GASB & AUDIT UPDATE NOVEMBER 2018 Alaska Government Finance Officers Association BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
AGENDA Upcoming Standards Changes Audit Update Data Analytics 1 GASB & AUDIT UPDATE
Upcoming Standards Changes 2 GASB & AUDIT UPDATE
New Pronouncements and Effective Dates Pronouncements that were effective for years ended June 30, 2017: Statement No. 73, Pensions not within scope of GASB 68 and amendments to GASB 67 and 68 Statement No. 74, Financial Reporting for OPEB Plans GASB Statement No. 82, Pension Issues GASB Implementation Guide 2016-1 Pronouncements that were effective for years ended December 31, 2017: GASB Statement No. 81, Irrevocable Split-Interest Agreements GASB Implementation Guide 2017-2, Reporting for OPEB Plans (GASB 74) 3 GASB & AUDIT UPDATE
New Pronouncements and Effective Dates Pronouncements that were effective for years ending June 30, 2018: Statement No. 75, Accounting and Financial Reporting for OPEB Statement No. 86, Certain Debt Extinguishment Issues GASB Implementation Guide 2017-1, Implementation Guide 2017 GASB Implementation Guide 2017-3, Accounting & Reporting for OPEB Benefits (GASB 75) Pronouncements that will be effective for years ending June 30, 2019: Statement No. 83, Certain Asset Retirement Obligations GASB Statement 88, Certain Disclosures Related to Debt GASB Implementation Guide 2018-1, Implementation Guide Update 2018 4 GASB & AUDIT UPDATE
New Pronouncements and Effective Dates Pronouncements that will be effective for years ending December 31, 2019: Statement No. 84, Fiduciary Activities Exposure Draft, Majority Equity Interest Exposure Draft, Interest Costs During Construction Pronouncements that will be effective for years ending December 31, 2020: Statement No. 87, Leases 5 GASB & AUDIT UPDATE
GASB 75 OPEB Supersedes GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other than Pensions and Statement No. 57, OPEB Measurements by Agent Employers Prior to GASB 75 governments only recognized a liability if they didn t fully fund the ARC. This statement requires recognition of the net OPEB liability For defined benefit OPEB, the statement identifies methods and assumptions that would be used to project benefit payments, discount the projected payments to the actuarial present value and attribute that present value to periods of employee service Net OPEB liability is the actuarial present value of projected benefit payments attributed to past periods less fiduciary net position 6 GASB & AUDIT UPDATE
GASB 75 OPEB Mirrors the requirements of GASB 68 for employer reporting of pension liabilities, expense and deferred inflows/outflows, including same amortization periods Required note disclosure - General information about the plan - Net OPEB liability and significant assumptions, including health care trend rates - Discount rate and long-term expected rate of return - Sensitivity of net OPEB liability to changes in discount rate - Information on OPEB expense and deferred outflows and inflows 7 GASB & AUDIT UPDATE
GASB 75 OPEB The total OPEB liability must be determined through actuarial valuation as of the measurement date or update procedures are used to roll forward to the measurement date from an actuarial valuation no more than 30 months and 1 day earlier than the most recent year end. If there are less than 100 members an alternative method may be used Discount rate should be the single rate that reflects the long-term rate of return on investments that will be used to pay benefits (if sufficient assets) If not, use index rate for 20-year tax-exempt muni bonds with average rating of AA/Aa or higher Entry age actuarial cost method must be used 8 GASB & AUDIT UPDATE
GASB 75 OPEB RSI schedules for cost-sharing employers: 10-year schedule of changes in employers proportion of the collective net OPEB liability and related key ratios 10-year schedule of actuarially determined employer contributions, actual amounts contributed, covered-employee payroll Notes to RSI should include information about significant methods and assumptions used, factors that affect trends in amounts reported (for example, change in benefit terms) and information about investment related factors 9 GASB & AUDIT UPDATE
GASB 75 OPEB OPEB Plans not administered through trust - for insured defined benefit plans - requires recognition of expense equal to amount of premiums and description of benefits provided OPEB Plans not administered through trust - other than insured plans, recognize total OPEB liability Measurement date can be no earlier than end of employers prior fiscal year Discount rate should be the index rate for 20-year tax-exempt muni bonds with rating of AA/Aa or higher Defined Contribution OPEB plans employers recognize expense for the amount of contributions, net of forfeited amounts Effective Date: Years ending June 30, 2018 10 GASB & AUDIT UPDATE
Other GASB Statements and Exposure Drafts 11 GASB & AUDIT UPDATE
GASB Implementation Guide 2017-1, Implementation Guidance Update-2017 Includes new questions and answers Cash flows, pensions, investment pools, tax abatements Amends previously issued questions and answers Deposits and investments, financial reporting entity, pensions Effective Date: Years ending June 30, 2018, early implementation encouraged 12 GASB & AUDIT UPDATE
GASB Implementation Guide 2018-1, Implementation Guidance Update-2018 Tax abatements OPEB and pension Amendments to previously issued questions International mutual fund Cash flows reporting Pensions Basic financial statements Tax abatements Effective date: Years ending June 30, 2019 (early application encouraged) 13 GASB & AUDIT UPDATE
GASB 81 Irrevocable Split-Interest Agreements Applies when government is beneficiary of an irrevocable split-interest agreement Examples include: Charitable lead trusts Charitable remainder trusts Charitable annuity gifts Life-interests in real estate Lead interest- government receives resources during the term of the agreement Remainder interest government will receive the resources at the end of the agreement s term 14 GASB & AUDIT UPDATE
GASB 81 Irrevocable Split-Interest Agreements Governments will recognize assets, liabilities and deferred inflows at fair value at inception of the agreement and remeasure annually Revenue will be recognized when resources become applicable to the reporting period (normally at termination) Effective date: Years ended December 31, 2017 15 GASB & AUDIT UPDATE
GASB 83, Asset Retirement Obligations Applies to facilities other than landfills, such as Nuclear power plants Sewage treatment facilities Coal-fired power plants Removal and disposal of wind turbines or x-ray machines Governments with legal obligations to perform future asset retirement activities related to its tangible capital assets would be required to recognize a liability Liability and corresponding deferred outflow is recorded when liability is both incurred and reasonably estimable Liability is based on best estimate of current value of outlays expected to be incurred 16 GASB & AUDIT UPDATE
GASB 83 ARO Must have both an external and an internal obligating event External obligating event (e.g. court judgment, creation of legally binding contract or approval of federal, state or local laws or regulations) Internal obligating event (contamination, use, retirement, abandonment) Exception for minority owner (<50%) Annual remeasurement required, adjusting for the effects of inflation or deflation Recognition in financial statements using modified accrual- recognize to the extent normally expected to be liquidated with expendable financial resources Effective date: Years ending June 30, 2019 17 GASB & AUDIT UPDATE
GASB Statement No. 84, Fiduciary Activities Establishes criteria for reporting fiduciary activities with focus on whether a government controls the assets and beneficiaries Currently there are 4 types of fiduciary funds: Pension and OPEB trust funds (covered by GASB 68 and 75) Investment trust funds Private-purpose trust funds Agency funds Agency funds will be replaced by custodial funds which are used to report fiduciary activities that are not held in trust 18 GASB & AUDIT UPDATE
GASB Statement No. 84, Fiduciary Activities Issues that the ED addresses: Existing guidance doesn t define fiduciary responsibility Business-type activities don t always include fiduciary activity Current classification as private-purpose trust funds and agency funds is inconsistent The term agency fund is confused with agencies of the government Result is inconsistency in practice 19 GASB & AUDIT UPDATE
GASB Statement No. 84, Fiduciary Activities A government should report an activity as fiduciary if the government controls the assets, the assets are not derived solely from the government s own revenues and one or more of the following criteria is met: Assets are administered through a trust agreement or equivalent Assets are provided to individuals that are not required to be residents Assets are provided to organizations or other governments that are not part of the financial reporting entity nor a recipient of the government s services Assets result from a pass-through grant for which the government does not have administrative or direct financial involvement in the program Business-type activities may report resources with a corresponding liability that otherwise should be reported in a custodial fund if the resources will be held for three months or less 20 GASB & AUDIT UPDATE
GASB Statement No. 84, Fiduciary Activities Changes are as follows: Investment trust fund or private purpose trust fund will be used if trust agreement exists and trust assets are dedicated to providing benefits and legally protected from creditors of the government acting as fiduciary New custodial fund type will be used to report any fiduciary activity not administered through a trust agreement (would include old agency funds, pension funds not held in trust) Custodial funds can have net position Might change whether some activities still qualify as fiduciary activity in financial statements, including pension and OPEB funds. Need to evaluate control (paragraph 11c(1)) 21 GASB & AUDIT UPDATE
GASB Statement No. 84, Fiduciary Activities Statement of Fiduciary Net Position will remain the same Statement of Changes in Fiduciary Net Position separate display of: Investment income, Investment costs and Net investment income Administrative costs If assets held for three months or less can aggregate additions and disbursements into single line for each Effective date: Years ending December 31, 2019 GASB is working on an Implementation Guide with an Exposure Draft likely in December 2018 22 GASB & AUDIT UPDATE
GASB Statement No. 85, Omnibus 2017 Addresses several practice issues that have been identified during implementation Blending component units- business-type activity that uses a single column for financial statement presentation - a component unit may be blended only if it meets one of the criteria in GASB 14, paragraph 53: Governing body of component is substantially same as that of primary government (PG) Component provides services almost entirely to the PG or almost exclusively benefits the PG Component s debt will be repaid by primary governments Component is NFP corporation where PG is sole corporate member 23 GASB & AUDIT UPDATE
GASB Statement No. 85, Omnibus 2017 For acquisitions that occurred prior to GASB 69 implementation date, paragraph 39 of GASB 69 should be applied so that negative goodwill is not reported Deferred outflow will be reported for the positive goodwill and amortized to future periods. Negative goodwill is written off to net position Fair value measurement: Each unit of account of real estate held by insurance entities should be classified as an investment or capital asset Money market investments and participating interest-earning investments with maturity at time of purchase of one year or less may be measured at amortized cost as permitted by GASB 31, paragraph 9 Money market investments include commercial paper, U.S. Treasury and agency obligations but not asset-backed securities 24 GASB & AUDIT UPDATE
GASB Statement No. 85, Omnibus 2017 Postemployment benefits: Liabilities to employees for pensions or OPEB should be measured as of end of reporting period in financial statements using modified accrual basis On-behalf payments should be recognized in modified accrual statements equal to total of amounts paid and the change between nonemployer contributing entities beginning and ending balances, including amounts payable Presentation of payroll related measures in RSI for OPEB plans Present covered payroll (payroll on which contributions are based) If contributions are not based on payroll, no measure of payroll should be presented For plans administered through trust present covered payroll if based on pay or covered-employee payroll if contributions are not based on pay 25 GASB & AUDIT UPDATE
GASB Statement No. 85, Omnibus 2017 Classification of employer-paid member OPEB contributions For GASB 74 statements (OPEB Plan), classify as member contributions For GASB 75 purposes (OPEB Employer), classify as employee contributions, including for determining cost-sharing employers proportion Modifications to the alternative measurement method for OPEB relate to the expected point in time at which plan members will exit active service and turnover 26 GASB & AUDIT UPDATE
GASB Statement No. 85, Omnibus 2017 OPEB provided through certain multiple-employer OPEB plans that are not a state/local plan, provides benefits to government and nongovernment employees and have no predominant governmental employer (VEBA plans) OPEB expense recognized equal to required contributions Payable recognized to extent normally expected to be liquidated Certain note disclosures required RSI to present required contributions for the most recent 10 years for each OPEB plan and include notes Effective date: Years ending June 30, 2018. Can early implement all topics or single topics. 27 GASB & AUDIT UPDATE
GASB 86 Certain Debt Extinguishment Issues Objective is to improve consistency in accounting and reporting transactions in which only existing resources are placed in trust for the sole purpose of extinguishing debt Currently GASB Statements No. 7 and 23 address reporting requirements when debt is extinguished using bond proceeds The proposed statement specifies that the use of solely existing resources to retire bonds qualifies for in-substance defeasance Cash and other monetary assets must be placed with an escrow agent in a trust to be used solely for satisfying scheduled debt service payments Trust is restricted to owning only risk-free monetary assets: Direct obligations of the U.S. government Obligations guaranteed by the U.S. government Securities backed by U.S. government obligations 28 GASB & AUDIT UPDATE
GASB 86 Certain Debt Extinguishment Issues Assets held by the trust are required to provide cash flows that approximately coincide with scheduled interest and principal payments on the debt Difference between the reacquisition price and the net carrying amount of the debt will be recognized as a separately identified gain or loss in the period of defeasance in financial statements using the economic resources measurement focus Payments to the escrow agent from existing resources should be reported as debt service expenditures in governmental fund types Prepaid bond insurance related to debt that is refunded should be included in the net carrying amount of old debt when calculating difference between reacquisition price and carrying amount 29 GASB & AUDIT UPDATE
GASB 86 Certain Debt Extinguishment Issues Note disclosures should include: General description of the transaction that may include the amount of the debt, The amount of existing resources placed with the escrow agent, Reasons for the defeasance and Cash flows required to service the defeased debt If the substitution of risk-free monetary assets with monetary assets that are not riskfree is not prohibited, governments would disclose that fact The amount of defeased debt that remains outstanding in all subsequent periods Effective date: Years ending June 30, 2018 30 GASB & AUDIT UPDATE
GASB Statement No. 87, Leases GASB considered the FASB and IASB project on lease accounting in the context of the unique nature of governmental entities Current guidance is located in several places NCGA 5, GASB 13, GASB 62 and GASB 65 and identifies leases as capital or operating New definition of a lease a contract that conveys the right to use another entity s nonfinancial asset for a period of time in an exchange or exchange-like transaction Examples include buildings, land, vehicles and equipment Excludes leases that transfer ownership (bargain purchase option) and service concession arrangements covered by GASB Statement No. 60 Other exclusions- leases for inventory, underlying asset is financed by conduit debt, biological assets 31 GASB & AUDIT UPDATE
GASB Statement No. 87, Leases Government has the right to use an asset if both of the following are true: The right to obtain present service capacity as specified in the contract The right to determine the nature and manner of use as specified in the contract A lessee would be required to recognize a lease liability and an intangible rightto-use lease asset A lessor would be required to recognize a lease receivable and a deferred inflow of resources 32 GASB & AUDIT UPDATE
GASB Statement No. 87, Leases Lease term is defined as the period during which lessee has noncancellable right to use the asset and includes: Periods covered by lessee s option to extend the lease if probable, based on all relevant factors that lessee will exercise that option Periods covered by lessee s option to terminate if probable that the lessee will not exercise that option Lessees would recognize a liability and intangible asset at beginning of lease, unless it is a short-term lease Liability is equal to the present value of lease payments to be made Asset is equal to the value of lease liability plus any prepayments and certain initial direct costs Recognize interest expense on the liability and amortization expense on the asset 33 GASB & AUDIT UPDATE
GASB Statement No. 87, Leases Lessor would recognize a lease receivable and deferred inflow of resources at beginning of lease Receivable is equal to present value of lease payments to be received Deferred inflow is equal to value of receivable plus any payments received at beginning of lease that relate to future periods Recognize interest revenue on the receivable and lease revenue from the deferred inflow Lessor would not derecognize the underlying asset 34 GASB & AUDIT UPDATE
GASB Statement No. 87, Leases Short term lease has a maximum possible term, including options to extend, of 12 months or less Contracts that contain both lease and service components generally should be separated Subleases should be accounted for as transactions separate from the original lease Additional disclosures will be required GASB is working on an Implementation Guide Effective date: Years ending December 31, 2020 35 GASB & AUDIT UPDATE
GASB 88 Disclosures Related to Debt Objective is to improve note disclosures related to debt by defining debt for purposes of note disclosure Currently there is a lack of consistency in what is disclosed in the debt footnote Defines debt for purposes of disclosure as a liability that arises from a contractual obligation to pay cash or other assets in one or more payments to settle an amount that is fixed at date obligation is established If the amount to settle a liability is unknown, it should be excluded from the footnote Would exclude pension and OPEB liabilities, leases and accounts payable as those should be disclosed in separate notes Includes capital appreciation bonds and variable rate debt 36 GASB & AUDIT UPDATE
GASB 88 Disclosures Related to Debt Note disclosures are in addition to current disclosures: 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 Disclose separately information regarding direct borrowings and direct placement from other debt 37 GASB & AUDIT UPDATE
GASB 88 Disclosures Related to Debt Direct borrowings are when a government enters into a loan agreement with a lender Direct placements are when a government issues a debt security directly to an investor Neither are offered for public sale Effective date: Years ending June 30, 2019 38 GASB & AUDIT UPDATE
GASB 89 Accounting for Interest Cost during Period of Construction In financial statements using economic resources measurement focus (businesstype activities, proprietary funds), interest incurred during construction should be recognized as an expense of the period In financial statements using current financial resources measurement focus (governmental funds), interest incurred during construction should be recognized as an expenditure Interest cost should not be capitalized Interest does not meet the definition of an asset or a deferred outflow and does not enhance the service capacity of an asset Effective date: Years ending December 31, 2019 39 GASB & AUDIT UPDATE
GASB 90 Majority Equity Interests Report majority equity interest as an investment if it meets the definition Measure using the equity method, unless held by a special-purpose government engaged only in fiduciary activities, fiduciary fund or endowment /permanent fund. These measure it at fair value For all other majority equity interest, report as component unit and fund that holds the equity interest reports an asset using the equity method Acquisition of a component unit in which government holds 100% interest would be measured using acquisition value Effective date: Years ending December 31, 2019 40 GASB & AUDIT UPDATE
Other GASB Projects Reexamination of GASB Statements No. 34, 35, 37, 41, 46 and Interpretation 6 The near-term financial resources approach, working capital approach with past-due compensation liabilities approach, and a total financial resources approach will be further developed The following two presentation alternatives for resources flows will be further developed: statement of revenues, expenditures, and changes in fund balances (current format) and short-term (or current) activities separated from long-term activities A governmental funds statement of cash flows that could be presented as part of the working capital approach or the total financial resources approach will be further explored 41 GASB & AUDIT UPDATE
Other GASB Projects Reexamination of GASB Statements No. 34, 35, 37, 41, 46 and Interpretation 6 The following alternatives will continue to be explored for the presentation of the government-wide statement of activities: the current format and a traditional format with expenses presented by function or program. Methods of communicating information about the natural classification of functional expenses will be explored Revenue and Expense Recognition common exchange transactions not specifically addressed in GASB standards and post-implementation review of GASB 33 and 36 42 GASB & AUDIT UPDATE
Other GASB Projects Going Concern Disclosures- Reexamination of Statement No. 56 The objective of this research is to evaluate whether existing literature provides sufficient guidance about management s responsibilities for evaluating and disclosing uncertainties associated with severe stress (going concern) Note Disclosure Reexamination To evaluate whether currently required disclosures are meeting needs of users of state and local governmental financial reports 43 GASB & AUDIT UPDATE
Audit Update 44 GASB & AUDIT UPDATE
AUDIT UPDATE Uniform Guidance State Single Audit Audit Data Analytics 45 GASB & AUDIT UPDATE
UNIFORM GUIDANCE / STATE SINGLE AUDIT Federal Threshold now $750,000 Type A threshold is $750,000 if under $25mil in total expenditures Only required to have 40% coverage if high risk, 20% if low risk State Threshold now $750,000 No smaller than font size of 9-point 46 GASB & AUDIT UPDATE
UNIFORM GUIDANCE Procurement Micropurchase raised to $10,000 Simplified acquisitions raised to $250,000 Should have a formal policy Only applies to federal funds Must follow your policy, even if it is more restrictive 47 GASB & AUDIT UPDATE
THE PROFESSION IS CHANGING REGULATORY PERSPECTIVE Center for Audit Quality Symposium - ADA 48 GASB & AUDIT UPDATE
AUDIT DATA ANALYTICS & THE PROFESSION Audit Data Analytics "...the science and art of discovering and analyzing patterns, identifying anomalies, and extracting other useful information in data underlying or related to the subject matter of an audit through analysis, modeling, and visualization for the purpose of planning or performing the audit. - AICPA Guide to Audit Data Analytics, December 2017 49 GASB & AUDIT UPDATE
VISUALIZATION GASB 88 Disclosures Related to Debt 50 GASB & AUDIT UPDATE
ENABLING TECHNOLOGY PAYROLL TESTING 51 GASB & AUDIT UPDATE
DATA ANALYTICS CLIENT IMPACT ADA APPROACH INSTEAD NOT MORE! Will rely on reports and data that we may not traditionally obtain Involvement of IT personnel At least 2 years of data (or more) Fewer tests of transactions Identification of the real risk areas Can fully replace many traditional audit procedures 52 GASB & AUDIT UPDATE