Governmental Accounting Update. ACI-NA Finance Committee Meeting. Business of Airports Conference. April 20, 2015

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1 Governmental Accounting Update ACI-NA Finance Committee Meeting Business of Airports Conference April 20, 2015 Daniel P. Miller, CPA Principal Crosslin & Associates, PLLC Nashville, Tennessee

2 Governmental Accounting Update Agenda: GASB Exposure Drafts Postemployment Benefits Other Than Pensions (OPEB) GASB Preliminary Views Leases OMB Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards 1

3 GASB Exposure Drafts - OPEB In May 2014, the GASB Issued two Exposure Drafts relating to accounting and financial reporting for OPEB obligations GASB explains that it is issuing the exposure drafts and related proposed: 1) To improve the usefulness of information about OPEB and for making decisions and assessing accountability of government with respect to the obligations 2) To shift the focus to EARNING of OPEB benefits rather than PAYING OPEB benefits OPEB is a form of deferred compensation for employees. Although they do not receive the benefit until their service ends, employees have earned benefits currently Governments have currently incurred the obligation to pay benefits despite the fact that payment does not occur until the future 2

4 GASB Exposure Drafts - OPEB The first draft proposes a Statement that impacts PLAN reporting and would replace GASB Statement No. 43. The proposed Statement: Would be applicable whether the OPEB plan issues a stand alone financial statement or is included as a fiduciary / trust fund of a government Would require similar treatment for OPEB plans as GASB 67 did for pension plans The second draft impacts EMPLOYER reporting and would replace GASB Statement No. 45. This exposure draft proposes a Statement that: Would make many of the same requirements of GASB 68 (pension plans) applicable for OPEB plans 3

5 GASB Exposure Drafts - OPEB The effective dates proposed in the exposure drafts are: Plan Reporting: Fiscal years beginning after December 15, 2015 (calendar year 2016, fiscal year 2017) Employer Reporting: Fiscal years beginning after December 15, 2016 (calendar year 2017, fiscal year 2018) The effective dates on the Project Page of the GASB website are: Plan Reporting: Fiscal years beginning after June 15, 2016 (calendar year 2017; June fiscal year = June 30, 2017) Employer Reporting: Fiscal years beginning after June 15, 2017 (calendar year 2018; June fiscal year = June 30, 2018) Earlier application is encouraged 4

6 GASB Exposure Drafts - OPEB Plan Reporting: The proposed Statement addresses plans administered through a trust and those not within a trust Similar to GASB 67/68, to qualify as an OPEB trust, the trust would need to meet the following: Contributions to the trust are irrevocable OPEB assets are dedicated to providing OPEB benefits to plan members Assets are protected from creditors 5

7 GASB Exposure Drafts - OPEB Plans administered through a Trust: Similar to GASB 67, the proposed Statement would require two financial statements and amended disclosures: Statement of fiduciary net position Statement of changes in fiduciary net position New, significant disclosures Plans not administered through a Trust: Any assets accumulated for OPEB purposes, but not held in a trust meeting certain criteria, would be reported as assets of the EMPLOYER, not the plan Therefore separate plan reporting would be reporting only the OPEB liabilities 6

8 GASB Exposure Drafts - OPEB Employer Accounting and Reporting: The unfunded OPEB liability will become a balance sheet item rather than a disclosure item The calculation of the OPEB liability is very similar to the Net Pension Liability under GASB 68. Governments will be bringing both their full pension and OPEB liabilities onto the balance sheet within a 3 year period 2015 to In many cases these are tens of millions to billions of dollars. The overall impact of the OPEB standards is likely to be much more significant than the pension standards. Many governments have set aside assets for pensions, but have not for OPEB. 7

9 GASB Exposure Drafts - OPEB For governments which administer OPEB through a TRUST, the net OPEB obligation recorded would be as follows: Total OPEB liability, less the OPEB plans fiduciary net position = Net OPEB obligation recorded (again, this treatment is very similar to GASB 68 for Pensions) For governments without an OPEB trust, the recorded OPEB liability would be total OPEB liability (as determined by the actuary). 8

10 GASB Exposure Drafts - OPEB Proposed changes to the Actuarial Valuations: Entry Age Normal accrued liability method required, which removes the option of up to six different methods in current practice o All OPEB obligations will be measured using the same actuarial method Discount rate for a plan administered through a TRUST is a bifurcated rate equal to the 1.) expected long term rate of return on investments provided that the investments are expected to be sufficient 2.) tax exempt 20 year AA or higher rated municipal bond rate o Most pension plans have assets; however, many OPEB plans do not. Accordingly, the discount rates used for OPEB plans will generally be lower than for Pension plans, yielding higher liability amounts. 9

11 GASB Exposure Drafts - OPEB The discount rate for plans WITHOUT a trust is the tax exempt 20 year AA or higher rated municipal bond rate Actuarial valuations must be performed at least every two years (current standards allow three years in some instances) The exposure drafts allow for the Alternative Measurement Method ( AMM ) instead of an actuarial valuation to determine the OPEB liability for OPEB plans of 100 of fewer members Ad hoc benefits, including COLAs are included in the actuarial projections of OPEB liabilities if such ad hoc adjustments are substantively automatic. (Accordingly, conversations with actuaries and plan board members are warranted) 10

12 GASB Exposure Drafts - OPEB Note Disclosures (Single and Agent Employers): Types of benefits provided by the plan Number and classes of employees covered by the benefit terms Sources and changes of the net OPEB liability Significant assumptions used to calculate the total OPEB liability: o Inflation o Healthcare cost trend rate o Ad hoc benefit changes o Discount rate and related inputs o Mortality assumptions o Dates of experience studies 11

13 GASB Exposure Drafts - OPEB Additional disclosures for OPEB administered through Trusts (including separately or reported in a fund of the government): Investment policies How fair value of investments is determined Concentration of investments Annual money weighted rate of return Other information about contributions, reserves and insurance contracts Composition of the OPEB plan s Board 12

14 GASB Exposure Drafts - OPEB Required Supplementary Information: RSI is required for a 10 year period, as follows Sources of changes in net OPEB liability Components of the net OPEB liability and related ratios Schedule of required contributions (actuary, statute or contract), actual contributions, and related ratio If assets are held in trust, a schedule of the annual money weighted rate of return on OPEB plan investments 13

15 GASB Exposure Drafts - OPEB Transition and Next Steps: In the year of adoption, the impact of the proposed Statements would be reported through a restatement of beginning net position Consult with actuaries and accountants to ensure that they are aware and thinking about actuarial assumptions and method Inform board members and other stakeholders about the significant impacts of these statements Consider development of an OPEB funding policy. After GASB 67/68, many states enacted legislation requiring funding of obligations Hold discussions with employees and airlines about benefits 14

16 GASB Exposure Drafts - OPEB Resources: GASB Website Project Pages AICPA Government Audit Quality Center www. Aicpa.org/gaqc GFOA American Academy of Actuaries 15

17 GASB Preliminary Views - Leases GASB has released Preliminary Views on lease accounting and related issues Per the GASB: A Preliminary Views is a step toward an Exposure Draft of a Statement but is not an Exposure Draft. A Preliminary Views is a Board document designed to set forth and seek comments on the Board s current views at a relatively early stage of a project. A Preliminary Views generally is issued when the Board anticipates that respondents are likely to be sharply divided on the issues or when the Board itself is sharply divided on the issues. The Board anticipates that respondents likely will express a range of differing views on major issues related to recognition and measurement by lessees and lessors and, therefore, it believes that a Preliminary Views rather than an Exposure Draft is appropriate. 16

18 GASB Preliminary Views - Leases Only after the Board is satisfied that all alternatives have adequately been considered, and modifications have been made as appropriate, will a vote be taken to issue and Exposure Draft. The PV intends to provide a basis for the Board to consider whether operating leases meet the definitions of assets or liabilities. The GASB is issuing the PV in connection with similar projects involving leases which are currently underway at the FASB and IASB. The PV describes the GASB s view that long term leases are essentially financings, which create an asset (i.e. a right to use intangible asset). 17

19 GASB Preliminary Views - Leases The PV document proposes that leases, which are longer than 12 months, be reported as follows: Lessees: Intangible asset for the right to use the asset Corresponding liability for the lease payments Amortization expense for the leased asset Interest expense relating to the lease liability Treatment is very similar to a current capital lease 18

20 GASB Preliminary Views - Leases Lessors: Receivable for expected payments under the lease Corresponding deferred inflow of resources for the resources relating to future periods Revenue associated with lease receipts (reduction of the deferred inflow) Interest revenue for the receivable Again, similar to a current financing lease Interest revenue or expense would be determined using an implicit interest rate 19

21 GASB Preliminary Views - Leases Scope exceptions The PV provides scope exceptions for the following types of leases: Financed purchases: o Leases that transfer ownership o Leases that contain a bargain purchase option Short Term leases: o Leases with an expected term of 12 months or less Other exceptions: o Natural resources o Biological assets o Licensing contracts (motion picture films, recordings, patents, copyrights) o Service concession arrangements under GASB No

22 GASB Preliminary Views - Leases Lease term is defined as: The period during which a lessee has the non cancellable right to use an underlying asset, plus the following, if applicable: o Periods covered by a lessee s option to extend the lease if it is probable, based on all relevant factors, that the lessee will exercise the option o Periods covered by a lessee s option to terminate the lease if it is probably, based on all relevant factors, that the lessee will not exercise that option o Reassessments of the lease term if the lessee extends or terminates the lease when it was not probable Lease term would significantly impact the amounts recorded in the financial statements as a lease receivable or payable and would be subjectively determine 21

23 GASB Preliminary Views - Leases Lease Modifications: o Lessee adjust lease asset and liability o Lessor adjust lease receivable and deferred inflows of resources Lease Terminations: o Lessee adjust lease asset and liability o Lessor adjust lease receivable and deferred inflows of resources Any differences in assets or liabilities/deferred inflows would be reported as gains or losses Subleases: o Treated as transactions separate from the original lease o Recognize the lease asset and liability for the lease AND lease receivable and deferred inflows for the sublease 22

24 GASB Preliminary Views - Leases The GASB had a Letter of Comment period and three public hearings relating to the PV. All Letters of Comment are available on the GASB website File Reference No. 3 24P There are three Letters of Comment documents that address airports City of Houston, Houston Airport System, Finance and Accounting Division (Letter No. 24) AICPA Private Companies Practice Section (Letter No. 34) Washington Society of Certified Public Accountants (Letter No. 26) 23

25 GASB Preliminary Views - Leases The Letters of Comment generally express the following concerns for leases relating to airports: (Items are paraphrased full comments are available in the respective letters on the GASB website) 1.) Airports are not specifically addressed in the PV o Leases of an airport are unique in nature, often covering many types of arrangements terminal, concessions, ground rent, special facility leases o The proposed standard requires a lease term to be determined, and many airport related lease terms are indeterminate o Airline agreements (either compensatory or residual) have different rates from year to year. How could a receivable be determined? o How would you measure the lease receivables to record for the following? Airline agreements Car rental concession Other concessions 24

26 GASB Preliminary Views - Leases The Government Accounting and Auditing Committee of the Washington Society of Certified Public Accountants addresses airport leasing arrangement in its Letter of Comment as follows: [F]or concession agreements managed by an airport authority, the minimum annual guarantee ( MAG ) is only fixed when the MAG exceeds the variable payments that are based on the lessee s performance (i.e. volume of sales). This type of concession agreement further requires an annual true up of annual MAG versus annual variable payments. Using paragraph 4 and 5 of Chapter 5, the present value of the lease receivable should include the MAG. However, what would be the appropriate treatment of the amount of variable payments that exceeds the MAG in any given month? Should the delta be recognized as revenue using paragraph 6 of Chapter 5? 25

27 GASB Preliminary Views - Leases Similarly, for an airport authority, airline agreements may include both fixed and variable payment components in a lease agreement. While the preparer can account for the fixed and variable payments separately following the provisions within this PV, airline agreements often called for annual cost recovery true ups or settlements of all components (both fixed and variable payments) based on the operating costs of the leased properties. Which portions should be included in the net present value of the lease receivables? 26

28 GASB Preliminary Views - Leases 2.) Reporting a lease asset creates duplicate reporting of assets o Assets would be reported for the capital assets being leased and for the lease receivable associated with leasing such assets o Concern is expressed that the service value of the asset is being reported twice 3. ) Airports have significant leasing activities, with hundreds of related agreements o The AICPA Technical Issues Committee states that TIC believes the changes will have a disproportionate implementation cost for governments compared to the resulting benefits for financial statement users o The TIC letter also mentions a medium size airport field test participant with more than 90 leases, and states that disclosures for such leases would be voluminous 27

29 GASB Preliminary Views - Leases 4.) Special Facility Revenue Bonds are treated as conduit debt, but have debt service which is guaranteed by lease agreements o GASB Interpretation No. 2 provides that conduit debt arrangements are disclosed, but not recorded. Recording of leases associated with such arrangements may be contradictory to the Interpretation o Recording the lease revenues and deferred inflows relating to conduit debt arrangements needs to be reconciled with GASB Interpretation No. 2 5.) Ground rentals o Leases may contain reversion of improvements, including buildings or other infrastructure. Should those be considered in determining the lease receivable? 28

30 GASB Preliminary Views - Leases Keep current through the GASB Project Page The timeline per the GASB Project Page (as of April 2015), is as follows: Through March 2015 Public Comment Period (Public comment period and Public Hearings have already taken place) April October 2015 Redeliberate issues January 2016 Issue an Exposure Draft February May 2016 Comment period on Exposure Draft June October 2016 GASB analysis November 2016 Issue final Statement Public Comment period on PV and Public Hearings have expired, but there is still time to comment through the Exposure Draft, when it is issued. 29

31 OMB Super Circular --- The Rule Overview Reforms to Single Audit Process Reforms to Award / Non Federal Entity Administrative Requirements Resources 30

32 OMB Super Circular --- The Rule Overview: The Rule was issued on December 26, 2013 and is generally effective as follows: Guidance / Regulation from Federal Agencies to be effective by December 26, 2014 Audits for fiscal years beginning on or after December 26, 2014 The purpose of the Rule is two fold: 1.) To establish uniform: cost principles audit requirements administrative requirements for all federal grants and cooperative agreements 2.) To provide updates for rules that are outdated, insufficient or overly burdensome 31

33 OMB Super Circular --- The Rule Overview: The Rule supersedes the following OMB Circulars: A 21, A 87, A 89, A 102, A 110, A 122, A 133, certain sections of A 50 relating to Audit Follow up So, no longer will we refer to A 133 audits or A 87 cost principles All updated guidance that was formerly found in the OMB Circulars is now found in the Rule. The Rule is available at The Rule consists of Subparts A F which contain guidance for Pre and Post Federal Awards requirements (i.e. Administrative Requirements), Cost Principles and Audit Requirements. The Rule also contains 11 Appendices. 32

34 OMB Super Circular --- The Rule Reforms to Single Audit Process: Single Audit Threshold for an audit or program specific audit is raised from $500,000 to $750,000 of federal expenditures in a year Changes have been made to the criteria for qualifying as a low risk auditee, and percentage of coverage for major programs is decreased to 20% coverage for low risk and 40% for non low risk (previous levels were 25% and 50%, respectively) Threshold for reporting questioned costs as an audit finding is increased from $10,000 to $25,000 Significant changes were made to the major program determination. Two of the significant changes are: Type A threshold has been increased from $300,000 to $750,000 Elimination of the two options for selection of high risk Type B programs for testing. (Now, at least 1/4 th of low risk type A programs) 33

35 OMB Super Circular --- The Rule Reforms to Single Audit Process: Changes to Audit Reporting: Additional information is required when a finding is a repeat finding, including why it has been repeated Reporting packages will be made public, including financial information Certification now required that no protected personal identifiable information is included Finding numbers are uniformly formatted Federal agencies no longer have the ability to grant extensions 34

36 OMB Super Circular --- The Rule Reforms to Award / Non Federal Entity Requirements: With respect to federal awards, the Rule describes 25 times that written policies should exist in the following six areas (source AICPA): Financial Management Payment Procurement Compensation Relocation costs Travel Costs Non federal entities should ensure that written policies exist and address the requirements: Federal agencies will likely review such policies in any monitoring Auditors will be asking to review your policies as part of their procedures (this may formally be added to the Compliance Supplement) 35

37 OMB Super Circular --- The Rule Reforms to Award / Non Federal Entity Requirements: Non federal entities must disclose in writing the following to the federal or passthrough agency: Any potential conflict of interest (must also maintain written policies covering conflicts of interest for federal awards) Any violations from fraud or violations of laws Changes to the key project staff or scope should have prior written approval Certification of project completion with financial data tied to performance 36

38 OMB Super Circular --- The Rule Reforms to Award / Non Federal Entity Requirements: Significant new emphasis is place on Internal Control over federal awards: Internal control must be established and maintained effectively Procurement guidelines include certain requirements at various dollar thresholds (i.e. quotations, sealed bids) Purchasing departments should ensure that purchasing polices are updated to reflect the guidance in Sections of the Rule 37

39 OMB Super Circular --- The Rule Resources: The Rule: Federal Agency Guidance: Guidance from federal agencies is required to be applicable for federal awards effective December 26, (Non federal entities are required to implement the new requirements upon the effective date, according to the Rule and federal agency guidance.) OMB has crosswalk documents which reference paragraphs of the former guidance to the Rule. These are also available on the OMB website AICPA Government Audit Quality Center AICPA Audit and Accounting Guide for Governments and Government Audit Risk Alerts Various webcasts available on 38