Please note that all board decisions are tentative until a final pronouncement is issued.

Transcription

1 MEMORANDUM TO: FROM: All NASACT Members and Other Interested Parties R. Kinney Poynter, Executive Director DATE: December 28, 2018 SUBJECT: October 2-4, 2018, GASB Meetings Gerry Boaz, CPA and CGFM, Technical Manager, State of Tennessee, is attending the meetings of GASB as an observer on behalf of NASACT. These comments are not an official statement, but represent Gerry s summary of the board s actions. All board members and the director of research were present for all or a portion of the October 2-4, 2018, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered 1. Implementation Guide Fiduciary Activities 2. Implementation Guide Update 3. Subscription-Based IT Arrangements 4. Revenue and Expense Recognition 5. Public Private Partnerships 6. Conceptual Framework Disclosure Framework Please note that all board decisions are tentative until a final pronouncement is issued. Implementation Guide Fiduciary Activities Lisa Parker, project manager; Ken Schermann, consultant; and Rebecca Cessna and Shelby Cameron, postgraduate technical assistants, presented the board with potential draft questions and answers for inclusion in the GASB 84, Fiduciary Activities, Implementation Guide. Staff identified issues and developed potential implementation guide questions and answers (Q&A) since the project was added to the technical agenda. The draft Q&As incorporated (1) specific issues raised by respondents to the Preliminary Views (PV), Financial Reporting for Fiduciary Responsibilities, and Exposure Draft (ED) of a proposed Statement, Fiduciary Activities, which were identified as candidates for consideration in an Implementation Guide, (2) practical issues raised from technical inquiries, (3) feedback received from the Governmental Accounting Standards Advisory Council (GASAC) at their March and July 2018 meetings, and (4) specific feedback received from the project s consultative group on the draft questions and answers. For Q.#4.1, Mr. Bean indicated that equivalent arrangements had similar characteristics to a trust but did not have legal standing. This question also was the link between a trust and legal separation. For Q.#4.3, staff indicated that the end of the answer should indicate that the primary government could not abolish the pension plan board. For Q.#4.8 (control applicability), Mr. Granof believed treasury services needed further clarity, but he agreed with the answer. For Q.#4.9, Mr. Previdi asked about investment earnings related to the derived from notion. Mr. Bean believed the Q&A for Q.#4.8 and Q.#4.9 should be reclassified related to component unit consideration trumping control. For Q.#4.12, Mr. Brown believed the question needed to be clarified to indicate that the association charged fees for the maintenance of the cemetery. He believed this was necessary because perpetual cemetery trusts usually received donations. For Q.#4.13, Mr. Granof suggested eliminating student advisor from the question fact set because it was obvious there was no governmental administrative involvement. Mr. Previdi wanted to make it clear that the other criteria also did not apply (monitoring and compliance) in this

2 scenario. He also wanted to discuss direct financial involvement along with the administrative involvement. Staff suggested changing criteria to examples to address Mr. Previdi s suggestion. For Q.#4.14, Mr. Knight believed the question needed to be clarified if the parent(s) were also a teacher or administrator. He wanted to clarify the dual role scenario because of in fact and appearance. Staff indicated that it depended on who was setting the rules and if the parent was acting in his/her parent role or teacher/administrator role. The board, except Mr. Knight, agreed to keep the Q&A as written for this question. For Q.#4.22 (seized assets by law enforcement), Mr. Caputo believed the assets are derived from the county s own-source revenues needed clarity because not everyone understood the process from the fact set. Staff indicated that the resources would be fiduciary until the defendant was convicted, at which point the government had an actual claim to the property. Thus, the answer needed to be changed. Mr. Brown believed the correct action was the conclusion of the due process legally allowed in the U.S. constitution (due process and property rights), which was typically an adjudication decision. Mr. Sundstrom agreed with Mr. Brown that this answer for the fact set should be a fiduciary activity until such time they had a legal claim to the seized assets (court order, case dropped, court decision/verdict). For Q.#4.23 (contractor deposit), Mr. Brown questioned how the activity for a new city hall could be recognized in an enterprise fund. Staff agreed and suggested changing the fact set to the city hiring a contractor to construct a new building rather than a new city hall. For Q.#4.27 (inmate funds), Mr. Caputo and Mr. Previdi believed the answer needed further development and should include discussion of contraband laws in general. Mr. Previdi believed restricting items involved some administrative involvement. He also suggested clarifying that the government was ensuring no contraband entered the correctional facility based on the contraband laws. He suggested eliminating the restricted language. For Q.#4.29, Mr. Granof wanted to explain the differences between GASB 84 11(c)(2) and (3) to discuss for the reader why the difference was important. Mr. Previdi believed the answer was missing something about individuals. Mr. Knight wanted to highlight that the benefits accrued to an organization outside the primary government. For Q.#4.33 (ABLE plan), Mr. Granof believed the plan being in a trust had no impact on the answer and could be confusing; thus, he suggested emphasizing that the plan did not have to be in trust because it was not a critical factor. Mr. Brown indicated that the ABLE plan had to be in a trust in order to receive the tax benefit. For Q.#4.43 (how often and when a BTA should assess whether custodial fund assets were expected to be held for 3 months or less), Mr. Previdi indicated that GASB was not a requirement, and he wanted to further explain the how and when regarding the assessment and past practice because past practice and the circumstances could change. For Q.#4.46 (custodial fund), Mr. Brown believed the required registration payment was not a contribution as indicated. It was either an encouraged fee or something else. Staff agreed with Mr. Brown and agreed to change the requirement to an encouragement. Implementation Guidance Update Michelle Czerkawski, Pam Dolan, Paulina Haro, Roberta Reese, and Scott Reeser, project managers; Emily Paul, assistant project manager; and Rebecca Cessna and Eleanor Mann, postgraduate technical assistants, presented the board with proposals related to the next implementation guidance update. For the financial reporting entity discussion, 6 of GASB 61, The Financial Reporting Entity: Omnibus, specified the following: The primary government is financially accountable if an organization is fiscally dependent... on and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government... regardless of whether the organization has (1) a separately elected governing board, (2) a governing board appointed by a higher level of government, or (3) a jointly appointed board.... In contrast, the answer in Q.# in Implementation Guide No used the term may be instead of is when referring to a circumstance involving application of the provisions of 6 above. To address this inconsistency, staff proposed to amend the answer to reflect the wording in GASB 61. The proposed modification to Q.# was a result of GASB 90, Majority Equity Interests, which would be effective for periods beginning after June 15, Therefore, this proposal was a modification to the text in place after the effective date of GASB 90. ( Q What is financial accountability? b. The primary government is financially accountable if a special-purpose government is fiscally dependent ). The board agreed with staff s amendment. Next, staff clarified questions and answers related to GASB 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, and GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, measures of contributions and benefit payments, including amounts from employers as OPEB came due and amounts related to the implicit rate subsidy. Staff proposed addressing the issues separately for OPEB plans and for employers that provided OPEB. Further, staff proposed that the employer questions address the requirement of GASB 75 that most frequently was asked about by stakeholders - 2 -

3 the reporting of contributions or benefit payments subsequent to the measurement date. To address those issues, staff proposed clarifying questions and answers for which the board agreed. For the discount rate municipal bond index rate (pensions/opeb and plans/employers, currently effective literature addressing pensions and OPEB required that assumptions and other inputs used in measuring defined benefit postemployment benefit liabilities be selected, for plan reporting, as of the plan s fiscal year-end and, for employer reporting, as of the measurement date. The discount rate applied in those measurements potentially incorporated a municipal bond index rate, which was an input subject to the timing requirement. Staff received inquiries regarding whether an average of index rates could be used for purposes of determining the index rate that should be used or incorporated into the determination of the discount rate. Staff believed an average of index rates that were as of dates other than the plan s fiscal year-end or the measurement date, as applicable, were inconsistent with the timing requirements specified in the authoritative literature. Thus, staff proposed questions and answers to address this issue. The board agreed with staff s recommended new questions and answers. In regard to derivative instruments accounting for settlement amounts from early terminations, 23 of GASB 53, Accounting and Financial Reporting for Derivative Instruments, as amended, required governments to report, within the investment revenue classification, the balance of the deferred outflow of resources or deferred inflow of resources related to the changes in the fair value of hedging derivative instruments when termination events, including terminating the hedging derivative instrument, occurred. However, GASB 53 did not specifically address situations where the settlement date was not the date of termination. To address this issue, staff proposed the following Q&A: Q A government terminates an interest rate swap that is an effective hedge against interest rate risk associated with a variable-rate bond. How should the government account for the termination of the swap? A A government is released from the rights and obligations of the interest rate swap agreement on the termination date. At that date, in addition to reporting the balance of the deferred outflow of resources or deferred inflow of resources related to changes in fair value of the swap on the flow of resources statement within the investment revenue classification, a government should report a receivable or payable for the amount to be received or paid at the settlement date. Mr. Brown believed termination should be explained to occur before the scheduled end of the swap expiration. The board agreed with staff and Mr. Brown. Next, staff proposed an amendment to Q.# in Implementation Guide The second and third sentences of Q.# in Implementation Guide implied that the text exactly reflected 10a of GASB 38, Certain Financial Statement Note Disclosures. To address this issue, staff proposed removing the quotation marks from the second and third sentences of the question and to include the currently omitted portion of 10a that required the specified information be presented separately. The board agreed with staff s recommended amendments. Furthermore, the board discussed other implementation guidance related to nonexchange transactions for federal domestic assistance provided for natural disasters. Stakeholders posed questions about the appropriate time to recognize revenue from federal domestic assistance provided for natural disasters. Generally, governments incurred large expenditures, but grant agreements were executed at a much later date. GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, 64 explained in the basis for conclusions (BFC) that [t]he Board concluded that the conceptually appropriate recognition point for assets and liabilities in nonexchange transactions is when an enforceable legal claim to resources arises, based on the specification of enabling legislation or contractual requirements. Furthermore, the provisions in GASB and 20 required the existence of eligibility requirements in the context of expenditure-driven grant programs to establish the appropriate point in time for recognition of assets (receivables) from voluntary nonexchange transactions. Staff believed the GASB 33 provisions required the existence of an executed grant agreement to be able to establish the existence of eligibility requirements even in circumstances in which the expenditures took place prior to the agreement. It was not unusual for grant programs to specify, in the grant agreements, that expenditures incurred in advance of the agreement were allowable under specific circumstances. Following existing GASB 33 provisions, a government recognized assets and revenue arising from expenditures incurred in disaster recovery at the point in time when the government executed the grant agreement. Staff believed clarification of existing revenue recognition provisions in the context of a legally enforceable claim was needed. To address this issue, staff proposed a question and answer. The board agreed with staff s recommended new question and answer. Mr. Brown believed at most this was a contingent asset when no grant agreement was in place. He agreed with Mr. Knight that the subsequent event would be a type 2 event. Mr. Knight indicated that this was a subsequent event disclosure. Staff also indicated the government had no control over the resources

4 For irrevocable split-interest agreements (GASB 81, Irrevocable Split-Interest Agreements. Establishment of a Permanent Endowment at Termination), the first question addressed circumstances in which a donor transferred resources pursuant to an irrevocable-split interest agreement that created a permanent endowment at the termination of the agreement. Stakeholders asked whether the remainder interest benefit should be recognized by the resource recipient as revenue at the inception of the irrevocable-split interest agreement. Staff believed such an arrangement should be accounted for as two separate transactions an irrevocable split-interest agreement and, at termination, the creation of the permanent endowment. To address this issue, staff proposed a new question and answer for which the board agreed. In regard to recognition in governmental funds, the second question addressed the recognition of a liability in governmental funds pursuant to an irrevocable split-interest agreement. The board considered this issue during its deliberations preceding GASB 81. At that time, the board concluded it was appropriate to recognize a liability in a governmental fund because the nature of liabilities arising from irrevocable split-interest agreements is different from operating liabilities or those arising from long-term borrowings, as stated in GASB 81 B10 (BFC). To address this issue, staff proposed a new question and answer. The board agreed with the recommendation. For insurance recoveries, 21 of GASB 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, provided guidance for reporting an insurance recovery associated with an impaired capital asset in governmental funds. The insurance recovery should be reported as an other financing source a separate transaction from the restoration or replacement of the impaired capital asset. GASB indicated that insurance recoveries other than those related to the impairment of capital assets should be accounted for as described in 21. Stakeholders questioned whether insurance recoveries associated with expenditures, such as clean-up costs related to storm damage, should be netted with the related expenditure or reported as an other financing source in governmental fund financial statements. The principle underlying GASB 42 with regard to reporting of insurance recoveries was that netting should be applied only in the circumstances covered by the insurance contract. For purposes of impaired capital assets, insurance covered the damage to the capital asset and was netted against the impairment loss reported for that capital asset in financial statements reported applying the economic resources measurement focus. Because acquisition of capital assets was reported as expenditures in governmental funds, the GASB 42 guidance was to report the related insurance recovery as an other financing source. For circumstances in which insurance related to a current-period expenditure, the insurance recovery should be netted with the related expenditure. To address this issue, staff proposed the following question and answer: ( Q How should noncapital clean-up costs for storm damage and related insurance recoveries be reported in governmental funds? A Clean-up costs for storm damage not related to capital outlays generally should be reported as expenditures in governmental funds. Insurance recoveries that are related to noncapital clean-up of storm damage and are realized or realizable in the same year as the related clean-up expenditures should be netted against those expenditures. Insurance recoveries that are related to noncapital clean-up of storm damage and are recognized in subsequent periods should be reported as other financing sources. ). Mr. Brown wanted to expand the answer to explain why this would not be a special item. The board agreed with staff. However, Mr. Sundstrom agreed with Mr. Brown s modification. In regard to other implementation guidance valuation of intra-entity transfers, 15 of GASB 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues, required that assets transferred intra-entity be reported by the recipient entity at the carrying value of the transferor. Questions arose about whether in such circumstances the recipient government could revalue those assets at fair value if the recipient management s intent with respect to those assets was different than the transferor management s intent. The provisions of 68 of GASB 72, Fair Value Measurement and Application, required that a government retain classification of an asset for financial reporting purposes even if management s intent changed over time. Staff s proposed new question and answer would clarify that the provisions of GASB 72 applied in circumstances in which the transfer took place between two legally separate entities belonging to the same financial reporting entity. The board agreed with staff s new question and answer. Next, 6 of GASB 54, Fund Balance Reporting and Governmental Fund Type Definitions, stated that the nonspendable fund balance classification includes amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. That paragraph further specified the not in spendable form criterion included, among other transactions, the long-term amount of loans and notes receivable. Staff received questions about circumstances in which the government had notes receivable for sales of capital assets specifically, whether it was appropriate to recognize those amounts as nonspendable fund balance. In those circumstances, the government had not recognized revenue from the transaction resulting in the note receivable and, therefore, had not recognized an increase in net position because the revenue was not collectible soon enough after the end of the current period to meet the government s established policy for - 4 -

5 available revenue using the current financial resources measurement focus. Staff believed in those circumstances, similar to recognition of restricted net position as a net position classification, the government should reduce the long-term portion of the note receivable balance by the balance of the deferred inflows of resources for revenue not available using the current financial resources measurement focus. That approach resulted in no amount being reported as nonspendable fund balance. To address this issue, staff proposed a new question and answer. Mr. Previdi and Mr. Vaudt agreed with adding staff s explanation of the concept. The board agreed with staff. For tax abatement disclosures, 7(b) of GASB 77, Tax Abatement Disclosures, described the following note disclosure requirement: The gross dollar amount, on an accrual basis, by which the government s tax revenues were reduced during the reporting period as a result of tax abatement agreements. Staff s proposed new question and answer was the subject of numerous technical inquiries from preparers and auditors. The scenario related to fee in lieu of taxes (FILOT) agreements entered into between governments and individuals or entities in their jurisdiction. In determining the amount of the reduction of tax revenues for the GASB 77 disclosure requirement, governments should compare the amount of taxes the government would have received in the absence of an agreement with the amount of FILOT revenue they received as stated in the agreement for the reporting period. The difference resulting from that comparison was the amount that should be disclosed pursuant to GASB 77 7(b). In the scenario described in the technical inquiries, an additional element existed that some governments believed should be considered in the calculation of the disclosed amount. That additional element involved a state economic development incentive that provided an exemption from property taxes to any entity investing an amount greater than $50,000 in its new business. The property tax exemption was in effect for a period of five years after the qualifying investment. It was available to all entities meeting the investment criteria, except those that entered into a FILOT agreement with a local government. Due to the broad applicability of the property tax exemption that would apply to the entity in the absence of the FILOT agreement, some governments believed the amount to be disclosed as forgone revenue was the difference between the FILOT amount a government was entitled to and the amount that it was entitled to under the economic development exemption (which was zero). That approach resulted in no tax revenue forgone and, thus, no disclosures related to the GASB 77 requirements. Alternatively, some stakeholders believed a government should disregard the economic development property tax exemption and instead compare the amount the government was entitled to pursuant to the FILOT to the tax revenue the government was entitled to before consideration of any exemptions or incentives. Staff believed the fact that an entity would have qualified for an alternative incentive if it had not chosen to enter into the FILOT agreement was irrelevant to the computation of the amount required to be disclosed by GASB 77 7(b). The only aspects relevant to the amount required to be disclosed were the amount of taxes forgone by the government as a result of the agreement between the government and the other entity. The fact the economic development incentive was broad-based and not subject to approval by the government for each individual entity did not make the amount of property tax revenue, as reduced by the potential economic development incentive, a substitute for the tax revenue to which the government was entitled. Furthermore, the pronouncement did not provide any basis for consideration of alternative agreements available to, but ultimately rejected by, the entity. To address this issue, staff proposed a new question and answer. Mr. Previdi believed the other agreements should be considered. Mr. Knight believed a good anchor was disclosing what the entity should pay without incentives and then with the incentives. Mr. Brown agreed with Mr. Knight. The board agreed with staff. Next, staff s proposed new questions and answers under the headings of OPEB Plans Contributions and OPEB Plans Benefit Payments addressed the issue of inclusion of the implicit rate subsidy in measurement of contributions (in certain circumstances) and benefit payments in the financial statements of OPEB plans. Since distribution of staff s issue paper to the board for this topic, staff realized that the issues addressed in the proposed new questions already were addressed in previously issued implementation guidance. Both issues were addressed in Implementation Guide No , Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Specifically, Q.#4.55 in Implementation Guide addresses the issue in the context of contributions, and Q.#4.63 in that guide addressed the issue in the context of benefit payments. Because the issue was already addressed in existing literature, staff proposed removing the associated two questions from consideration for inclusion in the implementation guidance update. Therefore, staff suggested only two proposed new questions and answers related to employer reporting for OPEB. For insurance recoveries, staff proposed the following modifications to clarify the new question and answer related to insurance recoveries (GASB 42 21): Q Should insurance recoveries related to clean-up costs for storm damage, such as removal of downed trees and other debris, be netted against the related cleanup expenditures in governmental funds? A Insurance recoveries that are related to clean-up of storm damage - 5 -

6 and are realized or realizable in the same year as the related clean-up expenditures should be netted against those expenditures. Insurance recoveries that are related to clean-up of storm damage and are recognized in subsequent periods should be reported as other financing sources. The board agreed with staff s proposal. Cloud Computing Arrangements Jialan Su, project manager; Ken Schermann, consultant; and Rebecca Cessna and Eleanor Mann, postgraduate technical assistants, presented the board with an issue paper that discussed definitions and classification. The objective was to discuss the characteristics of subscription-based information technology arrangements (SBITA) and how they should be defined for accounting and financial reporting purposes. SBITAs were becoming more and more common. SBITAs could include both hardware and software and allowed a government to acquire its IT resources in a more elastic and dynamic way by paying a periodic fee for access. SBITAs had many unique characteristics from both operational and accounting perspectives. Four potential defining characteristics of a SBITA were as follows: 1) The arrangement was for hardware, software, or a combination of both; 2) the arrangement granted a government the right to use hardware or software; 3) the arrangement was on a subscription basis over a contract-specified period of time; and 4) the arrangement was an exchange, or exchange-like transaction. These characteristics were aimed at describing the transactions that the project scope intended to address. Staff noted from conducted research that SBITAs incorporated pieces of both hardware and software. Within one government, SBITAs could be used to serve functions such as human resources, financial reporting, marketing, training, and procurement; within each department, SBITAs also could be used to store data, conduct training, select vendors, and perform other tasks specific to that department. One example of a SBITA was cloud computing. The National Institute of Standards and Technology (NIST) was a federal agency established by Congress and their definitions were commonly accepted and referenced in other studies and reports. The NIST defined cloud computing as, a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. Staff indicated that the examples in this definition included both hardware (servers) and software (applications). Additionally, the NIST also defined the three most common deployment models for cloud computing software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS). These three deployment models involved either hardware, software, or a combination of both. Staff believed a potential defining characteristic of SBITAs should be that they were for hardware or software. Based on research conducted, stakeholders did not view a SBITA that was for the use of hardware as significantly different from a SBITA that was for software, and in many cases the arrangement included both hardware and software. Therefore, for purposes of describing a SBITA, staff did not believe separating arrangements based on whether or not the arrangements included only software or only hardware was a valid distinction. Instead, staff believed a defining characteristic of SBITAs should include both software and hardware. Some contracts for SBITAs also included service components. Staff did not believe the presence of a service component in a contract for hardware or software prevented that arrangement from being a SBITA. Staff planned to discuss the accounting treatment for multiple components in a SBITA at a later date. However, staff believed it was important to specify for this project that if an IT arrangement solely provided support services, that arrangement was considered a service contract and not a SBITA. In other words, the project scope should exclude IT arrangements that solely provided support services. Staff did not believe a contract solely for services was economically the same as a contract for hardware or software. Additionally, the board was deliberating accounting and financial reporting alternatives for service contracts in the revenue and expense project. This approach was similar to the approach taken in GASB 87 and the proposed position of the private public partnerships (P3) project. GASB 87 6 specifically excluded contracts that were only for services, this definition excludes contracts for services except those contracts containing both lease and service components. For the P3 project, the board tentatively agreed the proposed definition for P3s eliminated simple maintenance contracts from that definition because they did not involve the use or operation of the underlying asset. Thus, staff recommended that a) one of the defining characteristics of SBITAs should be that the arrangement was for IT hardware, software, or a combination of both, and b) the project scope should exclude IT arrangements that solely provided support services. Mr. Sundstrom believed IT infrastructure was a key component of the definition and represented both software and hardware. He believed these arrangements - 6 -

7 included both tangible and intangible assets. If the subscription service was going to be disaggregated into its components, he believed it must include infrastructure. However, he agreed with Mr. Knight that the government was simply purchasing a subscription service. He agreed with Mr. Brown if the service was standalone. Mr. Previdi believed IT infrastructure was repetitive of combination of both. Mr. Bean indicated that IT infrastructure was a subset of the combination of both or an example. Mr. Knight believed the subscription service included three components: software, hardware, and a combination of both, including IT infrastructure. Mr. Brown believed the goal was to exclude the service component from the accounting and financial reporting of this project. Staff clarified that IT infrastructure modified all three components (software, hardware, and the combination of both). The board agreed with staff s recommendations. Next, during pre-agenda research staff learned that most SBITAs gave governments the right to use a provider s hardware or software. This was described by another one of the NIST s essential characteristics of cloud computing: broad network access. The NIST defined broad network access as, capabilities [that] are available over the network and accessed through standard mechanisms (e.g., mobile phones, laptops, and personal digital assistants [PDAs]). This was different from internally developed or commercially purchased IT, which allowed a government to tangibly control the physical hardware or software. Commercially purchased software typically gave customers a license, whereas SBITAs typically did not. One example given to staff during research was the difference between commercially purchasing software versus contracting with a provider for cloud-based software that provided almost the same functionality. If a government commercially purchased the software, they would either receive a physical CD-ROM or download the source code onto their own system, and the third-party vendor would not be able to change the software version the government purchased without the acquiring government s permission. However, under the cloud arrangement, the third-party vendor gave a government the right to use the software through the cloud. In this case, the government would not have a physical CD-ROM or the source code. Often, the third-party vendor was able to upgrade the version of software in the cloud at any time, but the government always had the right to use the most updated code for the length of the agreement. FASB did not specifically define a SBITA, however their definition of a hosting arrangement was comparable to what staff learned from the research. This year, the FASB amended their definition of a hosting arrangement established by Accounting Standards Update (ASU) , Intangibles Goodwill and Other Internal-Use Software (Subtopic ) Customer s Accounting for Fees Paid in a Cloud Computing Arrangement in the recently issued ASU , Intangibles Goodwill and Other Internal-Use Software (Subtopic ): Customer s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The revised definition focused on access and usage, not a license, which was in the previous definition. The BFC 16 in ASU explained some of the changes to the definition. Thus, staff believed a potential defining characteristic of SBITAs should be that the arrangement granted a government the right to use hardware or software. Research indicated that the notion of a perpetual license was not applicable to SBITAs because a license often was never transferred. This also was one of the reasons the FASB changed their definition of a hosting arrangement in ASU Instead, research showed that SBITAs generally provided a government the right to use a third-party s hardware or software. This could be the ability to access a third-party s server where the government s data was stored or the ability to run cloud-based software through internet access. Staff noted that this structure was different than internally developed IT, where the government either built the hardware or developed the software code. This structure also was different from a commercially purchased hardware or software license that conveyed ownership of the specific hardware or a license of the software. Staff recommended that one of the defining characteristics of SBITAs should be that the arrangement granted governments the right to use IT hardware or software. The board, except Mr. Vaudt, Mr. Brown, and Mr. Granof, agreed with staff. Research indicated that one of the potential defining characteristics of SBITAs was they were on a subscription basis over a contract-specified period of time. Based on staff research, interviewees generally believed that distinguishing IT arrangements based on their method of acquisition was an appropriate approach. A subscription basis included paying for a good or service periodically for a specified length of time according to a contract. Staff noted that interviewees believed the current subscription models allowed them to access IT similarly to how internally developed or commercially acquired licensing arrangements did. Interviewees stated that subscription-based arrangements typically had a contract-specified baseline fee on a periodic basis designed to accommodate the government customer s projected consumption (processing power, usage, storage, number of employee users, and so on). Often, the fee was for a range of consumption, and a different fee was charged for a different range. Another of NIST s essential characteristics of cloud computing was that it was on a measured service. The NIST definition of measured service was as follows: Measured service: Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to - 7 -

8 the type of service (e.g., storage, processing, bandwidth, and active user accounts). Resource usage can be monitored, controlled, and reported, providing transparency for both the provider and consumer of the utilized service. Some of the advantages of SBITAs being subscription-based were the scalability of applications to organization growth, upgrades, and predictable periodic payments spread out over the contract period. For example, the NIST stated that cloud computing allowed for on-demand self-service where, a consumer can unilaterally provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service s provider. Additionally, providers of subscription arrangements believed they allowed their customers to spread out the cost of innovation and upgrades by charging a subscription fee that was all-inclusive. Thus, the third characteristic that staff identified as a potential defining characteristic of a SBITA was the arrangement was on a subscription basis over a contract-specified period of time. Staff noted that by paying a subscription fee, the government users were granted the right to use hardware or software for a contract-specified period of time but did not receive the same kind of ownership as purchasing hardware or obtaining software license. Additionally, providers often allowed a customer to rapidly scale their arrangements up to receive additional capacity on a subscription basis. Staff believed this ability to dynamically provision hardware and software was a new feature of SBITAs that was not addressed in current guidance. Therefore, staff recommended that one of the defining characteristics of SBITAs should be that the arrangement was on a subscription basis over a contract-specified period of time. Mr. Brown did not believe the period of time needed to be specified in the contract itself but agreed with staff s basic recommendation. He believed specified period of time was the key, not whether that was specified in a contract. The board agreed with staff. In regard to the exchange or exchange-like transaction issue, staff noted that SBITAs were agreements between vendors and governments and generally required a government to pay a fee periodically for the arrangement. SBITAs generally charged a baseline fee for a specified range of use, and additional fees were added if that range of consumption was exceeded. Research indicates it was rare for vendors to donate the use of hardware or software to governments. If a government obtained access and use of hardware or software free of charge, that transaction was subject to GASB 33, Accounting and Financial Reporting for Nonexchange Transactions. GASB 87 B9 explicitly excluded those transactions that were classified as nonexchange transactions. Staff noted that a potential characteristic of a SBITA was that a government paid for such an arrangement in an exchange or exchange-like transaction. Staff also noted that the Revenue and Expense Recognition project was currently reexamining the concepts of exchange, exchange-like and nonexchange. However, until the completion of that project, staff believed the most consistent approach to address this aspect of SBITAs would be one similar to that in GASB 87. Therefore, staff recommended that one of the defining characteristics of a SBITA was that the arrangement was an exchange or exchange-like transaction. Mr. Brown believed it was possible to have a non-exchange transaction (voluntary non-exchange) with these arrangements. Mr. Bean believed the intangible nature of this was the key characteristic to limit it to exchange and exchangelike. He did not believe Mr. Brown s concern was relevant at this time considering the rarity of a non-exchange transaction occurring (none known to date). The board generally agreed with staff. For the proposed definition of a SBITA, staff proposed the following as the definition of SBITAs: In connection with acquiring the right to use hardware or software, arrangements in which a government enters into an exchange or exchange-like transaction to access information technology hardware or software on a subscription basis for a contract-specified period of time. Staff modified the definition again to incorporate the control concept. Mr. Previdi wanted to parallel GASB 87 s definition for leases. Mr. Granof believed adding the control concept was unnecessary and agreed with Mr. Previdi. The board agreed with staff. Revenue and Expense Recognition Paulina Haro and Pam Dolan, project managers; Ken Schermann; Hollis Hanson-Pollock, practice fellow; and Alex Balkan, Shelby Cameron, Rebecca Cessna and Jacqueline Roberts, postgraduate technical assistants, presented the board with issue papers that discussed an overview of federal grants, grants analysis, and analysis of specific beneficiary and rights and obligations that articulated in equivalent terms. The objective of the first discussion was to provide a broad overview of resources, commonly referred to as grants, provided by the federal government to state, local, and tribal governments. Although in the governmental environment grants also might be provided by state and private entities, staff focused on inflows provided by the federal government. Furthermore, grant outflows would be considered along with the expense transaction analysis in a future meeting. Staff discussed five areas: a broad overview of the current level of federal - 8 -

9 appropriation for grants and a brief historical overview of federal domestic assistance; an overview of the federal side of grants administration; a summary of certain legal issues about grants as binding arrangements; allowable costs in the context of the timing of the arrangements, federally imposed conditions, and matching and certain cash disbursement practices; and a brief description of grant categorization. As a result of staff s research, staff identified potential overlap between grants and other contractual relationships, such as interlocal agreements. Further challenges were identified about the characterization of grants from a state perspective, which was different from the federal perspective. Issues about grouping grants also arose because of the varied formats of federal domestic assistance that were currently provided (fifteen different types), including specific issues related to Medicare and Medicaid. Lastly, it also became apparent that other voluntary non-exchange transactions such as donations and pledges had an impact on the analysis of grants. In regard to grant categories, staff s starting point to identify federal grant characteristics was the Catalog of Federal Domestic Assistance (CFDA); which included in its 2017 edition a list of over 2,900 programs and 15 categories. The CFDA was developed from the perspective of the grant applicant. Although it included eligibility requirements of applicants, it was not easy to determine the number of grant programs applicable to state and local governments or the prevalence of each of the 15 grant types. Staff performed a basic analytical review and concluded that the most prevalent type of grant program was a formula grant. Additional consideration was given to the classification used in reports issued by the Congressional Research Service (CRS) of the Library of Congress. That research generally classified grants into three categories: (1) categorical grants, (2) block grants, and (3) general revenue sharing. Categorical grants were generally defined as grant programs that Congress authorized for narrowly defined purposes. Block grants were defined as grant programs authorized for broad purposes in which the federal agencies and primary grant recipients had substantial discretion in the use of funds. General revenue sharing was authorized under the State and Local Fiscal Assistance Act of 1972 and expired in While it was authorized, general revenue sharing provided wide discretion to state and local governments in the use of funds. The research also showed that the least prevalent type of grant was block grants, and in FY2014 only 21 block grants were funded. The top three block grant appropriations in FY2017 were the Surface Transportation Program in the amount of $10 billion, the Child Care and Development Block Grant in the amount of $5.3 billion, and the Community Development Block Grant (CDBG) in the amount of $3 billion. Mr. Previdi believed public good could be part of the exchange. He also wanted to analyze the substance of the transactions over their form. He wanted to ensure the board developed a comprehensive model that addressed the 15 types of CFDA categories of federal financial assistance. He questioned whether ancillary beneficiaries meant there were no specific beneficiaries (e.g., sidewalk in front of his house that others could use). Mr. Granof believed there were major differences between categorical grants and block grants. Mr. Caputo believed allowable costs with pre-awards were challenging when applied to the specific facts and circumstances of each grant. Mr. Brown wanted consideration of state grants, which might have different characteristics than federal grants. He believed the OMB Compliance Supplement could be helpful to the board in reaching decisions. He agreed with staff that there would be difficulty in evaluating federal programs for categorization into the types of assistance. He believed the reliability criteria would fail for revenue recognition for some of these transactions because of this difficulty. He believed that once a government voluntarily accepted the grant, the government then must comply with all compliance requirements. Next, staff discussed grants analysis. The objective was to analyze the grant transactions considered in the research. Staff classified certain federal domestic transactions into four groups and provided analysis of them in the context of the seven characteristics identified in the project for classification. In an attempt to propose an initial grouping and provide a level of analysis for board feedback, staff proposed tentatively classifying federal domestic assistance into four broad categories: (1) project grants, (2) formula grants, (3) research grants and loans, and (4) individual assistance. Staff tentatively grouped research grants and loans together because those transactions were considered exchange transactions under current literature because the resource provider received something in return. It was possible that this assumption might not hold, and the two types of transactions could be further divided into their individual categories. Additional categories, such as insurance, would be considered at a later time. Given that there were multiple characteristics consistent across categories, staff organized the analysis based on the seven characteristics and not based on each of the grant categories: 1) voluntary (determining whether the transaction was voluntary or compulsory); 2) service relatable (determining whether there was a relatable service in the transaction or specific goods or services); 3) cost recovery (determining whether the fee consideration was established with a relationship to the cost of the activity giving rise to the transaction); 4) benefit (determining whether the resource provider received a direct, including exclusive, benefit or indirect, or exclusive, - 9 -

10 benefit in the transaction); 5) binding arrangement (based on examples included in the ITC, determining what type of binding arrangement was applicable to the transactions reviewed); 6) specific beneficiary and to some extent reciprocity (identifying the party who received the benefit of the goods or services provided by the government); and 7) rights and obligations that articulate in equivalent terms (the metric used to establish the amount of consideration was the same metric used to measure the service provided). For the issue of specific beneficiary and rights and obligations that articulated in equivalent terms, staff indicated that the objective was to analyze two characteristics identified for revenue classification: (1) specific beneficiary and (2) rights and obligations that articulated in equivalent terms. The characteristic of specific beneficiary was identified as a relevant element in the definition of a performance obligation. Furthermore, the board had requested consideration of an additional characteristic in the definition of a performance obligation, specifically rights and obligations that articulated in equivalent terms. Staff discussed analysis of both characteristics as applicable to the five types of revenues: (1) taxes, (2) punitive fees, (3) special assessments, (4) regulatory fees, and (5) fees for specific services. Specific beneficiary was selected as one of the six characteristics for analysis of certain revenue transactions because it was included in the Invitation to Comment (ITC), Revenue and Expense Recognition, in the definition of a performance obligation. The ITC defined a performance obligation as, a promise in a binding arrangement between a government and another party to provide distinct goods or services to a specific beneficiary. The specific beneficiary was the party receiving the benefit of the goods or services provided by the government. To be a specific beneficiary, the characteristics of the beneficiary must be sufficiently distinguishable from the general citizenry. A specific beneficiary could include an identified group of individuals, if their common characteristics were distinct. The ITC provided an example of a specific group of beneficiaries as low-to-moderate-income citizens in need of affordable housing that were eligible for participation in Community Development Block Grant (CDBG) programs. A group that did not meet the specific beneficiary characteristic was persons in need of public safety services. If a specific beneficiary was not identified, the transaction was not considered to contain a performance obligation. When analyzing the specific beneficiary in a revenue transaction, it was important to distinguish between the parties in the transaction as there was a potential overlap between the specific beneficiary and the resource provider. In most revenue transactions (but not all), the resource provider also was the beneficiary of the transaction. However, issues arose in the analysis that led to conclusions regarding reciprocity in the transfer of resources. Included in the ITC description of a binding arrangement, the need to have rights and obligations that articulate in equivalent terms was proposed as a characteristic necessary to establish the existence of a performance obligation. Although this characteristic could be perceived as part of the binding arrangement, it also was possible this characteristic could be separate from the existence of a binding arrangement. The ITC 5 described the characteristic. Some communication challenges were identified at the issuance of the ITC because the term articulate did not convey the message intended to all stakeholders. An alternative to identify this characteristic could be to state that, a transaction contains a performance obligation in situations in which the metric used to establish the amount of consideration is the same metric used to measure the service provided. For example, motor fuel tax revenue failed to contain a performance obligation because the metric used to derive the tax revenue was the number of gallons purchased by motorists in a specific jurisdiction; while the metric used to measure the services provided with these resources was the number of miles resurfaced, or the number of holes patched in a specific fiscal year. Public-Private Partnerships (PPP), including Reexamination of GASB 60 Wes Galloway and Scott Reeser, project managers; and Alex Balkan and Christian Romanelli, postgraduate technical assistants, presented the board with issue papers that discussed the definition and scope of a PPP and an accounting approach for PPP guidance. Staff continued discussions on the tentative definition of public-private and public-public partnerships (PPPs) within the project scope. The board tentatively agreed to the following definition of a PPP: Public-private and public-public partnerships (PPPs) are arrangements in which a government contracts with another entity (public or private) to convey control of the right to operate or use infrastructure or other capital assets in an exchange or exchange-like transaction for a period of time. The board also tentatively concluded that capital assets included those for which the transferor government did not hold title but was required to report under GASB 60, Accounting and Financial Reporting for Service Concession Arrangements. Staff proposed edits and additions to the tentative PPP definition and other application issues based on an analysis of the following areas: intangible assets in GASB 60 and GASB 87, Leases, capital assets versus nonfinancial assets, the notion of significant consideration in the reporting of a capital asset under GASB 60, and the provision of public services notion in