2015 Annual Governmental GAAP Update. Government Finance Officers Association November 5, 2015 & December 3, 2015

Transcription

1 2015 Annual Governmental GAAP Update Government Finance Officers Association November 5, 2015 & December 3,

2 Program Overview 2

3 Fair Value Measurement and Application (GASB 72) Definition of fair value Measuring fair value Application to investments Disclosure Fair value vs. acquisition value 3

4 Postemployment benefits Pensions not administered through trusts (GASB 73) Technical amendments for plans and employers (GASB 73) Other postemployment benefits OPEB (GASB 74 & 75) Employer implementation (GASB 68 & 71) Journal entries for first year Allocation to proprietary and fiduciary funds Covered payroll vs. covered-employee payroll Audit impact Funding impact Explaining the change 4

5 Other new standards The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GASB 76) Tax Abatement Disclosures (GASB 77) 5

6 Recent exposure drafts Accounting and Financial Reporting for Certain External Investment Pools (June 2015) Blending Requirements for Certain Component Units (June 2015) Accounting and Financial Reporting for Irrevocable Split-Interest Agreements (June 2015) Accounting and Financial Reporting for Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans (October 2015) 6

7 Forthcoming exposure drafts Financial Reporting for Fiduciary Responsibilities 4Q15 Asset Retirement Obligations 4Q15 Leases 1Q16 7

8 Other topics GASB Technical Plan Reexamination of the Financial Reporting Model Reporting deficiencies 8

9 Fair Value Measurement and Application GASB 72 (issued February 2015) 9

10 Background and content Motivation Private-sector changes and international changes Disclosure concerns raised by 2008/2009 credit crisis Alignment with GASB Concepts Statement No. 6, Measurement of Elements of Financial Statements Only affects items now reported at fair value Liabilities = certain amounts related to derivatives 10

11 Definition of fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Market transactions Perspective of one selling an asset (transferring a liability) vs. buying an asset (assuming a liability) Exit price vs. entry price 11

12 Market transactions (1/4) Issues Sale can take place in a variety of circumstances Factors specific to a government could affect price Resolution Fair value based on real or potential market transactions Fair value unaffected by factors irrelevant to market participants Circumstances characteristic of the seller rather than of the asset being sold 12

13 Market transactions (2/4) Multiple markets? Principal market Most advantageous market (in absence of a principal market) Transaction costs relevant? Determination of most advantageous market - Yes Amount reported - No Transportation costs transaction cost Relevant if location is a characteristic of the asset (commodities) 13

14 Market transactions (3/4) Nonfinancial assets? Starting point for assessment = government s current use Highest and best use considering what is: Physically possible (e.g., size and location of property) Legally permissible (e.g., current zoning rules) Financially feasible for potential buyers 14

15 Market transactions (4/4) Liabilities Amount to transfer the obligation to a third party Not the amount to settle with the counterparty Normally = fair value of corresponding asset 15

16 Measuring fair value (1/3) Three acceptable techniques Market approach Actual market transactions for identical or similar items Cost approach Current cost to replace the service capacity of an asset Takes into account obsolescence and physical deterioration Income approach Discounted future cash flows All three require inputs 16

17 Measuring fair value (2/3) Types of inputs Observable Independently verifiable Unobservable Example: amount based on internally generated data Goal Maximize use of observable inputs Minimize use of unobservable inputs 17

18 Measuring fair value (3/3) Hierarchy of input quality Level 1 Quoted prices (unadjusted) in active markets for identical items Level 2 All observable inputs excluding those that qualify for level 1 Level 3 Unobservable inputs 18

19 Application to investments (1/2) Generally applicable Same exceptions as exist today Pending changes for 2a7-like pools discussed later in connection with ED on Accounting and Financial Reporting for Certain External Investment Pools Equally applicable to governmental funds Use of net asset value (NAV) per share (or equivalent) permitted in absence of readily determinable fair value 19

20 Application to investments (2/2) Definition of an investment Security or other asset Held primarily for the purpose of income or profit; and Present service capacity based solely on its ability to generate cash or to be sold to generate cash Application (example) student loans Fail first criterion not profit-motivated Fail second criterion provide programmatic benefits Determination made just once (initially) 20

21 Disclosure (1/3) Level of detail and disaggregation Nature, characteristics, and risks of an asset/liability Level of the fair value hierarchy Type already specified in standards Objective or mission of the government Characteristics of the government Relative significance of assets and liabilities Availability of separately issued financial statements Line items on statement of net position Distinction Recurring fair value measurement (each year) Nonrecurring fair value measurement (specific events) 21

22 Disclosure (2/3) For both recurring and nonrecurring measurement items Fair value as of reporting date Level of inputs used (unless NAV per share) Valuation techniques Change in valuation techniques with significant impact and reason for change For nonrecurring measurement items Reason for measurement 22

23 Disclosure (3/3) Additional disclosure for NAV per share if: NAV per share calculated Fair value not readily determinable Measured at fair value during the period Disclosure objectives Nature and risks of the investments Whether sale at a different amount is probable 23

24 Fair value vs. acquisition value Term fair value previously sometimes used to describe entry (buy) price Donated capital assets and similar items (donated works of art and historical treasures) Capital assets generated in connection with service concession arrangements Terminology change Now acquisition value 24

25 Question 1 Fair value should be based on A. Exit price B. Entry price C. Normally A but sometimes B 25

26 Question 2 Transaction costs are A. Relevant to determining fair value B. Relevant to determining a government s most advantageous market for purposes of determining fair value C. Both A and B D. Neither A nor B 26

27 Question 3 A city owns a building that originally was constructed as a school, but which it currently uses as a warehouse. What should the city s starting point be for assessing the building s fair value? A. Use as a school building B. Use as a warehouse C. Either A or B D. Lower of A or B 27

28 Question 4 The fair value of a liability should be determined based on A. The amount necessary to pay off the liability (settlement amount) B. The amount necessary for a third-party to assume the liability C. Either A or B D. Higher of A or B 28

29 Question 5 Unobservable inputs may properly be classified as A. Level 2 inputs B. Level 3 inputs C. Both A and B 29

30 Question 6 Which of the following would qualify as investments? A. Timber rights associated with park lands B. Securities held as deposits for contractors C. Student loans D. All the above E. None of the above 30

31 Question 7 Which of the following statements is true regarding the valuation of donated capital assets? A. They should be reported at fair value, defined as an entry price for this purpose B. They should be reported at fair value, defined as an exit price for this purpose C. They should be reported at an amount equal to A, but not described as fair value 31

32 Postemployment benefits Pension issues for employers (GASB 68, 71, 73) OPEB (GASB 74-75) 32

33 Part 1 PENSIONS NOT ADMINISTERED THROUGH TRUSTS (GASB 73) 33

34 Scope of GASB pension standards Plans administered through trusts or equivalent arrangements Contributions are irrevocable Assets may be used only to provide pensions to plan members in accordance with plan terms Legally protected from creditors 34

35 Overview Analysis Pension arrangements not administered through a trust or equivalent arrangement Same objectives as other pension arrangements Only difference = no fiduciary net position (FNP) Conclusion Apply the provisions of GASB 67 and GASB 68 accordingly No netting of related assets against employer liability Total pension liability vs. net pension liability Use discount rate for an unfunded liability High-grade municipal rate 35

36 Treatment of assets Employers Single-employer plan Report as employer assets Multiple-employer plan Plans Report employer s proportionate share of accumulated resources as employer assets Report in an agency fund (like OPEB) 36

37 Part 2 TECHNICAL AMENDMENTS FOR PLANS AND EMPLOYERS (GASB 73) 37

38 Three changes 1. Notes to schedules of required supplementary information (RSI) 2. Payables to defined benefit (DB) pension plans 3. Revenue recognition for support of nonemployer contributing entities not in a special funding situation 38

39 1. Notes to schedules of RSI Original requirement Information about investment-related factors that significantly affect trends in the amounts reported Clarifying amendment Limited to those factors over which the pension plan or participating governments have influence Changes in investment policies? Yes Changes in market prices? No 39

40 2. Payables to DB pension plans (1/2) Separately financed specific liability Examples An increase in the total pension liability due to an individual employer joining a pension plan An increase in the total pension liability due to a change of benefit terms specific to an individual employer A contractual commitment for a nonemployer contributing entity to make a one-time contribution for purposes of reducing the net pension liability Not obligations associated with pooled obligation Even if separate payment terms 40

41 Payables to DB pension plans (2/2) Amendments Defines separately financed specific liability A specific contractual liability to a DB pension plan for a onetime assessment to an individual employer or nonemployer contributing entity Clarifies exclusion of payables for unpaid (legal, contractual, or statutory) financing obligations associated with the pooled portion of the total pension liability (even if separate payment terms) Provides revenue recognition guidance 41

42 3. Revenue support other than special funding situation Clarifying amendment Recognize revenue in the reporting period in which the contribution of the nonemployer contributing entity is reported as a change in the net pension liability (or collective net pension liability) 42

43 Effective date Plans not administered through trusts Fiscal year ending 6/30/17 Amendments to GASB 67 and GASB 68 Fiscal year ending 6/30/16 Earlier application encouraged in both cases 43

44 Part 3 OTHER POSTEMPLOYMENT BENEFITS OPEB (GASB 74 & GASB 75) 44

45 Background Economic substance of OPEB Employee compensation paid in a later period Substantively equivalent to pensions Treatment until now Parallel treatment for pensions and OPEB Compromised by new pension guidance New GASB OPEB standards Restore parallel treatment 45

46 Fundamental OPEB changes Employer liability Net employer liability vs. unfunded contributions Employer expense Recognition divorced from funding Cost-sharing plans Employer s proportionate share of total liability and expense 46

47 Other observations (1/2) Incorporates guidance on pensions not administered through a trust Retains requirement to consider an implicit rate subsidy as OPEB Preserves alternative measurement method for small employers and plans 47

48 Other observations (2/2) Broadened sensitivity disclosure +/- 1% in the discount rate +/- 1% in the health-care trend rate 48

49 Effective date Plans Fiscal year ending 6/30/17 Employers Fiscal year ending 6/30/18 49

50 Employer implementation Part 4 SAMPLE EMPLOYER JOURNAL 50 ENTRIES (GASB 68 & GASB 71)

51 Background The City sponsors a single defined benefit pension plan City fiscal year end = 9/30 Plan fiscal year end = 6/30 GASB 67 requires the plan to perform a valuation as of the plan s fiscal year end Because the plan performs an annual valuation, the simplest approach is to also use the valuation date as the measurement date The plan has elected not to record initial deferred outflows and deferred inflows of resources 51

52 Assumptions: contributions Total employer contributions For FYE 9/30/14 = $3,000,000 For FYE 9/30/15 = $3,100,000 Contributions made between plan and employer fiscal year ends* 6/30/14-9/30/14 = $750,000 ($3M/4) 6/30/15-9/30/15 = $775,000 ($3.1M/4) *Need to defer to synchronize with measurement year 52

53 Assumptions: change in plan terms Measurement year ending 6/30/15 Loss due to change in plan terms = $600,000 Immediate recognition required 53

54 Assumptions: actuarial gains/losses Measurement year ending 6/30/15 Gain due to investment return in excess of assumption = $500,000 Amortization required over five years ($500,000/5 years = $100,000/year) Other losses (actual vs. assumption) = $720,000 Amortization required over average estimated remaining service life which actuary determined as 6 years ($720,000/6 years = $120,000/year) 54

55 Assumptions: balances Net Pension Obligation (NPO) per GASB 27 9/30/15 = $1,100,000 Net Pension Liability (NPL) per GASB 68 6/30/14 = $4,000,000 6/30/15 = $5,000,000 55

56 Prior period adjustments (1/3) Eliminate NPO (GASB 27) Net pension obligation $1,100,000 Net position $1,100,000 56

57 Prior period adjustments (2/3) Record beginning NPL (GASB 68) Net position (starting) $4,000,000 Net pension liability $4,000,000 57

58 Prior period adjustments (3/3) Record deferred outflow for contributions made subsequent to the measurement date (GASB 71) Deferred outflow - post measurement date contributions $750,000 Net position $750,000 58

59 Preparing 2015 entry (1/3) A change in plan terms is recognized in the period and reflected in the final NPO No effect on journal entry Gains and losses on investments are amortized over 5 years $500,000 total amount to be amortized Less: 100,000 amortized in current year (in NPL) $400,000 deferred inflow of resources 59

60 Preparing 2015 entry (2/3) Other gains and losses amortized over average remaining service life (6 years) $720,000 total amount to be amortize Less: 120,000 amortized in current year (NPL) $600,000 deferred outflow of resources 60

61 Preparing 2015 entry (3/3) Deferred outflow for subsequent contributions $775,000 deferred outflow for 2015 amount Less: 750,000 recognition of 2014 deferred amount $ 25,000 net increase in deferred outflow Expressed another way, contributions made during the measurement year 7/1/14 to 6/30/15 = $3,075,000 $750,000 x 1 = $ 750,000 $775,000 x 3 = $ 2,325,000 $ 3,075,000 61

62 Entry to Record the FY 2015 Amounts Pension expense $3,875,000 Deferred outflow subsequent contributions 25,000 Deferred outflow assumption losses 600,000 Deferred inflow -- excess investment return $ 400,000 Net pension liability increase from prior year 1,000,000 Contributions 3,100,000 62

63 Reconciliation of Pension Expense Change in the Net Pension Liability $1,000,000 Current year contributions 3,100,000 Flow through of Deferred Contributions 750,000 Deferral for subsequent contributions (775,000) Deferred Outflow -Actuarial Losses (600,000) Deferred Inflow- Excess Investment Earnings 400,000 Pension Expense $3,875,000 63

64 Pension Amounts on Statement of Net Position - 9/30/15 Deferred Outflow -- Subsequent contributions $775,000 Deferred Outflow -- Actuarial Loss 600,000 Deferred Inflow -- Investment Earnings (400,000) Net Pension Liability (5,000,000) 64

65 Looking to 2016 Remaining service life will vary from year to year. GASB 68 requires layered amortization Each year s amortization schedule remains intact until that year s deferral is completely amortized. Example: current year amounts amortized in 2016 Deferred inflow excess earnings $100,000 (credit to pension expense) Deferred outflow difference: actual vs. assumptions $120,000 (debit to pension expense) Deferred outflows/inflows normally may not be netted Exception = deferrals related to investment earnings Aggregation across years is permitted 65

66 Employer implementation Part 5 ALLOCATION OF PENSION/OPEB TO PROPRIETARY AND FIDUCIARY FUNDS 66

67 Items to be allocated Net pension liability (or asset) Deferred outflows/inflows of resources arising from changes in actuarial assumptions Deferred outflows/inflows arising from differences between actuarial assumptions and actual outcomes Deferred outflows due to employer contributions made subsequent to the net pension liability s measurement date and prior to the entity s reporting date 67

68 Authoritative guidance National Council on Governmental Accounting s (NCGA) Statement 1, Governmental Accounting and Financial Reporting Principles, paragraph 42: Fund Long-Term Liabilities. Bonds, notes, and other longterm liabilities (e.g., for capital leases, pensions, judgments, and similar commitments) directly related to and expected to be paid from proprietary funds and Trust Funds should be included in the accounts of such funds. These are specific fund liabilities, even though the full faith and credit of the governmental unit may be pledged as further assurance that the liabilities will be paid. Too, such liabilities may constitute a mortgage or lien on specific fund properties or receivables. 68

69 Criteria Liability relates to the activity reported in the fund and The fund is reasonably expected to use its own resources to liquidate the liability 69

70 Practical application One option: treat as though participants in an internal cost-sharing defined benefit plan Employers that participate in a defined benefit cost-sharing plan report their proportionate share of the total pensionrelated amounts for all participating employers, based on their proportionate share of total employer contributions Illustration Implementing GASB Statement No. 68, Accounting and Financial Reporting for Pensions (Exhibit A) California Committee on Municipal Accounting Other options acceptable Disclose in notes 70

71 Employer implementation Part 6 COVERED VS. COVERED-EMPLOYEE PAYROLL (GASB 67 & GASB 68) 71

72 Definitions Covered payroll ( pensionable payroll) All elements included in compensation paid to active employees on which contributions to a pension plan are based. For example, if pension contributions are calculated on base pay, including overtime, covered payroll includes overtime compensation. Covered-employee payroll Total payroll for covered employees, including nonpensionable amounts 72

73 Presentation in RSI Point of comparison (denominator) Covered payroll ( pensionable payroll) Unfunded actuarial liability (GASB 25 & 27) Covered-employee payroll (total payroll for covered employees) Net pension liability (GASB 67 & 68) 73

74 Impact on amount (example) Assumptions $27 million salary paid $3 million overtime paid Overtime pay not a factor in calculating employer contribution Covered payroll (GASB 25 & 27) $27 million of pensionable portion Covered-employee payroll (GASB 67 & 68) $30 million total payroll for covered employees 74

75 Challenge Pension plans not necessarily able to determine total payroll for covered employees if different from pensionable portion Employers will need to provide both amounts to plan 75

76 Employer implementation Part 7 AUDIT IMPACT 76

77 Agent plans preliminaries Responsibility Ultimate audit responsibility Employer auditor Responsibility for reviewing the reasonableness of actuarial assumptions Employer Employer auditor Audit work Plan auditor must provide information/perform audit procedures on information maintained by the plan Employer auditor must review census data received from the plan, based on employer data regarding current employees 77

78 Agent plans available data Fiduciary net position (FNP) Display at plan level Insufficient audit coverage for individual employers Total pension liability (TPL) Neither Display nor disclosure Not for system as a whole Not for individual participating employers 78

79 Agent plans solution for FNP Plan Prepares schedule of changes in FNP by employer Plan auditor Utilize SOC 1 Type 2 to support allocations, or Substantive testing of allocations among employers 79

80 Agent plan solution for TPL Three responsible parties A. Actuary B. Plan auditor C. Employer auditor 80

81 Agent plans TPL actuary A. Report for each participating employer Total pension liability Deferred inflow/outflow of resources by type and year Pension expense Discount rate calculation 81

82 Agent plans TPL auditors B. Plan auditor Provides support for census data SOC 1 Type 2 report for applicable period, or Attest engagement certifying pension data for each employer C. Employer auditor Audits census data for active employees, and Confirms census data used by actuary 82

83 Cost and timing factors SOC 1 Type 2 report would appear most practical approach for plan auditors Must be performed during the period to which it applies Alternatives are available, but could result in Greater effort Higher costs Potential delay in issuing financial statements 83

84 Cost-sharing plans available data Fiduciary net position (FNP) Display at plan level Insufficient audit coverage for individual employers Total pension liability (TPL) Disclosure for system as a whole Insufficient audit coverage for individual employers 84

85 Cost-sharing plans solution Information on the employer s proportionate share of total for all employers (audited by plan auditor) Supplemental schedule of employer allocations, or Schedule of plan pension amounts by employer 85

86 Supplemental schedule of employer allocations Actual Employer Employer Contributions A 72,000 B 58,000 C 36,000 D 8,000 E 12,400 F 16,000 G 5,000 H 18,500 I 2,000 Total 227,900 Employer Allocation Percentage $ 32% $ 25% $ 16% $ 4% $ 5% $ 7% $ 2% $ 8% $ 1% $ 100% 86

87 Employer implementation Part 8 FUNDING IMPACT 87

88 Need for funding guidelines Close historical link between Accounting and financial reporting for pensions Funding (budgeting) pensions Same actuarial method used for both GASB 68 breaks this link Single actuarial method now required for accounting and financial reporting purposes, regardless of funding That method not well adapted to funding Resulting concerns GAAP information no longer directly useful in assessing the adequacy of funding Loss of GASB-mandated parameters on application of actuarial methods 88

89 Development of common guidelines for sustainable funding Big 7 public interest groups National Governors Association National Conference of State Legislatures Council of State Governments National Association of Counties National League of Cities U.S. Conference of Mayors International City/County Management Association Government Finance Officers Association National Association of State Auditors, Comptrollers, and Treasurers National Association of State Retirement Administrators National Council on Teacher Retirement 89

90 Essential elements Use actuarially determined contributions (ADC) as a basis for actual employer contributions Guidelines for making principled decisions regarding the calculation of the ADC Actuarial cost method Asset smoothing Amortization Provide information needed to assess funding progress 90

91 GFOA best practice Adopts and adapts funding guidelines Specific recommendations on how to apply the guidelines Recognition that a transition period may be necessary 91

92 Employer implementation Part 9 EXPLAINING THE CHANGE 92

93 Accounting change vs. event The underlying factual situation has not changed Should not be a surprise to bond rating agencies Similar information previously disclosed in notes Actuarial value of assets (net fiduciary position) Actuarial accrued liability (total pension liability) Unfunded actuarial accrued liability (net pension liability) 93

94 Response to NPL Different liabilities are funded differently Vacation leave Key consideration with postemployment benefits = disciplined, systematic funding over time Assured by using actuarially determined contributions Selection of appropriate actuarial method and assumptions 94

95 Plan contributions vs. employer expense Difference What something costs (expense) How we pay for it (contributions) 95

96 Question 8 If a pension plan is not administered through a trust or equivalent arrangement, the employer should report A. Accumulated assets B. Total pension liability C. Net pension liability D. All the above E. Both A and B 96

97 Question 9 Which of the following should be included in the notes to RSI for pensions? A. Change in investment policies B. Change in market prices C. Both A and B D. None of the above 97

98 Question 10 Any employer payable to a multiple-employer pension plan with employer-specific payment terms qualifies as a separately financed specific liability. A. True B. False 98

99 Question 11 Which of the following will remain true under GASB 75? A. Employers sometimes have to recognize OPEB expense for retirees who pay the full amount of their healthcare premium B. Some employers may have the option of using an alternative measurement method that eliminates the need to engage the services of a professional actuary C. Both A and B D. None of the above 99

100 Question 12 Which of the following statements best describes the relationship between sensitivity disclosure for pensions and sensitivity disclosure for OPEB? A. There is more required sensitivity disclosure for OPEB than for pensions B. There is less required sensitivity disclosure for OPEB than for pensions C. There is no difference in required sensitivity disclosure for OPEB and for pensions 100

101 Question 13 Which of the following statements is true? A. Pension expense must always be allocated to enterprise funds B. Pension expense must sometimes be allocated to enterprise funds C. Pension expense must never be allocated to enterprise funds 101

102 Question 14 Which of the following commonly is described as pensionable payroll? A. Covered payroll B. Covered-employee payroll 102

103 Question 15 Which of the following information should be available at the plan level for an agent plan? A. Fiduciary net position B. Total pension liability C. Both A and B D. None of the above 103

104 Question 16 Which of the following information should be available at the plan level for a cost-sharing plan? A. Fiduciary net position B. Total pension liability C. Both A and B D. None of the above 104

105 Question 17 Differences between accounting and financial reporting and funding should be minimal if the entry age (level percentage of pay) actuarial cost method is used for both. A. True B. False 105

106 Other new standards GAAP Hierarchy (GASB 76) Tax Abatement Disclosures (GASB 77) 106

107 GASB 76 THE HIERARCHY OF GAAP FOR STATE AND LOCAL GOVERNMENTS 107

108 Scope Changes chain of command of sources of authoritative guidance Current hierarchy Four levels of authoritative sources of GAAP Other accounting literature New hierarchy Two levels of authoritative sources of GAAP Highest level requires GASB approval Second level requires GASB clearance Nonauthoritative accounting literature 108

109 New GAAP hierarchy AUTHORITATIVE GUIDANCE Category A Category B GASB Statements (including previously issued interpretations) GASB Technical Bulletins (TB) GASB Implementation Guides (IG) Applicable AICPA literature cleared by GASB 109

110 Key changes No future GASB Interpretations Role to be filled by statements/technical bulletins Implementation Guides now authoritative Need for due process Limited to clarifying, explaining, or elaborating Widely recognized and prevalent practice no longer authoritative 110

111 Citing authoritative guidance Equal authority GASB Original Pronouncements GASB Codification of Governmental Accounting and Financial Reporting Standards 111

112 Nonauthoritative guidance GASB Concepts Statements Literature of other standard-setting bodies Financial Accounting Standards Board Federal Accounting Standards Advisory Board International Public Sector Accounting Standards Board International Accounting Standards Board Relevant AICPA guidance not cleared by the GASB Widely recognized and prevalent practices Literature of other professional associations Literature of regulatory agencies Accounting textbooks, handbooks, and articles 112

113 Application No specific authoritative guidance? Consider authoritative guidance for similar transactions and events Unless application by analogy prohibited How to evaluate nonauthoritative sources? Consistency with GASB Concepts Statements Relevance to the particular circumstances Specificity of the literature General recognition of the issuer/author as an authority 113

114 Impact on new Implementation Guide Material eliminated from this new edition Verbatim excerpts or paraphrases of authoritative standards Definitions of terms provided in authoritative standards Explanation of the reasoning behind authoritative standards Discussions of the applicability of nonauthoritative accounting literature All illustrative material consigned to nonauthoritative appendices No new questions added this year 114

115 GASB 77 TAX ABATEMENT DISCLOSURES 115

116 Tax expenditures Opportunity cost of foregoing the collection of taxes to which otherwise entitled Subcategories Tax exemptions Tax deductions Tax abatements 116

117 Definition: tax abatements A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments 117

118 Essential characteristics Type of revenue A tax (not a fee or charge) Existence of an agreement Identifiable agreement with a specific individual or entity Government promises to reduce the counterparty s tax liability The counterparty promises to take certain actions Must precede any reduction in taxes Purpose Does not have to be in writing Does not have to be legally enforceable Promote economic development or otherwise benefit the government or its citizens 118

119 Two types of tax abatements Agreements of the government itself Agreements of others that reduce the government s revenue 119

120 General presentation Distinguish: Government s own agreements Agreements of others that reduce the governments revenue Individual display must be based on a quantitative threshold Different thresholds may be used for government s own agreements and agreements of others Required only as long as abatements are outstanding Information on a government s associated commitments not necessary once fulfilled Governments are not required to present information if they are legally prohibited from doing so (although that fact must be disclosed) 120

121 Specific disclosures Agreements of the government Organized by major tax abatement program, even for abatements that are disclosed individually Agreements of others that reduce the government s revenue Organized by government and specific tax abated, even for abatements that are disclosed individually 121

122 Disclosure: agreements of the government (1/2) A brief description that includes: Names and purposes of tax abatement programs Specific taxes being abated Authority for entering into the tax abatement agreement Eligibility criteria for recipients Abatement mechanism How taxes are reduced (reduction of tax liability, rebate, reduction of assessed value) How the amount is determined (specific dollar amount or percentage of taxes owed) Provisions for recapturing abated taxes ( claw-back provisions) and the conditions for recapture Type of commitments made by recipients 122

123 Disclosure: agreements of the government (2/2) Gross dollar amount of revenue reduction in period (accrual basis) If amounts received/receivable from other governments Names Authority Dollar amount received/receivable Commitments in addition to tax reduction (until fulfilled) Types Most significant individual commitments Quantitative threshold for disclosure by individual agreement Description of general nature of information omitted because of legal prohibition and specific source of latter 123

124 Disclosure: agreements of other governments A brief description that includes: Names of governments Specific taxes being abated Gross dollar amount of revenue reduction in period (accrual basis) If amounts received/receivable from other governments Names Authority Dollar amount received/receivable Quantitative threshold for disclosure by individual agreement Description of general nature of information omitted because of legal prohibition and specific source of latter 124

125 Disclosure: discretely presented component units Essential to fair presentation? Yes? disclose like an agreement of the government No? disclose like an agreement of another government 125

126 Effective date Implementation required for fiscal year ending 12/31/16 Earlier application encouraged 126

127 Question 18 Which of the following statements best describes the difference between Category A guidance and Category B guidance on the new GAAP Hierarchy? A. Category A guidance is authoritative, whereas Category B guidance is not B. Category A guidance has to be approved by the GASB, whereas Category B guidance only needs to be cleared C. Both A and B 127

128 Question 19 Which of the following statements is true under the new GAAP Hierarchy? A. GASB Implementation Guides have become more authoritative B. GASB Implication Guides will be subject to more due process C. Both A and B 128

129 Question 20 In the absence of specific authoritative guidance, financial statement preparers should first consider applying authoritative guidance for similar transactions and events by analogy (unless a standard prohibits them from doing so). A. True B. False 129

130 Question 21 Which of the following has greater authoritative standing for purposes of citation? A. Original Pronouncements B. Codification of Governmental Accounting and Financial Reporting Standards C. Neither A nor B 130

131 Question 22 Which of the following would qualify as a tax abatement? A. A property tax exemption for elderly disabled homeowners B. An income tax deduction for qualifying energy-saving home improvements C. Reduction in future service fees for businesses that agree to relocate to the community D. All of the above E. None of the above 131

132 Question 23 Which of the following statements is true regarding the level of detail needed for tax abatement disclosures? A. Information on a government s own agreements should be reported separately from information on the agreements of other governments that reduce its revenue B. A quantitative threshold should be used to ensure consistent reporting for individual agreements C. The same quantitative threshold for presentation by individual agreement should be used for both the government s own agreements and the agreements of other governments that reduce its revenue D. All of the above E. Both A and B 132

133 Question 24 The requirement to present tax abatement disclosures by major tax abatement program (for a government s own agreements) or by government and specific tax abated (for agreements of other governments that reduce its revenue) also applies to agreements reported individually in both categories. A. True B. False 133

134 Question 25 Governments that are not legally permitted to disclose certain information regarding tax abatements are not required to do so to comply with GAAP. A. True B. False 134

135 Question 26 How should tax abatement agreements of discretely presented component units be treated? A. As agreements of the government itself B. As agreements of another government that reduce the government s revenue C. Either A or B D. None of the above 135

136 Accounting and Financial Reporting for Certain External Investment Pools Blending Requirements for Certain Component Units Accounting and Financial Reporting for Irrevocable Split-Interest Agreements Accounting and Financial Reporting for Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans RECENT EXPOSURE DRAFTS 136

137 Exposure draft June 2015 [Final statement scheduled for 4Q15] ACCOUNTING AND FINANCIAL REPORTING FOR CERTAIN EXTERNAL INVESTMENT POOLS 137

138 Background Amortized cost would be expected to approximate fair value for money market funds Nature of money market investments limits deviation Consequently: Such pools have been permitted to report all of their investments at amortized cost Participants in such pools have been permitted to report their position based on share value prices that reflect amortized cost Until now, SEC rule 2a7 has provided the criteria for defining qualifying pools Recent changes make it impractical to continue to rely on SEC rule 2a7 138

139 Objective GASB proposes to replace 2a7 criteria with its own criteria for pools that operate like money market funds 139

140 Nature of exception Use of amortized cost remains purely optional Use of fair value always permitted Once a pool has elected to use fair value, it cannot subsequently reverse that election 140

141 Criteria for being permitted to report at amortized cost Stable net asset value (NAV) per share Additional requirements A. Meets portfolio maturity requirements B. Meets portfolio quality requirements C. Meets portfolio diversification requirements D. Meets portfolio liquidity requirements E. Meets shadow price requirements 141

142 A. Maturity requirements Remaining maturity 397 days Weighted average maturity 60 days Takes into account maturity shortening features Weighted average life 120 days Ignores maturity shortening features 142

143 B. Quality requirements Denominated in U.S. dollars Highest credit rating category at acquisition 143

144 C. Diversification requirements Single issuer 5% total assets Not applicable to U.S. government securities 144

145 D. Liquidity requirements (1/2) Definitions Illiquid investments Cannot be sold or disposed of in the ordinary course of operations at amortized cost within 7 calendar days Daily liquid assets Cash and deposits Direct U.S. government obligations Securities that mature within one business day Weekly liquid assets Cash and deposits Direct U.S. government obligations U.S. government agency or instrumentality securities issued at a discount, no interest payments and maturity 60 days Securities that mature within five business days 145

146 Liquidity requirements (2/2) Acquisition of illiquid security Liquid must remain 95% total assets Acquisition of any security Daily liquid must remain 10% total assets Weekly liquid must remain 30% total assets 146

147 E. Shadow price requirements Definition of shadow price NAV per share calculated using total investments measured at fair value at the calculation date Calculate at least monthly Earliest 5 business days prior to end of month Latest end of month Deviation 0.5% price/share at amortized cost 147

148 Current period noncompliance Significant noncompliance with any criterion: Disqualified from using amortized cost for that period May still report short-term debt investments with remaining maturities at reporting date 90 days at amortized cost Significant = professional judgment Consider whether Noncompliance was promptly identified Noncompliance was due to factors exclusively outside the control of the external investment pool s management Noncompliance was an isolated incident Necessary corrective or remedial action was promptly taken 148

149 Previous noncompliance Significant noncompliance with any of the criteria during a previous reporting period? Still qualifies for reporting at amortized cost in current period if previous noncompliance due to exceptional circumstances 149

150 Disclosure requirements Pools Disclosure already required for fair value measurement per GASB 31 and GASB 72 Any limitations or restrictions on participant withdrawals Notice periods Maximum transaction amounts Pool s authority to impose liquidity fees or redemption gates Participants Any limitations or restrictions on withdrawals Notice periods Maximum transaction amounts Pool s authority to impose liquidity fees or redemption gates 150

151 Effective date Generally FYE 6/30/16 Additional 6 months (certain credit risk requirements) 151

152 Exposure draft June 2015 [Final statement scheduled for 1Q16] BLENDING REQUIREMENTS FOR 152 CERTAIN COMPONENT UNITS

153 Background Situation Desire to increase services or spin off operations Legally separate entities that are component units Governing bodies comprise Representatives of the community Primary government as sole corporate member Typically do not now qualify for blending Not the same board Services not (almost) exclusively provided to government Primary government not responsible for all debt 153

154 Challenge and solution Theory Blending should be used if a component unit functions essentially as part of the government Solution Establish an additional criterion for blending Unit incorporated as not-for-profit corporation (but not included based on GASB 39), and Primary government is sole corporate member Effective date Start fiscal year ending 6/30/17 Earlier application encouraged 154

155 Exposure draft June 2015 [Final statement scheduled for 1Q16] ACCOUNTING AND FINANCIAL REPORTING FOR IRREVOCABLE SPLIT-INTEREST AGREEMENTS 155

156 Background (1/2) Irrevocable split-interest agreements Donor resources conveyed to intermediary Government Other beneficiary For unconditional benefit of both Government Other(s) Terms based on Specific number of years (period-certain term) Lifetime (life-contingent term) Combination Significant for universities and hospitals 156

157 Background (2/2) Lead interest Access to resources during term of agreement Annuity Percentage of fair value (unitrust) Remainder interest Access to resources at termination of agreement 157

158 Government as intermediary (1/5) Timing of recognition Agreement executed and Assets received Elements recognized Assets for donated resources Liability to third party (= split interest) Deferred inflow of resources (= government s share) 158

159 Government as intermediary (2/5) Measurement of assets Dependent on use (investment vs. capital asset) Regular recognition rules apply Measurement of liability/deferred inflow Lead interest = settlement amount for payment stream Use established valuation technique Consider Specific provisions and underlying assumptions Estimated return on assets Discount rate (if reported at present value) Mortality rate (if life-contingent) Adjust only for mortality (if life-contingent) Remainder interest = balance 159

160 Government as intermediary (3/5) Application: government as remainder interest beneficiary Liability to beneficiary of the lead interest Calculated at settlement amount Adjusted only for mortality Reduced by subsequent payments to the beneficiary not attributable to interest expense (if the obligation is reported at present value) Deferred inflow of resources for the government s remainder interest Recognized as revenue at the term of the agreement 160

161 Government as intermediary (4/5) Application: government as lead interest beneficiary Deferred inflow of resources for the government s lead interest Calculated at settlement amount Adjusted only for mortality Reduced by subsequent payments to the beneficiary not attributable to interest (if the deferred inflow is reported at present value) Liability to the beneficiary of the remainder interest Difference between asset and deferred inflow of resources for government s lead interest 161

162 Government as intermediary (5/5) Life interests in real estate Government = remainder interest Asset recognized at time of donation Capital asset Investment Liability obligation to sacrifice financial resources Insurance, maintenance, repairs (reduced as fulfilled) Deferred inflows of resources (2 separate items) Remainder interest Recognized as revenue at term of the agreement Donor s ongoing right to use property Present value of estimated rent payments based on actual life expectancy (no subsequent adjustments) Amortized as revenue over term of the agreement 162

163 Third party as intermediary (1/2) Criteria for recognizing deferred inflow Government aware of agreement Measurable Government specified by name as beneficiary in legal document Unconditional beneficial interest Agreement irrevocable Intermediary without unilateral power to redirect the use of the resources to another beneficiary (variance power) Intermediary not under control of donor Intermediary s approval not required for assignment of beneficial interest Actual attempt to assign beneficial interest would not invalidate that interest and thereby terminate the agreement 163

164 Third party as intermediary (2/2) Asset recognized at fair value of government s beneficial interest Lead interest = deferred inflow reduced by periodic payments Remainder interest = deferred inflow eliminated at the term of the agreement 164

165 Effective date Fiscal year ending 12/31/17 Earlier application encouraged 165

166 Exposure draft - October 2015 ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS PROVIDED THROUGH CERTAIN MULTIPLE-EMPLOYER DEFINED BENEFIT PENSION PLANS 166

167 Issue GASB 68 covers all employer pension benefits administered through a trust or equivalent arrangement Some multiple-employer plans that are used to provide benefits to government employees are not themselves state or local government plans Taft-Hartley plans and similar arrangements It may be difficult to obtain the necessary information to comply with GASB 68 if the government itself (or some combination of governments) is not the predominant employer Governments typically are only a small subset of all participating employers 167

168 Solution Exclude qualifying plans from the scope of GASB 68 Mandate treatment similar to that used for employers participating in cost-sharing plans prior to GASB 68 Report required employer contributions related to the period as pension expense/expenditure Report liability for deficiencies in required employer contributions 168

169 Criteria for exemption Cost-sharing defined benefit pension plan Not a state or local government pension plan Serves nongovernmental employees Governments are not predominant 169

170 Note disclosure (1/2) Identification Name of the pension plan Entity that administers Cost-sharing plan meeting criteria Whether publicly available financial report and how to obtain Brief description of benefit terms Number of employees covered Types of benefits provided Authority for establishing/amending 170

171 Note disclosure (2/2) Contribution requirements Basis for determining employer contributions Authority for establishing/amending Required contribution rates for employer and employees Employer s required contributions in dollars Expiration date(s) of collective-bargaining agreement(s) requiring contributions Minimum contributions required for future periods by the collective-bargaining agreement(s), statutory obligations, or other contractual obligations Withdrawal provisions Balance of payables resulting from unpaid contributions 171

172 Required supplementary information (RSI) 10-year schedule of employer s required contributions Notes: information about factors that significantly affect trends in the amounts reported 172

173 Effective date Fiscal year ending 12/31/16 173

174 Question 27 Investments now reported at amortized cost by 2a7-like pools and their participants will likely be reported at fair value in the future. A. True B. False 174

175 Question 28 The calculation of which of the following ignores shortening features? A. Weighted average maturity B. Weighted average life C. Both A and B D. None of the above 175

176 Question 29 Qualifying pools that initially elect to report investments at amortized cost, rather than fair value, will be precluded from later changing to fair value reporting. A. True B. False 176

177 Question 30 Which of the following would permanently preclude an investment pool from using amortized cost to value of investments? A. Significant noncompliance with portfolio requirements in the current period B. Significant noncompliance with portfolio requirements in the previous period C. Voluntary use of fair value reporting in previous period D. All of the above E. None of the above 177

178 Question 31 The GASB plans to expand the criteria for blending to encompass not-for-profit entities for which the primary government functions as the sole corporate member. A. True B. False 178

179 Question 32 When should an irrevocable split-interest agreement be recognized by a government that is functioning as the intermediary? A. When the agreement is executed B. When the assets are received C. Both A and B 179

180 Question 33 When does the government recognize revenue if it is a remainder interest beneficiary? A. Immediately B. Over the life of the agreement C. At the term of the agreement 180

181 Question 34 Sometimes a government in a split-interest agreement may need to recognize two separate deferred inflows of resources. A. True B. False 181

182 Question 35 When a third-party functions as the intermediary for a split-interest agreement, the government should recognize its beneficial interest as soon as it becomes aware of the agreement. A. True B. False 182

183 Question 36 How should a governmental employer that participates in a Taft-Hartley plan in which governmental employers are not predominant recognize pension expense? A. Required employer contributions made during the period B. Required employer contributions related to the period C. Proportionate share of total contributions by participating employers 183

184 Financial Reporting for Fiduciary Responsibilities Asset Retirement Obligations Leases FORTHCOMING EXPOSURE 184 DRAFTS

185 Forthcoming GASB ED (scheduled for 4Q15) FINANCIAL REPORTING FOR FIDUCIARY RESPONSIBILITIES 185