Implementation Guide No. 20XX-X, Implementation Guidance Update 20XX

Transcription

1 September 21, 2015 Comments Due: November 30, 2015 Proposed Implementation Guide of the Governmental Accounting Standards Board Implementation Guide No. 20XX-X, Implementation Guidance Update 20XX This Exposure Draft of a proposed Implementation Guide is cleared by the Board for public comment. Written comments should be addressed to: Director of Research and Technical Activities Project No ED

2 IMPLEMENTATION GUIDANCE UPDATE 20XX WRITTEN COMMENTS Deadline for submitting written comments: November 30, 2015 Written comments. We invite your comments on the implementation guidance in this proposed Implementation Guide. Because this proposed Implementation Guide may be modified before it is cleared as a final Implementation Guide, it is important that you comment on any aspects with which you agree as well as any with which you disagree. To facilitate our analysis of comment letters, it would be helpful if you explain the reasons for your views, including alternatives that you believe we should consider. Comments should be addressed to the Director of Research and Technical Activities, Project No ED, and ed to director@gasb.org or mailed to the address below. OTHER INFORMATION Public files. Written comments will become part of the Board s public file and are posted on the GASB s website. Orders. This Exposure Draft may be downloaded from the GASB s website at For information on prices for printed copies, please contact the Order Department at the following address: Governmental Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT Telephone Orders: Please ask for our Product Code No. GE99. GASB publications also may be ordered at Copyright 2015 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2015 by Financial Accounting Foundation. All rights reserved. Used by permission. i

3 Proposed Implementation Guide of the Governmental Accounting Standards Board Implementation Guide No. 20XX-X, Implementation Guidance Update 20XX September 21, 2015 CONTENTS Paragraph Numbers Introduction...1 Implementation Guidance Applicability of This Implementation Guide New Questions and Answers...4 Amendments to Questions and Answers from Implementation Guide No Effective Date and Transition...6 Appendix A: Background... A1 A4 Appendix B: Description of Proposed Amendments to Implementation Guide B1 Appendix C: Illustrations... C1 Appendix D: Codification Instructions... D1 D6 ii

4 INTRODUCTION 1. The objective of this Implementation Guide is to provide guidance that clarifies, explains, or elaborates on GASB Statements and Interpretations. IMPLEMENTATION GUIDANCE Applicability of This Implementation Guide 2. The requirements of this Implementation Guide apply to the financial statements of all state and local governments unless narrower applicability is specifically provided for in the pronouncement addressed by a question and answer. 3. This Implementation Guide supersedes Implementation Guide No , Questions and , as well as all questions in Sections This Implementation Guide amends Implementation Guide , Questions 1.9.2, 1.9.5, , , , , , , , , , 7.5.2, 7.8.3, 7.8.8, , , , 8.1.2, 8.1.3, 8.4.3, 8.5.4, 8.6.1, 8.6.4, 8.9.3, , , , , , , , , , , , , , , , , Z.16.1, Z.24.1, Z.33.26, Z.47.2, Z.48.4, Z.48.15, and Z In addition, this Implementation Guide removes the following transition-related questions from the Codification of Governmental Accounting and Financial Reporting Standards and the Comprehensive Implementation Guide: , , , and New Questions and Answers 4. The following are questions and answers that were not presented in Implementation Guide : Disclosures Related to Deposits with Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements 4.1. Q Are deposits with the U.S. Treasury for unemployment compensation, interfund loans, and equity in joint ventures subject to deposit and investment disclosure requirements? A No. Those transactions are not deposits with financial institutions and generally are not considered investments. To subject them to the disclosure requirements of Statements No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, and No. 40, Deposit and Investment Risk Disclosures, as amended, would not serve the purpose of the Statements, which is to provide financial statement users with information about deposit and investment market and credit risk. 1

5 4.2. Q Are the requirements of Statements 3 and 40, as amended, and Statement No. 72, Fair Value Measurement and Application, applicable to all of the reporting entity s deposits and investments? A Except for certain component unit presentations subject to Statement No. 14, The Financial Reporting Entity, as amended, Statements 3 and 40, as amended, and Statement 72 apply to all deposits with financial institutions and investments that are reported on the face of a governmental reporting entity s financial statements. Therefore, the Statements apply to deposit and investment transactions of all funds, including those for which the reporting entity is a custodian and that are reported in an agency, trust, or other fund such as deferred compensation plan assets and pooled amounts invested by a state treasurer on behalf of local governments. (See also Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, as amended, and Question in Implementation Guide concerning Internal Revenue Code [IRC] Section 457 deferred compensation plan assets.) Many of the deposits and investments that are subject to the disclosure requirements of Statements 3 and 40, as amended, and Statement 72 may be reported in the statement of net position/balance sheet using different titles. For example, some deposits and investments may be reported in the statement of net position/balance sheet as cash and cash equivalents. (See Question in Implementation Guide ) Others may be reported in the statement of net position/balance sheet using titles that do not identify their nature as deposits and investments. For example, securities held as escheats or other unclaimed property may be reported in an agency fund or private-purpose trust fund without specific identification of the nature of the item. Despite the statement of fiduciary net position presentation, those securities are subject to the disclosure requirements of Statements 3 and 40, as amended, and Statement 72 for investments. Sometimes questions arise as to whether annuity contracts that are in the name of lottery prize winners are subject to the disclosure requirements of Statements 3 and 40, as amended, and Statement 72. If they are reported in the government s financial statements, they are subject to those requirements. Further, Statements 3 and 40, as amended, and Statement 72 apply to deposits and investments held by another entity for a government for example, amounts held by fiscal agents for bond payments and reserves if they are reported on the face of the government s financial statements. Statements 3 and 40, as amended, and Statement 72 also apply to deposits and investments of component units included in a reporting entity s financial statements, although the manner in which they are applied should consider the requirements of Statement 14, as amended. Specifically, Statement 14 requires that disclosures for discretely presented component units be made separately from disclosures for the primary government and its blended component units. Applying the requirements of Statement 14 also may result in not presenting disclosures required by Statements 3 and 40, as amended, and Statement 72 for 2

6 some discretely presented component units. (See Question in Implementation Guide about disclosures for discretely presented component units.) Disclosure requirements do not apply to deposits and investments that are not reported in the statement of net position/balance sheet for example, amounts held by escrow agents on debt that is reported as defeased in substance in accordance with Statements No. 7, Advance Refundings Resulting in Defeasance of Debt, and No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, as amended Q Are cash equivalents subject to the fair value disclosure requirements of Statement 72? A Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, cash equivalents are measured at other than fair value (including amortized cost) and, consequently, are not subject to the fair value disclosure requirements of Statement 72. Specific exceptions to fair value measurement for some investments are described in paragraph 69 of Statement 72. Examples of such investments include certain money market investments and nonparticipating interest-earning investment contracts, such as certain nonnegotiable certificates of deposit (CDs). If a cash equivalent is measured at fair value, the fair value disclosure requirements of Statement 72 apply Q How should the investments of an internal investment pool be disclosed under the requirements of Statements 3 and 40, as amended, and Statement 72? A Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools, defines an internal investment pool as [a]n arrangement that commingles (pools) the moneys of more than one fund or component unit of a reporting entity. For financial reporting purposes, the funds participating in the pool report their pro rata share of participation in the pool. Internal investment pools are a government s own cash and investments and, accordingly, require all applicable disclosures from Statements 3 and 40, as amended, and Statement 72. A component unit s position in an internal investment pool is its investment, and looking through to the underlying investments of the pool is not appropriate. A component unit should make its investment disclosures with respect to its position in the internal investment pool and not the underlying investments of the pool. 3

7 4.5. Q Most CDs are characterized in paragraph 8 of Statement 31 as nonparticipating interest-earning investment contracts. What disclosure requirements apply to nonparticipating interest-earning investment contracts? A A nonparticipating interest-earning investment contract is not negotiable and has redemption terms that do not consider market rates. That form of CD is a type of investment that is a deposit. The required disclosures for deposits, such as those about deposit policies and custodial credit risk (paragraphs 6 and 8 of Statement 40, respectively), should be made Q What disclosure requirements apply to a negotiable CD? A A negotiable CD is a form of a participating interest-earning investment contract whose value is affected by market (interest rate) changes (paragraph 8 of Statement 31). For a negotiable CD that is measured at fair value, the investment risk disclosures of Statement 40, as amended, and the fair value disclosures of Statement 72 should be made. Negotiable CDs that are required to be measured at fair value include (a) all negotiable CDs reported by external investment pools other than 2a7-like pools and (b) for governments other than 2a7-like pools, negotiable CDs that have a remaining maturity at the time of purchase of more than one year. For a negotiable CD that is measured at amortized cost, the investment risk disclosures of Statement 40, as amended, should be made. Investments held by 2a7-like external investment pools may be measured at amortized cost as provided in paragraph 16 of Statement 31. In addition, paragraph 9 of Statement 31 provides governments other than external investment pools that are not 2a7-like with the option to measure participating interest-earning investment contracts, including negotiable CDs, at amortized cost if they have a remaining maturity at the time of purchase of one year or less Q Is the need for disclosure of the effects of highly sensitive investments affected by the other securities held in the portfolio? A Yes. Individual securities held in the portfolio may be highly sensitive to changes in interest rates, and a government should consider the effect of those instruments on the interest rate risk of the entire portfolio when determining appropriate disclosures. The interest rate risk disclosure methods outlined in paragraph 15 of Statement 40 generally consider the effects of offsetting investments that either increase or decrease a government s exposure to interest rate risk. For example, a government may choose to present its interest rate risk using the weighted average maturity of the government s portfolio, thereby taking into consideration the aggregate effect of all investments on the government s interest rate risk. Governments holding investments that are highly sensitive to changes in interest rates should also analyze the effect of such instruments on the interest rate risk of the entire portfolio, making appropriate disclosures of the terms of those instruments if the terms are not expressed in the interest rate risk 4

8 disclosure method selected. For example, a government holds a variable-rate investment with a coupon set at 2.25 times the 3-month London Interbank Offered Rate (LIBOR). The effective duration of the portfolio, including the variable-rate investment, is 5.46 years, whereas the effective duration of the portfolio without the variable-rate investment is 4.87 years. The variable-rate investment serves to increase the government s exposure to interest rate risk, which is communicated in the interest rate risk disclosure method selected from paragraph 15 of Statement 40. Additional terms and the fair value of the investment should be disclosed in accordance with paragraph 16 of Statement 40, as amended, and Statement Q A limited partnership has investments in various countries. Do foreign currency risk disclosures look through the partnership to identify the foreign currency risks? A No. Consistent with the requirements established for external investment pools, no disclosure is required for the individual deposits or investments of the limited partnership. (See Question in Implementation Guide ) Consequently, a government holding an investment in a limited partnership would not be required to report the risks associated with the individual investments of the limited partnership. Disclosure of the fair value and type of investment is sufficient to acknowledge the government s exposure to foreign currency risk. Disclosures related to fair value measurement also should be provided, consistent with the requirements of Statement 72. However, in the case that an investment in a limited partnership is itself an investment in foreign currency investments, the disclosure requirements in paragraph 17 of Statement 40 should be followed. For example, a government invests in a limited partnership that holds all of its investments (which are significant to the total assets of the limited partnership) in Japan. If exchange rates become significantly unfavorable, the financial viability of the limited partnership may be called into question. Consequently, the financial viability of the government s investment in the limited partnership also may become questionable because of the foreign exchange risk attributable to Yen borne by the partnership. Cash Flow Reporting 4.9. Q Rent income is an item often presented in the nonoperating income section of the operating statement. Should rent be classified as an operating activity or as some other activity? A As discussed in Question in Implementation Guide , the classification of a transaction for operating statement purposes should not dictate its classification in the statement of cash flows. Therefore, the basic question is whether rent income meets the classification criteria of the noncapital financing category, the capital and related financing category, or the investing activities category. If not, the cash flows should be classified in the operating activities category because that is the residual category. Rent income is not specifically 5

9 addressed in Statement No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting; however, that should not necessarily lead one to categorize rent as an operating activity. The characteristics of the rent-generating asset should be examined. The definition of the investing activities category does not specifically address the possibility of an investment being a tangible capital asset such as land; however, the list of investments described is not intended to be all-encompassing. If the land or other capital asset generating the rent meets the definition of an investment in paragraph 64 of Statement 72, rent should be classified as an investing activity. Reporting the rent-generating asset in the statement of net position as an investment rather than a capital asset is evidence that the cash flows should be classified as investing activities. The Financial Reporting Entity Q If a government chooses to present a total column for the financial reporting entity, what eliminations should be made? A Paragraphs of Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments, as amended, provide guidance for eliminations for presentation of the required total column for the primary government. If the government chooses to present a total column for the financial reporting entity, the same considerations would apply Q A primary government acquires the stock of a real estate development corporation that retains its separate legal standing. Does the acquisition qualify for treatment as an investment in a legally separate organization (paragraph 55 of Statement 14, as amended) rather than as a component unit? A The answer depends on whether the acquisition meets the definition of an investment. If the government intends to use the corporation to directly enhance its ability to provide services to the public, the stock acquisition should be evaluated as a potential component unit. However, if the government purchases the corporation primarily for the purpose of income or profit and its present service capacity is based solely on its ability to generate cash (or to be sold to generate cash), the government should account for its equity interest ownership in the corporation as an investment. If the acquisition meets the definition of an investment, it should be measured in conformity with the provisions of paragraphs 77 and 78 of Statement Q A housing authority is the general partner of a limited tax credit partnership (a legally separate entity) and includes it as a component unit consistent with Question in Implementation Guide The limited partners have a percent equity interest in the limited tax credit partnership. Paragraph 78 of Statement 14, as amended, requires any equity interest of the minority participants 6

10 to be reported as restricted net position, nonexpendable; however, paragraph 9 of Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, requires the net investment in capital assets component of net position to include capital assets, net of accumulated depreciation, reduced by outstanding obligations that are attributable to the acquisition, construction, or improvement of those assets. How should the components of net position be classified if the limited tax credit partnership holds capital assets that will revert to the housing authority? A Statement 34, as amended, and Statement 63 do not establish a prioritization for the calculation of the components of net position. Because the housing authority s legal ownership is limited to 0.01 percent of the net position of the limited tax credit partnership, the housing authority should first calculate its 0.01 percent of each component of net position and then report the remaining percent of each component of net position as restricted net position, nonexpendable Q If a primary government is the trustee for a defined benefit pension plan, should the plan be evaluated as a potential component unit? A No. If the primary government is acting in a trustee capacity for a defined benefit pension plan that is administered through a trust that meets the criteria in paragraph 3 of Statement No. 67, Financial Reporting for Pension Plans, the assets of the pension plan should be reported in a pension trust fund of the primary government. If the primary government is acting in a fiduciary capacity for a defined benefit pension plan that is not administered through a trust that meets the criteria in paragraph 3 of Statement 67, the assets accumulated for purposes of providing pensions to the employees of other governments through the plan should be reported in an agency fund. Balances reported in the agency fund should exclude any amounts that pertain to the primary government, which should be reported as assets of the primary government. Pensions Employer and Plan Accounting and Reporting Q A defined benefit pension plan s trust agreement includes a provision for the return of plan assets to an employer if the funded status of the plan reaches a specified level, regardless of whether all obligations associated with the plan that is administered through the trust have been fulfilled. Is this provision consistent with the criterion in paragraph 3a of Statement 67 regarding the irrevocability of contributions? A No. A provision for the reversion of plan assets to an employer prior to the point at which all obligations associated with the plan have been fulfilled is not consistent with the criterion related to irrevocability of contributions. A plan that has such a provision is not within the scope of Statement 67, and the assets accumulated for purposes of providing pensions through such a plan should be accounted for in conformity with the requirements of paragraphs 115 and 116 of 7

11 Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and Q A defined benefit pension plan has certain debt securities that management intends to hold to maturity. May these investments be reported at cost? Would the answer be different if the plan is legally restricted from selling the securities below cost? A No. Statements 31 and 67, as amended, and Statement 72, do not provide for valuing such investments at cost based on management s intent to hold the securities to maturity, or in circumstances in which the likelihood of selling the security is significantly limited by legal provisions Q Should the information that is required by paragraphs 30a(4) and 30a(5) of Statement 67 about the number of employees that are covered by the benefit terms and the benefit terms themselves, respectively, be current as of (a) the actuarial valuation date that is used as the basis for the total pension liability or (b) the pension plan s fiscal year-end? A The requirements of paragraphs 30a(4) and 30a(5) of Statement 67 are intended to result in the disclosure of information about the benefit terms at the pension plan s fiscal year-end Q If a single-employer or cost-sharing multiple-employer pension plan reports a net pension liability that is based on the results from an actuarial valuation that has been updated to the pension plan s fiscal year-end, what information is the pension plan required to disclose regarding the update? A Information about the measure of total pension liability (for example, the assumptions used in the measurement) should reflect amounts and circumstances as of the pension plan s fiscal year-end. However, if update procedures were used to develop the measure of the total pension liability, paragraph 31c of Statement 67 requires that the pension plan disclose that fact. No other specific information about the update process is required Q How should the effects of a change in the discount rate on the total pension liability be classified in the schedule of changes in the net pension liability? A A change in the total pension liability arising from a change in the discount rate should be presented as a change of assumption or other input. A change in the discount rate can result from a change in the long-term expected rate of return on pension plan investments (an assumption), a change in the municipal bond yield or index rate (an other input), or a change in the relative weighting of the rates (the result of a change of assumption or other input that impacts projected plan fiduciary net position or projected benefit payments). 8

12 4.19. Q Is the actuarial valuation date required to have the same relationship to the pension plan s fiscal year-end in each reporting period (or, for pension plans that have biennial actuarial valuations, to the pension plan s fiscal year-end in every other reporting period)? A No. The date of the actuarial valuation that is used to determine the net pension liability at the pension plan s fiscal year-end can vary from period to period (or every 2 periods when biennial valuations are used) provided that it is within 24 months of the pension plan s fiscal year-end Q In the circumstances described in Questions , , and in Implementation Guide , can the long-term expected rate of return that is used to establish the discount rate be reduced by a factor that is anticipated to represent the assets that are expected to be used to pay the automatic postemployment benefit change instead of incorporating the anticipated effects of the postemployment benefit change into the projection of benefit payments? A No. Paragraph 24 or paragraph 62 of Statement No. 68, Accounting and Financial Reporting for Pensions, or paragraph 39 of Statement 67, as applicable, requires that the effects of automatic postemployment benefit changes be included in the projection of benefit payments. The long-term expected rate of return that is used as the basis for the discount rate should not be adjusted to approximate the effects of the postemployment benefit change on the measurement of the total pension liability Q Should refunds of employee contributions through a defined benefit pension plan be included in the projection of benefit payments for purposes of measuring the total pension liability? A Yes. When provided through a defined benefit pension plan, refunds of employee contributions are classified as a form of benefit payment for purposes of Statement 67 and should be included in the projection of benefit payments for purposes of measuring the total pension liability, including determination of the discount rate to be applied in the measurement Q Does the requirement in paragraph 27 or paragraph 65 of Statement 68, or paragraph 41 of Statement 67, as applicable, that the portion of projected contributions intended to finance benefits of future employees be excluded from projected contributions for purposes of determining the discount rate apply to situations in which benefits are substantially financed as they come due (sometimes referred to as pay-as-you-go financing)? A Yes, unless the plan is closed to new entrants, a portion of projected contributions should be allocated to future employees, regardless of the manner in which the benefits are financed Q In 20X5, if an employer reports a deferred outflow of resources related to pensions for contributions made to the pension plan subsequent to the 9

13 measurement date and before the end of the reporting period, how should the contributions be accounted for in the subsequent reporting period (20X6)? A In 20X6, the amount of contributions that was reported as a deferred outflow of resources related to pensions in 20X5 should be accounted for as a reduction of deferred outflows of resources related to pensions and a reduction of the net pension liability Q Can the period over which deferred outflows of resources and deferred inflows of resources related to pensions arising from changes in the total pension liability are recognized in expense be calculated as a weighted average of the expected remaining service lives of the employees provided with benefits through the plan? A No. Statement 68 requires that the period be equal to the average of the expected remaining service lives of employees that are provided with benefits through the plan (active and inactive). For this purpose, a weighted average should not be used. Accounting and Financial Reporting for Certain Investments and for External Investment Pools Q In what situations does Statement 31, as amended, require or allow defined benefit pension plans to report investments at cost or amortized cost? A Defined benefit pension plans should follow the interest-earning investment contract guidance found in paragraph 8 of Statement 31, which indicates that nonparticipating contracts should be reported using a cost-based measure. They also can apply the provisions of paragraph 9 that allow for money market investments and participating interest-earning investment contracts that have a remaining maturity at the time of purchase of one year or less to be reported at amortized cost, provided that the fair value of those investments is not significantly affected by the impairment of the credit standing of the issuer or by other factors Q Under the terms of a construction contract, a county government withholds 5 percent of periodic progress payments due to a contractor. The contract requires that the retainage be accounted for in a separate fund or evidenced by a specific investment. This retainage is invested for the benefit of the contractor and is released upon completion of the contract. How should the retainage be reported? A If a statute or contract requires the county to use a separate fund, the retainage should be reported in a private-purpose trust fund or, if held for a short period, an agency fund. Because the county has invested the retainage, the county should value and report that investment in accordance with Statement 31, as amended, and Statement

14 4.27. Q A school district acting in a fiduciary capacity holds moneys that were contributed for scholarship purposes. The school district uses those moneys to purchase commercial paper until scholarships are awarded. Should the commercial paper be reported as an investment? A Yes. Paragraph 64 of Statement 72 defines an investment as a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash. In this example, the scholarship moneys are being invested for income or profit Q How should fair value increases and decreases be reported when a qualified governmental entity follows the provisions of the regulated operations guidance in paragraphs of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, as amended? A The regulated operations guidance of Statement 62, as amended, may be applied to activities of entities that meet the criteria in paragraph 476 of that Statement. If the entity s regulator concludes that fair value increases and decreases should not affect utility rates, those increases and decreases should be reported as required by Statement 31, as amended, and Statement 72. They should then be reversed at the end of the change statement (for example, the statement of revenues, expenses, and changes in net position) using a heading such as Net costs to be recovered from future billings, and the applicable provisions of paragraphs of Statement 62, as amended, should be applied Q Can resources held as restricted assets or in sinking or reserve funds be considered investments under the provisions of Statement 31, as amended, and Statement 72? A Yes. The definition of an investment in paragraph 64 of Statement 72 applies to restricted assets, sinking funds, and reserve funds that include securities or other assets acquired for income or profit, even if those assets are specifically purchased for a dedicated purpose, such as a debt service obligation. (See also Question in Implementation Guide ) Q Bonds can be issued with covenants that are at variance with Statement 31, as amended, or Statement 72 for example, covenants that require cash-basis or amortized-cost accounting. How should Statement 31, as amended, and Statement 72 be applied when determining compliance with those covenants? A Statement 31, as amended, and Statement 72 apply to financial statements prepared in conformity with generally accepted accounting principles (GAAP). Bond covenants commonly apply to matters such as amounts placed on deposit in reserve funds or coverage ratios (for example, the level of cash-basis operating revenues as a ratio of debt service payments). Compliance with those bond 11

15 covenants should be interpreted with the assistance of bond counsel. In some cases, additional schedules or narrative explanations may be necessary to report legal compliance responsibilities and accountabilities Q If a debt security is not actively traded, should a government measure the security at its fair value, or can it use a cost-based method? A A government should measure the security at its fair value. Lack of market activity does not prevent the government from determining the fair value of those securities. The determination of the fair value of a thinly traded debt security should be based on the requirements in paragraphs of Statement Q How should a restriction on the sale of an asset be considered in determining its fair value? A Consideration of a restriction on the sale of an asset depends on whether the restriction is specific to the asset or to the government holding the asset. If the restriction is a characteristic of the asset (for example, the sale of a security in a private offering), the restriction is taken into consideration by market participants and, consequently, should be incorporated into the fair value measurement. If the restriction is a characteristic of the government and is unrelated to the asset (for example, the asset has been pledged as collateral), the restriction should not be reflected in the fair value measurement Q For conservation purposes, a government acquires land with mineral rights, leases the mineral rights, and receives royalty payments from the lease transaction. How should the land and the mineral rights be classified? A There is no accounting requirement to separate the land from its mineral rights. If the government chooses to report the land and mineral rights aggregated in a single unit of account, the land and the mineral rights (as one unit of account) should be classified as a capital asset. If the government separates the land and mineral rights, the land should be reported as a capital asset (the primary purpose of acquiring the land is conservation instead of income or profit). In this circumstance, the mineral rights would be evaluated in the context of whether they meet the definition of an investment Q An asset is sold in two different active markets at different prices. A government enters into transactions in both markets and can access the price in those markets for the asset at the measurement date. In Market A, the price that would be received at the measurement date is $26, transaction costs in that market are $3, and the costs to transport the asset to that market are $2 (therefore, the net amount that would be received from selling that asset is $21). In Market B, the price that would be received at the measurement date is $25, transaction costs in that market are $1, and the costs to transport the asset to that market are $2 12

16 (therefore, the net amount that would be received in Market B is $22). How can the government distinguish between the principal and most advantageous market? A If Market A is the principal market for the asset (that is, the market with the greatest volume and level of activity for the asset), the fair value of the asset would be measured using the price that would be received in that market, after taking into account transportation costs ($24). If neither market is the principal market for the asset, the fair value of the asset would be measured using the price in the most advantageous market. The most advantageous market is the market that maximizes the amount that would be received to sell the asset after taking into account transaction costs and transportation costs (that is, the net amount that would be received in the respective markets). Because the government would maximize the net amount that would be received for selling the asset in Market B ($22), the fair value of the asset would be measured using the price in that market ($25), less transportation costs ($2), resulting in a fair value measurement of $23. Although transaction costs are taken into account when determining which market is the most advantageous market, the price used to measure the fair value of the asset is not adjusted for those transaction costs Q If a government identifies its principal market, can the government disregard the price of an orderly transaction in that market and instead use the price from a different market? A Generally, no. A government should disregard an identified principal market only if it is unable to access that market Q According to organizing legislation at its incorporation, a state government owns land in selected sections of townships within that state. That land generally is referred to as trust land. The income from that land is dedicated to the support of public education; however, some of the land also is used for other purposes (for example, recreation). The state elects to treat the trust land as one unit of account. Does the trust land meet the definition of an investment? A No. Because the state government has determined the unit of account to be the entire trust land and some of the land is used for other purposes (for example, recreation), the land s service capacity is not based solely on its ability to generate cash or to be sold to generate cash. If the state government instead had determined the unit of account to be each individual parcel of land, the government should classify each parcel on the basis of whether the individual parcel meets the definition of an investment. 13

17 4.37. Q Some capital assets produce income but are, nevertheless, classified as capital assets. What are examples of such capital assets? A The following are examples of circumstances in which capital assets should not be classified as investments because the present service capacity of the assets is not based solely on the assets ability to generate cash or to be sold to generate cash: a. An airport authority, in its purpose to serve the traveling public, owns passenger terminals and hangars that yield lease income. b. A water utility, in its purpose to provide clean water to its citizens, owns a water-treatment plant and a distribution system that produces income from the sale of water. c. A state government, in its purpose to protect the environment, owns land surrounding a waterway that produces income from leased easements Q Can different governments arrive at different conclusions regarding the classification of similar assets? A Yes. A government s purpose for acquiring a particular asset is key to identifying it as an investment. For example, a retirement plan may own a building, and the present service capacity of that building is based solely on its ability to generate cash. In that circumstance, the building is classified as an investment. On the other hand, a local government may own a building that is rented to individuals in the provision of low-income housing. In that circumstance, the building is not considered an investment Q A city government owns a five-story office building. Three floors are occupied by city agencies, and two floors are leased to a retail merchant for the sole purpose of rental income. How should the building be classified? A The classification of the office building depends on the unit of account determined by the city s accounting policy that reflects the level of aggregation or disaggregation of the city s real estate properties for measurement, recognition, and disclosure purposes. If the unit of account is the building, the building would not meet the definition of an investment because the present service capacity of the building is not based solely on its ability to generate cash. In that circumstance, the building would be classified as a capital asset. If the unit of account is individual floors, the floors occupied by the city should be classified as capital assets, and the leased floors that meet the definition of an investment should be classified as such Q A city government constructs an office building with the intent to occupy the building for a city program. While the city awaits the grant approval, the city leases the building and receives lease income. Should the building initially be 14

18 classified as an investment and then reclassified when the city uses the building for the city s program? A No. The asset should be classified at acquisition as a capital asset. Because the city intends, at acquisition, to use the building for the purpose of a city program, the building does not meet the definition of an investment. After an asset is classified at acquisition, its classification should not change Q A city government seeks to provide affordable housing to the community. It lends money to its housing authority (a component unit of the city) to complete the development of an existing affordable-housing project. The housing authority will repay the loan over a 20-year period and will compensate the city with an interest rate commensurate with market conditions. Should the city classify this loan as an investment? A No. The loan is a receivable and not an investment because the purpose of the loan is to support its affordable housing program Q What is the one-year option for money market investments and participating interest-earning investment contracts? How does the one-year option affect the valuation of these investments? A The one-year option in paragraph 9 of Statement 31 relates to money market investments and participating interest-earning investment contracts that have a remaining maturity at time of purchase of one year or less, provided that the fair value of those investments is not significantly affected by the impairment of the credit standing of the issuer or by other factors. Statement 31, as amended, allows those investments to be reported at amortized cost. Governmental external investment pools are prohibited from applying the one-year option for money market investments and participating interest-earning investment contracts. (See also Question in Implementation Guide ) Q Treasury bills and commercial paper do not pay interest but instead are purchased at a discount. How does fair value accounting treat income from noninterest-bearing investments? A Fair value accounting limits interest income to an investment s stated interest or coupon rate. After such an investment is fair-valued, the market takes into account accreted discounts. Accordingly, accretion or amortization of discounts is not necessary; amortization has already been considered in the net increase (decrease) in the fair value of investments. Notwithstanding the foregoing, Statement 31, as amended, allows many of those investments to be reported at amortized cost. Amortized cost issues are covered in Questions in Implementation Guide Q A pension plan applies the measurement provisions of paragraphs of Statement 72 to its investment in a limited partnership. Those paragraphs address investments in certain entities that calculate a net asset value (NAV) per share (or 15

19 its equivalent). The measurement date of the investment is three months earlier than the date of the pension plan s statement of fiduciary net position, and the general partner did not perform a valuation as of the date of the pension plan s statement of fiduciary net position. What adjustments should the pension plan make to the NAV as of the measurement date? A The pension plan should adjust the valuation at the measurement date provided by the general partner by rolling it forward to the date of the pension plan s statement of fiduciary net position. Adjustments should be made for the following events: a. Capital contributions made by the pension plan or distributions received from the general partner since the valuation date of the NAV per share (or its equivalent) reported to the pension plan b. Changes in the composition of assets or liabilities reported by the general partner since the valuation date of the NAV per share (or its equivalent) reported to the pension plan c. Fair value changes of assets or liabilities reported by the general partner since the valuation date of the NAV per share (or its equivalent) reported to the pension plan Q Entities other than governmental external investment pools may report money market investments or participating interest-earning investment contracts at amortized cost if they have remaining maturities of one year or less at the time of purchase. If such an investment has a remaining maturity of one year or less at the statement of position date, can it be reported using amortized cost? (For example, a money market investment has a remaining maturity at date of purchase of 18 months but only 3 months at the statement of position date.) A No. The option in paragraph 9 of Statement 31 applies only to money market investments and participating interest-earning investment contracts that have a remaining maturity of one year or less at the time of purchase. Statement 31, as amended, does not provide for entities other than governmental external investment pools to change the valuation of a money market investment for financial statement purposes from fair value to a cost-based measure Q How should a government address the credit quality for an interest rate swap that is in a liability position? A Derivative instruments, including interest rate swaps, should be measured at fair value, as required by Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. Interest rate swaps can be in either an asset or a liability position at a given measurement date. When a government holds an interest rate swap that is in a liability position, the requirements for measuring fair value of a liability apply to the measurement of that interest rate swap liability. Paragraph 62 of Statement 72 requires a government to consider the nonperformance risk when measuring the fair value of a liability. Therefore, when 16

20 measuring the fair value of an interest rate swap that is in a liability position, a government should consider the effect of its credit quality and any other factors that might affect the likelihood that the obligation will or will not be fulfilled Q Are short sales of securities covered by Statement 31, as amended? A No. A short sale is the sale of a security not owned by the seller. The seller borrows the security, sells it, and then buys it at a later time to close the transaction. Short sales represent obligations to deliver securities, not investments Q A government employer purchases life insurance covering the lives of employees and former employees with vested benefits for which the government is the beneficiary. At what amount should the government recognize its investment in life insurance for financial reporting purposes? A The government employer should recognize as an asset the amount that could be realized by that employer under the insurance contract cash surrender value as of the date of the statement of net position. The government employer should recognize death benefits as income only upon the actual death of an insured; income from death benefits should not be recognized on an actuarially expected or projected basis Q In order to buy or sell an investment, a government pays brokerage fees. A government also pays legal fees to enter into an interest rate swap. Should those fees be reported as part of the price of the investment or the interest rate swap? A No, those fees are transaction costs incurred to buy or sell the investment and the interest rate swap. The fees are related to the period that incurs the cost and, therefore, if separable, should be treated as a period expense or expenditure Q Should investment transactions be accounted for based on the trade date (the date the order to buy or sell the investment is placed) or the settlement date (the date that the cash and investment instrument are exchanged)? A Investment transactions should be accounted for based on the trade date. The trade date is the date on which the transaction occurred and the date the government is exposed to (or released from) the rights and obligations of the ownership of the instrument. This guidance is consistent with paragraph 18 of Statement 67 and paragraph 24 of Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Q Can all investment income interest, dividends, and changes in fair value be aggregated and reported as investment income in the change statement, or should the elements of investment income be reported separately? A All elements of investment income may be presented as an aggregate amount, even for defined benefit pension plans, as provided for in paragraph 23 of Statement