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

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1 MEMORANDUM TO: FROM: All NASACT Members and Other Interested Parties R. Kinney Poynter, Executive Director DATE: July 18, 2017May 30, 2017 SUBJECT: May 23-25, 2017, 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 actions of the board. All board members and the director of research were present for all or a portion of the May 23-25, 2017, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered 1. Leases 2. Implementation Guide OPEB 3. Debt Disclosures, Including Direct Borrowings 4. Certain Debt Extinguishment Issues 5. Revenue and Expense Recognition 6. Financial Reporting Model Reexamination Leases Please note that all board decisions are tentative until a final pronouncement is issued. Wes Galloway and Jialan Su, project managers; Ken Schermann, senior technical advisor, and Elizabeth Schmidt and Kayta Gruneberg, postgraduate technical assistants, presented the board with a pre-ballot draft of the Statement, Leases. For 12 (lease term), staff suggested including some language from the FASB exposure draft (ED) to help clarify this requirement related to lease cancellability options. Mr. Brown was concerned with the additional language because it undermined the strength of the current proposed language. Mr. Sundstrom believed lease agreements would be engineered to minimize the lease term because of the newly proposed language. He wanted to state that there would be an economic penalty. Staff clarified that both the lessor and the lessee had the option to cancel the lease without permission from the other party (i.e., mutual option). Mr. Previdi was concerned about the burden on the preparers of having to perform a termination assessment. The board agreed with including language about the mutual permission option. The board, except Mr. Sundstrom and Mr. Granof, agreed not to include a provision about penalties. In regard to 23 (lease liability an estimate of the rate that would be charged for borrowing the lease payment amounts for the lease term ), the board, except Mr. Sundstrom, supported leaving the paragraph as written. For 44a (lease receivable), staff suggested clarifying the fixed payments requirement to fixed payments, less payments (in accordance with 60-61) paid to the lessee. The board agreed with the change. For 49c (contingency), staff added language to address when a contingency caused a variable lease payment to become fixed. Mr. Brown agreed with staff s change, which would be similar to the FASB s guidance. Mr. Caputo agreed with staff in order to reduce unnecessary burden on preparers. Mr. Previdi supported theoretical purity and being consistent with FASB on this issue. The board agreed with staff. For 71b (lease modifications), Mr. Granof questioned why this was needed if the lease terms were unreasonable. For B50 (remeasurement) in the basis for conclusions (BFC), Mr. Granof preferred to remeasure all assets and liabilities by the same amount at fair value for cost/benefit reasons. The board supported moving forward with a ballot draft.

2 Implementation Guides, Accounting and Financial Reporting for Postemployment Benefit Other Than Pension Michelle, Czerkawski, project manager, Emily Paul, assistant project manager, and Kayta Gruneberg and Alec Schon, postgraduate technical assistants, presented the board with a draft of a proposed Implementation Guide. Staff addressed two issues that affected the draft of a proposed Implementation Guide, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The two issues were the following: 1) the requirement to exclude administrative cost from the projection of benefit payments for purposes of determining the (collective) net (total) OPEB liability under the requirements of 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; and 2) the effective date of the Implementation Guide and considerations related to plan and employer coordination in circumstances in which there were questions and answers proposed to be included in this Implementation Guide about measurement of the (collective) net (total) OPEB liability not included in Implementation Guide No , Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. In regard to administrative costs, staff received multiple requests for clarification regarding the GASB 75 provision that, for purposes of projecting benefit payments, administrative costs associated with providing OPEB should be excluded ( 31 and others). One of those requests was submitted in response to the ED of Implementation Guide No , Financial Reporting for OPEB Plans. Other requests for clarification came from representatives of actuarial firms. Those representatives described the characteristics of administrative costs in generally the same way another respondent had (i.e., as falling into two broad categories those directly related to the payment of medical claims and others). One such representative noted that the exclusion of administrative costs directly related to medical claims were a different approach than that required by other standards setters, and further commented that those costs have historically been treated as a component of medical claims because they are inherently tied to the payment of those claims. Finally, one representative indicated that such costs in a fully insured plan generally would not be separately assessed or identified. Instead, those amounts typically were incorporated into the premiums charged by the third-party insurer, and traditionally were included as part of the projection of benefit payments. In addition, staff was contacted by financial statement preparers for OPEB plans administered through trusts meeting the criteria in GASB 74 3 (GASB 75 4) and that administered some or all claims directly, rather than through a third-party insurer. Those questions focused on whether items should be included as administrative expense or benefit payments in the financial statements of the OPEB plan. Also raised were questions about whether the amounts reported as benefit payments and administrative expense by two plans that were otherwise identical should differ if one plan was fully insured (and thus, premiums charged by the insurer included amounts for claims administration) and the second plan administered some or all claims directly. For the source of the requirement, the requirement in GASBs 74 and 75 was included in the final Statements but was not included in the ED of those Statements. The provision was added post-eds in response to a respondent comment. For exclusion of administrative expense, a respondent requested that the final Statements explicitly state that administrative expenses should not be included in the projection of benefit payments for purposes of measuring the total OPEB liability. As stated by the respondent, Section of ASOP No. 6, Measuring Retiree Group Benefits Obligations and Determining Retiree Group Benefits Program Periodic Costs or Actuarially Determined Contributions, required an actuary to consider administrative and other expenses in the measurement of retiree group benefits. If language can be inserted to address potential confusion between the requirements for the projection of benefit payments for financial reporting purposes and Actuarial Standards of Practice (ASOP), staff believed it should be done. Although the respondent recommended amending the definition of total OPEB liability, staff believed an explicit statement that administrative expenses should not be included in the projection of benefit payments should be presented in the standards section of the final Statement. Staff also believed it would be most appropriate to include that provision in the requirements addressing the projection of benefit payments. Therefore, staff recommended adding a sentence to the discussion of the projection of benefit payments in the ED Draft to clarify that administrative expense should not be included in the projection of benefit payments for purposes of measuring the total OPEB liability. For the requirements in the Plan ED related to the measurement of the total OPEB liability, the issue had implications for the Plan ED that were the same as for the Employer ED. Therefore, staff made the same recommendation for the final Plan Statement as for the final Employer Statement. If the board s intent was to exclude as administrative cost only those amounts not directly related to the payment of claims, staff believed - 2 -

3 questions and answers based on the following should be included in the Implementation Guide (Q&A) to clarify the measurement provision: Question 1 (Q.#4.86 in the Q&A): Q Statement 75 specifies that administrative costs associated with providing OPEB should be excluded from projected benefit payments. For this purpose with regard to postemployment healthcare benefits, should amounts that are directly related to the payment of healthcare claims, such as third-party claims-administration fees, be classified as administrative costs? A No. The requirement to exclude administrative costs associated with providing OPEB is intended only to encompass items related to the OPEB plan s administrative operations that are not reported as investment expense, such as certain salaries and payroll taxes, trust custodial fees, and attorney and consultant fees. If, instead, the board s intent was to exclude all administrative cost from the projection of benefit payments, staff believed that questions and answers based on the following should be included in the Implementation Guide to clarify the measurement provision: Question 2: Q Statement 75 specifies that administrative costs associated with providing OPEB should be excluded from projected benefit payments for purposes of determining the employer s total OPEB liability. For this purpose with regard to postemployment healthcare benefits, should amounts that are directly related to the payment of healthcare claims, such as third-party claims-administration fees, be classified as administrative costs? A Yes. The requirement to exclude administrative costs associated with providing OPEB is intended to encompass all items related to the administration of OPEB, including amounts that are directly related to the payment of healthcare claims. Therefore, such costs should be excluded from projected benefit payments for purposes of determining the employer s total OPEB liability. Furthermore, staff did not believe there was an intention for the result to be that two otherwise identical plans reported different amounts for benefit payments, administrative expense, and the employer s OPEB liability if one plan paid claims directly and the second plan contracted with an insurer to provide benefits. Therefore, under this application of the requirements, staff believed the following additional question and answer should be included to emphasize that this approach was required to be applied to benefits provided through a third-party insurer, as well as to benefits provided through plans in which claims were paid directly: Question 3: Q Does the answer to [Question 2] apply to healthcare benefits that are provided through a third-party insurer that includes amounts for claims administration in the premiums charged? A Yes. Regardless of the manner in which benefits are provided, all administrative costs should be excluded from the projected benefit payments for purposes of determining the employer s total OPEB liability. For measurements based on age-adjusted premiums approximating claims costs, this approach resulted in the need to isolate the amount of such costs included in premiums so they could be classified as administrative cost, rather than included in the projection of benefit payments. The board agreed with staff s suggestion to add the new questions. The draft questions and answers cited above for the two alternatives were distributed to members of the project s consultative group for feedback. Members of the group who commented emphasized the impracticality of separating costs associated with claims administration, particularly when benefits were fully insured. Staff had significant concerns about the practicality of applying the interpretation represented by Questions 2 and 3, particularly in the case of a fully insured OPEB. Given the feedback received from members of the project s consultative group regarding the practicality of applying Questions 2 and 3 (particularly to fully insured benefits), the prevalence of fully insured benefits (particularly postemployment healthcare), and an assumption that the intent was not to have fully insured benefits measured differently from benefits provided through plans in which claims were paid directly, staff believed the first interpretation (that represented by Question 1) was preferable because it promoted comparability with potentially less cost than the alternative represented by Questions 2 and 3. Next, the board discussed the effective date and new measurement-related questions and answers. Employers and governmental nonemployer contributing entities generally were required to report measures of the (collective) net OPEB liability (for benefits provided through single-employer or cost-sharing OPEB plans) that coordinated with those reported by the OPEB plan. However, GASB 75 permitted employers and governmental nonemployer contributing entities to report an OPEB liability that was based on a measure of the (collective) net OPEB liability determined as of a date up to one year prior to the government s fiscal year end (e.g., in its June 30, 2018 financial statements, a single employer could report a net OPEB liability measured as of or after June 30, 2017 and as of or before June 30, 2018.) The pre-ballot draft of the proposed Implementation Guide included questions and answers addressing three liability-related measurement issues not addressed in Implementation Guide and about which there was no pension-focused question and answer to which analogy could be drawn. Those issues were as follows: 1) considerations related to administrative cost, 2) the end of the attribution period for the actuarial present value of projected benefit payments in a circumstance in which an employee s eligibility for OPEB ceased after a certain age and the employee was expected to be employed by the employer - 3 -

4 past that age, and 3) the end of the attribution period for the actuarial present value of projected benefit payments if there was a deferred retirement option program (DROP) for pensions but no such program for OPEB. Therefore, at the time this Implementation Guide becomes effective, there would not have been comparable requirements for OPEB plan measurement effective early enough for the employer or governmental nonemployer contributing entity in all cases to meet its reporting requirements by using the measure of the net OPEB liability reported by the OPEB plan. For example, at June 30, 2018, an employer reporting a net OPEB liability with a measurement date of June 30, 2017 would have to comply with the requirements of this Implementation Guide, but the measure reported by the OPEB plan at June 30, 2017 might not have been done in accordance with the requirements outlined in this Implementation Guide. To address this issue, staff considered the following alternative approaches: 1) omit the new questions and answers from this Implementation Guide and issue them as part of the next Implementation Guidance Update project, 2) include the new questions and answers in this Implementation Guide for employer and governmental nonemployer contributing entities and issue those questions and answers for OPEB plans in the next Implementation Guidance Update, or 3) expand the scope of this proposed Implementation Guide to include the questions and answers for both employers/governmental nonemployer contributing entities and OPEB plans. For alternative 1 above, an ED for that project was scheduled to be issued for comment later this year, with a final Implementation Guide planned for spring If that project followed the pattern of past Implementation Guidance Updates, the next Update would be effective for reporting periods beginning after June 15, To ensure plan and employer/governmental nonemployer contributing entity coordination under this alternative, the requirements of the new questions and answers in the Update would become effective first for OPEB plans (OPEB plan reporting periods beginning after June 15, 2018), with employer and governmental nonemployer contributing entities required to comply in reporting periods in which the (collective) net OPEB liability had a measurement date of June 30, 2019 or later (reporting periods beginning after June 15, 2019). To ensure plan and employer/governmental nonemployer contributing entity coordination under alternative 2 above, the effective date of the new questions and answers in this Implementation Guide for employers and governmental nonemployer contributing entities would be delayed until reporting periods in which the (collective) net OPEB liability had a measurement date of June 30, 2019 or later (reporting periods beginning after June 15, 2019). Under approach 3 above, the new questions and answers could be made effective for OPEB plan reporting periods beginning after June 15, To ensure plan and employer/governmental nonemployer contributing entity coordination, the new questions and answers could be required to be applied by employers and nonemployer contributing entities in reporting periods in which the (collective) net OPEB liability had a measurement date of June 30, 2018 or later (reporting periods beginning after June 15, 2018). Staff believed it was preferable to issue the three questions and answers as soon as possible to support consistent application of the requirements therein. Therefore, staff proposed that the questions and answers be included in this Implementation Guide for employers/governmental nonemployer contributing entities and OPEB plans. In addition, there were three questions and answers in Implementation Guide for which the effective date was tied to the effective date of GASB 85, Omnibus 2017 reporting periods beginning after June 15, Therefore, in order to ensure OPEB plan and employer/governmental nonemployer contributing entity coordination, staff proposed that the similar questions and answers included in this proposed Implementation Guide become effective for employers/governmental nonemployer contributing entities in reporting periods in which the (collective) net OPEB liability had a measurement date of June 30, 2018 or later (reporting periods beginning after June 15, 2018). The board did not object to proceeding to a ballot draft of the Implementation Guide. Debt Disclosures, Including Direct Borrowing Scott Reeser, project manager; Amy Shreck, practice fellow; Ken Schermann; and Robert Bell and Christian Jones, postgraduate technical assistants, presented the board with issue papers that discussed cost/benefit considerations, GASB scope of authority, and a draft standards section of the debt disclosure ED. Based on the pre-agenda research results, staff believed additional debt disclosures were beneficial to a variety of types of users for assessing government accountability and for making economic, social, and political decisions. Additional debt disclosures should result in greater consistency in financial reporting, clarify and improve application, and enhance the usability of information about the outstanding debt of governments. Staff believed governments could generally implement with minimal effort and cost the proposed Statement provisions

5 Staff believed the intended benefits of the final Statement justified the anticipated costs of implementation and ongoing compliance. The board agreed with staff. Next, a policy of the Financial Accounting Foundation s trustees addressed the characteristics of the information GASB might incorporate into accounting and financial reporting standards. These scope considerations were based on accounting and reporting characteristics currently in the GASB s Concepts Statements. The policy classified governmental financial information into three groups. If this information met all of the characteristics of Group 1, the financial information clearly was within the scope of the GASB s authority. No further analysis would be necessary. Staff noted that the requirements to be included in the ED did not contain accounting requirements; only financial reporting requirements were being proposed. Staff believed the financial reporting requirements to be included in the ED, Debt Disclosures, Including Direct Borrowing, met all of the characteristics in Group 1. Under the proposed guidance, additional disclosures would be required for transactions meeting the debt definition for disclosure purposes. Staff believed the proposed definition resulted in presentation of useful information about debt transactions, and that the proposed disclosures were essential to understanding that information. By requiring additional disclosures and reducing inconsistencies in current practice with a consistent definition of debt for disclosure purposes in the notes, staff believed users had the information they needed to understand the debt transactions of state and local governments and assess the accountability of those governments. The board agreed with staff. The board next discussed a draft standards section of a proposed Statement in preparation for the scheduled issuance of an ED in June The draft standards section incorporated tentative board decisions made during deliberations based on the project scope. For 3 (definition of debt For purposes of disclosure in notes to financial statements, debt is defined as a contractual obligation to pay cash (or other assets that may be used in lieu of payment of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. Debt for disclosure purposes does not include liabilities related to leases or trade accounts payable. ), Mr. Granof wanted to clarify that this definition should exclude executory contracts. He believed a government had an obligation to make payments, but the other party had to perform also. Mr. Previdi indicated that guaranteed contracts also addressed transactions where payments were required when the other party did not have to perform (e.g., fired football coach who was required to continue to be paid). In regard to 4 (notes to financial statements In addition to other requirements to disclose information related to debt, governments should disclose summarized information about the following in notes to financial statements related to outstanding debt: a. Unused lines of credit extended b. Collateral pledged as security for the debt c. Significant events of default or termination events and their significant finance related effects as specified in the debt agreement d. Subjective acceleration clauses. ), Mr. Brown suggested adding the introduction language above to clarify the requirement. He preferred to use the significant finance related language from other statements rather than Mr. Previdi s suggestion in c. Mr. Granof preferred to use aggregated rather than summarized. Ms. Sylvis supported Mr. Brown s suggestion with a discussion in the BFC about aggregation and what summary meant. Mr. Previdi preferred to omit extended from 4a and recommended the language above for 4c. He also wanted a summary of the remedies, as well as the events. Mr. Vaudt agreed with Mr. Previdi. For 5 ( In notes to financial statements, governments should separate disclosures regarding direct placements of debt (for example, an investor acquiring a debt security directly from a government) or direct borrowings (for example, a lender entering into a loan agreement with a government) from disclosures about all other types of debt. ), Mr. Previdi believed direct borrowing was just another form of debt, not specifically a type of debt. He suggested omitting types. Mr. Brown suggested omitting about all. Mr. Bean suggested omitting disclosures about all. The board agreed with the suggestions. The board supported proceeding to an ED. Revenue and Expense Recognition Amy Shreck, Ken Schermann, Pam Dolan and Randy Finden, project managers, and Robert Bell and Christian Jones, postgraduate technical assistants, presented the board with issue papers that discussed recognition of expense from exchange transactions, an overview of the exchange/nonexchange model, and examples. At the April 2017 board meeting, the board explored two alternatives to further define the recognition of revenue from exchange transactions using an earnings-based approach: (1) the substantial accomplishment alternative and (2) the entitlement to revenue alternative. The board tentatively decided to pursue the entitlement - 5 -

6 to revenue alternative to describe the recognition of revenue from exchange transactions under the earningsbased approach because it was more relevant to the governmental environment and it more closely aligned with GASB s conceptual framework. Using the entitlement to revenue notion, revenue was recognized when the government received cash or had a claim to cash from the resource provider and the term in which the revenue could be refunded had substantially expired. After the board s discussion about interperiod equity at the April meeting and in accordance with Concepts Statement 4, staff believed it was useful to expand the description of the entitlement to revenue notion to include that the acquisition of these net assets also must be applicable to the reporting period in which the costs of providing the services were incurred to be recognized as a revenue. If the net assets were acquired and they were not applicable to the reporting period, they were recognized as a deferred inflow of resources. Current GASB literature did not identify this expansion of the concept of deferred inflows and deferred outflows as described in Concepts Statement To apply a notion similar to entitlement to revenue to expense recognition by a provider government, the provider government could consider when it had incurred an obligation that could not be avoided and consequently net assets were consumed, and if the consumption of net assets was applicable to the reporting period. That recognition point mirrored when the recipient had a claim to cash of the provider government and the point at which the resources could be refunded to the provider government had past. Simply, the provider government recognized an expense when the goods or services were provided in the applicable period and it was obligated to provide the consideration in the exchange transaction. In regard to illustrative transactions, the application of the obligation for expense notion to expense recognition by a provider government might be more clearly understood by applying it to several example exchange transactions and describing the expense recognition that resulted. All four examples (audit services, fuel purchases, payroll and compensated absences, training registration) illustrated the underlying notion of the earnings-based approach, which was that expense should be recognized when the underlying exchange occurred and the provider of the resources had an obligation to pay for the value they received based on the agreement with the provider of the goods or services. As it related to exchange expense recognition, the earnings based approach and the obligation for expense notion aligned with the conceptual definition of a liability and an outflow in Concepts Statement 4. The idea behind the obligation for expense notion also aligned and was symmetrical with the notion for the entitlement to revenue for the other side of the transaction. Staff believed the earningsbased approach could be operationalized for both revenues and expenses. As with other examples the board evaluated, practical considerations called for some modifications to the general notions when applying this approach. Therefore, staff recommended further developing the obligation for expense notion for exchange expense recognition in the earnings-based approach in the Invitation to Comment (ITC). The board agreed with staff s recommendation. The next discussion was an overview of exchange/nonexchange model. The objective of this project was to develop a comprehensive application model for the recognition of revenues and expenses that arose from transactions currently classified as exchange, exchange-like, and nonexchange transactions including guidance for exchange transactions not specifically addressed in current literature. The purposes of developing a comprehensive model were to (1) improve the information regarding revenues and expenses that users needed to make decisions and assess accountability, (2) provide guidance regarding exchange and exchange-like transactions not specifically addressed by existing guidance, (3) evaluate revenue and expense recognition in the context of the conceptual framework, and (4) address application issues in practice identified during the preagenda research on revenue for exchange and exchange-like transactions. The first due process document would be an ITC expected to present two potential models for the recognition of revenue and expense: (1) the performance obligation/no performance obligation model and (2) the exchange/nonexchange model. Staff presented alternatives considered for the exchange/nonexchange model. For the exchange/nonexchange model, the central notion of this model was to first determine whether a transaction was classified as exchange or nonexchange, according to the definitions set forth in GASB 33, Accounting and Financial Reporting for Nonexchange Transactions. For each type of transaction, the ITC was expected to propose two alternatives. For exchange transactions, the two alternatives being considered were (1) a performance obligation approach and (2) an earnings-based approach. The performance obligation approach used the ideas developed for the performance obligation/no performance obligation model, but only applied those steps to exchange transactions. The second alternative was to develop an earnings-based approach (i.e., to recognize revenue when the earnings process was complete). This approach focused on when the entity was entitled to the benefits represented by the revenue. For nonexchange transactions, this model proposed two alternatives: (1) a performance obligation approach and (2) an evaluation of key characteristics or eligibility requirements. Alternative 1 (the performance obligation approach) considered whether the nonexchange transaction contained a performance obligation. If so, the satisfaction of the performance obligation provided the - 6 -

7 basis for recognition. If the arrangement did not contain a performance obligation, recognition would be based on an evaluation of the transaction s key characteristics or eligibility requirements. Alternative 2 was solely to evaluate the key characteristics or eligibility requirements as the basis for recognition. Next, staff described each step of the exchange/nonexchange model narratively, followed by a flowchart that represented the key decision points. The first step in the proposed exchange/nonexchange model was to determine if the transaction was an exchange transaction (the parties in the transaction received or gave up essentially equal value) or a nonexchange transaction (the parties in the transaction gave or received value without directly receiving or giving essentially equal value in exchange). If the transaction met the definition of an exchange transaction, two alternatives would be considered in the ITC. Under the performance obligation/no performance obligation alternative, the exchange transaction would be evaluated to determine if there was a performance obligation. If there was a performance obligation, the steps outlined under the performance obligation model would be applicable. If the transaction did not have a performance obligation, key characteristics would be used to determine revenue and expense recognition. The second alternative for exchange transactions was an earnings-based approach for revenue and expense recognition. The development of this approach focused on revenue recognition when the government was entitled to the benefits represented by the revenue from the transaction and the net assets acquired were applicable to the reporting period. The application of the entitlement to revenue notion to expense recognition required a provider government to consider when it incurred an obligation that could not be avoided, net assets were consumed, and the consumption of net assets applied to the reporting period. For nonexchange transactions, the ITC would present two alternatives for revenue and expense recognition. The first alternative followed the same steps as the performance obligation alternative for exchange transactions. The second alternative involved clarifying guidance with incremental modifications to the eligibility requirements or key characteristics that currently existed for nonexchange transactions. Staff presented a flowchart summarizing the steps described above to demonstrate how the exchange/nonexchange model could be applied to a governmental entity s transactions giving rise to revenue or expense. Staff believed the narrative discussion and related flow chart accurately depicted the tentative decisions made in the development of the exchange/nonexchange model. The board agreed with staff. Mr. Previdi wanted to ensure the descriptions were consistent throughout, especially related to the key characteristics. In regard to the examples, staff proposed using example transactions to illustrate the application of the models and demonstrate the benefits and challenges of the alternatives to be described in the ITC. This Staff described the principles used to develop the examples described; identified issues related to the performance obligation/no performance obligation model and performance obligation approach, as well as the examples proposed to illustrate those issues; presented issues related to the exchange/nonexchange model and related examples; and described issues related to both models. Staff believed the proposed examples sufficiently demonstrated the issues. The board agreed with staff. For the application of group or groups issue, some transactions were structured such that the provider of the resources was not the recipient of the goods, services, or other resources. Relevant examples were property tax (the taxpayer was the resource provider, but the recipients were public at large); education program (the state government was the resource provider, but the recipients were the school s students); research grant (in the example, the grantor was the resource provider, but the recipients were users of the research tool or results); and legal services for the benefit of third parties (in the example, the government pays a grant for services rendered to individuals outside the governmental entity). These examples demonstrated the different application of the performance obligation definition if the notion of groups of individuals was included or excluded from the definition. Staff believed the proposed examples sufficiently demonstrated the issues. The board agreed with staff. Next, recognition of revenue or expense based on the satisfaction of a performance obligation required evaluation of whether a performance obligation was satisfied over time or at a point in time. The following example transactions were relevant to that evaluation: Tuition (in the example, the semester would cross fiscal period-end); utility revenue (in the example, the billing for utility services during the last month of the fiscal year would not occur until the following fiscal year); sporting event (in the example, the cash is received by the government in one fiscal year for an event that occurs in the next fiscal year); parking permits (the permits are valid for a period of time that is significant and include refund provisions); and vehicle registrations (the registrations are valid for several years and include refund provisions). Each of these examples demonstrated a nuance of the evaluation of the satisfaction of a performance obligation. Some demonstrated the potential for satisfaction at a point in time, while - 7 -

8 others demonstrated the potential for satisfaction over time. Others might not have a clear answer. Staff believed the proposed examples sufficiently demonstrated the issues. The board agreed with staff. For the expenses issue, the application of the performance obligation notion to expense transactions was a new concept. The application of a notion primarily developed for revenue recognition to expense transactions required the model or approach to be applied in reverse. Relevant examples included legal services for the benefit of third parties and legal services for an entity. This project aimed to develop a comprehensive model for recognition of revenue and expense, not to consider the effects of capitalizing certain items. These examples used services to illustrate the application of the model to expense transactions. The example of legal services for the benefit of third parties also was relevant to the consideration of expense recognition by the state. Staff believed the proposed examples sufficiently demonstrated the issues that the government should recognize expenses to the nonprofit organizations as the organizations satisfied the performance obligation at a point in time or over time. Ms. Sylvis wanted to consider the flip side of some of the revenue examples when evaluating this issue. Mr. Bean indicated that the objective was symmetry between revenues and expenses transactions. The board agreed with staff. On the other hand, the exchange/nonexchange model of revenue and expense recognition focused first on the classification of a transaction as exchange or nonexchange. Following that determination, the ITC would present two alternatives for each category. For exchange transactions, revenue and expense could be recognized using (1) a performance obligation approach or (2) an earnings-based approach. For nonexchange transactions, revenue and expense could be recognized using (1) a performance obligation approach or (2) a key characteristics or events approach. The issues related to the performance obligation approach were discussed above. The next discussion described the issues identified regarding (1) the distinction between exchange and nonexchange transactions and (2) the entitlement to revenue approach. The first step in applying the exchange/nonexchange model of revenue and expense recognition was to classify the transaction as exchange or nonexchange in nature. This classification was required under existing GASB literature and some diversity in practice was identified, particularly in relation to some grants. The board tentatively decided to propose that the definitions of exchange and nonexchange transactions should not be modified, but clarifying guidance should be provided. The current definitions were provided in GASB Staff believed the proposed examples sufficiently demonstrated the issues. The board agreed with staff. Staff also suggested potentially adding a pharmacy example. Using the earnings-based approach to recognition of revenue and expense from exchange transactions required the evaluation of when an entity had cash or a claim to cash and the refund period had expired. Examples that could be used to demonstrate the application of this approach and related issues included tuition (in the example, the semester crossed fiscal period-end and the refund period ended prior to the end of the fiscal period); a sporting event (in the example, the cash was received by the government in one fiscal year for an event that occurred in the next fiscal year; the example could include or exclude the potential for a refund); parking permits (the permits were valid for a period of time that was significant and did not include refund provisions); and vehicle registrations (the registrations were valid for several years and included refund provisions). The variations in time periods and refund provisions could be used to demonstrate the application of the earnings-based approach. Each of the examples described above could be used to consider when a government was entitled to revenue or obligated for expense. Staff believed the proposed examples sufficiently demonstrated the issues. Mr. Previdi suggested replacing or adding a revenue example. Staff suggested adding the legal services example to address Mr. Previdi s suggestion. The board agreed with staff and Mr. Previdi. In regard to all the models, current GASB guidance required that endowment pledges were not recognized as assets until the resources were received, and revenue recognition was tied to asset recognition. Beneficial interests in perpetual trusts were not recognized, and revenue was recognized when earnings were distributed to the government beneficiary. The board tentatively decided that these provisions might not be consistent with the conceptual framework, and potential modifications to the guidance should be considered at later stages in the project. Because the ITC would raise the accounting for these two types of transactions as a potential issue, an example of each could be considered for inclusion in the ITC. Staff believed the proposed examples sufficiently demonstrated the issues. Mr. Previdi and Mr. Granof questioned if the examples were needed. The board agreed with staff s recommendation. For property taxes, staff was conducting additional research regarding how lien and levy dates were described in state statutes and other sources to determine when imposed tax revenues became legally enforceable. The application of those dates in consideration of when imposed tax revenues became legally enforceable had been inconsistent. Once the board was updated on the results of that research and determined - 8 -

9 the potential for inclusion in the ITC, the property tax examples above could be used to illustrate issues related to the lien and levy dates. In regard to contingencies, one of the eligibility requirements currently described in GASB literature for the recognition of voluntary nonexchange transactions was that of a contingency. For the recognition of revenue and expense for transactions without performance obligations or were nonexchange in nature, the eligibility requirements would be proposed as the key characteristics or events. The board tentatively decided that the eligibility requirements, including that a recipient met a contingency imposed by the resource provider, were consistent with the conceptual framework. However, the application of a contingency requirement to certain transactions was inconsistent. A relevant example was forgivable loans from colleges or housing finance agencies. The ITC would raise the potential for modifications to improve the application of the contingency requirement, but would not pose the specific modifications. The examples described could be used to demonstrate the nature of the issue without proposing specific changes. The forgivable loans example could demonstrate the difficulty in the application of the contingency eligibility requirement. One interpretation was that the state housing agency did not recognize expense until the homebuyer met the contingencies described. The alternative view was that program expense should be recorded at the time of the loan, as there was an expectation that the homebuyer met the contingencies. Staff believed the proposed examples sufficiently demonstrated the issues. The board agreed with staff. Financial Reporting Model Reexamination Roberta Reese, Lisa Parker, Pam Dolan, and Scott Reeser, project managers; and Robert Bell, Stefan Jensen, Maia Yang, Elizabeth Schmidt, and Alec Schon, postgraduate technical assistants, presented the board with issue papers that discussed classification of operating and nonoperating revenues and expenses in proprietary fund and business-type activity financial statements industry outreach. The objective of the discussion was to present industry outreach and evaluate alternatives for the purpose of establishing a definition of operating activities for both the statement of revenues, expenses, and changes in fund net position and the statement of cash flows for proprietary funds and business-type activities. The objective was to consider high-level alternatives for the definition not the specific language of that definition. Staff contacted individuals and organizations representing the major industries that reported either as proprietary funds or business-type activities to obtain their views on several issues related to the presentation of operating and nonoperating revenues and expenses. The principal issues on which staff solicited feedback were (1) which of the conceptual approaches to defining operating and nonoperating expenses (principally either the self-sustaining or subsidized approach or the financial performance approach) was most valuable, (2) any specific issues with applying either approach, and (3) whether they viewed the financial reporting needs of stand-alone business-type activities differently from those of proprietary funds. Fourteen individuals/organizations (airports, higher education, healthcare, housing authorities, housing finance authorities, lotteries, port authority, public power, turnpike authority, transit 1, transit 2, tribe, utilities, and water and sewer utility) responded to staff s requests. In a few cases, the responses were representative of the specific industry, but for most, the responses represented individuals within that specific industry. Therefore, the responses were not intended to represent a balanced presentation, with all the pros and cons of associated with the alternatives. It was not unexpected that the views of stakeholders in many of the industries that reported as proprietary funds and business-type activities were diverse, both as to which approach to defining operating activities was best, but also as to how that approach should be developed. Views were not consistent within some industries, even less so, from industry to industry. Some of the more salient points identified included 1) stakeholders from entities that were self-sustaining tended to favor the self-sustaining or subsidized approach, and stakeholders from entities with financing structures that included tax, grant, and other third-party revenue sources tended to favor the financial performance approach; 2) when the intermediate operating subtotal did not provide information about an organization that some parties did not consider useful, non-gaap measures would be developed to explain to stakeholders how the organization performed for the year; 3) there was no consensus regarding what should be included in a financial performance measure; 4) developing different financial performance measures for different industries, although perhaps ideal when considering separately issued financial statements, might be confusing in primary government financial statements, especially if those activities were proprietary funds or blended component units; 5) although some felt strongly that different reporting for stand-alone business-type activities was appropriate and needed, some felt that this would present challenges in understandability; 6) using the phrase self-sustaining or subsidized approach did not encompass many of the resource flows currently presented as nonoperating (were this approach to be pursued, consideration should be made as to whether the flows from subsidies should also include financing and investing flows and flows associated with ancillary activities); 7) if the self-sustaining or subsidized approach was pursued, consider whether the definition should be - 9 -

10 modified for what was considered a subsidy to accommodate some of the concerns identified in the industry outreach, such as with taxes and grants specifically associated with certain activities; 8) requiring separate subtotals of nonoperating revenues and expenses; and 9) no single solution appeared to serve the needs of all stakeholders. Staff noted that the three resource flows statements in the current model were somewhat different in the approach to the presentation. The current statement of activities presented information about cost of services, program revenues associated with those services, net cost of services, and general revenues. This approach generally could be considered a self-sustaining or subsidized approach. However, the revenues compared with cost of services included operating and capital grants; thus, the view of what revenues were associated with program costs was broad. The current resource flows statement for governmental funds was in a traditional format, with revenues presented before expenditures, and other financing sources and uses presented together. It was not expected for governmental activities to generate charges for services or other program revenues sufficient to cover the expenditures of a fund. Rather it was expected that some level of subsidy was needed. Therefore, there was little focus of whether a fund required a subsidy. The current resource flows statements for proprietary funds (and stand-alone business-type activities) generally were considered to take a self-sustaining or subsidized approach. Though the view toward what revenues were attributable to the services provided was narrower than that in the government-wide statement of activities. With only limited exceptions, grants were considered nonoperating activities and capital grants were presented below nonoperating activities. Also, interest expense was considered a nonoperating activity, consistent with the classification in the statement of cash flows. Staff generally believed the approach to the three resource flows presentations in the financial reporting model should have a compatible focus and be understandable in relationship to each other. At the January meeting, staff recommended pursuing the self-sustaining or subsidized approach for the proprietary fund and business-type activities resource flows statement. After obtaining additional feedback from individuals and groups representing organizations that report as proprietary funds and business-type activities, staff continued to believe the self-sustaining or subsidized approach was the most feasible at this time. Perhaps the most persuasive argument for the financial performance approach was the use of non-gaap measures by certain organizations to explain their financial statements to stakeholders. This indicated that the existing presentation was not entirely successful in conveying needed information about the year s operations. It also presented challenges in terms of comparability from entity to entity, as well as, from affording the ability to present a biased, rather the objective, view of operations for the period. The industry outreach confirmed staff s earlier concerns with the financial performance approach. There were issues with practicability. Those that favored a financial performance approach had differing views on what items would and would not be included in a financial performance measure. Although some favored a single approach to financial performance for all industries, the diversity of views indicated that that likely was not possible without providing for a significant about of flexibility, which presented a challenge regarding comparability. If it was not practicable to develop a financial performance measure that could be used by all industries, then if that approach were to be pursued, staff believed guidance by industry was needed. Staff once again recommended the self-sustaining or subsidized approach because it was more practicable than the financial performance approach and for consistency within resource flows statements in the financial reporting model. This approach was likely to produce more comparable results. Staff noted that as part of developing the self-sustaining or subsidized approach, there were opportunities for improving and clarifying the approach. Therefore, staff recommended pursuing the self-sustaining or subsidized approach with modification. Specifically, consideration should be made as to whether the distinction should include financing, investing, and ancillary activities. Additionally, the definition of subsidy versus the items that were currently considered noncapital financing activities in accordance with GASB 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, needed to be evaluated with the possibility of considering resources more closely associated with operating activities to be reported as operating revenues. Finally, the possibility of additional subtotals within the statement of resource flows should be considered. Mr. Brown did not believe a single framework was possible for all industries. The board agreed with staff s recommendation