2014 CliftonLarsonAllen LLP CliftonLarsonAllen LLP. GASB Update. Greg Bussink and Sean Walker October 22, CLAconnect.

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1 2014 CliftonLarsonAllen LLP GASB Update Greg Bussink and Sean Walker October 22, 2014 CLAconnect.com

2 Effective Dates Years beginning after December 15, 2012 (June 30, 2014) Statement 65 Items Previously Reported as Assets and Liabilities Statement 66 - Technical Corrections an amendment of GASB Statements No 10 and No 62 June 15, 2013 (June 30, 2014) Statement 67 Financial Reporting for Pension Plans - an amendment of GASB Statement No 25 Statement 70 - Accounting and Financial Reporting for Nonexchange Financial Guarantees December 15, 2013 (June 30, 2015) Statement 69 - Government Combinations and Disposals of Government Operations June 15, 2014 (June 30, 2015) Statement 68 Accounting and Financial Reporting for Pension Plans - an amendment of GASB Statement No 27 Statement 71 - Pension Transition for Contributions Made Subsequent to Measurement Date - an amendment of GASB Statement No. 68 2

3 GASB No. 65 Items Previously Reported as Assets and Liabilities

4 Background Certain items previously identified as assets and liabilities are not really considered to be assets or liabilities The use of the concept of deferred inflows and outflows was established to handle these items This statement establishes those items which are now to be recast as deferred inflows and outflows

5 Deferred Inflows/Outflows Previously restricted only to use in hedging and Service Concession arrangements Deferred Outflows A consumption of net position that is applicable to a future accounting period (e.g. dfd loss on refunding) Shown as a separate category below assets Deferred Inflows An acquisition of net position that is applicable to a future accounting period (e.g. Unavailable revenue in a governmentasl fund) Shown as a separate category below liabilities

6 Areas of Specific Guidance Refundings of Debt Nonexchange transactions Sales of Future Revenues Debt issuance costs Leases Acquisition costs related to insurance activities Lending activities Mortgage Banking activities Regulated Operations Revenue recognition in governmental funds Use of the term Deferred Major Fund criteria - effects

7 Specific Guidance Debt refundings Gain or Loss from a refunding resulting in a defeasance Deferred Inflow Gain Deferred Outflow - Loss Nonexchange transactions Deferred inflows when resources are received or reported as a receivable before: The period for which property taxes are levied The period when resources are required to be used or first permitted Deferred outflows are reported for resources received before time requirements are met, but eligibility requirements have been met

8 Specific Guidance (continued) Debt Issuance costs Report as a period expense when incurred, no longer amortized over the life of the debt Sale of Future Revenues Transferor reports a deferred inflow for resources in both the government-wide and fund financial statements Only exception is found in GASB 48, para 14 and has to do with revenue not previously recognized due to uncertainty of inability to measure Intra-entity sales - recognize as deferred inflow and outflow until all revenue recognition criteria met(gasb 48, para. 15)

9 Specific Guidance (continued) Leases Operating lease lessor Record initial direct costs (acquisition, legal, etc) as a period cost Sale/-Leaseback transaction Gain/loss on sale/leaseback should be recorded as either a deferred inflow or outflow, as applicable Revenue recognition in Governmental Funds Revenue not recognized because of availability criteria should be reported as deferred inflows (e.g. property taxes)

10 Specific Guidance (continued) Use of the term Deferred in GASB financial statements Limited only to use in connection with Deferred Inflows and Deferred Outflows Major Fund Criteria Utilize deferred Outflows as part of assets and deferred inflows as part of liabilities in the calculations in determining major funds

11 GASB No. 66 an amendment of GASB No. 10 and 62 Technical Corrections

12 Fixed GASB No. 54, removed the limitation on using general fund or internal service fund for risk financing activities. GASB No. 62, 13, and 48. Clarified language on issues related to: Operating leases Recognition of premium or discount on purchase of loans. Servicing fees for receivables that have been sold. 12

13 GASB No. 69 Government Combinations and Disposal of Government Operations 13

14 Background APB Opinion No. 16, Business Combinations Pooling of interests Purchase method Superseded by FASB No. 141 Business Combinations Did not apply to nonprofit organizations Eliminated pooling of interests FASB No. 164 NFP Entities: Mergers and Acquisitions Governments used superseded guidance in APB Opinion No. 16 Needed some GAAP for governments

15 Scope and Applicability Establishes standards for government combinations and disposals of government operations Government merger Government acquisition Transfer of operations Transactions Combinations of legally separate entities NFP, For profit, government (new or continuing government is formed) Mergers and acquisition of activities less than the entire legally separate entity

16 Scope and Applicability (cont.) Operations integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities Examples: fire department, golf course, parking garage, etc. Disposal of operations Statement does not apply to: Assets and liabilities not considered an operation Line items Organizations that remain legally separate (GASB 14) Equity interests in an organization (GASB 14)

17 Definitions Government merger combination of legally separate entities without significant consideration exchanged. Transfer of operations combination of operations without significant consideration Government acquisition - combination of legally separate entities or operations with significant consideration exchanged. 17

18 Consideration Assets Assumption of liabilities Contingent assets NOT assumption of negative net position 18

19 Merger Government merger combination of legally separate entities without significant consideration exchanged. Two or more are now one Pooled, but don t use the word pooled. No revaluations Test for impairment Eliminate transactions between the parties 19

20 Transfer Transfer of operations combination of operations without significant consideration Pooling with an equity modification Net position transferred is a special item 20

21 Acquisition Government acquisition - combination of legally separate entities or operations with significant consideration exchanged. Purchase method (sort of) Intangible asset (i.e. goodwill-deferred outflow) Detailed measurement rules 21

22 Measurement Rules Acquisition date Control of assets Obligated for the liabilities Acquisition value market-based entry price Price that would be paid for acquiring similar assets, having similar service capacity or discharging the liabilities assumed Exceptions OPEB, pensions, compensated absences Landfill, pollution remediation Investments Deferred inflows and outflows

23 Disposals Gain or loss should be recorded as a special item 23

24 GASB No. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

25 Background Investors are looking for more credit enhancements and assurances on obligations Minimize the possibility of nonpayment Government often provide guarantees and receive guarantees for free Belief nonpayment is not likely Currently, a liability is recorded when It is probable the government will be required to pay and amount can be reasonability estimated

26 Scope and Applicability Government provides a financial guarantee as a nonexchange transaction Government receives a financial guarantee as a nonexchange transaction Key considerations Three legally separate entities (component units qualify) Not deemed guarantees for this statement Withholding or garnishing revenues Pledges of future revenues Joint-and-several obligations

27 Three Legally Separate Entities Obligation Holder Guarantor Issuer

28 Government as the Grantor Assess the issuer s ability pay using qualitative factors If the government is more likely than not required to pay the issuer s debt, then book it More than 50% likelihood Book - The discounted present value of expected cash flows as the result of the guarantee, or If cash flows are within a range, the discounted present value of the minimum expected cash flows (low part of the range)

29 Qualitative Factors Bankruptcy or financial reorganizations Breach of debt contract Covenants Coverage ratios Default Other financial difficulty indicators Loss of major revenue source Debt holder concessions Using earmarked funding to pay debt

30 Book It Journal entry DR: Expense/Expenditures CR: Nonexchange Financial Guarantee Government-wide Financial Statements, and Fund Financial Statement to the extent the liability is normally expected to be liquidated with expendable available financial resources.

31 Government as a Guarantor to a Group You could analyze individually, or You could analyze as a group using qualitative factor of the group - Historical trends Economic factors Etc. May book a liability similar to an allowance on bad debt, historical trends

32 Practical Timing Issue The process should be ongoing and the books and records should be adjusted when the government becomes more likely than not to pay the debt of the issuer.

33 Disclosures 2014 CliftonLarsonAllen LLP

34 Government as Issuer Footnote disclosure explaining the guarantee If the government is required to repay the guarantor, then the liability should be reclassified as a liability to guarantor when the guarantor begins to pay the debt. If the government is legally released from the debt, a revenue is recognized for guarantor s assumption of the liability.

35 Disclosure 2014 CliftonLarsonAllen LLP

36 Intra-Entity Primary government guarantees a blended component unit s debt Blended component unit guarantees a primary government's debt Blended component unit guarantees another blended component unit A receivable should be booked in the amount of the liability booked by the guarantor.

37 GASB No. 67 Financial Reporting for Pension Plans

38 Scope and Applicability Replaces previous guidance under GASB No. 25, Financial Reporting for Defined Pension Plans and Note Disclosures Establishes financial reporting standards for pension plans administered through trusts in which: Contributions to the plans and related earnings are irrevocable Plan assets are dedicated to providing pensions to plan members in accordance with benefit terms Plan assets are legally protected from creditors of employers, nonemployer contributing entities and plan administrators Applicable for defined benefit plans and defined contribution plans Does not include OPEB plans

39 Defined Benefit Pension Plans Recognition, measurement and presentation of the financial statement amounts generally similar to current guidance Incorporates deferred outflows of resources and deferred inflows of resources, where applicable

40 Defined Benefit Pension Plans (continued) Required Financial Statements Statement of Fiduciary Net Position Assets + Dfd Outflows Liabilities Dfd Inflows = Fiduciary Net Position Statement of Changes in Fiduciary Net Position

41 Defined Benefit Pension Plans (continued) Notes to the Financial Statements: Plan description Allocated insurance contracts excluded from plan assets Plan investments, including investment policy, determination of fair value, annual money-weighted rate of return and identification of investments that represent 5% or more of plan net position Receivables - terms of any long term contracts for contributions to the plan Deferred retirement option program (DROP) balances Policy for reserves of plan net position

42 Defined Benefit Pension Plans (continued) Notes to the Financial Statements: Components of the net pension liability, including Total pension liability Pension plan s fiduciary net position Net pension liability Pension plan s fiduciary net position as a percentage of total pension liability Significant assumptions used to measure the total pension liability Date of actuarial valuation and if applicable, disclosure that roll forward procedures were used to roll forward the total pension liability from the actuarial valuation date to the plan s fiscal year end

43 Defined Benefit Pension Plans (continued) Required Supplementary Information: 10 year schedule of Changes in net pension liability Net pension liability Contributions Annual money weighted rate of return Encouraged to present all years retroactively in implementation year If retroactive information is not available for all 10 years, only include those years where information is available in transition year and until 10 yrs of such information is available Notes to the Required Schedules: Significant methods and assumptions used in calculating the actuarially determined contributions

44 Schedule of Changes in Net Pension Liability Last 10 Fiscal Years Schedules of Required Supplementary Information SCHEDULE OF CHANGES IN THE SCHOOL DISTRICTS NET PENSION LIABILITY Last 10 Fiscal Years 2014 CliftonLarsonAllen LLP

45 Schedule of Net Pension Liability Last 10 Fiscal Years SCHEDULE OF THE SCHOOL DISTRICTS NET PENSION LIABILITY Last 10 Fiscal Years (Dollar amounts in thousands) 2014 CliftonLarsonAllen LLP

46 Schedule of Contributions Last 10 Fiscal Years SCHEDULE OF SCHOOL DISTRICTS CONTRIBUTIONS Last 10 Fiscal Years (Dollar amounts in thousands)

47 Schedule of Investment Returns Last 10 Fiscal Years SCHEDULE OF INVESTMENT RETURNS Last 10 Fiscal Years

48 Defined Benefit Pension Plans (continued) Net Pension Liability Total pension liability, net of plan s fiduciary net position Measurement of Total Pension Liability Timing and frequency of actuarial valuations As of plan s most recent fiscal year end or The use of update procedures to roll forward to plan s most recent fiscal year end from actuarial valuation Actuarial valuation date can be no more than 24 months prior to plan s fiscal year end

49 Defined Benefit Pension Plans (continued) Measurement of Total Pension Liability Discount rate Long term expected rate of return on investments that are expected to be used to finance payment of benefits, to the extent that net position is sufficient to make projected benefits and assets are invested using a strategy to achieve that return, Yield or index rate for 20 yr, tax exempt general obligation municipal bonds with an average rating of AA/Aa or higher to the extent the conditions used for the long term expected rate of return are not met. Actuarial cost method Entry age actuarial cost method should be used to attribute the actuarial present value of projected benefit payments to periods

50 Defined Contribution Plans Footnote disclosures should include: Identification of the pension plan as a defined contribution pension plan Classes of members covered Number of plan members Participating employers for multiple-employer plans Nonemployer contributing entities, if applicable The authority under which the plan is established or may be amended.

51 Additional Resources GASB Toolkit (available at the GASB website) Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans Podcast discussing the types of pension plans affected by Statement 67 and most significant changes Article on the key implementation issues Summary and Full Text of Statement 67

52 GASB No. 68 Accounting and Financial Reporting for Pension Plans 52

53 Background Part of the effort which goes back to GASB 34 to make government statements more usable, comparable and on par with the corporate world Investors understand full accrual accounting and get confused with multiple levels of government reporting Gives a better perspective as to both financial position and financial condition

54 Scope and Applicability Applies to: Employers in single-employer and agent multipleemployer defined benefit plans Employers in cost-sharing plans Special funding situations One government makes payments on behalf of another Employers in defined contribution plans

55 Defined Benefit Pensions Employer liability Current: Difference between the annual required contribution (ARC) and actual contributions = Net pension obligation Only record a liability if required funding not made New: Difference between the total pension liability and the fiduciary net position = Net pension liability Record net liability of the governmental entity Measured as of a date no earlier than the end of the employer s prior fiscal year (measurement date)

56 Defined Benefit Plans (continued) Changes in the pension liability Service cost, interest on the pension liability and changes in benefit terms Recorded as pension expense immediately Changes in economic and demographic assumptions and differences between economic and demographic assumptions and actual experience Amortized over a closed period equal to the average remaining service period for plan members Current portion recorded as pension expense Remaining portion recorded as deferred outflows or deferred inflows of resources

57 Defined Benefit Plans (continued) Changes in the pension liability (continued) Differences between expected and actual rates of investment returns Amortized over a closed 5 year period (including current period) Current portion recorded as pension expense Remaining portion recorded as deferred outflows or deferred inflows of resources Employer contributions made subsequent to the measurement date of the net pension liability are recorded as deferred outflows of resources

58 Defined Benefit Plans (continued) Actuarial valuations Required at least every two years Total pension liability should be determined by An actuarial valuation as of the measurement date which must be within 1 year and 1 day of the report date or The use of update procedures to roll forward from the actuarial valuation to the measurement date no more than 30 months and 1 day before employers year end Entry age method only Consistency multiple methods no longer accepted No tie to actuarial method used for funding Service cost determined as a percentage of pay

59 Timing of Measurement of Total Pension Liability Pension Expense (measurement period) Deferred Outflows of Resources Plan Prior Year-End Employer Prior Year-End Plan Current Year-End Employer Current Year-End Measurement Date June 2014 December 2014 June 2015 December 2015 Measurement date will most likely correspond to year-end of plan. Employer contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer s fiscal year should be recognized as a deferred outflow of resources. 59

60 Example Impact of Using Prior Year Measurement Date Pension Expense (measurement period) Deferred Outflows of Resources Employer Prior Year-End Employer Current Year-End Plan Year-End Plan Year-End Measurement Date June 2013 June 2014 June

61 Example Impact of Using Current Year Measurement Date Pension Expense (measurement period) Employer Prior Year-End Employer Current Year-End Plan Year-End Plan Year-End Plan Year-End June 2013 June 2014 Measurement Date June

62 Projection of Benefit Payments Projections Include: Automatic cost of living adjustments (COLAs) and other automatic retroactive benefit changes Ad hoc COLAs and ad hoc retroactive benefit changes substantively automatic Projected future salary increases if benefit formula is based on future levels Projected future service credits (when determining probability of eligibility for benefits and when formula is based on years of service)

63 New Blended Discount Rate Single rate reflective of: Long-term expected rate of return to extent plan net position for specified source is: Projected sufficient to make benefit payments Expected to be invested using long-term investment strategy Otherwise, index rate for a tax-exempt 20-year GO rated AA/Aa (or equivalent) or higher

64 Example Scenario- Discount Rate Current Situation 8% discount rate, same as historical rate of return 75% funded plan 20 year GO rate is 4%

65 Example Scenario- Discount Rate (cont d) New Calculation: Blended rate Calculation Step Funded % X Historical Rate of Return Unfunded % X Tax Exempt 20yr Rate Example 75% X 8% 6% 25% X 4% 1% Blended Discount Rate 6% + 1% = 7%

66 Discount rate calculation Projected Benefit Payments Actuarial Present Values of Projected Benefit Payments Year (a) Projected Beginning Fiduciary Net Position (b) Projected Benefit Payments (c) "Funded" Portion of Benefit Payments (d) "Unfunded" Portion of Benefit Payments (e) Present Value of "Funded" Benefit Payments (f) = (d) ( %) (a) Present Value of "Unfunded" Benefit Payments (g) = (e) (1 + 4%) (a) Present Value of Benefit Payments Using the Single Discount Rate (h) = (c) ( %) (a) $ 1,431,956 $ 109,951 $ 109,951 $ - $ 102,280 $ - $ 104,427 1,500, , , , ,088 1,565, , ,749-99, ,019 1,628, , ,690-98, ,154 1,687, , ,229-97, ,370 1,742, , ,168-96, ,487 1,792, , ,466-95, ,468 1,835, , ,332-94, ,450 1,871, , ,591-93, ,302 1,898, , ,069-91, ,918 The sum of the present values of the two benefit payment streams is calculated. 547, , ,779-49,236-84, , , , ,175 81,140 64, , , ,713 77, , , ,032 74, , , ,135 70, Total $ 2,109,333 + $ 1,724,534 = $ 3,833,867 66

67 Cost Sharing Plans Cost Sharing Employers Current: New: Liability recorded only if the actual employer contribution is less than annual required contribution Expense is equal to annual required contribution Liability is equal to the employers proportionate share of the total net pension liability of all participating employers Will now allow readers to determine overall liabilities currently not easily determinable More pressure to adequately fund Expense is equal to the employer s proportionate share of the pension expense of all participating employers Both liability and expense are reported as of the date reported by the plan No need to adjust/rollforward to actual report date of the government

68 Cost Sharing Plans (continued) Employer s recognize their proportionate share of collective: Net pension liability Pension expense Deferred outflows of resources Deferred inflows of resources This will provide audit challenges

69 Special Funding Situations Nonemployer entity legally responsible for making contributions directly to a pension plan for the employees of another entity and either: The amount of contributions for which the nonemployer entity legally is responsible is not dependent upon one or more events unrelated to pensions or The nonemployer is the only entity with a legal obligation to make contributions directly to the pension plan Nonemployer contributor accounting patterned on accounting for employers in cost-sharing plans

70 Defined Contribution Plans No significant changes Expense Amount of contributions (employee and employer) to the employee accounts, net of forfeited amounts Liability Difference between the amount of the expense recorded and amount paid to the plan

71 Note Disclosures Description of the Plan Assumptions Used to Measure Total Pension Liability Brief Description of Changes in Benefit Terms and Assumptions that Affect Measurement of Total Pension Liability

72 Required Supplementary Information Single Employer Plan SCHEDULE OF CHANGES IN THE COUNTY S NET PENSION LIABILITY AND RELATED RATIOS Last 10 Fiscal Years

73 Required Supplementary Information Single Employer Plan (continued) SCHEDULE OF COUNTY CONTRIBUTIONS Last 10 Fiscal Years

74 Required Supplementary Information Cost-Sharing Employer Plan SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

75 Required Supplementary Information Cost-Sharing Employer Plan (continued) SCHEDULE OF DISTRICT CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years

76 Required Supplementary Information Special Funding Situation SCHEDULE OF THE DISTRICT S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

77 Required Supplementary Information Special Funding Situation (Continued) SCHEDULE OF THE DISTRICT CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years*

78 Required Supplementary Information Special Funding Situation: Nonemployer Contributing Entity SCHEDULE OF THE STATE S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

79 Required Supplementary Information Special Funding Situation: Nonemployer Contributing Entity (continued) SCHEDULE OF THE STATE CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years*

80 Additional Guidance AICPA White Paper: Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting Provides guidance on employer challenges related to recognizing proportionate share of collective pension amounts and related auditor issues Recommends cost-sharing plans calculate each employer s allocation percentage and collective pension amounts Prepare a Schedule of Employer Contributions and related Notes to the Schedule Plan engage its auditor to form an opinion on the schedule in accordance with AU-C section 805, Special Considerations Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

81 Additional Guidance (continued) GASB Toolkit (available at the GASB website) Guide to Implementation of GASB Statement 68 on Accounting and Financial Reporting for Pensions Videos outlining key issues, discussing stakeholder outreach, and top implementation issues Podcasts discussing the most significant changes to accounting and financial reporting for pensions Background documents and fact sheets A Setting the Record Straight document addressing common misperceptions about the new pension standards

82 GASB No. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date

83 Background GASB 68 requires: Recognition of a net pension liability measured as of a date no earlier than the end of its prior fiscal year If a contribution is made between the measurement date and the end of the reporting period, its recognized as a deferred outflow of resources Recognition of deferred outflows and inflows of resources for other pension-related events Differences arising between expected and actual experience in relation to economic and/or demographic factors Effects of changes of assumptions about future economic or demographic factors Differences between projected and actual investment earnings

84 Background (continued) At transition, if it s not practical to determine the amounts of all deferred inflows and outflows of resources related to pensions, no beginning balances for deferred inflows and outflows be reported Potential for significant misstatement of beginning net position and subsequent expense in accrual based statements if the employer does not recognize its contributions made after the measurement date of the beginning net pension liability as deferred outflows of resources at transition

85 Summary When it s not practical to determine all amounts of deferred inflows and outflows of resources related to pensions, GASB 71 states: Employers should recognize a beginning deferred outflow of resources for pension contributions, if any made subsequent to the measurement date of the beginning net pension liability No beginning balances for other deferred inflows and outflows of resources related to pensions should be recognized

86 2014 CliftonLarsonAllen LLP Greg Bussink, CPA, CGFM Principal, State and Local Government Sean Walker, CPA, CGFM, CGMS Principal, State and Local Government CLAconnect.com twitter.com/ CLAconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 86