Latest Inventions from the Mind of GASB. March 15, Jerry E. Durham, CPA, CGFM, CFE

Transcription

1 Latest Inventions from the Mind of GASB March 15, 2019 Jerry E. Durham, CPA, CGFM, CFE 1

2 Some GASB Concepts You Should Know Classification Measurement Focus Basis of Accounting Recognition Component Units 2

3 Revenue and Expense Recognition Models The are four components of a revenue and expense recognition model Classification is the process of identifying the type of transaction (for example, is the transaction exchange or nonexchange?) Measurement is the process of determining what amount to report for the element. Basis of Accounting is the process of identifying when an element should be reported - for example, recognize revenue when earned Recognition is the process of determining what element should be reported and when, and then recording the transaction on the accounting records. 3

4 Revenue and Expense Recognition Models Classification - Revenue - Exchange, Nonexchange, etc. Measurement - Government-wide Statements = Economic Resources Measurement Focus - Fund Financial Statements = Current Financial Resources Measurement Focus Basis of Accounting - Full Accrual - Modified Accrual Recognition is based on whichever of the methods above you choose 4

5 Component Unit Criteria under GASB 14 and 61 Financial Accountability Board Appointment Fiscal Dependence Financial benefit or burden Ability to impose will Financial benefit or burden Normally, Pension and OPEB plans that are in GASB 67 and 74 compliant trusts are separate legal entities Primary government considered to have financial burden if it makes contributions to the plan Legally required or assumed the obligation Blending Criteria under GASB 14, 61, and 81 Other Criteria under GASB 39 (i.e. mostly for Nonprofit Foundations)

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8 2017 Statement 73 Pensions Amendments to Certain Provisions of 67 & 68 Statement 74 Financial Reporting OPEB Plans Statement 77 Tax Abatement Disclosures Statement 78 Pensions Provided through Certain Multiple-Employer Defined Benefit Plans Statement 79 Certain Investment Pools and Participants Statement 80 - Blending Requirements for Certain Component Units Statement 82 Pension Issues

9 2018 Statement 75 OPEB (employers) Statement 81 irrevocable split-interest agreements Statement 85 omnibus (may be implemented by topic) Statement 86 certain debt extinguishment issues Implementation Guide Statement 83 certain asset retirement obligations Statement 88 certain debt disclosures Implementation Guide Statement 84 fiduciary activities Statement 90 majority equity interests 2021 Statement 87 leases Statement 89 interest cost 9

10 2018 Statement 75 OPEB (employers) Statement 85 omnibus (may be implemented by topic) Statement 86 certain debt extinguishment issues Implementation Guide Statement 83 asset retirement obligations Statement 84 fiduciary activities Statement 88 certain debt disclosures Implementation Guide Statement 90 majority equity interests 2020 Statement 87 leases Statement 89 interest cost 10

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12 Certain Asset Retirement Obligations Statement No

13 Certain Asset Retirement Obligations What: The Board issued Statement 83 to establish accounting and financial reporting standards for legal obligations to retire certain capital assets, such as decommissioning nuclear power plants and removing sewage treatment plants Why: Statement 18 addressed only municipal landfills but governments have retirement obligations for other types of capital assets; diversity exists in practice When: Effective for fiscal years beginning after June 15, 2018 Earlier application is encouraged 13 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

14 Definitions and Scope Asset retirement obligation Legally enforceable 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) Examples Nuclear power plant decommissioning Coal ash pond closure Contractually required land restoration, such as removal of wind turbines 14 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

15 Definitions and Scope Cont d Asset retirement obligation Legally enforceable 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) Examples Sewer Plants X-Ray Equipment 15 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

16 Recognition & Measurement Initial Recognition Subsequent Recognition ARO liability when incurred and reasonably estimable. Incurrence manifested by both external and internal obligating events. Measured based on the best estimate of the current value of outlays expected to be incurred. At least annually, adjust for general inflation or deflation At least annually, evaluate relevant factors to determine if there is a significant change in the estimated outlays; remeasure liability when significant Deferred outflow of resources same amount as the ARO liability An outflow of resources (such as expense) in a systematic and rational manner over the estimated useful life of the capital asset. Immediately expense if capital asset is abandoned. 16 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

17 ARO Asset Retirement Obligations (ARO): - Legally enforceable liability - Internal obligating event - Associated with a tangible capital asset - Recognize a liability when incurred and reasonably estimable - Use probability weighing of all potential outcomes or if this is not available at a reasonable cost, then use most likely amount - Record a deferred outflow = to liability - Remeasure the liability for effects of inflation and deflation annually and other relevant factors. Book if significant - Special recognition for minority interests calculated under other than GASB GAAP 17 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

18 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 Costs to comply with funding and assurance provisions are period costs separate from the ARO expense 18 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

19 Disclosures General description of ARO and associated tangible capital assets, including source of AROs (such as federal laws or regulations, contracts, court judgments) 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 a government has an ARO (or portions of an ARO) that is incurred but not yet recognized because it cannot be reasonably estimated, that fact and the reasons therefor 19 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

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21 Statement No. 88 Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements 21

22 Debt Disclosures What: The Board issued Statement 88 to improve existing standards for disclosure of debt Why: A review of existing standards related to disclosures of debt found that debt disclosures provide useful information, but that certain improvements could be made When: Effective for periods beginning after June 15, Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

23 23 Debt Disclosures GASB 88 Disclosures: This standard is about disclosures, not accounting.

24 Definition of Debt for Disclosure Purposes A liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of payment of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established For purposes of this determination, interest to be accrued and subsequently paid (such as variable-rate interest) or added to the principal amount of the obligation, such as capital appreciation bonds, would not preclude the amount to be settled from being considered fixed at the date the contractual obligation is established. Operating leases and accounts payable are excluded from the definition of debt for disclosure purposes. Capital Leases are included. 24 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

25 New Disclosure Requirements Direct borrowings and direct placements of debt should be distinguishable from other types of debt for all disclosures New Disclosures about All Types of Debt Amount of unused lines of credit Assets pledged as collateral for debt Terms specified in debt agreements related to significant: Events of default with finance-related consequences Termination events with finance-related consequences Subjective acceleration clauses 25 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

26 26 Debt Disclosures GASB 88 Disclosures: Additional Debt Disclosures under GASB 88 In notes to financial statements, a government should separate information in debt disclosures regarding (a) direct borrowings and direct placements of debt from (b) other debt.

27 Disclosure Example 27

28 Disclosure Example 28

29 Disclosure Example 29

30 Coming Soon to a Government Near You! 30

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32 Accounting for Interest Cost Incurred before the End of a Construction Period Statement No

33 Interest Cost Incurred before the End of a Construction Period What: The Board issued Statement 89 to enhance the relevance of capital asset information and simplify financial reporting Why: Accounting guidance has been based on FASB Statements 34 and 62, which were incorporated into the GASB literature by GASB Statement 62 but were not reconsidered in light of GASB s Concepts Statements When: Effective for periods beginning after December 15, Earlier application is encouraged. 33 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

34 Recognizing Interest Cost Financial statements prepared using the economic resources measurement focus: Interest cost incurred before the end of a construction period should be recognized as an expense in the period incurred. Financial statements prepared using the current financial resources measurement focus: Interest cost incurred before the end of a construction period should be recognized as an expenditure consistent with governmental fund accounting principles. Prospective application at transition 34 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

35 35 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

36 Fiduciary Activities Statement No

37 Fiduciary Activities What: The Board issued Statement 84 to clarify when a government has a fiduciary responsibility and is required to present fiduciary fund financial statements Why: Existing standards require reporting of fiduciary responsibilities but do not define what they are; use of private-purpose trust funds and agency funds is inconsistent; BTAs are uncertain about how to report fiduciary activities When: Effective for fiscal years beginning after December 15, 2018 Earlier application is encouraged 37 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

38 Fiduciary Activities Statement No. 14, The Financial Reporting Entity, Paragraph 19 - Include if the primary government has a fiduciary responsibility for them Statement No. 61, The Financial Reporting Entity: Omnibus - Fiduciary activities broader than reporting entity considerations so not addressed Existing standards - Fiduciary responsibilities not defined - Inconsistent application - Business-type activities Governmental Accounting Standards Advisory Council (GASAC) - High priority to address fiduciary activities Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only. 38

39 Four paths to making this determination: Component units that provide postemployment benefits Component units that do not provide postemployment benefits Postemployment benefit arrangements that are not component units All other activities

40 Fiduciary Activities Defines and clarifies fiduciary activities Introduces custodial funds, eliminates agency funds 40

41 When Should a Government Report Assets in a Fiduciary Fund? Four paths to making this determination: Are the assets held by a component unit? Yes No Are the assets held for a pension or OPEB arrangement? Yes No Yes No Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

42 Component unit (CU) criteria of GASB 14 Fiscal accountability Board appointment Fiscal dependence Financial benefit or burden Ability to impose will Financial benefit or burden Normally, Pension and OPEB plans that are in GASB 67 and 74 compliant trusts are separate legal entities Primary government considered to have financial burden if it makes contributions to the plan Legally required or assumed the obligation Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

43 Component Units That Are Postemployment Benefit Arrangements Are Fiduciary if They are one of the following arrangements: 1 St Pension plan administered through a trust that meets criteria St St OPEB plan administered through a trust that meets criteria Assets from entities not part of the reporting entity accumulated for pensions St Assets from entities not part of the reporting entity accumulated for OPEB 43 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

44 Other Component Units Are Fiduciary if They have one or more of the following characteristics: 2 Assets are: Administered through a trust in which government is not a beneficiary Dedicated to providing benefits, AND Legally protected from the creditors of government or Assets are for the benefit of individuals Assets are not derived from government s provision of goods or services to the individuals AND Government does not have administrative involvement or direct financial involvement w/ the assets or Assets are for the benefit of organizations/ governments not part of the reporting entity AND Assets are not derived from government s provision of goods or services to them 44 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

45 Other Component Unit - Involvement Examples of 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 - If it determines eligible expenditures that are established by the government or by a resource provider that does not receive the direct benefits of the activity - If it has the ability to exercise discretion in how assets are allocated Example of direct financial involvement - If it provides matching resources for the activities or is liable for disallowed costs. 45 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

46 Own-Source Revenues Own-source revenues are revenues that are generated by a government itself: Exchange and exchange-like revenues (for example, water and sewer charges) and investment earnings. Derived tax revenues (such as sales and income taxes) Imposed nonexchange revenues (such as property taxes) also are included. Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only. 46

47 Postemployment Benefit Arrangements That Are Not Component Units Are Fiduciary if Arrangement is one of those in 1 AND 3 The government controls the assets of the arrangement - Control means one or both of the following is true: Government holds the assets Government has ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended beneficiaries 47 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

48 Postemployment Benefit Arrangements That Are Not Component Units (Cont d) Control is not a factor in determining whether the activity is fiduciary if the entity is a Component Unit. Government (or designee) has the ability to direct the use, exchange, or employment - Having a designee does not cause the government to relinquish fiduciary responsibility Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only. 48

49 All Other Activities Are Fiduciary if 4 Arrangement meets one or more of the criteria in The government controls the assets AND AND 2 Those assets are not derived either: - Solely from the government s own-source revenues, or - From grants, with the exception of pass-through grants for which the government does not have administrative or direct financial involvement 49 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

50 Examples All Other Activities Taxes Property Tax Collected by County on Behalf of City City Sales Tax Inmate Funds Student Activity Funds or SSO Funds held by the School Pass-through Grants Customer Deposits IRC 457 Plans Escheat Funds 50

51 Examples All Other Activities Tax Increment Financing Patient Accounts Retainage Payable on Contracts Courts (Litigants, Heirs, Others) Employee payroll deductions Cemetery Associations Asset Seizures Cash Bonds 51

52 Fiduciary Fund Classes Pension and other employee benefit trust fund Investment trust fund Privatepurpose trust fund Custodial fund Trust agreement or equivalent arrangement should be present 52 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

53 Stand-Alone Business-Type Activities A stand alone BTA s fiduciary activities should be reported in separate fiduciary fund financial statements. Exception: Resources expected to be held 3 months or less can be reported instead in the statement of net position, with inflows and outflows reported as operating cash flows in the statement of cash flows 53 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

54 Typical Trust Company Typical Address Typical Zip Code

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56 GASB 84 Memo written to CPA s dated October Proposed Solution Pension and OPEB Trust Funds: The Division believes current standards support the reporting of a fiduciary fund in the situations discussed above and we may question an entity s financial statement presentation and a CPA s audit response in certain obvious situations. However, the Division will continue to allow discretion when making determinations about fiduciary responsibility and financial statement presentation as it relates to Pension and OPEB Trust Funds until the effective date of the Exposure Draft. Our office will not require financial statements to be restated and resubmitted until the Fiduciary Activities Exposure Draft is finalized into an Accounting Standard and that Standard becomes effective. Effective Date (Calendar Year 2019, Fiscal Year July 1, 2019 to June 30, 2020, Earlier Application Encouraged. 56

57 Revenue and Expense Recognition 57

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59 Recognition in Governmental Funds Short-Term Transactions Normally are due to convert to or generate cash or require the use of cash within one year from the inception of the transaction Long-Term Transactions Normally are due to convert to or require the use of cash beyond one year from the inception of the transaction An entire class of transactions will either be short-term transactions or long-term transactions. Transactions within classes (for example, investments) are not treated differently. 59

60 Recognition Example Other Taxes Receivable End of year balance: $13,342,623 Other taxes are associated with the current year; $3,342,623 of other taxes are due 3 months after year-end, $10,000,000 are due 6 months after year-end Recognition Approach Balance Sheet Resource Flows Statement Current financial resources Taxes receivable of $13,342,623 Inflows of resources of $3,342,623 and deferred inflow of resources of $10,000,000 Short-term financial resources Taxes receivable of $13,342,623 Inflows of resources of $13,342,623 Normally = Short-term 60

61 Recognition Example Property Taxes Receivable End of year balance: $28,954,754 Property taxes levied before period end for the subsequent fiscal year; property taxes are due 6 months after period-end Recognition Approach Balance Sheet Resource Flows Statement Current financial resources Taxes receivable of $28,954,754 No inflows of resources and deferred inflow of resources of $28,954,754 Short-term financial resources Taxes receivable of $28,954,754 and deferred inflow of resources of $28,954,754 No inflows of resources Normally = Short-term 61

62 Recognition Example Prepaid Items Beginning of year balance: $5,800 Spending on prepaid items during year: $60,000 End of year balance: $13,800 Recognition Approach Balance Sheet Resource Flows Statement Current financial resources Prepaid item and nonspendable Outflows of resources of $52,000 fund balance of $13,800 Short-term financial resources Prepaid item of $13,800 Outflows of resources of $52,000 Normally = Short-term 62

63 Recognition Example Inventory Beginning of year balance: $15,200 Spending on inventory during year: $185,000 End of year balance: $23,500 Recognition Approach Balance Sheet Resource Flows Statement Current financial resources Inventory of and nonspendable Outflows of resources of $176,700 fund balance $23,500 using consumption method Short-term financial resources Inventory of $23,500 Outflows of resources of $176,700 Normally = Short-term 63

64 Recognition Example Bonds Payable Beginning of year balance: $33,414,493, all capital-related Principal paid during the current year: $8,331,457 End of year balance: $25,083,036 Recognition Approach Balance Sheet Resource Flows Statement Current financial No amounts recognized Expenditures of $8,331,457 resources Short-term financial resources No amounts recognized Outflows of resources of $8,331,457 Normally = Long-term 64

65 Alternative Views (Continued) Examples - General obligation bond that will be called shortly after periodend using existing resources - Long-term debt payment due 1 month after period-end - Long-term debt payment due 11 months after period-end Government-wide statement of cash flows 65

66 PV Improvements 66

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68 68

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70 Proposals: Proprietary Funds Separate presentation of operating and nonoperating revenues and expenses Operating Activities other than nonoperating activities Nonoperating Subsidies received and provided Revenues and expenses of financing Resources from the disposal of capital assets and inventory Investment income and expenses 70 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

71 Proposals: Proprietary Funds (continued) Add a new subtotal for operating income (loss) and noncapital subsidies Subsidies are resources provided by another party or fund for the purpose of keeping the rates lower than otherwise would be necessary for the level of goods and services to be provided 71 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

72 Other Proposals Major component unit presentations If it is not feasible to present major component unit financial statements in separate columns in the reporting entity s financial statements, the financial statements of the major component units would be presented in the reporting entity s basic financial statements as combining financial statements Schedule of government-wide expenses by natural classification would be presented as supplementary information Governmental activities expenses by function or program Business-type activities expenses by different identifiable activity 72 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

73 Proposal: Budgetary Comparisons Would be presented as required supplementary information (no option for basic statements) Required variances would be final-budget-to-actual and original-budget-to-final-budget 73 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

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75 Revenue and Expense Recognition 75

76 Leases Statement No

77 Leases What: The Board issued Statement 87 to improve lease accounting and financial reporting Why: Existing standards in effect for decades without review in light of GASB s conceptual framework; FASB and IASB conducted a joint project to update their lease standards; opportunity to increase comparability and usefulness of information and reduce complexity for preparers When: Effective for periods beginning after December 15, Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

78 Background Why (continued): - Governmental lessees Over 89,000 state and local governments, including states, counties, cities, ports, hospitals, universities, and special-purpose governments Over 500 federally recognized tribal governments - Governmental lessors About 390 primary commercial airports Sports stadiums Tribal casinos Ports and marinas Utilities power poles 7 8

79 Lessee - Determines type of lease Capital or Operating Transfer of ownership at conclusion Bargain purchase option Capital Lease if one criteria met, otherwise Operating Lease Lease term >= 75% of economic life of asset PV of future minimum lease payments >= 90% of FMV Lease Type Accounting accrual basis Disclosure Capital Debit: capital assets Credit: long-term debt for PV of future minimum payments Disclose future minimum payments Operating Expense payments as made Disclose future minimum payments (if noncancelable)

80 Scope and Approach Capital/operating distinction is eliminated Statement 87 applies to any contract that meets the definition of a lease: A lease is 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. Leases are financings of the right to use an underlying asset Single approach applied to accounting for leases with some exceptions, such as short-term leases 80 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

81 Scope Exclusions Intangible assets (mineral rights, patents, software, copyrights), except for the sublease of an intangible right-to-use asset Biological assets (including timber, living plants, and living animals) Inventory Service concession arrangements (Statement 60) Assets financed with outstanding conduit debt, unless both the asset and the debt are reported by the lessor Supply contracts (such as power purchase agreements that do not convey control of the right to use the underlying generating facility) 81 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

82 Initial Reporting Lessee Lessor Assets Liability Deferred Inflow Intangible lease asset (right to use underlying asset) value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in use Lease receivable (generally includes same items as lessee s liability) Continue to report the leased asset Present value of future lease payments (incl. fixed payments, variable payments based on index or rate, reasonably certain residual guarantees, etc.) NA NA Equal to lease receivable plus any cash received up front that relates to a future period 82 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

83 Subsequent Reporting Assets Liability Deferred Inflow Lessee Amortize the intangible lease asset over shorter of useful life or lease term Reduce by lease payments (less amount for interest expense) NA Lessor Depreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition) Reduce receivable by lease payments (less amount needed to cover accrued interest) NA Recognize revenue over the lease term in a systematic and rational manner 83 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

84 Short-Term Leases Definition Lessee accounting Lessor accounting At beginning of lease, maximum possible term under the contract is 12 months or less Recognize expenses/expenditures based on the terms of the contract Do not recognize assets or liabilities associated with the right to use the underlying asset Recognize lease payments as revenue based on the payment provisions of the contract Do not recognize receivables or deferred inflows 84 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

85 Other Topics Covered by Statement 87 Disclosures Lease term Contracts with multiple components Contract combinations Lease modifications & terminations Lease incentives Subleases Sale-leasebacks Lease-leasebacks 85 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

86 Statement of Net Position - Lessee

87 Statement of Net Position - Lessor

88 Transition Guidance Paragraph Leases should be recognized and measured using the facts and circumstances that existed at the beginning of the period of implementation. If applied to earlier periods, leases should be recognized and measured using the facts and circumstances that existed at the beginning of the earliest period restated. 88

89 Leases - General 89

90 Leases - General 90

91 Revenue and Expense Recognition 91

92 Revenue and Expense Recognition 92

93 Revenue and Expense Recognition What: The Board is redeliberating stakeholder input on an Invitation to Comment as part of developing a comprehensive model for recognition of revenues and expenses Why: Guidance for exchange transactions is limited; guidance for nonexchange transactions could be improved and clarified When: Redeliberations began in June Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

94 Project Scope The project scope broadly encompasses revenue and expense recognition but excludes the following: Topics with guidance developed considering the current conceptual framework For example, pensions and other postemployment benefits Topics related to financial instruments For example, investments, derivatives, leases, and insurance Topics related to transactions arising from recognition of capital assets or certain liabilities For example, depreciation, asset retirement obligations, and pollution remediation obligations 94 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

95 Revenue and Expense Recognition Models The are four components of a revenue and expense recognition model Classification is the process of identifying the type of transaction (for example, is the transaction exchange or nonexchange?) Measurement is the process of determining what amount to report for the element (not addressed in the Invitation to Comment) Basis of Accounting is the process of identifying when an element should be reported - for example, recognize revenue when earned Recognition is the process of determining what element should be reported and when, and then recording the transaction on the accounting records. 95 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

96 Revenue and Expense Recognition Models The are three components of a revenue and expense recognition model Classification is the process of identifying the type of transaction (for example, is the transaction exchange or nonexchange?) Recognition is the process of determining what element should be reported and when (for example, recognize revenue when earned) Measurement is the process of determining the amount to report for the element (not addressed in the Invitation to Comment) 96 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

97 Exchange/Nonexchange Model Classification Is the transaction an exchange? Recognition YES Earnings recognition approach: Government controls a resource, or incurs an obligation to sacrifice a resource, and The change in net assets is not applicable to a future period NO Provisions of Statement 33: Derived tax revenue Imposed nonexchange revenue Government-mandated nonexchange transaction Voluntary nonexchange transaction Measurement Measurement was not addressed in the Invitation to Comment but is expected to be addressed in a later due process document. 97 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

98 Performance Obligation Definition A performance obligation is a promise in a binding arrangement between a government and another party to provide distinct goods or services to a specific beneficiary. A binding arrangement is a legally enforceable mutual understanding between a government and another party. Distinct goods or services are separately identifiable and can provide benefits on their own. Another party can be a customer, a vendor, a resource provider, an employee, and so on. A specific beneficiary would be identifiable and distinguished from the general public. 98 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

99 Performance Obligation/ No Performance Obligation Model Classification Does the transaction contain a performance obligation? Recognition YES Performance recognition approach: Determine consideration Allocate consideration to performance obligation(s) Recognize revenue or expense as each performance obligation is satisfied (at a point in time or over time) and the transaction is applicable to the reporting period(s) NO Provisions of Statement 33: Derived tax revenue Imposed nonexchange revenue Government-mandated nonexchange transaction Voluntary nonexchange transaction Measurement Measurement is not addressed in the Invitation to Comment but is expected to be addressed in a later due process document. 99 Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

100 Example - Performance Obligation Building Permit Office Collects: - Building Permit Fee - Impact Tax or Fee ($1.00 per sq. foot) - And Sets up 3 Building Inspections. One at the beginning of the project, one in the middle, and one at the end. How would you record the revenue? Copyright by Financial Accounting Foundation, Norwalk CT. For non-commercial, educational/academic purposes only.

101 Jerry E. Durham, CPA, CGFM, CFE Assistant Director TN Division of Local Government Audit