Understanding Issues of Significance to Stand. BTAs Resulting from Select Recent GASB Standards. May 23, Administrative Notes

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1 Understanding Issues of Significance to Stand Alone BTAs Resulting from Select Recent GASB A Web Event May 23, 2013 Administrative Notes Troubleshooting Tips No Audio? Ensure that your computer speakers are turned on and that the volume is turned up. Check to ensure that audio streaming is enabled on your computer. If the presentation slides stop advancing during the presentation you should: Hit the red Exit button located to the right of the main screen; this will close out of the presentation and re launch the webcast If you are still having audio or other technical difficulty Check with your organizational IT personnel to ensure that this event is not being blocked by a firewall. Call the AICPA Service Center at Administrative Notes We encourage you to submit your technical questions please limit your questions to the content of today s program. You can submit your questions at any time during this Web event by clicking on the Q &A tab on the bottom of your screen. You can also download slides in PDF or PowerPoint format by clicking on Handouts tab. This event is being recorded and will be posted in an archived format to the GAQC Web site. 3 May 23,

2 Continuing Professional Education To document your participation and obtain CPE, you must click OK on 75% of pop up markers. To track your progress on the pop up markers, click on the Participation tab on lower portion of screen. At the end of today s presentation we will provide steps for obtaining your CPE certificate. Please note that it may take up to 24 hours for your certificate to be placed into your account. Contact the Service Center for help with obtaining CPE at or service@aicpa.org. If you are not receiving CPE for this event, ignore the pop up markers if they appear. 4 Presenters Karen Craig Consultant The National Association of College and University Business Officers (NACUBO) Not-for-Profit Expert Panel Martha Garner Managing Director PricewaterhouseCoopers LLP Healthcare Expert Panel Andrew Richards Partner BKD, LLP State & Local Government Expert Panel 5 What we will cover Background on Business Type Activities Implications of GASB 62 Implications of GASB 61 Effect of Government Combinations on BTA Acquisitions Application of Deferred Inflows of Resources and Deferred Outflows of Resources to BTA Transactions 6 May 23,

3 Background on Business Type Activities 7 Appropriate GAAP/Definition of a Government Public corporations and bodies corporate and politic are governmental entities. Also, entities that have one or more of the following characteristics: Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization s governing body by officials of one or more state or local governments The potential for unilateral dissolution by a government with the net assets reverting to a government The power to enact and enforce a tax levy Also consider ability to issue directly tax exempt debt 8 Appropriate GAAP Governmental entities follow accounting pronouncements issued by the Governmental Accounting Board The AICPA provides guidance in the following Audit & Accounting Guides: State and Local Governments Not for Profit entities Health Care Entities and Employee Benefit Plans 9 May 23,

4 Other Possible GASB Reporters Entities created/acquired by governmental hospitals, universities, utilities, Indian tribes University foundations Pension plans sponsored/administered by a government Certain entities incorporated as not for profit and exempt from federal income taxation, but still meet the definition of a government Special purpose governments created by a municipality to carry out a specific function 10 FASB Reporting vs. GASB Reporting View of two perspectives FASB focus on economic utility GASB focus on accountability Challenges from differences Difficulty in comparing 11 Areas of Differences between FASB/GASB Recognition items included in financials Measurement at what amount Presentation how shown on financials Disclosure what is required for financial statements 12 May 23,

5 What is a stand alone BTA? Business-type activities (BTAs) are financed in whole or in part by fees charged to external parties for goods or services These activities may be reported in enterprise funds, as component units or as other stand-alone governments Contrasted to governmental activities Generally financed through taxes, intergovernmental revenues, and other nonexchange revenues Usually reported in governmental funds and internal service funds This webcast focuses on stand-alone BTAs the governmental equivalent of commercial entities Many BTAs have private-sector counterparts Some activities may be conducted in controlled corporations 13 BTAs Addressed in this Webcast BTAs that are component units or funds of a primary government and that issue separate financial statements Presented as if they were a primary government Cannot be referred to as a primary government, e.g. Sample State University (A Component Unit of Sample State) Stand-alone BTAs Not component units or funds Do not have separately elected governing bodies BTA column of GWFS NOT the focus of this webcast 14 Stand alone BTAs for Purposes of this Webcast Entities engaged only in Business Type Activities Enterprise Funds Primary Government Component Units Other stand-alone governments 15 May 23,

6 Reporting Entity Relationships General Purpose Governments vs. BTAs Exhibit 4-1 from AICPA Audit & Accounting Guide State and Local Governments 16 Component units that are corporations Many BTAs have corporate subsidiaries (forprofit or not for profit) For profit: BTA is sole shareholder, majority shareholder, or managing member University Not for profit: BTA is sole corporate member or appoints a majority of the governing board Often, such entities are included in the reporting entity by blending NFP Hospital Inc. 17 BTA Financial Reporting Relationships Usual Presentation Single column presentation, including blended component units 18 May 23,

7 BTA Financial Reporting Relationships Usual Presentation Single column presentation, including blended component units Often Primary BTA including blended component units Single column Discretely presented component units Usually single column Optional Total column 19 BTA Financial Reporting Relationships Primary BTA. including blended component units Single column Major Fund A Major Fund B Usual Presentation Single column presentation, including blended component units Major Fund C Often Discretely presented component units, usually single column Less Often Aggregate Non Major Primary BTA Optional total column DPCU Reporting Entity Required Single column Required Single column Required Single column Required Single column Required Total column Required Single column (usually) Optional Total column 20 Implications of GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre November 30, 1989 FASB and AICPA Pronouncements 21 May 23,

8 GASB 62 Eliminates GASB 20 GASB FASB More Which Applies? Speculation! 22 GASB 62 vs. GASB 20 GASB 20 Required proprietary funds to apply non conflicting pre November 1989 FASB Also BTA s could make one time election to apply nonconflicting post November 1989 FASB standards GASB 62 Codifies into GASB standards non conflicting pre November, 1989 FASB standards, eliminating need for GASB 20 Most post November 1989 FASB subjects have been addressed in GASB literature, thus those FASB standards often conflict 23 GASB 62 Eliminates GASB 20 Remember: If you can find some non conflicting FASB standards, you can still apply them as other accounting literature. 24 May 23,

9 Implications of GASB 61, The Financial Reporting Entity 25 GASB 61, Financial Reporting Entity Reconsideration of GASB No. 14 Effective date Periods beginning after 6/15/2012 (fiscal and calendar 2013 year ends) Key changes for BTAs to consider Blending Equity Interests 26 Evaluating inclusion of corporate component units Primary government appoints a voting majority of the board? Yes Governmental entity Report using GASB No Not a government reported using FASB standards Evaluate ability to impose will, financial benefit vs. burden If included, must also evaluate need for blended vs. discrete presentation Consider GASB 39 s requirements for inclusion If included, must be discretely presented 27 May 23,

10 Case Study: Big State University System Big State University Notes to Consolidated Financial Statements Note 1: Organization and Basis of Presentation University The accompanying financial statements present the accounts of Big State University and its three component units. Medical Center Inc. For Profit Inc. Foundation The University is the sole corporate member of the University Medical Center and the University Foundation, both of which are 501(c)(3) not-for-profit corporations. The University also owns 75% of the shares of For- Profit Inc, which was formed to help carry out the University s educational mission. Based on the control exercised by the University s Board of Regents over the activities of these corporations and the fact that their activities exclusively benefit the University, these are reported as blended component units. 28 Component Units Evaluating Presentation Substantively the same boards? Y Blended component unit N Provision of services/ exclusive benefit? N Discretely presented component unit Y GASB 61 s clarifications of the original GASB 14 blending criteria will require entities to consider whether continuing to blend is appropriate 29 Legal control substantively the same The notion of control as the foundation for the governmental financial reporting entity was considered during deliberations leading to Statement 14 and rejected in favor of the financial accountability concept...the Board has reaffirmed the Statement 14 blending principle in this Statement. Basis for Conclusions, par. 44 [A] control criterion is a conceptually different basis for blending than the financial accountability approach in Statement 14. Basis for Conclusions, par May 23,

11 GASB 61 clarifies substantively the same boards criterion Blending is required if the component unit s governing body is substantively the same as the governing body of the primary government. -- GASB 14, par. 53(a) What Doesn t Qualify Anything that involve BSU s legal control of CU Big State University is the sole corporate member of CU Big State University owns (or owns a majority voting interest) in CU Big State University has the power to appoint and dismiss CU s board What Qualifies Blending based on having EXACTLY THE SAME individuals on each board BSU s Board of Regents serves as the board of the CU 31 Board comparison Substantively the same boards University BOARD OF REGENTS Jane Doe Richard Roe John Q. Public John Smith Jane Smith Boards are not substantively the same BOARD OF REGENTS Jane Doe Richard Roe John Q. Public John Smith Jane Smith University NFP Hospital Inc. Board of Directors Jane Doe Richard Roe John Q. Public John Smith Jane Smith Board of Directors Jane Doe Richard Roe NFP Jill Jones Hospital Inc. Rights to appoint /dismiss board members are irrelevant!! 32 Substantively the same boards criterion GASB 61 adds additional requirements Old criterion Blending required if entities have substantively the same governing body.. GASB 61 adds:.and EITHER financial benefit or burden relationship exists OR management has operational responsibility for the CU 33 May 23,

12 GASB 61 clarifies exclusive benefit criterion Blending is required if the component unit provides services (almost) entirely to the primary government or (almost) exclusively benefits the primary government. -- GASB 14, par. 53(b) What Qualifies Component unit s goods or services are provided to the government itself rather than to citizenry or customers Essence of the arrangement is much the same as an internal service fund What Doesn t Qualify Component unit s services are provided to parties external to the government rather than to the government itself The fact that the profits or cash generated by the component unit are dedicated to or represent a significant source of support for the primary government does not meet the intent of the criterion 34 Results of blending reassessment Big State University Notes to Consolidated Financial Statements Note 1: Organization and Basis of Presentation The accompanying financial statements present the accounts of Big State University and its three component units. The University is the sole corporate member of the University Medical Center and the University Foundation, both of which are 501(c)(3) not-for-profit corporations. The University also owns 75% of the shares of For- Profit Inc, which was formed to help carry out the University s educational mission. Based on the control exercised by the University s Board of Regents over the activities of these corporations and the fact that their activities exclusively benefit the University, these are reported as blended component units. Big State University Notes to Consolidated Financial Statements Note 1: Organization and Basis of Presentation The accompanying financial statements present the accounts of Big State University and its three component units. The University is the sole corporate member of the University Medical Center and the University Foundation, both of which are 501(c)(3) not-for-profit corporations. The University also owns 75% of the shares of For- Profit Inc (FPI), which was formed to help carry out the University s educational mission. Because the activities of the Foundation exclusively benefit the University, it is reported as a blended component unit. The Medical Center and FPI are discretely presented component units. 35 De blending implications Financial statement display Pre- GASB 61 Post- GASB 61 Big State University Consolidated Balance Sheet Total assets Deferred outflows Total liabilities Deferred inflows Total net position XXX XXX XXX XXX XXX Big State University Balance Sheet Primary Component Institution Units Total Entity** Total assets XXX XXX XXX Deferred outflows XXX XXX XXX Total liabilities XXX XXX XXX Deferred inflows XXX XXX XXX Total net position XXX XXX XXX ** Total column is optional 36 May 23,

13 De blending implications Note disclosures Disclosures provided for discretely presented component units must be clearly segregated from disclosures related to primary government Extent of disclosures related to DPCUs is a matter of professional judgment Long term debt footnote Pre GASB 61 Post GASB 61 Total System Principal Interest 2013 XXX XXX 2014 XXX XXX 2015 XXX XXX 2016 XXX XXX 2017 XXX XXX XXX XXX XXX XXX X,XXX X,XXX Primary Institution Component Units Principal Interest Principal Interest 2013 XXX XXX XXX XXX 2014 XXX XXX XXX XXX 2015 XXX XXX XXX XXX 2016 XXX XXX XXX XXX 2017 XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX X,XXX X,XXX X,XXX X,XXX 37 De blending implications Statement of cash flows DPCU information is optional 38 De blending implications Reporting major component units Guidance GASB 14, par. 51 requires information about major component units What is major? Nature & significance of relationship to PG, based on services provided significant transactions, or significant financial benefit or burden relationship 39 May 23,

14 De blending implications Reporting major component units Display on face Combining statements Note disclosure 40 Presentation of equity interests & minority interests GASB 61 s changes If optional total column is presented, these amounts will eliminate in combination Represents the 25% of FPI that is owned by outsiders 41 GASB 61 key takeaways Considerations for de blended component units Financial information is presented in a separate column or columns on the face of the financial statements Consider reporting an optional total entity column to provides users with a more complete picture of total operations; make all necessary eliminations Consider need for major component unit disclosures Component unit s note disclosures must be clearly segregated from information about primary government Discuss any potential reduction of disclosures or cash flow information with disclosure counsel Consider audit changes relative to new opinion unit 42 May 23,

15 New disclosures for single column blending presentations If a single column format is used for the primary government and its blended component units, GASB 61 requires disclosure of the following for each blended component unit Condensed balance sheet Condensed statement of revenues, expenses, and changes in net position Condensed statement of cash flows Big State University Balance Sheet Primary Component Institution Units Total Entity** Total assets XXX XXX XXX Deferred outflows XXX XXX XXX Total liabilities XXX XXX XXX Deferred inflows XXX XXX XXX Total net position XXX XXX XXX ** Total column is optional 43 Component units evaluating presentation under GASB 61 Substantively the same board AND benefit/burden relationship? Y Blended component unit N Provision of services/ exclusive benefit? Y N Discretely presented component unit N CU s debt paid with PG resources? NEW! Y 44 GASB 61 key takeaways Other changes Consider applicability of new third blended criterion Make note of new minority interest display requirements If single column presentation is used, disclose condensed combining information in the notes 45 May 23,

16 Effect of GASB 69 on BTA Acquisitions 46 GASB 69, Government Combinations and Disposals Issued: January 2013 Effective Date: Periods beginning after 12/15/2013 Provides guidance on certain forms of government combinations Excludes many transactions entered into by BTAs Provides guidance on disposals of operations 47 GASB 69 s scope includes A B A B AB Merger Merger (if no consideration) Acquisition (with consideration) 48 May 23,

17 Acquiring a new component unit BTAs may acquire corporations (for profit or not forprofit) by purchase or by change of control ) transactions For profit: BTA becomes sole shareholder, majority shareholder, or managing member University Not for profit: BTA becomes sole corporate member, or articles of incorporation are amended to permit BTA to appoint majority of the governing board Often, the corporation is not subsumed but instead, becomes a component unit of the BTA NFP Hospital Inc. Such transactions are NOT within the scope of GASB69 49 GASB Statement No. 69 Paragraph 7 Although this Statement provides guidance for mergers and acquisitions of complete entities, it does not address combinations in which a government acquires another organization that continues to exist as a separate entity. University This Statement also does not address the acquisition of equity interests in organizations that remain legally separate from the acquiring government. Statement No. 14, The Financial Reporting Entity, as amended, provides the financial reporting requirements for legally separate organizations that comprise a financial reporting entity, and for reporting a government s ownership of equity interests. NFP Hospital Inc. 50 M&A guidance for BTAs Prior to GASB 62 adoption (as level A GAAP) APB 16 APB 17 FAS 141 FAS 142 CANNOT use FAS 164 Prior to GASB 69 adoption (as other accounting literature ) APB 16 APB 17 FAS 141 FAS 142 SHOULD NOT use FAS 164 Upon GASB 69 adoption Acquisitions of forprofit entities: GASB61, par. 10 GASB14, par. 55 Change-of-control transactions: GASB62, par May 23,

18 Acquisition transaction guidance GASB 14/61 Source: Presentation by GASB staff on The Reporting Entity & Government Combinations at 2011 AICPA National Government and Not-for-Profit Training Program 52 Change of control transaction guidance GASB 62 Change in the Reporting Entity One special type of change in accounting principle results in financial statements that, in effect, are those of a different reporting entity. This type is limited mainly to changing the organizations included in a reporting entity s financial statements. A different group of organizations comprise the reporting entity after each change. Accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity should be reported by restating the financial statements of all prior periods presented in order to show financial information for the new reporting entity for all periods. The financial statements of the period of a change in the reporting entity should describe the nature of the change and the reason for it. In addition, the effect of the change on beginning net assets should be disclosed for all periods presented. 53 Transactions within the Scope of 69 Consideration is Key Differentiator Merger Two (or more) governments cede control to form one or more new governments without the exchange of significant consideration Acquisition Government acquires another entity, or its operations, in exchange for significant consideration Transfer of Operations Transactions involving the transfer of operations that do not constitute entire legally separate entities and in which no significant consideration is exchanged 54 May 23,

19 Illustration #1 Government A, a business-type activity, acquires all of the assets and liabilities of Entity B, a not-forprofit organization, in an acquisition transaction. Entity B ceases to exist as a legally separate entity. Becomes a part of Government A s legally separate entity. Transaction qualifies as a government acquisition. Illustration #1 Additionally, Government A determines that the consideration paid exceeds the acquisition values assigned to the assets and liabilities acquired by $225,000. Government A would recognize acquisition values of the assets acquired and liabilities assumed Classify the excess of $225,000 as a deferred outflow of resources Illustration #2 However, if Entity B will remain as a legally separate entity after it is acquired by Government A Transaction falls outside the scope of Statement 69 Government A determines that Entity B qualifies as its component unit under the requirements of Statement 14, as amended. Government A s equity interest in Entity B is measured by its share of the component unit s (Entity B s) net resources. May 23,

20 Illustration #2 Entity B does not remeasure its assets and liabilities at acquisition value or to allocate the acquisition price paid by Government A. Assuming Government A provides excess consideration as described in the Illustration #1 Government A records an expense to adjust for the difference between the carrying values of the component unit s (Entity B s) assets and liabilities and the amount of consideration paid Preexisting Goodwill An acquiree s previously recognized goodwill is not brought forward into new entity If goodwill is generated in an acquisition, report as deferred outflow of resources and amortize in a systematic and rational manner based on professional judgment (GASB 69 par. 39) Period of amortization ( attribution ) should consider factors such as Estimated service lives of capital assets acquired (when acquisitions are largely based on expected use of those capital assets) Estimated remaining service life for acquisitions of landfills that are capacity driven Expected length of contracts acquired Estimated remaining service life of technology acquired, if acquisition is based on expected efficiencies of a technology system 59 Disposals of government operations Current GAAP (APB 30) GASB 69 Qualifying for special treatment Specific criteria need to be met in order to qualify No specific criteria Segregating the discontinued operations Measurement date Recognition of gain or loss on disposal Once measurement date occurs, discontinued operations must be segregated from continuing operations When formal plan for disposal is approved Estimated loss is accrued at measurement date and adjusted in future periods as necessary Gains recognized when realized (i.e., at disposal date) Operations continue to be reported normally until they cease When disposal occurs or operation ceases Gain/loss is reported as a special item in period that disposal occurs or operation ceases 60 May 23,

21 Application of Deferred Inflows of Resources & Deferred Outflows of Resources to BTA Financial Statements 61 Financial statement elements -- GASB v. FASB FASB Assets Liabilities Revenues Expenses Equity/Net assets GASB Assets Liabilities Inflows of Resources Outflows of Resources Net Position Deferred inflows of resources Deferred outflows of resources 62 that utilize deferred inflows/outflows Current standards GASB 53 (Derivatives) GASB 60 (SCAs) New standards GASB 65 GASB 67 (Pensions) GASB 69 (M&A) May 23,

22 The Dynamic Duo Presentation & display guidance Expands usage 64 GASB 63, Financial Reporting of Deferred Outflows/Inflows of Resources and Net Position Addresses questions associated with balance sheet display of deferred inflows/outflows Effective date Periods beginning after 12/15/2011 (calendar 2012, fiscal 2013 year ends) Did not expand usage of deferrals 65 GASB Statement 63 Major Changes Deferred inflows/outflows are NOT assets or liabilities As such, they must be reported separately from assets and liabilities Do not include in total assets and total liabilities captions Instead, use caption such as Total assets and deferred outflows Deferred inflows and deferred outflows should not be netted Net assets section of balance sheet is now called net position Net assets = assets liabilities Net position = assets liabilities + deferred outflows deferred inflows Deferrals do not connote liquidity Not classified as current/noncurrent 66 May 23,

23 Reporting net position balance sheet format UNIVERSITY ASSETS Total current assets $4,000,000 $4,200,000 Total noncurrent assets 6,000,000 6,500,000 Total assets 10,000,000 10,700,000 DEFERRED OUTFLOWS 25,000 32,000 Total assets and deferred outflows of resources 10,025,000 10,732,000 LIABILITIES Total current liabilities 1,500,000 1,750,000 Total noncurrent liabilities 3,400,000 3,200,000 Total liabilities 4,900,000 4,950,000 DEFERRED INFLOWS 50,000 47,500 NET POSITION Total net position 5,075,000 5,734,500 Total liabilities, deferred inflows of resources and net position $10,025,000 $10,732, GASB 65, Reporting Items Previously Recognized as Assets and Liabilities Reconsideration of all items historically classified as assets/liabilities Certain assets/liabilities will no longer qualify Some are deferred inflows/outflows Some are current period income/expense Effective date Periods beginning after 12/15/2012 (calendar 2013, fiscal 2014 year ends) 68 Examples of financial statement items impacted by GASB 65 Affected item Previous treatment After GASB 65 adoption Gain/loss on defeasance Deducted from/added to new debt liability Deferred outflow/inflow of resources Reported separately from liability Debt issuance costs Certain (not all) resources received in advance in voluntary nonexchange transactions Gain/loss in sale/leaseback transactions Lending activities Origination fees Origination costs Deferred charge (asset) Deferred revenue (a liability) Deferred charge (asset) or deferred credit (liability) Deferred revenue Deferred charge All costs except prepaid bond insurance are expensed as incurred Deferred inflow of resources Deferred inflow or outflow of resources Deferred inflow of resources Expense as incurred 69 May 23,

24 Items previously recognized as assets/liabilities Example debt issuance costs Pre-GASB 65 Balance Sheet Post GASB 65 Statement of Revenues, Expenses and Changes in Net Position Debt issuance costs $ 3,000,000 Other assets 100,000,000 Total assets $103,000,000 Expenses: Debt issuance costs $ 3,000, Items previously recognized as assets/liabilities Example deferred loss on bond refunding Pre-GASB 65 Post GASB 65 Balance Sheet Assets $80,000,000 Bonds payable 60,000,000* Net position 20,000,000 Total liabilities & net position $80,000,000 Balance Sheet Assets $80,000,000 Deferred outflows of resources 2,000,000 Total assets & deferred outflows $82,000,000 Bonds payable 62,000,000 Net position 20,000,000 Total liabilities & net position $82,000,000 * includes $2,000,000 of deferred loss on bond refunding 71 Wrap Up and Questions 72 May 23,

25 Additional Resources AICPA Audit & Accounting Guides State and Local Governments Health Care Entities Not for Profit GARS on the GASB Web site 73 How do I get my CPE certificate? Just follow these steps: 1. Log on to CPA2Biz.com 2. Click on My Account at the top of the page and enter your CPA2Biz/AICPA username and password 3. Click on My Web Events tab 4. Click on AICPA Learning Center Transcripts and Certificates link (a new window or tab will open) 5. On the AICPA Learning Center, click on My Transcript in the left hand menu 6. Locate your completed course and click on Go to retrieve your certificate. Please note that it may take up to 24 hours for your certificate to be placed into your account. If you need assistance with locating your certificate, please contact the AICPA Service Center at or service@aicpa.org. 74 Evaluations Please take a few minutes to let us know what you thought about today s Web event Click on the link below to begin a short evaluation 75 May 23,