or under funding of employer contributions. 164

165 Employer Expense GASB Statement No An employer s pension expense each year will need to incorporate all of the following (Thanks for the actuary): Annual service cost; Interest on the net pension liability; The full effect of any change in benefit terms; Projected earnings on plan investments Changes in related plan net position not resulting from investments; and Amortization of deferred outflows of resources and deferred inflows of resources. 165

166 Employer Expense Amortization of deferred outflows of resources and deferred inflows of resources Changes in economic and demographic assumptions; Differences between economic and demographic assumptions and actual experience; And differences between expected investment returns and actual investment returns. 166

167 Discount Rate The total pension liability represents the present value of projected benefits earned for past service. The calculation of present value requires the use of a discount rate. GASB Statement No Discounting now is based on the estimated long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments. 167