1 NEW DEVELOPMENTS COPYRIGHTED MATERIAL INTRODUCTION

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1 1 NEW DEVELOPMENTS Introduction 1 Recently Issued GASB Statements and Their Effective Dates 1 Most Recent GASB Statement: GASB Statement 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies (GASBS 58) 2 Accounting Recognition 2 Accounts Payable, Notes, and Debt Obligations 3 Capital Leases 3 Pensions and Other Postemployment Benefits 4 Other Liabilities 4 Other Matters 4 INTRODUCTION Disclosure Requirements 5 Effective Date and Transition 5 Exposure Drafts 5 Exposure Draft-Codification of Accounting and Financial Reporting Guidance Contained in Pre- November 30, 1989 FASB and AICPA Pronouncements 6 Exposure Draft-Accounting and Financial Reporting for Service Concession Arrangements 6 Exposure Draft-Financial Instruments Omnibus 7 Invitation to Comment 8 GASB Project Plan 8 Summary 9 The 2010 Governmental GAAP Guide incorporates all of the pronouncements issued by the Governmental Accounting Standards Board (GASB) through December This chapter is designed to keep the reader up to date on all pronouncements recently issued by the GASB and their effective dates, as well as to report on the Exposure Drafts, Preliminary Views, and Invitations to Comment for proposed new statements or interpretations that are currently outstanding. This chapter also includes relevant information on the GASB s Technical Agenda for the upcoming year to give readers information as to potential areas for future GASB requirements. Recently Issued GASB Statements and Their Effective Dates GASB Statement Effective Date Where in this book 51 Accounting and Reporting for Periods beginning after 6/15/2009 Chapter 14 Intangible Assets 52 Land and Other Real Estate Held as Periods beginning after 6/15/2008 Chapter 12 Investments by Endowments 53 Accounting and Financial Reporting Periods beginning after 6/15/2009 Chapter 13 for Derivative Instruments 54 Fund Balance Reporting and Periods beginning after 6/15/2010 Chapter 4 Governmental Fund Type Definitions 55 The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Effective upon Issuance Chapter 2 COPYRIGHTED MATERIAL

2 2 Wiley GAAP for Governments 2010 GASB Statement Effective Date Where in this book 56 Codification of Accounting and Effective upon Issuance Chapter 5 Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards 57 OPEB Measurements by Agency Employers and Agent Multiple- Employer Plans Periods beginning after 6/15/2011 (provisions related to the use and reporting of the alternative measurement method are effective Chapter Accounting and Financial Reporting for Chapter 9 Bankruptcies immediately) Periods beginning after 6/15/2009 Chapter 1 MOST RECENT GASB STATEMENT: GASB STATEMENT 58 ACCOUNTING AND FINANCIAL REPORTING FOR CHAPTER 9 BANKRUPTCIES (GASBS 58) Perhaps as a reflection of the current difficult economic times and its impact on budgets of governments of all types, the GASB has issued guidance to municipalities that enter Chapter 9 bankruptcies. Chapter 9 of the US Bankruptcy Code is intended to protect a financially distressed government from its creditors while it develops and negotiates a plan for adjusting its debts. Chapter 9 of the US Bankruptcy Code allows municipalities to file for bankruptcy if specifically authorized to do so by state law. The bankruptcy code defines a municipality as a political subdivision or public agency or instrumentality of a State (Section 101). This can include cities, counties, special taxing districts, school districts, certain hospital authorities, airport authorities, or other revenue producing enterprises. GASBS 58 establishes accounting and financial reporting standards for all governments that have petitioned for relief under Chapter 9 of the US Bankruptcy Code or have been granted relief under the provisions of Chapter 9, including governments that enter into bankruptcy and are not expected to emerge as a going concern. GASBS 58 does not apply to troubled debt restructurings that occur outside of bankruptcy. GASBS 58 provides that its disclosure requirements cease to apply for periods following the fiscal year in which the bankruptcy case is closed or the government has its petition dismissed. Accounting Recognition GASBS 58 provides that when the Plan of Adjustment is confirmed by the court, the pre-petition liabilities that are subject to the plan are discharged, and the government is bound to the new debt and payment terms in the plan, governments should recognize gains (or losses) from adjustments to those liabilities (and assets, as discussed below) as of the confirmation date or a later date when all significant conditions existing prior to the plan s becoming binding are resolved In addition, a confirmed Plan of Adjustment may call for payments that are contingent upon future events. In GASBS 58 s provided example, a government may be required to make certain payments if tax collections exceed a specified amount or if the government is able to issue new debt. GASBS provides that the government should recognize a liability for a contingent future payment if it meets the recogni-

3 Chapter 1 / New Developments 3 tion requirements in paragraph 14 of NCGA Statement 4, Accounting and Financial Reporting Principles for Claims and Judgments and Compensated Absences. Additional recognition guidance for employer obligations relating to employee benefit plans is provided below. NOTE: The NCGA Statement and Paragraph above references FASB Statement 5 (now at FASB Accounting Standards Codification Section 450) for guidance. Basically, a liability for the future payment would be recorded when it is probable that a liability has occurred at the date of the financial statements and the amount of the loss can be reasonably estimated. GASBS 58 provides specific guidance on the various types of liabilities that might typically be recorded on the municipality s financial statements, as discussed below. Accounts Payable, Notes, and Debt Obligations Subject to the requirements for certain specific liabilities discussed below, a contractual obligation to pay on demand or on fixed or determinable dates (for example, accounts payable, notes, debentures and bonds, and related accrued interest) that is included in a confirmed Plan of Adjustment should be remeasured. GASBS 58 provides that measurement should be based on the payment terms specified in the confirmed Plan of Adjustment. Reductions in future interest payments that have not been accrued, if any, should result in lower interest costs reported in future periods. Reductions to the pre-petition principal and accrued interest payable amounts, if any, should be reported as gains to the extent that the adjusted principal and accrued interest payable amounts in the confirmed Plan of Adjustment are less than the carrying amounts of the debt, including unamortized premium or discount and accrued interest payable. Any remaining unamortized issuance costs associated with a liability that has been adjusted should be expensed. If the adjusted principal and accrued interest payable amounts in the confirmed Plan of Adjustment are greater than the carrying amounts (which may be encountered with deep discount debt), the difference should be reported as an adjustment to interest costs in future periods. If the Plan of Adjustment does not indicate whether it reduces the principal amount or interest payments, then the debt should be adjusted, and a gain reported, by an amount equal to the difference between the present value of the future payments under the confirmed Plan of Adjustment and the carrying amount of the prepetition debt. The present value of the future payments should be computed using the effective rate of interest for the original debt. Capital Leases GASBS 58 provides that if the provisions of a capital lease are modified in a way that changes the amount of the remaining minimum lease payments and the modification either (1) does not give rise to a new agreement or (2) does give rise to a new agreement but such agreement is also classified as a capital lease, then the present balances of the asset and the obligation should be adjusted by an amount equal to the difference between the present value of the future minimum lease payments under the revised or new agreement and the carrying amount of the pre-

4 4 Wiley GAAP for Governments 2010 petition obligation. The present value of the future minimum lease payments under the revised or new agreement should be computed using the rate of interest used to record the lease initially. A termination of a capital lease should be accounted for by removing the asset and obligation, with a gain or loss recognized for the difference. Pensions and Other Postemployment Benefits The method of measuring changes to an employer s pension or other postemployment benefit (OPEB) obligations depends on whether the confirmed Plan of Adjustment results in (1) rejection or (2) amendment of the pension or OPEB plan. 1. If an employer s obligation for unsecured plan benefits is rejected and becomes general unsecured debt, then the change should be accounted for as a termination of the pension or OPEB plan and a new liability recognized in its place. Any assets or liabilities that the employer has recognized related to the terminated plan should be eliminated. Any new liability established in the confirmed Plan of Adjustment should be recognized consistent with standards of accounting for liabilities arising from judgments. The gain (or loss) upon termination of the pension or OPEB plan and the outflow of economic resources related to the establishment of the new liability should be reported as provided in paragraph If an employer s liability for benefits is not rejected, the financial effects of benefit changes should be accounted for by applying the standards of accounting and financial reporting for amendments of a pension or OPEB plan. Other Liabilities GASBS 58 notes that payment provisions in a confirmed Plan of Adjustment also should be incorporated into the remeasurement of other liabilities that are measured and reported based on payment expectations (for example, pollution remediation liabilities). Other Matters GASBS 58 provides additional requirements relative to certain specific areas as follows: If a government is not expected to emerge from bankruptcy as a going concern, then the government s assets should be remeasured and reported at a value that represents the amount expected to be received as of the date of the confirmation of the Plan of Adjustment. Gains (or losses) resulting from remeasurement of liabilities or assets in bankruptcy should be reported as an extraordinary item. Additional guidance for governmental funds is provided below. Professional fees and similar types of costs directly related to the bankruptcy proceedings should be reported as an expense or expenditure as incurred. If the new payment terms affect liabilities (and assets) reported in the governmental funds, those amounts should be adjusted. Adjustments to the reported

5 Chapter 1 / New Developments 5 amount of governmental fund liabilities (and assets), if any, should be reported as an extraordinary item. Disclosure Requirements GASBS 58 provides that governments that have filed for bankruptcy should disclose the following: 1. Pertinent conditions and events giving rise to the petition for bankruptcy 2. The expected or known effects of such conditions and events, including: a. The principal categories of the claims subject to compromise or that already have been adjusted b. The principal changes in terms and the major features of settlement c. The aggregate gain expected to occur by remeasuring liabilities subject to a proposed Plan of Adjustment, or realized, as appropriate; or a statement that any gain is not yet reasonably estimable and the reasons therefor d. Contingent claims not subject to reasonable estimation 3. Significance of those conditions and events on the levels of service and operations of the government, and any mitigating factors, such as assumption of services by other governments 4. Possibility of termination of the government, or any plans to terminate the government, as appropriate 5. How to obtain a copy of the government s Plan of Adjustment or a statement that a plan is not yet available and an estimate of when it will be completed Effective Date and Transition GASBS 58 is effective for periods beginning after June 15, 2009, with early application encouraged. Retroactive application is required for all prior periods presented during which a government was in bankruptcy. If restatement of the financial statements for prior periods is required but not practical, then the cumulative effect of applying the statement should be reported as a restatement of beginning net assets (or equity or fund balance, as appropriate) for the earliest period restated (generally, the current period). If the information for previous years is not restated, governments should explain the nature of the differences from the prior information and why restatement was not practical. EXPOSURE DRAFTS The GASB has a number of Exposure Drafts that it has issued which will affect future accounting and financial reporting requirements. The following provides a brief synopsis of what is being covered by each Exposure Draft. Readers should always be aware that the GASB often modifies Exposure Drafts based upon its continuing deliberations and consideration of comments that it receives on each Exposure Draft.

6 6 Wiley GAAP for Governments 2010 Exposure Draft Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronounements The purpose of the Exposure Draft is to incorporate into the GASB s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with GASB pronouncements: FASB Statements and Interpretations Accounting Principles Board Opinions Accounting Research Bulletins Current guidance in this area is provided by GASB Statement 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting (GASBS 20), which would be superseded by the new statement. GASBS 20 is discussed in Chapter 7. Not only would it be convenient to have this information incorporated into GASB authoritative literature, the non-gasb pronouncements mentioned above have become nonauthoritative because of their incorporation into the FASB Accounting Standards Codification. The statement resulting from this Exposure Draft is expected to be effective for financial statements for periods beginning after December 15, Exposure Draft Accounting and Financial Reporting for Service Concession Arrangements The purpose of this Exposure Draft is to establish accounting and financial reporting requirements for service concession arrangements (SCAs). SCAs are a type of public-private or public-public partnership arrangement, which is the name more commonly used for these arrangements. The Exposure Draft defines an SCA as an arrangement between a transferor (a government) and an operator (governmental or nongovernmental) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a facility ) and (2) the operator collects fees from third parties. NOTE: The example often used (based upon a number of these transactions actually having occurred) is a toll road. The government (transferor) would transfer the operation of a toll road (including all or most of the tolls collected) to a private enterprise in return for an upfront payment. The primary issue for accounting and financial reporting is determining whether the transferor should report the facility subject to an SCA as its capital asset. The Exposure Draft has specific criteria to determine whether a transferor has control over the facility. If the transferor meets all control criteria, it would report the facility as its capital asset, subject to existing guidance for capital assets. Existing facilities would be reported at their current carrying amount; new or improved facilities would be reported at fair value along with a corresponding liability that would be amortized in a systematic and rational manner over the term of the arrangement.

7 Chapter 1 / New Developments 7 If the transferor does not meet the service-related control criteria, it would derecognize any existing facility and report only a residual interest in the facility. The amount of the residual interest in an existing facility would be determined based on its carrying amount, but the amount of the residual interest in a new or improved facility would be determined based on its fair value. If the SCA requires the operator to provide the transferor with up-front or installment payments, the transferor would consider these payments in determining the gain or loss on derecognition of the facility. The Exposure Draft also provides guidance for governments that are operators in an SCA. The governmental operator would report an intangible asset at cost for its right to access the facility and collect third-party fees; it would amortize the intangible asset over the term of the arrangement in a systematic and rational manner. For existing facilities, a governmental operator s cost may be the amount of an up-front payment. For new or improved facilities, a governmental operator s cost may be its cost of improving an existing facility or constructing or acquiring a new facility. The Exposure Draft would also require that, for revenue sharing arrangements, governmental operators report all revenues and expenses, unless they are functioning as an agent for the transferor. There are also certain disclosure requirements about SCAs that would be required to be included in the notes to the financial statements. The statement resulting form this Exposure Draft is expected to be effective for financial statements for periods beginning after June 15, 2011, with retrospective application generally required for all periods presented. Exposure Draft Financial Instruments Omnibus As its name implies, this Exposure Draft would address a number of specific topics related to financial instruments and affect a number of existing pronouncements. The summary of affected pronouncements provided in the Exposure Draft is as follows: Statements 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, and 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, would be amended to remove the fair value exemption for unallocated insurance contracts. The effect of this amendment would be that unallocated insurance contracts would be measured at fair value instead of contract value. Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, would be amended to indicate that a 2a7- like pool, as described in Statement 31, is an external investment pool that is not registered with the Securities and Exchange Commission (SEC) as an investment company but that operates in a manner compliant with the SEC s Rule 2a7. Statement 40, Deposit and Investment Risk Disclosures, would be amended to indicate that interest rate risk information should be disclosed only for bond mutual funds that do not meet the requirements of a 2a7-like pool.

8 8 Wiley GAAP for Governments 2010 Statement 53, Accounting and Financial Reporting for Derivative Instruments, would be amended to Clarify that the net settlement characteristic of Statement 53 that defines a derivative instrument would not be satisfied by a contract provision for a penalty payment for nonperformance. Provide that certain financial guarantees would no longer be exempted from the scope of Statement 53. The effect of this amendment is that certain financial guarantees, and specifically certain credit default swaps, would be measured at fair value. Clarify that certain contracts based on a specific volume of sales or service revenues would be excluded from the scope of Statement 53. Provide that the leveraged yield criteria of Statement 53 would be met if the initial rate of return on the companion instrument has the potential for at least a doubled yield. The statement resulting from this Exposure Draft is expected to be effective for financial statements for periods beginning after June 15, 2010, with earlier application encouraged. INVITATION TO COMMENT The GASB has an Invitation to Comment (ITC) outstanding entitled Pension Accounting and Financial Reporting. An ITC is a predecessor document to an Exposure Draft and is meant to solicit feedback on the fundamentals of a topic, rather than present a draft of proposed actual requirements in an Exposure Draft. The Pension Accounting and Financial Reporting ITC (and a companion project related to postemployment benefits other than pensions) examines a broad range of areas relating to pension accounting including recognition of pension liabilities and costs, alternative methods to measure pension obligations, use of actuarial methods, single employer vs. cost-sharing multiple employer plan considerations, etc. Although a final statement in this area is likely to be much more than a year away, this is a fundamental revisiting of pension accounting and will likely result in significant changes to employer and pension plan accounting and financial reporting. GASB PROJECT PLAN The GASB has a number of important projects on its agenda that will likely affect governmental accounting and financial reporting in the future. Some of the more significant projects are as follows: Economic Condition Reporting This project is examining whether there is any additional information that should be encouraged or required to be included in a government s financial report that would be useful in assessing financial condition. One focus is on growing concerns about governments fiscal sustainability. Also to be addressed are the risks associated with a government s intergovernmental financial dependencies.

9 Chapter 1 / New Developments 9 Fair Value Measurement This is a project to review and consider alternatives for the further development of the definition of fair value, the methods used to measure fair value and potential disclosures about fair value measurements. Guidance in this area has been issued by the FASB, which will likely be considered by the GASB in its analysis. Reporting Entity The current guidance as to the determination and reporting of component units predates the current financial reporting model and is due for a periodic reexamination. Many of the current questions regarding the reporting entity involve when to include fiduciary funds, as the guidance for when a government has a fiduciary responsibility for them is not well defined. Also to be considered is whether current requirements for blending or discrete presentation of component units are adequate. Electronic Financial Reporting This project is in response to the growing use of electronic media to deliver information to users. The project will determine whether the GASB needs to develop standards for financial reports intended for the use of electronic media. SUMMARY The GASB, as always, maintains an active agenda, and the accounting and financial reporting standards for governments are consistently evolving. Financial statement preparers need to keep an eye on emerging new GASB pronouncements to ensure that they have adequate time to plan for their implementation as well as to inform financial statement users about their potential impacts.

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