Recent GASB Pronouncements. Prepared for the North Dakota SBHE BAFC by Robin Putnam

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1 Recent GASB Pronouncements Prepared for the North Dakota SBHE BAFC by Robin Putnam North Dakota University System April 2011

2 Recent GASB Pronouncements 2 Applicable to NDUS: GASB Statement No. 51 Accounting & Financial Reporting for Intangible Assets. Effective Date: July 1, Other recent GASB Pronouncements not-applicable to NDUS in FY10: GASB Statement No. 52 Land & Other Real Estate Held as Investments by Endowments. Effective Date: July 1, 2009 GASB Statement No Accounting and Financial Reporting for Derivative Instruments. Effective Date: July 1, 2010 Note: GASB 52 will be applicable in the future if land or other real estate is held as an investment by endowments by either a campus or System Office. GASB 53 will be applicable in the future if a campus or System Office enters into a derivative arrangement that meets the criteria of GASB 53.

3 GASB STATEMENT NO. 51 ACCOUNTING AND FINANCIAL REPORTING FOR INTANGIBLE ASSETS EFFECTIVE FOR FISCAL YEAR 2010

4 Purpose and Effective Date 4 Requires intangible assets such as, software, easements, trademarks and patents, that meet certain criteria to be capitalized in the Statement of Net Assets (SNA) in the year of acquisition and amortized over the useful life of the asset. Prior to GASB 51, intangibles were typically expensed in the year acquired and reported in the Statement of Revenue, Expenses and Changes in Net Assets (SRECNA). GASB 51 required retroactive application back to June 30, 1980 for most intangibles. The cumulative effect of prior activity (including amortization) was reported as a restatement of $2.2 million to beginning net assets in the NDUS FY10 Financial Statements.

5 Definition 5 An intangible asset is an asset that has all of the following three characteristics: Lacks physical substance Nonfinancial nature Initial useful life extending beyond a single reporting period. Additionally: Asset is separable. Capable of being separated and sold, transferred, licensed, rented or exchanged. Includes purchased, acquired or internally generated assets. OR Asset arises from contractual or other legal rights, regardless of whether rights are transferable or separable.

6 Recording of Intangibles 6 Recorded as capital assets in the SNA. Amortization expense is recorded over the useful life of the asset in the SRECNA. Scope Exceptions: Assets that meet the definition but are acquired or created primarily for income or profit Capital leases Goodwill created through the combination of a government and another entity

7 Internally Generated Intangible Assets 7 Costs incurred related to an IGIA are capitalized when they meet all of these conditions: Specific objective of the project & the nature of the service capacity expected to be provided upon completion of the project has been determined. Technical feasibility has been determined. Demonstration of the current intention and ability to complete or, in the case of a multi-year project, continue development of the intangible asset. Costs incurred prior to meeting these criteria should be expensed as incurred.

8 Internally Generated Computer Software 8 Activities involved with Internally Generated Computer Software fall into one of three development stages Preliminary Project Stage (Costs are expensed as incurred): Concept formulation and evaluation of alternatives Determination of the existence of needed technology Final selection of alternatives Application Development Stage (Costs are capitalized once criteria is met; cease capitalizing when software is operational): Design of the chosen path Coding Installation to hardware Testing & parallel processing phase Post-Implementation/Operation Stage (Costs are expensed as incurred): Application training Software maintenance

9 Amortization 9 Same premise as depreciation of capital assets Useful life should not exceed the legal term of the rights associated with the asset. Intangible assets with indefinite useful lives are not amortized. Indefinite useful life: no legal, contractual, regulatory, technological or other factors that limit the useful life of the intangible asset. Example: Permanent right-of-way easement If changes in conditions result in the useful life no longer being indefinite, intangible asset should be tested for impairment because a change in the expected duration of use of the asset has occurred.

10 Disclosures 10 No note disclosures required specific to intangible assets Intangible assets should be included with the capital asset note disclosures.

11 GASB STATEMENT NO. 52 LAND AND OTHER REAL ESTATE HELD AS INVESTMENTS BY ENDOWMENTS

12 Purpose and Effective Date 12 Improves comparability and usefulness of financial reporting by endowments. Prior to GASB Statement No. 52, endowments were required to record land and other real estate held as investments at historical cost. Other entities, such as pension plans, were required to record them at fair value. Provisions of GASB Statement No. 52: Requires land and other real estate held as investments by endowments to be recorded at fair value. Changes in fair value during the year are reported as investment income. Effective date: July 1, 2009

13 GASB STATEMENT NO. 53 ACCOUNTING and FINANCIAL REPORTING for DERIVATIVE INSTRUMENTS EFFECTIVE FOR FISCAL YEAR 2010

14 Purpose and Effective Date 14 Purpose: to set accounting and financial reporting requirements for derivative instrument arrangements. Effective date: July 1, 2010.

15 What Are Derivative Instruments? 15 Complex financial arrangements where two parties agree to make payments to each other based on what happens in separate transactions, agreements or rates. Entered into with little or no initial investment to lower the costs of borrowing, lock-in prices, reduce price volatility, earn income, manage cash flows. Governments enter into derivative instruments with other parties, usually privatesector financial firms. Governments receive and make payments based on rates or prices without actually entering into the related financial or commodity transactions. Upside: Can reduce or eliminate impact of changes in cash flows and fair values caused by changes in interest rates and commodity prices. Downside: Can expose governments to significant risks, such as termination risk, credit risk, interest rate risk.

16 Examples of Derivatives 16 Interest rate swaps Commodity swaps Interest rate locks Options, such as calls, puts, collars, floors or swaptions Forward contracts Futures contracts for commodities such as fuel, agriculture products Synthetic guaranteed investment contracts Note: This list is not meant to be all-inclusive. Individual instruments should be evaluated using the criteria in GASB 53 to determine if they meet the definition of a derivative.

17 GASB 53 Excludes: 17 Normal purchases & sales contracts in the normal course of operations, such as natural gas or electricity, provided it is probable that the university will make or take delivery. Excluded if the university has a choice to take or make delivery of the commodity or exchange the cash value to terminate the contract. Certain insurance contracts. Loan commitments. Certain financial guarantee contracts such as guarantees to pay a creditor if a debtor fails to make payments. Nonexchange-traded contract with a rate based on either: A climate, geological or other physical variable A price or value of a nonfinancial asset Example: University enters into contract to purchase vehicles. If either party fails to perform its obligations, the contract provides for damages as a % of the value of the vehicles. The damage provision is related to the purchase of nonfinancial assets (the vehicles) and is therefore not within scope of GASB 53. Note: Commodity forward contracts are not excluded because the university is not taking delivery of the commodity through the forward contract but rather through the contract to purchase.

18 Types of Derivative 18 Investment or Hedging: Investment derivatives Instrument primarily to obtain income or profit or does not meet the criteria of a hedging derivative. Account for as investments. Hedging derivatives Instrument associated with a hedgeable item and significantly reduces financial risk by substantially offsetting changes in cash flows or fair values of the hedgeable items. Apply hedge accounting.

19 Accounting for Derivatives 19 Hedge Accounting Derivatives are reported at fair value on the SNA as either assets or liabilities. Fair value changes are reported as deferred assets or liabilities on the SNA until hedge is terminated. Hedge accounting is applied beginning of the year that a hedging derivative instrument is established and until the hedge is terminated. Exception to hedge accounting: Transactions within the primary government unit do not qualify for hedge accounting. For example: a commitment to sell electricity by a government utility (enterprise fund) to the government s general fund is not a hedgeable item.

20 Overview Meets definition of a derivative? No Stop Yes Hedgeable item? Yes No No Apply Investment Accounting Yes Debt Refunding? Yes Effective? Yes Terminated? Report derivative at FV on SNA Record FV changes to investment income in current period No No Include deferral amount in net carrying value of old debt Record deferral amount to income in period termination occurs Apply Hedge Accounting 20 Record derivative at FV on SNA Record FV changes as deferred inflow or outflow on SNA

21 21 Questions?