MEMORANDUM TO: FROM: All NASACT Members and Other Interested Parties R. Kinney Poynter, Executive Director DATE: November 14, 2016 SUBJECT: September 13-15, 2016, GASB Meetings Gerry Boaz, CPA and CGFM, Technical Manager, State of Tennessee, is attending the meetings of GASB as an observer on behalf of NASACT. These comments are not an official statement, but represent Gerry s summary of the actions of the board. All board members and the director of research were present for all or a portion of the September 13-15, 2016, meetings of the Governmental Accounting Standards Board (GASB) in Norwalk, Connecticut. At these meetings, the board primarily considered 1. Omnibus 2. Implementation Guidance for Statement 74 on Other Postemployment Benefits Certain Debt Extinguishments 3. Asset Retirement Obligations (ARO) 4. Fiduciary Activities 5. Financial Reporting Model Reexamination 6. Leases 7. Revenue and Expense Recognition Omnibus Please note that all board decisions are tentative until a final pronouncement is issued. Emily Paul, assistant project manager; Michelle Czerkawski and Jialan Su, project managers; Ken Schermann, senior technical adviser; and Kayta Grueberg and Jeffrey Bourgeois, postgraduate technical assistants, presented the board with a ballot draft of an ED, Omnibus 201X. In addition to the tentative changes at the August meeting, staff identified the following additional issue and proposed changes in the ballot draft related to the following: The ballot draft of the Exposure Draft (ED) included clarification with regard to the application of the primary recognition and measurement provisions for on-behalf payments included in 8 of GASB 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, and how those requirements should be applied in conjunction with the requirements in the pensions and OPEB standards. However, GASB 24 9 12 included additional requirements regarding on-behalf payments that, without modification, either overlapped with or, in some cases, contradicted the requirements in the pension and OPEB standards. Therefore, in addition to clarifying the primary recognition and measurement for on-behalf payments, staff proposed limiting GASB 24 9 12 to apply only to on-behalf payments for salaries and fringe benefits other than pensions or OPEB. Specifically, staff recommended including in the ED 12 and the additional Codification Instructions to update Section N50, Nonexchange Transactions.. The board agreed with staff. However, Mr. Brown wanted to clarify that this was not a reexamination of GASB 24 but was a one-time clarification of guidance. The board concurred with issuance of the ED. However, Mr. Brown still disagreed with the alternative measurement method within OPEB and pensions.
Implementation Guidance for Statement 74 on Other Postemployment Benefits Michelle Czerkawski, project manager, Emily Paul, assistant project manager; and Emily Balkonis and Kayta Grueberg, postgraduate technical assistants, presented the board with a preballot draft of an ED, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. Certain questions and answers in the draft used the phrase prepared in conformity with generally accepted accounting principles or the phrase prepared in conformity with [a specific GASB Statement]. (See Q.#4.1 and Q.#4.2 for examples.) The phrase in conformity with was adopted into the GASB style to conform with language used in audit reports. The American Institute of Certified Public Accountants (AICPA) State and Local Government Audit Guide first included that language in the 2013 edition. Since that time, the language used in audit reports changed to use the phrase in accordance with rather than the phrase in conformity with. Staff wanted board feedback regarding whether GASB style should conform on a goforward basis, including in this proposed Implementation Guide, to the current AICPA language. Mr. Sundstrom believed there was a difference in changing from in conformity with (i.e., was negative confirmation) and in accordance with (i.e., was a positive confirmation). Mr. Brown indicated that the change was likely due to using the international auditing standards as the foundation for the AICPA s standardssetting process. Mr. Granof was concerned about including this question but would not object to including it. The board supported being consistent with the AICPA for this issue. For Q.#4.2 (scope and applicability), Mr. Brown did not believe the answer was directly responsive to the question. He suggested deleting the last sentence (i.e., However, additional information can be presented in the note disclosures in the city s financial report if the information is determined to be essential to the fair presentation of the city s basic financial statements. ) because an essential disclosure for full presentation in accordance with GAAP was required to be presented. Mr. Caputo preferred consistency with pensions at this point, and thus retaining the language. However, he changed his mind that removing the language was preferable than trying to modify it to be accurate. The board agreed with Mr. Brown s suggestion to remove the language and to delete it from the pension Q&A guidance (Q.#15-1) also through the CIG update process. In regard to Q.#4.13 (trusts or equivalent arrangement), Mr. Previdi wanted to ensure that the characterization of equivalent arrangements included the attributes of the force and effect of a trust; otherwise, readers might not know what the board meant by this characterization. Mr. Bean suggested that the question likely should be deleted. Staff was not sure how much benefit this question and answer really was. The board agreed with removing the question. However, Mr. Brown wanted to ensure this issue was addressed in the fiduciary activities project. In regard to Q.#25 (disability benefits), staff suggested answering the question with a no because these benefits would not be an OPEB (i.e., An employer provides long-term disability benefits as a source of income until a recipient becomes eligible for pension benefits. A disabled employee is required to terminate his or her employment to become eligible for the benefits. Should the disability benefits be classified as OPEB for financial reporting purposes? ). The board agreed. In regard to Q.#4.39 (defined benefit OPEB plans administered through trusts meeting the criteria in paragraph 3 of GASB 74: number of OPEB plans), Mr. Previdi believed legally restricted was more appropriate than legally separated/segregated. The board agreed with Mr. Previdi, and staff agreed to provide the clarification. Question #4.42 addressed, from an OPEB plan reporting perspective, the use of stabilization accounts for contributions to cost-sharing OPEB plans. Staff noted, however, that the primary issues regarding financial reporting in circumstances in which these types of accounts were used appeared to relate to employer reporting, which was not addressed in this Implementation Guide. It was anticipated that, with regard to the use of such accounts for pensions, questions could be drafted for inclusion in the next implementation guidance update, which was scheduled for public comment exposure later this fall, and both the pension plan and the employer pension reporting perspectives could be addressed in that document. Further, similar questions for OPEB employer reporting could be included in the Implementation Guide on GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which was scheduled to be exposed for public comment in 2017. The question and answer in this Implementation Guide served as the jumping off point for those additional questions and answers. Therefore, at this meeting, staff invited preliminary board discussion of the financial reporting effects of the use of stabilization accounts of the type described in Q.#4.42 for all pension and OPEB plans (single, agent, - 2 -
and cost-sharing) and the employers providing benefits through those plans. Staff was indicating that in no situation would the assets be OPEB. To meet the plan criteria, staff indicated the assets should already be in an OPEB trust. For Q.#4.45, Mr. Granof questioned why an appropriation was not an enforceable legal right. Ms. Sylvis stated that the appropriation was an authorization to spend up to a certain amount. In regard to Q.#4.52 (liabilities Q Should the total OPEB liability be recognized as a liability of the OPEB plan? A No. The OPEB plan should report a liability for benefits that currently are due and payable in accordance with the benefit terms. The total OPEB liability should not be recognized as a financial statement liability of the OPEB plan. However, for single-employer and cost-sharing multiple-employer plans, Statement 74 requires disclosure of the components of the net OPEB liability (the total OPEB liability and the OPEB plan s fiduciary net position) in the notes to the OPEB plan s financial statements. ), Mr. Granof could not imagine how anyone could conclude from the standard that the total liability was recognized. He believed it should be deleted. Mr. Caputo and Mr. Brown agreed with Mr. Granof. The board agreed with deleting the question. For Q.#4.105 (projection of benefit payments), Mr. Granof believed this question added no useful guidance and suggested removing the question and answer (i.e., Q Should refunds of plan member contributions through a defined benefit OPEB 36 plan be included in the projection of benefit payments for purposes of measuring the total OPEB liability? A Yes. When provided through a defined benefit OPEB plan, refunds of plan member contributions are classified as a form of benefit payment for purposes of Statement 74 and should be included in the projection of benefit payments for purposes of measuring the total OPEB liability, including determination of the discount rate to be applied in the measurement. ). The board did not object to removing the question. For Q.#4.115 (postemployment benefit changes), Mr. Granof was concerned how to apply the question and answer. He did not believe it was clear (i.e., Q In the circumstance described in Question 4.114, 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 44 of Statement 74 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 OPEB liability. ). No other board members supported Mr. Granof s concern. In regard to Q.#4.121 (projecting postemployment healthcare benefits based on claims costs or age-adjusted premiums), Mr. Sundstrom disagreed with the answer that the employer was, in fact, paying the implicit rate subsidy which would never actually be paid (the employer sacrificed no resources, and the employees actually paid the subsidy) taking into account any contractual/statutory cap (i.e., Q With regard to the scenario in Question 4.120, if the employer s stated payment for the active-employee healthcare benefits is capped and the employees are required to pay the difference, if any, between the blended premium and the amount of the employer s stated payment, would the active employees be subsidizing the inactive employee benefits? A Only if the amounts expected to be paid by active employees exceed the expected age-adjusted premiums for their coverage on an ongoing basis can it be concluded that the active employees are subsidizing the inactive employee healthcare benefit. Otherwise, the amount of the benefit payments that is used as the basis for the projection of the total OPEB liability is determined in the manner discussed in Question 4.120. That is, the first step is to determine the claims costs, or age-adjusted premiums approximating claims costs, for inactive employees for the period. The second step is to subtract the amounts paid by the inactive employees for the period from their claims cost, or age-adjusted premiums approximating claims cost. (An example of this approach is presented in Illustration B1-2 of nonauthoritative Appendix B.)). His disagreement was using the employees contributions for OPEB benefits as active employees for anything other than reducing the employer s liability for the active employees. He believed this question contradicted the current OPEB standard (GASBs 43 and 45). Because the employer never actually paid the implicit rate subsidy, it never met the Concept Statement 4 liability definition. He suggested deleting the question and answer. Mr. Bean indicated that the employees contributions went first to the active employees benefits. He believed this question and answer was consistent with GASBs 43 and 45. Mr. Brown agreed with Mr. Bean. He indicated that the employees would only be paying a subsidy for retirees if their contribution was greater than their active employee - 3 -
current year service costs. Staff indicated that respondents had the ability to respond to the answer with any concerns. The board retained the question for respondent comment. For Q.#4.138-.142 (alternative measurement method), the board agreed to delete the questions because they repeated the standard. For the effective date and transition of this implementation guide, the board supported the alternative which was allowing staggered effective dates. The draft did not contain a proposed question and answer related to the projection of benefit payments in circumstances in which benefits were provided through an employer group waiver plan. Staff received feedback from members of the project s consultative group on this issue. Staff continued to explore potential questions and answers with the goal of bringing a board proposal to the ballot draft of the ED. The draft did not contain a proposed question and answer that limited the use of the long-term expected rate of return on OPEB plan investments for purposes of determining the discount rate in circumstances in which benefit payments were being made on a pay-as-you-go basis with a relatively small amount of resources accumulated in a trust meeting the specified criteria. The board discussed possible approaches to addressing this issue with regard to pensions when it reviewed proposed material for Implementation Guide No. 2016-1, Implementation Guidance Update 2016. At that time, the board concluded there was not a sufficient basis in GASB 67, Financial Reporting for Pension Plans, and No. 68, Accounting and Financial Reporting for Pensions, to support a question and answer that prohibited the use of the long-term expected rate of return in the circumstance at hand. Instead, certain characteristics of the discount rate approach were emphasized to address a subset of concerns related to this circumstance. Staff received a request to reconsider the possibility of developing a question and answer for this Implementation Guide to limit or prohibit the use of the long-term expected rate of return on OPEB plan investments in the circumstance described. Certain questions and answers in the draft were based on the ED proposals, Omnibus 201X. As proposed, that document, if approved, amended GASB 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The final Omnibus Statement was anticipated to be finalized prior to issuance of the final GASB 74 Implementation Guide. Therefore, if changes were made to the Omnibus proposal, those questions and answers also required modification. Specifically, those questions were Q.#4.135 and Q.#4.158. In addition, Illustrations B5, B6, and B7 in Appendix B contained material that potentially were affected by the final Omnibus Statement. Illustration B5 in Appendix B presented an illustration that was included for pensions in Implementation Guide No. 2015-1. Staff believed the circumstances described in that illustration were less common for OPEB plans than for pension plans, and staff wanted feedback from the board regarding whether to include the illustration in this Implementation Guide. The board did not object to issuance of the Implementation Guide ED. Asset Retirement Obligations Jialan Su and Wes Galloway, project managers, Ken Schermann, senior technical advisor, and Stefan Jensen and Jeff Bourgeois, postgraduate technical assistants, presented the board with issue papers that discussed draft standards for governments minority shares of Asset Retirement Obligations (ARO), illustrations and other issues, effective date and transition, scope of authority, and cost/benefit considerations. For the initial measurement initial measurement of a liability ( 17), Mr. Previdi wanted to clarify that the minority ownership interest could be in a capital asset rather than the entity as a whole and thus could be a joint ownership interest. The board agreed with the change. For the exception for the government that was a minority share owner in the ARO liability, Mr. Brown wanted to ensure that the auditor community was able to provide assurance related to the auditability of the ARO liability (e.g., degree of audit coverage). Regarding the request for illustrations to be included in the proposed ARO guidance, staff noted that the board had tentatively decided not to include illustrations in the ED. The board noted that many of the recognition, measurement, and disclosure provisions in the proposed guidance were similar to concepts and requirements found in other guidance. In addition, the ARO ED included examples of internal obligating events and external obligating events that required the recognition of an ARO. The recognition of a deferred outflow of resources was similar to the debit-side account resulting from the recognition of an ARO liability following FASB 143, Accounting for Asset Retirement Obligations, as amended. Regarding the - 4 -
measurement provisions, the current value measurement technique was introduced by GASB 18, Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs, and also utilized in GASB 49. The use of illustrations in a standard generally was used when new concepts were introduced, new calculations and accounting treatment were prescribed, or new disclosures that had never been required for similar transactions or account balances were required by a new standard. However, that would not be the case for the proposed ARO standard because its provisions did not introduce any new concepts, significantly different calculations, forms of accounting treatment, or disclosure requirements. Staff believed there was no new information or compelling reasons to include illustrative examples in the final Statement. Therefore, staff continued to believe that illustrations were not necessary to understand the proposed ARO guidance. Mr. Sundstrom preferred to include the illustrations because they were already completed. Mr. Caputo agreed with staff. Ms. Sylvis believed illustrations would be important for those entities that had never recognized these types of transactions in the past. Otherwise, she believed facts and circumstances would be very different. She supported staff s recommendation. Mr. Vaudt agreed with Ms. Sylvis. The board, except Mr. Sundstrom, agreed with staff. For the suggestion to add a comprehensive project to consider all environmental obligations, staff noted the board considered GASBs 18 and 49 when discussing the project scope. During initial deliberations, the board tentatively decided to exclude reexamination and modification of the basic guidance in GASBs 18 and 49 from the project scope. At the May 2016 meeting, the board tentatively decided to reaffirm this decision. Comment letter respondents also suggested adding projects to define criteria for valuing a liability when estimation was necessary, and to remove implementation guides from Category B guidance. Staff noted that adding new projects to the current technical agenda was outside the ARO project scope. In order for a project to be added to the current technical agenda, the proper due process must be followed. Therefore, staff believed it was not appropriate to address these topics in the proposed final Statement. Mr. Brown believed the board would eventually need to address the issues recommended by the respondent. The board agreed with staff. For concerns about additional deferred inflows of resources and deferred outflows of resources, staff did not believe recording a deferred outflow of resources and deferred inflow of resources when appropriate was contrary to more transparent, consistent, and clear financial statements. Concepts Statement 4 clearly established that deferred outflows of resources were not assets, and deferred inflows of resources were not liabilities, even though they had similar effect on net position. Further, 7 of GASB 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, provided that deferred outflows of resources and deferred inflows of resources should be reported in the statement of financial position in a separate section following assets and liabilities, respectively. GASB 63 standardized the presentation of deferred outflow of resources and deferred inflow of resources and their effects on a government s net position. Staff believed it was important to report a deferred outflow of resources and a deferred inflow of resources when items met the definitions of those financial statements elements established in Concepts Statement 4. With clearly presented deferred outflow of resources and deferred inflow of resources, users of financial statements would better understand these items and their effects on a government s net position and would, therefore, benefit from transparency and accountability that information about deferrals provided. Staff continued to believe that, as a result of the recognition of an ARO liability, a corresponding deferred outflow of resources also should be recognized. Mr. Granof agreed with staff and saw no problem with the board increasing the number of deferred items over time. The board agreed with staff. Next, a respondent suggested adding a statement to 6 (scope exclusion) of the ED to clarify that the requirement to report an ARO did not apply to immaterial items. Staff noted that it was standard practice to discuss materiality only in the text box at the end of the standard. Materiality was a general principle that applied to all GASB guidance and was not unique to the ARO standard. Therefore, it should not be an item under the scope exclusion provisions in the ARO guidance. Staff believed the general materiality statement was sufficient guidance to address whether the proposed standard applied to immaterial items, and did not recommend adding immaterial items to the list of items in 6, which were items excluded from the scope of the proposed ARO guidance. The board agreed with staff. Mr. Granof believed the materiality box was sufficient. - 5 -
In regard to the effective date and transition discussion, the effective date of financial reporting standards generally should be soon enough to provide financial statement users with the revised information in a timely fashion, but far enough into the future to give financial statement preparers and other practitioners adequate time to prepare for and implement the new reporting requirements. It also was preferable to have an effective date that did not coincide with several other pronouncements to avoid an undue amount of effort to apply them simultaneously. The ARO project was expected to result in a final Statement in November 2016. The ED, therefore, proposed implementation for periods beginning after December 2015, 2017, approximately one year after the expected issuance of the final Statement. That meant, except for early implementation, financial statement users would not begin to see the information until approximately two years after the Statement would be issued. The board decided during the initial ED deliberations that the proposed effective date allowed adequate time to prepare for the transition and implementation of the Statement. A respondent requested an extension of the implementation date so that there was more time to discuss the requirements of the standard. Since the redeliberations began, the ED provisions were not significantly revised. However, there was one change made during redeliberations that might require additional consideration when considering the effective date. That change was the addition of an exception to measurement and to certain note disclosures for governments with minority interests in capital assets with ARO liabilities when the majority owner reported the ARO under another standard setter s guidance, such as that of the FASB. The exception for this scenario did not add new requirements to the proposed Statement but, rather, provided an exception for governments in this scenario to continue their current practice, under which these governments continued to report their minority share of ARO liabilities using the measurement provided by the nongovernmental majority owner without adjustment. Even though staff did not believe the exception required significant implementation effort because the exceptions allowed governments to continue their current reporting practice, staff acknowledged some additional effort was needed to understand and apply the exception. According to the proposed effective date of December 15, 2017 for the ARO ED, the effective date of the proposed ARO standard for governments with a June 30 fiscal year end fell in 2019. No other proposed or final documents became effective in the same calendar year. However, staff noted several other factors that might require the board to reconsider the effective dates for the final ARO Statement. First, for governments with a December 31 fiscal year end, several documents became effective in 2018, including GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions as well as the EDs for Certain Debt Extinguishment Issues and for Omnibus-201x. If the proposed effective date for the ARO standard remained unchanged from what was proposed in the ED (December 15, 2017), the proposed ARO standard also would have been on that list. As a respondent commented, they were concerned about multiple standards being proposed or issued during recent years, and were concerned about the resources needed to implement a broadly applicable standard like GASB 75 and other final Statements, in the same reporting period GASB 75 applied to many governments and might require significant implementation efforts from these governments, which might suggest the originally proposed effective date for the ARO Statement might not be appropriate. Secondly, based on the board s tentative decisions made during the redeliberations, the Fiduciaries Activities project team was proposing that final Statement be issued with an effective date of periods beginning after December 15, 2018, providing an additional year for governments to prepare for the implementation and transition. That meant, if the board approved that recommendation, for governments with a December 31 year-end, the effective date of the Fiduciary Activities final Statement fell in the year 2019. In addition, the ED, Leases, also proposed an effective date of periods beginning after December 15, 2018. However, the most recent technical plan changed the projected issuance of the Leases Statement to May 2017, instead of the original projected issuance date of December 2016. Therefore, the board might consider changing the effective date of the Leases Statement at a future meeting. Given these considerations, staff recommended that the effective date for the ARO final Statement be extended six months, to apply to periods beginning after June 15, 2018. For governments with a June 30 year-end, the ARO final Statement would first be effective in 2019, which would not overlap with any other final or proposed documents. For governments with a December 31 year-end, the ARO Statement s first effective period would be the same period as only the Fiduciary Activities Statement and proposed Statement, Leases, which would be redeliberated in the future. Despite the proposed changes to the effective date of both the ARO Statement and the Fiduciary Activities Statement, the board s earlier tentative conclusion, that it would not be overly burdensome to governments if both proposed Statements - 6 -
were scheduled to become effective at the same time, still applied to the new implementation dates for the two final Statements. Staff believed the six-month extension avoided overlapping with the application of GASB 75, and it also provided some additional time for the governments with minority shares of AROs to implement the related provisions. Regardless of the effective date, staff continued to believe governments should have the flexibility to early apply the final Statement, as the earlier application would not significantly affect comparability. Therefore, staff continued to recommend that the board encourage earlier application in the final Statement and extending the effective date to periods beginning after June 15, 2018. Ms. Sylvis agreed with staff and providing some relief to small governments. Mr. Brown agreed with staff in this instance, but generally did not support delaying effective dates because it encouraged procrastination. Mr. Granof agreed with Mr. Brown. Mr. Caputo agreed with staff because of GASB 75 implementation. The board agreed with staff. For the transition provisions, staff believed B76 (BFC) of the ED adequately addressed the reason for the use of practicable as the new terminology in the GASB standards. Staff also further clarified that practicable did not intend to introduce a higher threshold than practical. The board originally considered retroactive application at the October 2015 meeting. The board noted that for governments that currently reported their AROs using nonauthoritative guidance, the majority of the information needed to calculate the current value of the ARO costs was readily available. The board also noted that for governments that did not currently report their AROs and might be required to report them for the first time using the recognition and measurement provisions in the proposed ARO guidance, application of the proposed guidance resulted in a significant change in their financial reporting. Therefore, a requirement for governments to restate prior periods provided financial statement users with a better understanding of the government s financial position and flows for all periods presented. For those governments that presented prior periods, restatement allowed for better comparison of those periods because the information presented was on the same basis. The board also acknowledged governments that did not currently report their AROs might experience significant challenges in the process of retroactively applying the proposed guidance. Therefore, if restatement of prior periods was not practicable, the board provided for restatement of beginning balances. This language was intended to provide cost relief if restatement was truly difficult. Staff continued to believe that user needs and costs of implementation were best balanced by carrying forward transition provisions in the ED to the final Statement. Ms. Sylvis indicated that the board had already discussed the issue of the term practicable, and because the respondent provided no new arguments, she agreed with staff. Mr. Brown indicated that difficult implementation was no argument for not implementing a standard. The board agreed with staff s recommendations. In regard to the scope of authority, a policy of the Financial Accounting Foundation s trustees addressed the characteristics of the information GASB might incorporate into accounting and financial reporting standards. These scope considerations were based on accounting and reporting characteristics currently in the GASB s Concepts Statements. The policy classified governmental financial information into three groups. If this information met all of the characteristics of Group 1, the financial information clearly was within the scope of GASB s authority. No further analysis was necessary. Group 1 characteristics were as follows. The financial information: 1) met governmental financial statement users common information needs, 2) resulted from economic or financial events affecting users assessment of the governmental reporting entity, 3) was relevant to governmental financial reporting objectives, and 4) fell within one or more of the following information categories included in general purpose external financial reports: a) historical, economic, or financial events recognized in basic financial statements; b) disclosures in notes to the basic financial statements; c) required supplementary information (RSI); and d) historical financial supplementary information. Staff believed the requirements to address a government s minority share of AROs, which would be included in the proposed final Statement, met all of the characteristics in Group 1 and was within the scope of the GASB s authority. A variety of users indicated that information about AROs was important to meet their information needs. Those users explained that this information was used in various ways, such as, understanding the long-term fiscal strength of a government, understanding whether revenues could cover decommissioning and other costs, and analyzing credit ratings. The measurement and disclosure provisions related to a government s minority share(s) of an ARO provided needed information to users as well. Further, because some users might not have easy access to the majority owner s financial information, disclosure of the related essential information, such as the general description of the jointly shared AROs and associated capital assets, might be critical to satisfy users information needs. Staff believed the proposed measurement and disclosure provisions for a government s minority - 7 -
share(s) of AROs met the objectives of the proposed standard, as described in the ED, and that the relevant financial information provided to the users was more effective at meeting users information needs. Mr. Brown very strongly agreed with staff and believed this project filled a hole that was in current GASB literature where entities analogized with FASB guidance. Ms. Sylvis and Mr. Sundstrom agreed with Mr. Brown. The board agreed with staff. For the cost benefit reconsiderations, information about AROs was important to a variety of types of users for making decisions, performing financial analyses, and assessing government accountability. The need for ARO-related information was made more acute by inconsistent reporting of AROs or no reporting of such information at all. Staff believed the expected benefits and perceived costs associated with the implementation and application of the proposed standard were thoroughly considered throughout the course of the project, and the proposed Statement as a whole achieved the objective of balancing the expected benefits and perceived costs. Additionally, there were certain components of the proposed guidance, such as the current value measurement method, that mitigated specific implementation efforts and ongoing costs. Staff believed that the primary costs were related to converting AROs currently reported at present value to current value, identifying new AROs that were not currently reported, and the retroactive application of the guidance. Included in the costs to identify new AROs were the time and resources necessary to examine existing legal requirements and contract obligations as well as obtaining an ARO cost study, if necessary. The transition guidance in the ED required the provisions be applied retroactively and financial statements for prior periods be restated, if practicable. The phrase if practicable was provided for cost benefit reasons because the board considered the potential for the lack of readily available information. In such a case, the cumulative effect of applying the final Statement should be reported as a restatement of beginning net position. Regarding the concern about the remeasurement provisions for the effects of other than general inflation or deflation, staff noted that the board tentatively decided on a periodic reassessment approach for cost benefit reasons. Instead of requiring remeasurement of the liability annually, remeasurement was only necessary if an increase or decrease in the liability was expected to be significant based on an evaluation of the relevant factors. Staff acknowledged that some efforts were unavoidable to apply the reassessment provisions, but staff continued to believe the expected benefits justified the cost, and to the extent possible, cost relief was provided in the proposed reassessment provisions. Therefore, staff continued to believe the subsequent measurement provisions in the ED were still justifiable. Respondents also raised multiple concerns about costs related to efforts to implement the proposed ARO guidance. A respondent raised a concern that governments might lack the expertise necessary to implement the proposed guidance and also stated that the collection of accurate information needed to calculate ARO liabilities was very difficult and time consuming. Another respondent stated that many governments might not have the proper record keeping systems to collect such information and also mentioned that governments might need the services of specialists to implement the proposed guidance. Staff acknowledged there would not be existing knowledge or systems in place for governments that did not currently report AROs. Staff also acknowledged that the services provided by specialists could be costly in certain circumstances. However, certain costs were generally expected when a new Statement became effective. The provisions in the proposed guidance aimed to strike a balance between user needs and cost considerations. Staff continued to believe these provisions achieved the balance between user needs and cost-benefit. Another respondent expressed concern about the number of GASB Statements proposed or issued recently. This respondent pointed out that a substantial amount of time was needed to research and analyze proposed Statements, in addition to the efforts needed to implement the guidance. Overall, implementing the proposed ARO guidance was not without cost, but staff believed the intended benefits of providing more consistent and transparent information about certain AROs justified the anticipated costs associated with implementation and the ongoing monitoring efforts. Staff believed the intended benefits of the proposed ARO Statement justified the anticipated costs of implementation and ongoing compliance. Ms. Sylvis believed bringing transparency to this issue was very important. She agreed with staff. Mr. Sundstrom believed the materiality box solved the issue for some governments. He believed the benefits far outweighed the costs. Mr. Caputo believed the board had provided relief in the guidance to help with costs. The board agreed with staff. Mr. Granof expressed a desire to dissent on the ED. He did not approve moving forward to a preballot draft. The board, except Mr. Granof, approved moving forward to a preballot ED. - 8 -
Fiduciary Activities Lisa Parker and Scott Reeser, project managers, Ken Schermann, and Maia Yang and Emily Balkonis, postgraduate technical assistants, presented the board with issue papers that discussed the potential impact of the ED, Fiduciary Activities, on governments that report single-employer and agent multiple-employer pension and OPEB plans in fiduciary funds; fiduciary criteria for certain postemployment benefits; statement of fiduciary net position, statement of changes in fiduciary net position, and businesstype activity reporting; and effective date and transition, flow charts, and illustrations. GASB 14, The Financial Reporting Entity, 19 required that even if an organization did not meet the criteria to be reported as a component unit, the organization should be reported as a fiduciary fund of the primary government if the primary government had a fiduciary responsibility for it. However, GASB 14 did not provide any further guidance regarding what was meant for the primary government to have a fiduciary responsibility. The ED proposed to replace the undefined concept of fiduciary responsibility with specific criteria for identifying and reporting fiduciary activities. Under the proposed requirements in the ED, a pension or OPEB plan that was a component unit of a primary government would be reported as a fiduciary activity in the fiduciary fund financial statements. For the fiduciary criteria for certain postemployment benefits, some respondents questioned whether the selection of investment options or determination of benefits was considered directing the use of the assets of the activity. Staff believed the board s prior tentative decision related to clarifying the control criteria by eliminating the phrase administer would clarify that the selection of investment options or determination of benefits would not, by themselves, result in a determination that the government controlled the assets. Instead, because most defined contribution plans were administered through a trust agreement or equivalent arrangement that allowed the beneficiary to direct the use of the assets, staff believed most defined contribution plans would not be reported as fiduciary activities. Furthermore, some respondents requested clarification regarding whether certain defined contribution and deferred compensation plans should apply the requirements proposed in 8 of the ED. Staff believed that, except for Internal Revenue Code (IRC) Section 457 plans, defined contribution plans, and deferred compensation plans applied the ED requirements in 8 to determine whether the activity was a fiduciary activity (i.e., if the government controlled the assets of the arrangement and the arrangement was required to apply the accounting and financial reporting requirements in GASB 67, GASB 74, or GASB 73 116, the activity would be reported as a fiduciary activity). However, Q.#5.116.5 of Implementation Guide No. 2015-1, explained that IRC Section 457 plans were not pension plans. As a result, staff believed reference to the Implementation Guide should be provided. Staff also believed that because most defined contribution plans were administered through trust agreements or equivalent arrangements, the beneficiary and not the government controlled the use of the assets and, therefore, would not meet the criteria to be reported as fiduciary activities of a government. Staff believed the board s intent could be communicated more clearly by amending the criteria in 8 to clarify that the requirements applied to defined benefit and defined contribution pension and OPEB plans administered through trusts or equivalent arrangements and to assets held in non-trusted arrangements for pensions and OPEB of other governments. The proposed amendments follow: a. The assets are part of a pension benefit arrangement within the scope of Statement No. 67, Financial Reporting for Pension Plans. b. The assets are part of a postemployment benefit other than a pension (OPEB) arrangement within the scope of paragraphs 18-57 or paragraph 60 of Statement 74, as amended. c. The assets are accumulated to provide pensions to employees of entities that are not part of the reporting entity, as described in paragraph 116 of Statement 73, as amended. d. The assets are accumulated to provide OPEB to employees of entities that are not part of the reporting entity, as described in paragraph 58 of Statement 74, as amended. Staff believed the amendment also explained the requirements of GASB 73 116. Some respondents asked the board to change the reference for all other pension and OPEB arrangements in the last sentence of 8 of the ED. Staff noted that changing the descriptions of all other pension and OPEB arrangements, except those previously covered in 8a-8c, to concentrate on assets held for pensions and OPEB should clarify the requirement. Thus, staff believed this provision should be modified as follows: For all other assets held for pensions and OPEB, a government should report the assets as a fiduciary activity if the assets are held in a trust or equivalent arrangement as described in paragraph 7a and contributions from employers and nonemployer contributing entities to the trust and earnings on those contributions are - 9 -
irrevocable. Staff did not believe additional guidance should be provided to determine whether defined contribution plans and deferred compensation arrangements should be reported as fiduciary activities. However, in the BFC of the final Statement, staff recommended referencing the answer to Q.#5.116.5 of Implementation Guide 2015-1, that Internal Revenue Code Section 457 deferred compensation plans were not pensions. Mr. Caputo believed the implementation guide should include illustrations of when a plan was clearly included and clearly excluded. Staff also recommended amending in the final Statement (as described above) the description of the pension and OPEB arrangements to be reported as fiduciary activities if the government controlled the assets. Mr. Sundstrom supported changing activity to asset. Staff also believed the description of the requirements should be amended in the final Statement as described above (i.e., all other pension and OPEB arrangements to be reported as fiduciary activities if the government controlled the assets and the assets were held in a trust agreement or equivalent arrangement meeting the criteria of 7a). The board agreed with staff s recommendations. In regard to single-employer pension and OPEB plans, staff believed the board operated under the belief that inclusion in fiduciary fund financial statements of component units fiduciary in nature would not be significantly affected by the requirements of this Statement. Nevertheless, because the research indicated that some pension and OPEB plans might currently be included as fiduciary component units due to apparent misapplication of the criteria in GASB 14, the board might want to consider whether that situation should be addressed in this final Statement. One might conclude that it would not be optimal to address certain inclusion criteria from GASB 14 within the limited context of pension and OPEB plans because similar misapplication of the criteria to other types of component units also might occur in practice. For this standard, the board could develop a specific criterion applied only to pension or OPEB plans administered by legally separate organizations that would determine whether those plans should be reported as component units. Alternatively, the board could choose not to address reporting entity issues in this project and instead consider issues related to those provisions in a separate project that considered those issues in a more comprehensive manner covering other potential component units, as well. Staff favored not addressing reporting entity issues because staff research did not extend to legally separate organizations that administered single-employer plans not reported as component units. However, staff acknowledged that inconsistent reporting among governments continued in those circumstances depending on how each individual government interpreted and applied the existing GASB 14 criteria. If the board instead favored the other approach in which an additional component criterion was developed, that criterion only should apply to legally-separate organizations that administered pension and OPEB plans. If the board believed criterion should be added to the description of a financial benefit/financial burden relationship, a pension or OPEB plan would be required to be reported as a component unit if that criterion was met and either (1) the majority of the plan s board was appointed by the government or (2) the plan was fiscally dependent on the government. Staff noted that this would include all types of plans: singleemployer, agent-employer, and cost-sharing employer. Therefore, staff did not recommend that an additional criterion be established to require certain pension and OPEB plans to be reported as component units. Mr. Sundstrom wanted this to continue to be facts and circumstances based. Mr. Brown believed the board needed to come up with a solution with broad based applicability; otherwise, practice would continue to be inconsistent, if not resolved. He also believed the misleading to exclude criterion helped the preparer focus on user needs but did not believe reexposure was necessarily certain. He disagreed with staff. Mr. Vaudt disagreed with staff similar to Mr. Brown. Mr. Caputo disagreed with staff. Ms. Sylvis believed more information and research was necessary and wanted further changes to address this issue. She did not want to orchestrate an outcome because the fiduciary activities were tailored to specific governments and might not be recognized or reported the way the board thought would happen. She preferred to get the right answer even if it delayed the project with a reexposure. Mr. Previdi agreed with Ms. Sylvis. Mr. Granof was reluctant to reexpose the ED for this issue. The board generally preferred to address the issue and disagreed with staff. For the issue of the statement of fiduciary net position, statement of changes in fiduciary net position, and business-type activity reporting, a respondent requested greater clarification as to when certain liabilities tied to administrative expenses of fiduciary funds should be recognized. The ED provided additional guidance specific to the recognition of a liability to the beneficiaries in a fiduciary fund (i.e., last sentence of B27 in the BFC). Staff believed this clarification should be included in the standards section of the final Statement. Specifically, staff believed that sentence should be added to the end of 18 of the - 10 -