Standards and statements Where do we go from here?

Transcription

1 Standards and statements Where do we go from here? 2018 MACATFO Summer Conference June 21, 2018 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.

2 Objectives Provide an overview of the new accounting standards affecting local governments Identify implementation dates for the new standards and suggested steps for adoption Discuss other projects in the works at the GASB 2

3 What we will cover GASB 75 OPEBs GASB 83 Certain Asset Retirement Obligations GASB 84 Fiduciary Activities GASB 86 Certain Debt Extinguishment Issues GASB 87 Leases GASB 88 Certain Disclosures Related to Debt GASB Looking Forward 3

4 GASB 75 Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (OPEBs) 4

5 GASB 75 Overview > Effective for 2018 calendar year financial statements > Applicability - All types of OPEBs - Healthcare Benefits Medical, dental, vision, hearing, and other health-related benefits even when provided through a pension plan - Other forms of benefits Death benefits, life insurance, disability, and long-term care when provided separately from a pension - Termination benefits, including accrued sick leave, are excluded 5

6 GASB 75 Overview (cont.) Types of plans > Single employer covers employees of only one employer (including component units of a primary government) > Multiple employer covers employees of multiple employers and comes in two forms: - Cost sharing assets of the plan are pooled and used to pay the expenses of any employer that participates in the plan. - Agent multiple employer assets (underlying investments) are pooled but separate accounts maintained for tracking of each employer s respective share and related expenses (can only be paid from their own assets). 6

7 GASB 75 Overview (cont.) GASB 75 - replaces statement No. 45. Terminology Changes GASB 45 GASB 75 GASB 68 Normal Cost Service Cost Service Cost Annual Required Contribution (ARC) Actuarially Determined Contribution (ADC) Actuarially Determined Contribution (ADC) Annual OPEB Cost OPEB Expense Pension Expense Actuarially Accrued Liability Total OPEB Liability (TOL) Total Pension Liability (NPL) Actuarial Value or Market Value of Assets Plan Fiduciary Net Position Plan Fiduciary Net Position Unfunded Accrued Liability Net OPEB Liability (NOL) Net Pension Liability (NPL) 7

8 GASB 75 Overview (cont.) > Net (or Total) OPEB Liability - Recorded by the Employer (not the plan) - Recorded on the Statement of Net Position - Equal to the actuarially determined total OPEB liability (TOL) less the net position of the OPEB trust fund Nontrusted plans only report the TOL - TOL is calculated by the actuary (or possibly by an alternative method if less than 100 participants) > Actuarial Valuation Date - No more than 30 months and 1 day earlier than employer s year end - Proper roll forward to measurement date No earlier than prior year end Required every 2 years 8

9 GASB 75 Disclosures OPEB Plan Description GASB 45 GASB 75 Name, Administrator and type of plan Yes Yes Brief description of benefits Yes Yes Number of employees covered by benefit terms No Yes Issues a stand alone report Yes Yes Authority contributions are established Yes Yes Required contribution rates of plan members Yes Yes Contribution rates ($ or %) Yes Yes Employer contributions No Yes 9

10 GASB 75 Disclosures (cont.) Assumptions GASB 45 GASB 75 Funded status of the plan (AAL, UAAL, ARC, etc.) Yes Discount Rate One rate Based on plan investments or index if no investments or blended Actuarial Cost Method Had options Entry Age Sensitivity Measurement None Discount rate and healthcare trend rate Amortization Periods Investment Gain/Loss Up to 30 years 5 years Liability Gain/Loss Up to 30 years Average working lifetime Assumption Changes Up to 30 years Average working lifetime Plan Changes Up to 30 years Immediate n/a 10

11 GASB 75 Disclosures (cont.) Assumptions GASB 45 GASB 75 The source of mortality assumption No Yes The Dates of Experience Studies on which significant assumptions are based No Yes 11

12 GASB 75 Disclosures (cont.) > Footnote Disclosures Single Employer and Agent - OPEB plan description - Assumptions Inflation Healthcare cost trend rates Salary changes Postemployment benefit changes Mortality Date of experience studies - Detail of Liability Change Schedule of changes in NOL/TOL - Deferred outflows/inflows 12

13 GASB 75 Disclosures (cont.) > Footnote Disclosures Single Employer and Agent (cont.) - Discount Rates Discount rate used Municipal bond rate used Long-term expected rate of return and how determined Assumptions about projected cash flow and periods where each rate is applied - Sensitivity Analysis 1% change in both directions for the discount rate 1% change in both directions for the healthcare cost trend rate 13

14 GASB 75 Disclosures (cont.) Required Supplementary Information GASB 45 GASB 75 Schedule of funding progress Yes n/a Schedule of changes in Net OPEB or Total Liability No Yes Schedule of contributions No Yes Time frame 3 year 10 years RSI Notes n/a Yes 14

15 GASB 75 Disclosures (cont.) > Footnote Disclosures Cost sharing plan differences - Do not disclose number of covered employees - Employers proportionate share of NOL - RSI Proportionate share of NOL > Footnote Disclosure and RSI Examples - Several are included within the appendices to GASB 75 and the Implementation Guide. - We can also provide user friendly examples upon request. 15

16 GASB 75 Implementation > Transition - Beginning deferred outflow of resources for contributions/opeb payments if any, subsequent to the measurement date (MD) of the beginning OPEB liability - All other deferred O/I balances all or nothing at initial implementation - RSI schedules are prospective if information not initially available. Information on contributions will generally be available for all periods in which a trusted plan was in existence. 16

17 GASB 75 Implementation (cont.) > Accounting Considerations - Similar to pensions, the initial journal entries will require: A prior period adjustment to reverse the previously recorded OPEB obligation and record the beginning MD TOL with the resulting restatement of beginning Net Position (consider materiality) - Unlike pensions that always have contributions as the starting point, OPEB will not be so uniform: Consider trust activity that collects, invests and pays benefits Employer contributions to the trust Benefits paid outside of trust Untrusted plans 17

18 GASB 75 Implementation (cont.) > Accounting Considerations (cont.) - Reimbursement Trusts Self-insured: Actual OPEB payments including retiree claims, stop loss and administrative expense less retiree premium contributions and employer contributions to trust Insured: Premiums paid for retirees less retiree premium contributions plus the implicit subsidy portion of active premiums and employer contributions to the trust - Non-Trusted Same as Reimbursement Trust but no employer contributions > Actuary Evaluation - Gain comfort that the actuary is familiar with plans of local governments - Be certain the method and discount rate used are appropriate 18

19 GASB 75 Example Sample information December 31, 2017 December 31, 2018 Existing GASB 45 OPEB Liability $50,000 n/a GASB 75 Total OPEB Liability $250,000 $265,000 GASB 75 Deferred Outflows $10,000 $12,000 GASB 75 Deferred Inflows $2,000 $3,000 19

20 GASB 75 Example (cont.) Sample entries Debit Credit January 1, 2018 Existing GASB 45 OPEB Liability $50,000 Deferred Outflows OPEB 10,000 GASB 75 OPEB Liability $250,000 Deferred Inflows OPEB 2,000 Unrestricted Net Position 192,000 December 31, 2018 Deferred Outflows OPEB $2,000 GASB 75 OPEB Liability $15,000 Deferred Inflows OPEB 1,000 OPEB Expense 14,000 20

21 GASB 75 Allocations > Allocations - Required allocations of the OPEB amounts between funds and activities should be similar to that of pensions Allocate if material and if the liability is expected to be liquidated through the resources of the fund or activity Utilize cost-sharing methodology - However actuarially determined contributions may not be calculated: Other possible allocation bases include premiums paid on behalf of the fund/activities employees, or entity specific experience including participation rates and retirement ages by employee groups 21

22 GASB 83 Certain Asset Retirement Obligations 22

23 GASB 83 Overview Background > Standard establishes accounting and financial reporting for legal obligations to retire certain capital assets > Effective for fiscal year ending December 31,

24 GASB 83 Overview (cont.) Definition and Scope > Asset retirement obligation legally enforceable (via regulation, binding contract, court judgment, etc) liability associated with the retirement of a tangible capital asset > Retirement of a tangible capital asset the permanent removal of a capital asset from service (such as from sale, abandonment, recycling, or disposal) > Does not apply to the following: - Obligation stemming from plans to sell/dispose of a tangible assets - Obligation related to the preparation of a tangible asset for a different use - Obligation for pollution remediation such as asbestos removal that result from the other-than-normal operation - Obligation associated with maintenance - Cost of replacement part for a component - Landfill closure and postclosure care - Conditional obligations to perform asset retirement duties 24

25 GASB 83 Overview (cont.) 25

26 GASB 83 Overview (cont.) Effects of Funding and Assurance > If legally required to provide funding and assurance, disclose that fact > Do not offset ARO with assets restricted for payment of the ARO > Cost to comply with funding and assurance provisions are period costs separate from the ARO expense 26

27 GASB 83 Disclosures Disclosures > General description of ARO and associated tangible capital asset > Methods and assumptions used to measure ARO liabilities > Estimated remaining useful life of tangible capital assets > How financial assurance requirements, if any, are being met > Amount of assets restricted for payment of ARO liabilities, if not separately displayed in financial statements > If ARO or portion of ARO is incurred but not yet recognized because it cannot be reasonably estimated, that fact and the reasons therefor 27

28 GASB 84 Fiduciary Activities 28

29 GASB 84 Overview > Objective - Improve guidance to enhance consistency and comparability regarding - What constitutes fiduciary activities for accounting and financial reporting purposes - How fiduciary activities should be reported > Standard establishes specific criteria for assessing whether activities should be reported as fiduciary activities > Fund classifications may change as a result of the assessments > Effective for 2019 calendar year financial statements - Pending implementation guidance 29

30 GASB 84 Overview (cont.) > Agency funds terminology changed to Custodial Funds > Statement of changes in fiduciary net position is required for Fiduciary Funds under GASB 84 > Changes to liability recognition may lead to reporting fund balances > Fiduciary activities apply to Business Type Activities Exception for assets held less than 3 months; cash inflows and outflows should be shown separately on the operating activities section of the statement of cash flows 30

31 GASB 84 Overview (cont.) > Four paths to reporting assets in a Fiduciary Fund Component units that provide postemployment benefits Postemployment benefit arrangements that are not component units Component units that do not provide postemployment benefits All other activities 31

32 GASB 84 Component Units that Provide Postemployment Benefits > If the plan (pension or OPEB) is a Component Unit per Statement 14 AND The Pension plan or OPEB plan are administered through a trust that meets the criteria of paragraph 3 of Statement 67 or paragraph 3 of Statement 74 The assets from entities that are not part of the reporting entity are accumulated for pensions as described in paragraph 116 of Statement 73 or are accumulated for OPEB as described in paragraph 116 of Statement 74 > Statement describes making contributions to a pension or OPEB plan to be a financial burden of the primary government for purposes of evaluating whether a legally separate entity is a component unit 32

33 GASB 84 Postemployment Benefit Arrangements that are not Component Units > If the plan of the previous slide does not meet the component unit criteria, need to assess control (defined on a later slide) > If the primary government has control over the postemployment activity, it is a fiduciary activity 33

34 GASB 84 Other Component Units (not providing postemployment benefits) > The activity meets component unit criteria per Statement 14 AND meets one or more of the following: The assets are (a) administered through a trust agreement or equivalent arrangement in which the government itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with the benefit terms, and (c) legally protected from the creditors of the government The assets are for the benefit of individuals and the government does not have administrative involvement with the assets or direct financial involvement with the assets. In addition, the assets are not derived from the government s provisions of goods and services to those individuals The assets are for the benefit of the organizations or other governments that are not part of the financial reporting entity. In addition, the assets are not derived from the government s provision of goods or services to those organizations or other governments 34

35 GASB 84 All Other Activities > Activity is fiduciary if the assets associated with the activity meet the following: Assets are controlled by the government Assets are not derived solely from the government s own-source revenues or from government-mandated nonexchange transactions or voluntary nonexchange transactions (there is a pass through exception here) 35

36 GASB 84 All Other Activities (cont.) > Activity is fiduciary if the assets associated with the activity meet the following (cont.): And meet one or more of the following The assets are (a) administered through a trust in which the government itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with benefit terms, and (c) legally protected from the creditor of the government. The assets are for the benefit of individuals, the government does not have administrative involvement or direct financial involvement with the assets, and the assets are not derived from the government s provision of goods or services to the benefiting individuals The assets are for the benefit of organizations or other governments that are not part of the financial reporting entity and are not derived from the government s provision of goods or services to those organizations/ governments. 36

37 GASB 84 Highlight of Specific Terminology > Control A government controls the assets of an activity if: The government holds the assets OR The government (or its designee acting on behalf of the government) has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended beneficiaries > Administrative or direct financial involvement A government has administrative involvement if it Monitors compliance with the requirements of the activity that are established by the government or by a resource provider that does not receive the direct benefits of the activity Determines eligible expenditures that are established by the government or by a resource provider that does not receive the direct benefits of the activity Has the ability to exercise discretion in how the assets are allocated > A government has direct financial involvement if it provides matching resources for the activities 37

38 GASB 84 Highlight of Specific Terminology (cont.) > Own-source revenue Revenues that are generated by a government itself Exchange and exchange-like revenues (charges for service and investment income) Derived tax revenues (sales and income taxes) Imposed nonexchange revenues (property taxes) 38

39 GASB 84 Example > Jail Commissary example Some inmates have jobs and earnings are deposited into an individual s account Families of inmates can also deposit money into an individual s separate account Inmates are allowed to make purchases at the commissary as needed to the extent that there are funds in their individual accounts When an inmate is released, their jail commissary account is emptied and they take the funds with them The County or any jail official does not determine how the inmate will use the funds in their individual account The County has not invested the funds in the past, but they are the custodian of the bank account 39

40 GASB 84 Example (cont.) > Jail Commissary example Walk through the criteria Are the assets held by a legally separate entity that meets the component unit criteria? Are the assets controlled by the government Are they held by the Government or does the government have the ability to direct the use, exchange or employment of assets? Are the assets derived solely from the government s own source revenue? Are the assets derived from government-mandated nonexchange transactions or voluntary nonexchange transactions? Are the assets (a) administered through a trust in which government is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with the benefit terms, and (c) legally protected from the creditors of the government? Are the assets for the benefit of individuals and the government does not have administrative involvement or direct financial involvement with the assets, and the assets are not derived from the government s provision of goods or services to those individuals? 40

41 GASB 84 Types of Fiduciary Funds (cont.) > Pension and other employee benefit trust funds Postemployment arrangements administered through trusts that meet criteria in Statements 67 or 74 Other employee benefit plans would also be reported in this trust fund if both of the following are true: The assets are (a) administered through a trust agreement or equivalent arrangement in which the government itself is not a beneficiary, (b) dedicated to providing benefits to recipients in accordance with the benefit terms, and (c) legally protected from the creditors of the government (Paragraph 11c(1)) Contributions to the trust and earnings on those contributions are irrevocable 41

42 GASB 84 Types of Fiduciary Funds (cont.) > Investment trust funds External portion of investment pools and individual investment accounts that are held in a trust that meets the criteria in paragraph 11c(1) > Private-purpose trust funds Fiduciary activities that (a) are not required to be reported in pension and OPEB trust funds or investment trust funds and (b) are held in a trust that meets the criteria in paragraph 11(c)1 > Custodial funds Fiduciary activities that are not required to be reported in the other three trust funds No trust agreement or equivalent arrangement 42

43 GASB 84 Statement of Fiduciary Net Position Statement of Fiduciary Net Position - Liability Recognition A government should recognize a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources Events that compel a government to disburse fiduciary resources occur when a demand for the resources has been made or when no further action, approval, or condition is required to be taken or met by the beneficiary to release the assets Liabilities other than those to beneficiaries should be recognized in accordance with existing accounting standards using the economic resources measurement focus. - There is a possibility that a Fiduciary Fund reports Net Position - Pension and OPEB plans should report changes in accordance with Statements 67 and 74 43

44 GASB 84 Statement of Changes in Fiduciary Net Positon Statement of Changes in Fiduciary Net Position Additions would be presented disaggregated by source Separate display of investment earnings, investment costs, and net investment earnings is required Deductions would be presented disaggregated by type Separate display of administrative costs is required Exception Custodial funds when assets are held for three months or less For these custodial funds, governments would be allowed to report total additions and total deductions in the aggregate, as long as the descriptions of the totals are sufficient to indicate the nature of the resource flows Pension and OPEB plans should report changes in accordance with Statements 67 or 74 44

45 GASB 84 Action Steps > Identify potential fiduciary activities > Assess whether those potential activities meet the reporting criteria > Determine those activities that should be reported as a part of the primary government Budget considerations > Audit considerations 45

46 GASB 86 Certain Debt Extinguishment Issues 46

47 GASB 86 Overview Objectives of Statement 86 - Improve consistency in accounting and financial reporting for certain in-substance defeasance of debt - Improve accounting and financial reporting for: prepaid insurance on debt that is extinguished notes to financial statements for debt that is defeased in substance > Effective for 2018 calendar year financial statements 47

48 GASB 86 Overiew (cont.) In Substance Defeasance under Refunding Transactions - No changes, same criteria to obtain the treatment Debtor irrevocably places cash or other assets with an escrow agent in a trust to be used solely for satisfying scheduled payments of both interest and principal of the defeased debt, and the possibility that the debtor will be required to make future payments on that debt is remote. The trust is restricted to owning only monetary assets that are essentially risk free as to the amount, timing and collection of interest and principal. 48

49 GASB 86 Overview (cont.) In Substance Defeasance using only Existing Resources - Debt considered defeased in substance (like other advance refundings) when only existing resources are used to acquire cash and other monetary assets placed in an irrevocable trust, if trust restricted to only essentially risk-free monetary assets (like for refundings) - Recognize the difference between the net carrying amount of the debt and the reacquisition price as a gain or loss in the period of defeasance (unlike refundings which recognize a deferred charges over future periods) 49

50 GASB 86 Overview (cont.) In Substance Defeasance using only Existing Resources (cont.) - Notes to the financial statements: Describe the transaction in the period it occurs (like other refundings) Disclose remaining outstanding balance in each period the defeased debt remains outstanding (may combine with refunded amount) 50

51 GASB 86 Overview (cont.) Reaffirmed existing treatment for in-substance defeasance of debt using existing resources in conjunction with refunding debt proceeds. - The entire difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred inflow or deferred outflow - The substance of the transaction is the substitution of debt and deferral of the entire difference is appropriate 51

52 GASB 86 Overview (cont.) Prepaid Insurance for All Debt Extinguishments - At the time debt is extinguished/defeased, any related prepaid insurance that remains should be included in the net carrying amount of the debt for the purpose of calculating the difference between its reacquisition price and net carrying amount - If you extinguish debt, whether through a payoff, defeasance using existing resources, or a refunding, the prepaid insurance related to that debt should be pulled into the net carrying amount of that debt and treated as a portion of the deferred charge on refunding. 52

53 GASB 86 Implementation Implementation Steps - Identify the transaction currently, it may be reported as restricted cash and showing the liability - What to do if you already treated debt as defeased resulting from a transaction using only existing resources? If you had followed refunding guidance and have a deferral related to the previous defeasance using only existing resources, you have to write off the deferral as of beginning net position If you wrote off the gain or loss previously, government would be reporting GAAP under the new standard 53

54 GASB 86 Implementation (cont.) Implementation Steps - Identify if any prepaid insurance remains on the financial statements relating to the previously defeased debt If so, assess materiality Proper steps would be to remove prepaid by offsetting your deferred charge on refunding as of the beginning net position 54

55 GASB 87 Leases 55

56 GASB 87 Overview Objectives of Statement 87 - Improve accounting and financial reporting for leases - Improve usefulness of government financial statements by recognizing assets and liabilities previously considered operating leases - Establish a single model for lease activities > Effective for 2020 calendar year financial statements 56

57 GASB 87 Overview (cont.) Existing guidance: > Capital Leases - Debit Capital Assets and Credit Long term debt for PV - Disclose future minimum lease payments > Operating Leases - Expense as payments are made - Disclose future minimum lease payments, if non-cancelable New guidance: > Leases are financings of the right to use an asset > Single model with no split between capital/operating capital generally becomes a straight financing of an capital asset, same treatment as above, but financing not called a lease. Operating generally meets definition of a right to use vs purchase. > Lessee Intangible asset (right to use), and lease liability > Lessor Lease receivable and deferred inflow of resources 57

58 GASB 87 Overview (cont.) Definition > A contract that conveys control of the right to use another entity s nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction. > Control - the right to obtain the present service capacity from use of the underlying asset, and - the right to determine the nature and manner of use of the underlying asset 58

59 GASB 87 Overview (cont.) Scope exclusions > Intangible assets (mineral rights, patents, software, copyrights) > Biological assets (including timber, living plants, and living animals) > Service concession arrangements (See GASB Statement 60) > Assets financed with outstanding conduit debt unless both the asset and conduit debt are reported by lessor > Inventory Exceptions: > Short-term leases - max possible term 12 months or less > Leases that transfer ownership and do not contain termination options > Leases of assets that are investments > Certain regulated leases (e.g., airport-airline agreements) 59

60 GASB 87 Lease Term Lease Term Starts with the noncancelable period, plus periods covered by a lessee s or a lessor s option to: > Extend the lease, if the option is reasonably certain of being exercised > Terminate the lease, if the option is reasonably certain of NOT being exercised Excludes cancelable periods > Periods for which lessee and lessor each have the option to terminate Rolling month-to-month leases, or right-to-use asset during a holdover period Fiscal funding/cancelation clauses ignored unless reasonably certain of being exercised 60

61 GASB 87 Lease Term (cont.) Lease Term Example Contract provides the government control of the right-to-use a vehicle for 3 years. - After three years, there is an option to extend for 2 years - After two years, the government can terminate the lease Step One Determine the noncancelable period 2 years Step Two Assess the options - Is it reasonably certain the termination option will be exercised by the government? NO - Is it reasonably certain the option to extend will be exercised by the government? YES 61

62 GASB 87 Lease Term (cont.) Lease Term Example (cont.) Contract provides the government control of the right-to-use a vehicle for 3 years. After three years, there is an option to extend for 2 years After two years, the government can terminate the lease Noncancelable period Years Period covered by option to terminate when it is NOT certain to be exercised Year 3 + Period covered by Option to Extend when its reasonably certain to be exercised Years 4 5 Total Lease Term 5 Years 62

63 GASB 87 Lease Term (cont.) Lease Term >Reassess the lease term only if any of the following occurs: - Lessee or lessor elects to exercise an option even though originally determined that the lessee or lessor would not exercise that option or - Lessee or lessor elects to not exercise an option even though originally determined that the lessee or lessor would exercise that option >An event specified in the contract that obligates the lessee to extend or terminate the lease occurs, resulting in a change in the lease term 63

64 GASB 87 Lessee Recognition Recognition and Measurement Lease Liability Lease Asset Recognition and Measurement Initial Periods Subsequent Periods Recognition and Measurement Re-measurement Disclosures 64

65 GASB 87 Lessee Recognition (cont.) LESSEE recognition and measurement > Recognize a liability for future lease payments and an intangible capital asset for the right to use the underlying asset (the lease asset ) - The lessee s intangible right-to-use lease asset is a capital asset - A lessee should measure the lease liability initially at the present value of payments expected to be made for the lease term. - Lease liability payments discounted using the rate the lessor charges the lessee or, if that rate cannot be readily determined, the lessee s incremental borrowing rate 65

66 GASB 87 Lessee Recognition (cont.) LESSEE recognition and measurement (continued) Lease asset is the right to use the underlying asset rather than the asset itself Initial measurement of a lease asset includes - Starts with the value of the initial lease liability - Plus any prepayments (at or before the beginning of the lease) - Less any incentives received from the lessor - Plus initial direct costs if they are ancillary charges to place the leased asset into use Equals the initial measurement of the lease asset Note: Initial direct costs should be expensed unless they are necessary to place the leased asset into use 66

67 GASB 87 Lessee Recognition (cont.) LESSEE re-measurement - recognition and measurement Reassessment of a lease liability at subsequent financial reporting dates when certain judgments change AND are expected to significantly affect the amount of the lease liability: > Change in the lease term > Likelihood of a residual value guarantee being paid has changed from reasonably certain to not reasonably certain, or vice versa > Likelihood of a purchase option being exercised has changed from reasonably certain to not reasonably certain, or vice versa > Change in the estimated amounts for payments already included in the liability > There is a change in the rate the lessor charges the lessee, if used as the initial discount rate 67

68 GASB 87 Lessee Recognition (cont.) LESSEE re-measurement - recognition and measurement (continued) > Adjustments to the lease liability generally should adjust the lease asset by the same amount > If the underlying asset becomes impaired, apply capital asset impairment guidance of Statement 42 to the right-to-use lease asset 68

69 GASB 87 Lessee Disclosures LESSEE disclosures A general description of leasing arrangements, including the basis, terms, and conditions, on which variable lease payments are determined and the existence, terms, and conditions, of residual value guarantees provided by the lessee Total amount of assets recorded under leases, and the related accumulated amortization, disclosed separately from other capital assets Lease assets disaggregated by major classes of underlying assets, disclosed separately from other capital assets Variable lease payments recognized during the period but not previously included in the lease liability 69

70 GASB 87 Lessee Disclosures (cont.) LESSEE disclosures (continued) > Other payments recognized during the period but not previously included in the lease liability (such as residual value guarantees or penalties) > A maturity analysis of all future lease payments - Payments for each of the first five years - Payments in five-year increments thereafter - Show principal and interest separately > Lease commitments, other than short-term leases, for which the lease term has not begun > Components of any net impairment loss (gross impairment loss less change in lease liability) 70

71 GASB 87 Lessor Recognition Recognition and Measurement Lease Receivable Deferred Inflow Recognition and Measurement Initial Periods Subsequent Periods Recognition and Measurement Re-measurement Disclosures 71

72 GASB 87 Lessor Recognition (cont.) LESSOR recognition and measurement >Recognize a lease receivable and deferred inflow of resources >Do not derecognize the underlying asset Depreciate as normal, unless leased asset is required to be returned in its original or enhanced condition or leased asset has an indefinite useful life >Recognize deferred inflow of resources as revenue when available 72

73 GASB 87 Lessor Recognition (cont.) LESSOR recognition and measurement > Initial measurement of the deferred inflow of resources includes: - Initial value of the receivable amount - Less any provisions for uncollectible amount - Any cash received up front that relates to future periods (e.g., final month s rent) > Recognize revenue over the lease term on a systematic and rational manner 73

74 GASB 87 Lessor Recognition (cont.) LESSOR subsequent recognition and measurement Remeasure the lease receivable and update the discount rate when the following occur and are expected to significantly affect the receivable amount: a) There is a change in lease term, or b) There is a change in the rate the lessor charges the lessee If remeasured for a) or b), also remeasure for changes in an index or rate used to determine variable lease payments > If the discount rate is updated, the receivable should be discounted using the revised rate > The deferred inflow of resources generally adjusted by the same amount as the lease receivable 74

75 GASB 87 Lessor Recognition (cont.) LESSOR disclosures >Lease activities may be grouped for disclosure purposes >A general description of leasing arrangements - The basis, terms, and conditions on which variable lease payments not included in the lease receivable are determined >Carrying amount of assets on lease or held for leasing by major classes of assets and the amount of accumulated depreciation >The total amount of inflows (for example, lease revenue, interest revenue, and any other lease-related inflows) recognized in the reporting period related to leases, if not displayed on the face of the financial statements 75

76 GASB 87 Lessor Recognition (cont.) LESSOR disclosures (continued) >The lease inflows related to variable lease payments and other payments not previously included in the lease receivable - Include inflows related to residual value guarantees and termination penalties >If lease payments secure lessor s debt: - The existence, terms, and conditions of options by the lessee to terminate a lease or abate lease payments 76

77 GASB 87 Multiple Components Leases with multiple components Separate contracts into lease and nonlease components or multiple lease components. Allocate consideration to multiple components: Does the contract have individual prices? NO Are there observable stand-alone prices for each component? NO Are there observable stand-alone prices for any component? NO Estimate component prices OR Account for contract as a single lease. Yes YES YES Are the prices reasonable based on other observable stand-alone prices? NO (or do not know) Allocate using relative standalone prices. Allocate stand-alone price AND EITHER Estimate remaining component prices OR account for rest of components as a single element. YES Use contract prices. 77

78 GASB 87 Other Issues Contract combinations > Contracts entered into at or near the same time with the same counterparty should be considered part of the same lease contract if either of the following criteria is met: - The contracts are negotiated as a package with a single objective - The amount of consideration to be paid in one contract depends on the price or performance of the other contract > Combined contract then subject to multiple components guidance 78

79 GASB 87 Other Issues (cont.) Subleases Subleases should be accounted for as transactions separate from the original lease > Do not offset original lease liability and sublease receivable > Include information about subleases in the general description of the original lease arrangements > New lessor transactions related to subleases should be disclosed separately from the original lessee transactions Related party leases Recognized on the substance of the transaction, when substance is significantly different from legal form Leases with/between blended component units Eliminations for internal leasing activity take place before the financial statements are aggregated 79

80 GASB 87 Other Issues (cont.) Sale-Leasebacks > Qualifying sale required (otherwise it is a borrowing) > Any gain or loss on sale portion deferred over term of leaseback (but immediately recognize if leaseback is short-term lease) > Report significant off-market terms based on substance - Borrowing - Nonexchange transaction - Advance lease payment > Disclose terms and conditions Lease-Leasebacks > Recognize net lease liability and asset or net lease receivable and deferred inflow > Disclose gross amount of the lease and the leaseback 80

81 GASB 87 Implementation Transition Provisions > Apply retroactively - Restate if practicable, cumulative effect if not > Leases recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation > Lessors would not restate the assets underlying their existing salestype or direct financing leases - Any residual assets for those leases would become the carrying values of the underlying assets 81

82 GASB 87 Implementation (cont.) To do~ > With all GASB pronouncements PROVISIONS OF THIS STATEMENT NEED NOT BE APPLIED TO IMMATERIAL ITEMS > Determine types of leases, service components, lease terms > Establish a capitalization threshold for leases 82

83 GASB 88 Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements 83

84 GASB 88 Overview > Objective is to improve the information that is disclosed in the notes regarding debt and clarifies which liabilities should be included. > Defines debt for the purposes of these disclosures as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. > Includes the need to provide additional essential information for unused lines of credit, assets pledged as collateral for the debt, and terms specified in debt agreements related to events of default with financerelated consequences. > Effective for 2019 calendar year financial statements 84

85 GASB Looking Forward Major Projects, Practice Issues, Pre-Agenda Research 85

86 GASB Looking Forward Financial Reporting Model Revenue and Expense Recognition Capitalization of Interest Costs Conduit Debt Equity Interest Ownership Issues Cloud Computing Implementation Guides 84 and 87 Pre agenda research - Going Concern - Defined Compensation Plans - Note Disclosure Reexamination 86

87 Questions? Thank you! 87

88 Contact info Ryan Engelstad, Partner Kim Shult, Partner