GAAP Update. Introduction / Summary 6/1/17. GASB Statement No. 73

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1 GAAP Update Greg Allison, Teaching Professor UNC-CH SOG Lee Carter, Vice President Capital Management of the Carolinas GASB Statement No. 73 Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered through Trusts That Meet Specified Criteria, and Amendments to Certain Provisions of GASB Statements 67 and 68 Introduction / Summary Covers pension plans not administered through trust arrangements Both DC and DB plans Assets in these plans are NOT pension plan assets Pensions are a cost of service for an employee GASB concluded that these pensions and pensions administered through trusts were no different except for restrictions on assets accounting should be essentially the same as GASB 67 and 68 Clarification of several GASB 67 & 68 issues 1

2 Requirement for Trust Arrangements Contributions are irrevocable Pension plan assets are dedicated to providing pension benefits to plan members Pension plan assets are protected from creditors, non-contributing employers, and the plan administrator Key Provisions Calculate total pension liability similar to pensions with trust arrangements Actuarial valuation Performed at least biennially May roll forward numbers to measurement date Measurement date no earlier than the end of the employer s prior fiscal year Assumptions conform to actuarial standards of practice Any assets set aside are not restricted and are reported within the appropriate fund No pension trust fund reported Key Provisions Acctg. and Financial Reporting Requirements (cont.) Notes and RSI similar to GASB 67 and 68 Additional disclosure that assets are not available in a trust Notes to RSI should indicate that there are no assets available in a trust 2

3 Implementation Date Requirements for pension plans not administered through trusts FYE 6/30/17 Amendments to GASB 67 and 68 effective for fiscal years ending 6/30/16 GASB Statement No. 74 Financial Reporting for Postemployment Benefit Plans Other Than Pensions Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Replaces requirements from GASB Statements 25, 43, 50, and 57 This statement addresses accounting and financial reporting for the plans themselves Basically the same requirements as GASB 67 for plans administered through trusts (uses the same definition for trust arrangements) - also covers plans not administered through trusts (GASB 73) Covers both DB and DC plans 2 statements required for plans administered through trusts: Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position Note disclosures Required Supplementary Information 3

4 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (cont.) Actuarial valuations required except for small plans with fewer than 100 active and inactive members Alternative measurement method allowed as an option for small plans Accounting, financial reporting, attribution (actuarial) method, and other requirements similar to GASB 67 for plans administered through trusts For plans not administered through trusts accounting is similar to accounting in GASB 73 for pension plans not administered through trusts Effective date fiscal years beginning after 6/15/16 FY in NC GASB Statement No. 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions Introduction / Background Term OPEB includes the following: Postemployment healthcare benefits regardless of whether they are provided in a pension plan or separately from a pension plan Other forms of postemployment benefits when provided outside of a pension plan Does not include termination payments or benefits Covers defined benefit and defined contribution OPEB plans Patterned after pension accounting requirements in GASB 68 and GASB 73 for pensions not administered through trust arrangements Same definition of trust as previous standards Multi-employer plans each employer recognizes its own pro rata share of the plan liability or asset 4

5 Measuring Total OPEB Liability 3 steps: Project benefit payments Discount projected benefit payments to actuarial present value (PV) Attribute PV (total OPEB liability) to past, present, and future years Amount could be a net OPEB asset reported as an intangible asset Projecting Benefit Payments Implicit rate subsidies continue to be treated as OPEB as they were in GASB 43 and 45 Should include all benefits to be provided to current and inactive employees under the plan Automatic COLAs included Ad hoc COLAs and other postemployment benefit changes included if past practices indicate that they are effectively automatic Discounting Projected Benefit Payments Projections of plan assets would include assumptions for earnings rates, contribution rates, etc. based on past experience and any changes in policy As long as assets are sufficient to pay benefits, discount rate would be LT expected rate of return on plan assets If assets are not sufficient to pay benefits, use taxexempt, high quality (AA-rated or higher), 20-year general obligation bond yield or index rate Discount rate is the blend of the 2 items above 5

6 Attribute Present Value To Specific Periods 1 attribution method entry age normal, level percentage of payroll A new actuarial valuation might be needed if there were significant changes in the plan and update procedures are being used Actuarial valuations must be performed at least biennially (GASB recommends annually) Measurement date must be no later than the fiscal year end for the prior fiscal year Statement Requirements OPEB liability / asset measured in a similar manner to pensions Accounting requirements: Similar to pension accounting - shorter amortization periods Accrual accounting used in government-wide, proprietary, and fiduciary statements Deferred outflows of resources for contributions between measurement date and fiscal year end In governmental funds: Net OPEB liability recognized to extent that liability is to be liquidated with expendable available resources OPEB expenditure amounts contributed to the plan + the change between the beginning and ending balances of the amounts normally expected to be liquidated with expendable available resources OPEB Plans Not Administered Through a Trust Covers DB plans other than insured plans Assets in these plans are NOT OPEB plan assets Disclosures indicate that no asset is held in trust No assets reflected in determination of net OPEB liability Assets for plan reported in other funds not OPEB trust fund Assets held for other governments reported in an Agency Fund Accounting requirements similar to GASB 68 and 73 6

7 Implementation Implementation Fiscal years beginning after 6/15/17 Prior period adjustments recommended, but are probably not possible restate beginning balances of earliest year presented and disclose nature of restatement Probably not possible to restate deferrals if not possible to restate, only show deferral for contributions b/w measurement date and FYE beginning balance of deferrals is amount between measurement date and start of fiscal year RSI should only be in conformity with statement if less than 10 years, present what is available LGC will have memos and other available resources GASB Statement No. 77 Tax Abatement Disclosures Background GASB believes financial statement users need to assess a government s fiscal health Limits on ability to raise revenues affect fiscal health would include tax abatements GASB 77 requires disclosure of tax abatement agreements that affect a government s fiscal health Includes agreements made by other governments that affect a government s revenues Implementation fiscal years beginning after 12/15/

8 Definition For financial reporting purposes a tax abatement is defined as: 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. Scope Abatements have 3 required characteristics: Purposes economic development or other public purposes that benefit government or citizens of government TAX revenues are reduced by tax abatements Existence of an agreement in force prior to the abatements may or may not be in writing Does not include grants or expenditures Does not include tax exemptions (homestead exemption) and tax deductions Generally a reduction of revenue or assessed value Generally tied to nonexchange transactions would not include special reductions in utility rates (exchange transactions) Implications for NC NC law requires equal taxation GASB 77 is intended to require disclosure of TAX abatements that are not otherwise apparent in the financial statements In NC taxes are paid and then may be abated through the budget process NC should have few, if any, abatements under GASB 77 If GASB 77 tax abatements exist extensive disclosures required See School of Government blogs from Greg Allison in October and January

9 GASB Statement No. 80 Blending Requirements for Certain Component Units an Amendment of GASB Statement No. 14 Basic Guidance Guidance for component units for which the primary government is the sole corporate member (not-for-profit corporations) Under current guidance, such entities would almost always be discretely presented Blending criteria now expanded to specifically include these situations Does not affect organizations included as component units under GASB 39 Effective date of FYE 6/30/17 GASB Statement No. 83 Certain Asset Retirement Obligations 9

10 Overview of Standard Provides guidance on retirement of capital assets that potentially create long-term liabilities related to closure Similar concept to landfill closure/post-closure and pollution remediation obligations Examples of Asset Retirements Decommission a nuclear reactor Remove and dispose an x-ray machine Remove and dispose of wind turbines Closure and removal of a sewage treatment facility Potential Retirement Costs Excludes. Cost of planning to sell/dispose tangible capital assets Prepping an asset for alternative use Pollution mitigation and landfill closure Routine maintenance Replacement of capital asset parts 10

11 When is an obligation incurred? Timing is based on a combination of an external and an internal event External? Approval of federal/state/local law/regulation Creation of a legally binding contract Issuance of a court judgment Internal? Contamination Actual use of the asset itself Permanent abandonment before even placed in use Other Elements of the Standard Valuation calculations should be based on the best estimate of current value of the outlays expected to be incurred Outflows of resources / deferred outflows of resources recognized After initial measurement current value of ARO adjusted annually Required note disclosures (of course!) Implementation date FY beginning after 12/15/18 GASB Statement No. 84 Fiduciary Activities 11

12 The Overall Plan. Gives criteria for specifying fiduciary activities Is a government controlling the assets of the fiduciary activity? The beneficiaries with whom a fiduciary relationship exists Exemption for business-type activities that normally expect to hold custodial assets for 3 months or less Generally, pension and OPEB plans held in trust are fiduciary activities regardless of whether they are a component unit Also, assets held for others outside of the reporting entity are normally fiduciary activities Other activities are fiduciary activities if: Government controls assets Not government own-source revenues and grants Assets are in a trust or held for the benefit of other individuals or governments Fiduciary Fund Reporting Fiduciary fund types for legally entrusted arrangements Pension (and other employee benefit) trust funds Pension plans OPEB trust LEO Special Separation Allowance Investment trust funds external investment pools Private-purpose trust funds Legally entrusted assets that are not pension or OPEB assets Government named as trustee but not the beneficiary May be expendable or nonexpendable in nature Fiduciary fund type for such activities not legally entrusted Custodial funds Fiduciary Financial Statements Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position 12

13 Implementation Date Fiscal years beginning after 12/15/18 Thus, in NC, FYE 6/30/20 No decision yet on whether NC will recommend early implementation GASB Statement No. 85 Omnibus 2017 Summary Designed to address certain practice issues identified during implementation of standards Most would not warrant their own projects Many are tied to the implementation of the new pension and OPEB standards Most guidance will have no impact on NC local governments Effective date periods beginning after 6/15/17 13

14 Issues for NC Primary government that is a business-type activity and reporting as a single column a component unit may be blended only if it meets the criteria for blending Money market investments MAY be measured at amortized cost this is an option and not a requirement reference is back to GASB 31 Financial statements using the current financial resources measurement focus pension and OPEB liabilities and expenditures should be for the reporting period (not the measurement period) Issues for NC (cont.) Presentation of payroll-related measures in RSI for OPEB Covered payroll is normally used after changes in GASB 82 if contributions are based on payroll Covered-employee payroll is used if contributions to the plan are not based on a measure of pay GASB Statement No. 86 Certain Debt Extinguishment Issues 14

15 Summary Guidance for in-substance defeasance of debt using existing resources Guidance for advance refundings is found in GASB Statement No. 7 Statement 86 establishes the same requirements for when a government defeases debt using existing resources There was some consideration of guidance for current refundings, but the GASB decided against providing guidance GFOA currently accepts payments on current refundings as either expenditures or other financing sources Includes guidance for prepaid insurance associated with debt that is extinguished Guidance for Trust Escrow agent Payments limited to only principal and interest payments on defeased debt Possibility that government will be required to make payments is remote Risk-free investments Direct obligations of the US government Obligation guaranteed by the US government Securities backed by US government obligations as collateral and collateral payments immediately flow to security holder Monetary assets should approximately coincide with debt service payments securities that are paid before their maturity (callables) do not meet this definition Accounting Guidance In-substance Defeasance Economic Resources Measurement Focus Old debt removed from statements Difference between reacquisition price and carrying value of debt gain or loss in period of in-substance defeasance Current Financial Resources Measurement Focus Payments from existing resources reported as debt service expenditures Note Disclosures Description of transaction during period of transaction In future periods the amount of defeased debt that remains outstanding 15

16 Accounting Guidance (cont.) Amount of remaining prepaid insurance should be included in calculation of gain or loss on in-substance defeasance affects existing debt carrying value Note disclosure for all in-substance defeasance transactions risk of substitution of risk-free assets with assets that are not essentially risk-free Effective date Periods beginning after 6/15/17 Earlier application encouraged Changes should be applied retroactively Exposure Draft - Leases Scope and Approach Applied to any contract that meets the definition of a lease: A lease is defined as a contract that conveys control of the right to use another entity s nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction. All leases are financings of the right to use an underlying asset - Therefore, single approach applied to accounting for all leases with a few exceptions - Lessee recognizes a liability and a capital asset - Lessor recognizes a receivable and a deferred inflow of resources Statement does not apply to leases for intangible assets (computer software), biological assets, service concession arrangements, supply contracts 48 16

17 Lease Term Excludes cancellable periods - Lessee has no enforceable right to use for cancellable periods Periods for which lessor has option to terminate lease Periods for which lessee and lessor both have the option to terminate lease - If only lessee has an option to terminate lease, evaluate probability that lessee will not exercise option Fiscal funding/cancellation clauses should be considered in determining the lease term only if it is reasonably certain that the clause will be exercised 49 Initial Reporting - Lessee Recognize lease liability PV of payments expected to be made in lease term Discount using lessor s rate if known; lessee s incremental borrowing rate if lessor s rate cannot be determined Recognize capital asset Sum of lease liability adjusted for lease payments at or before the lease started and initial direct costs necessary to place asset into service Exceptions Short-term leases and certain regulated leases Leases that transfer ownership at or before end of lease term with no termination options - direct financing leases accounted for as a financed sale of an asset Initial Reporting - Lessor Recognize lease receivable PV of payments received over lease term Discount rate should be rate lessor charges the lessee Recognize deferred inflow of resources Lessor should not derecognize asset underlying the lease Accounting for depreciation and impairments continue If asset must be returned in original condition, do not depreciate 17

18 Subsequent Reporting - Lessee Lease asset amortized in a systematic and rational manner Shorter of lease term or underlying life of asset If lease contains purchase option that lessee is reasonably certain to exercise, amortize over useful life of asset For non-depreciable assets, no lease amortization Lease amortization reported as an outflow of resources expense Discount on present value is amortized in a systematic way as an outflow of resources (interest expense) Subsequent Reporting - Lessor Discount on receivable amortized as interest revenue at a constant periodic rate of return Recognize inflows of resources (revenues) over lease term in a systematic and rational manner Other Items Final Statement expected Q Proposed implementation for periods beginning after 12/15/18 18

19 Invitation to Comment / Other Possible Changes Reporting Model Key Considerations & Decisions MD&A Enhance financial analysis Eliminate boilerplate description of reporting model Clarify guidance on currently known facts, conditions, etc. Government-wide Financial Statements Format of Statement of Activities Should a Cash Flow Statement be required? Major Funds options for additional information on Debt Service Funds Key Considerations & Decisions (cont.) Governmental Fund Financial Statements Conceptually consistent measurement focus / basis of accounting (MFBA) Presentation focus of Governmental Fund financial statements consistent with MFBA Conceptual framework on recognition of elements of financial statements restarted Alternate formats for operating statement Current format; format that distinguishes ST & LT activities Should expenditures be reported using natural classifications such as objects of expenditure? Proprietary Fund / Business-type Activity Statements Evaluate operating indicator alternatives Evaluate operating / nonoperating revenues and expenses 19

20 Key Considerations & Decisions (cont.) Fiduciary Fund Financial Statements explore where the statements should be presented in the Basic Financial Statements Budgetary Comparisons Move to RSI Which budget variances should be required to be presented Other Issues options that result in more timely reporting or reduced complexity of financial statements Key Considerations & Decisions (cont.) Governmental Funds focus of ITC document 3 MFBAs; Near-term financial resources recognition approach Short-term (working capital) financial resources recognition approach Long-term financial resources recognition approach Statement format Cash flow statement Timeline December 2016 Invitation to Comment document for the Governmental Funds July 2018 Preliminary Views document April 2020 Exposure Draft November 2021 Final Statement Implementation would be more than one year later 60 20