GASB Changes on the Horizon

GASB Changes on the Horizon Presented by: Don Rahn, Partner Jenni Steiner, Manager February 22, 2012 We gratefully acknowledge the GASB for the content of some of these slides. Baker Tilly Virchow Krause, LLP Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. 1

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Presenters Panelist Panelist Don Rahn Partner Public Sector Practice Group, Baker Tilly Jenni Steiner Manager Public Sector Practice Group, Baker Tilly 4

Statement 54 Fund Balance Reporting and Governmental Fund Type Definitions Effective for periods beginning after June 15, 2010 Items to Consider: Level of action to create a commitment should be most restrictive (but) Treat all library revenues in a SR Fund as restricted (excluding transfers) Use hindsight to classify BOY Fund balance (but keep it simple) No need to restate prior year statistical section (but recommended) Budgets normally create an assignment, but not more Transfers normally are assigned, but could be restricted or committed, depending on the source 5

Statement 54 (cont.) Fund Balance Reporting and Governmental Fund Type Definitions Effective for periods beginning after June 15, 2010 Items to Consider (cont.) Encumbrances are not shown on face of F/S, but should be included in restricted or committed balance TIF balances should usually be all restricted SR Funds would not normally have nonspendable fund balance, other than permanently restricted, prepaids, and inventory 6

Statement 60 Service Concession Arrangements (SCA) Effective date periods beginning after December 15, 2011 An arrangement in which: A transferor conveys to an operator the right and related obligation to provide services to the public through the operation of a capital asset, in exchange for significant consideration The operator collects and retains fees from third parties The transferor is entitled to significant interest in the service utility of the capital asset at the end of the agreement (a residual interest) The transferor determines or has the ability to modify or approve: What services the operator is required to provide To whom the services will be provided The prices or rates that will be charged 7

Statement 60 (cont.) Service Concession Arrangements (SCA) Effective date periods beginning after December 15, 2011 Typical examples: Ice Arena Golf Course Convention Center Toll Roads Parking meters / facilities 8

Statement 61 The Financial Reporting Entity - Omnibus Effective date periods ending June 30, 2013 The most significant effects of the amendments are to: Increase the emphasis on financial relationships What services the operator is required to provide Refocus and clarify the requirements to blend certain component units Improve the recognition of ownership interests Joint ventures Component units Investments 9

Statement 61 (cont.) The Financial Reporting Entity - Omnibus Effective date periods ending June 30, 2013 Blending Requirements Statement 14 requires blending if Primary Government and Component Unit have substantively the same governing body For example, County Board also serves as the Board of the Forest Preserve District Statement 61 expands that requirement to also include: A financial benefit/burden relationship, or Primary Government has operational responsibility for Component Unit Primary Government s personnel manage activities of Component Unit like a fund, program or department of the primary government Impact less blended component units 10

Statement 61 (cont.) The Financial Reporting Entity - Omnibus Effective date periods ending June 30, 2013 Blending Requirements (cont.) The blending criteria is broadened to include component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government Even if the component unit provides services to constituents or other governments, rather than exclusively or almost exclusively to the primary government Typical of some CDA s used to finance TIF costs Impact more blended component units 11

Statement 61 (cont.) The Financial Reporting Entity - Omnibus Effective date periods ending June 30, 2013 Blending Requirements (cont.) Clarifies how to blend component units in a business-type activity (BTA) reporting model: For a multiple column BTA Additional column(s), as if funds of the Primary Government For a single column BTA Consolidate Component Unit data into the single column Present combining info in the notes Additional column(s), with Primary Government total column 12

Statement 61 (cont.) The Financial Reporting Entity - Omnibus Effective date periods ending June 30, 2013 Reporting Equity Interests An asset should be recognized for an equity interest in: A joint venture A partnership An investment A component unit If the component unit is blended, the equity interest is eliminated in the blending process Minority interests would be classified in net assets as Restricted, nonexpendable Recognition and Measurement is based on Joint Venture equity interest requirements in Statement 14 13

Polling Question The impact on component units from GASB 61 will be: 14

Statement 62 Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements Effective date periods beginning after December 15, 2011 Basic Guidance Statement 20 is superseded All applicable pre-11/30/89 standards are contained in the GASB s codification All potentially applicable post-11/30/89 non-gasb standards will be other accounting literature, meaning that if there is no other guidance on a topic, you may consider post-11/30/89 FASB guidance 15

Statement 62 (cont.) Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements Effective date periods beginning after December 15, 2011 Basic Guidance (cont.) Guidance on 29 topics is brought into the GASB literature, including: Capitalization of interest costs (FAS 34) Statement of net assets classification (ARB 43, APB 12 and FAS 6) Prior period adjustments / corrections Loss contingencies (attorney letter) Lease accounting 16

Statement 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Display Requirements Deferred outflows should be reported in a separate section following assets Similarly, deferred inflows should be reported in a separate section following liabilities 17

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Display Requirements (cont.) Net Position components resemble net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows Net investment in capital assets Restricted Unrestricted Governmental funds continue to report fund balance 18

Sample City Statement of Net Position December 31, 20X1 Primary Government Governmental Business-Type Activities Activities Total ASSETS Cash and cash equivalents Receivables (net) Internal balances Inventories Capital assets: Total assets DEFERRED OUTFLOWS OF RESOURCES Accumulated decrease in fair value of hedging derivatives LIABILITIES Accounts payable and accrued expenses Advances from grantors Long-term liabilitiesadvances from grantors Due within 1 year Due in more than 1 year Total liabilities DEFERRED INFLOWS OF RESOURCES Accumulated increase in fair value of hedging derivatives Deferred service concession arrangement receipts Total deferred inflows of resources NET POSITION Net investment in capital assets Restricted for: Unrestricted (deficit) Total net position 19

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Disclosures Provide details of different types of deferred amounts if components of the total deferred amounts are obscured by aggregation on the face of the statements If the amount reported for a component of net position is significantly affected by the difference between deferred inflows or outflows and their related assets or liabilities provide an explanation in the notes 20

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Deferred Outflows/Inflows Statement 53 Accounting and Financial Reporting for Derivative Instruments Statement 60 Service Concession Arrangements 21

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Related Project Reporting Items Previously Recognized as Assets and Liabilities Concepts Statement 4 provides that recognition of deferrals should be limited to those instances specifically identified by GASB The Board added a project to identify deferrals (for example, deferred revenue, prepaid expenses) that would be subject to requirements of Statement 63 Currently reported as assets or liabilities Should they be deferred outflows/inflows, or expenses/revenues? 22

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Proposed Deferred Outflows of Resources Grant paid in advance of meeting timing requirement Deferred amounts from refunding of debt (debits) Cost to acquire rights to future revenues (intra-entity) Deferred loss from sale-leaseback 23

Statement 63 (cont.) Financial Reporting of Deferred Outflows of Resources, Deferred Inflows on Resources, and Net Position Effective date periods ending December 31, 2012 Proposed Deferred Inflows of Resources Grants received in advance of meeting timing requirement Deferred amounts from refunding of debt (credits) Proceeds from sales of future revenues Deferred gain from sale-leaseback Regulatory credits 24

Polling Question Which of the following is not a proposed outflow of resources? 25

Pension Accounting and Financial Reporting Project Timeline Staff research completed in 2008 Invitation to Comment issued in 2009 Preliminary Views issued in 2010 Two Exposure Drafts approved in June 2011 include proposals to: Improve transparency in financial reporting Enhance decision usefulness of pension information Assist financial report users to assess accountability and interperiod equity related to pensions 26

Pension Accounting and Financial Reporting (cont.) Fundamental Approach View the cost of pensions within the context of an ongoing, career-long employment relationship Use an accounting-based versus funding-based approach to measurement Produce measures of the employer s obligation to employees and the current period cost to taxpayers of providing governmental services 27

Pension Accounting and Financial Reporting (cont.) Basics Defined benefit pensions originate from exchanges between the employer and employees of salaries and benefits for employee services and are part of the total compensation for employee services Obligations for pensions meet the definition of a liability in Concepts Statement 4 Compensation expense should be recognized in the period employee services are provided 28

Pension Accounting and Financial Reporting (cont.) Measurement of Plan Assets In calculating the employer s net pension liability, plan net position should be measured in the same way as measured in the plan s statement of plan net position, including measurement of investments at fair value This differs from the measurement used by the plan s actuary, due to smoothing that takes place 29

Pension Accounting and Financial Reporting (cont.) Immediate Expense Recognition Expense recognition would be immediate for: Pension benefits earned during the reporting period Interest cost on the total pension liability Changes in benefit terms that affect the total pension liability Differences between expected and actual changes in economic and demographic factors and changes in such actuarial assumptions related in inactive/former employees 30

Pension Accounting and Financial Reporting (cont.) Cost-Sharing Employers A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the collective unfunded obligation of the employers in the cost-sharing plan Approach uses a basis for allocation of proportionate share based on the employer s expected contribution effort relative to that of all contributors 31

Pension Accounting and Financial Reporting (cont.) Impacts would be on: Government wide Statement of Net Assets Government wide Statement of Activities Enterprise and Internal Service Funds statements Audit issues numerous OPEB is next on the GASB agenda 32

Economic Condition Reporting: Financial Projections Project Objectives Identify the information that users of governmental financial information need to assess a governmental entity s fiscal sustainability Compare those needs with the information that users receive under the current accounting and financial reporting standards Consideration of the information users identified as necessary to assess the risks associated with intergovernmental financial dependencies 33

Economic Condition Reporting: Financial Projections (cont.) Project Objectives (cont.) Consider whether additional guidance or guidelines should be provided based on the information needed by users Determine the preferable methods of communicating any additional information, if applicable Basic facts about GASB s Project can be found at http://www.gasb.org/facts/economic_condition_reporting_fact_sheet.pdf 34

Economic Condition Reporting: Financial Projections (cont.) What is Fiscal Sustainability? Fiscal sustainability is a government s ability and willingness to generate inflows of resources necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits 35

Economic Condition Reporting: Financial Projections (cont.) Board has discussed: Categories of information necessary for users to make an assessment of a government s fiscal sustainability Types of information necessary for users to make an assessment of these categories The concept of forward looking information and specific forward looking measures necessary for users to make an assessment of a government s fiscal sustainability Whether and how this type of information should be reported Should it be required? (RSI) Period(s) for projections (5 years) Method(s) to use in making projections (currently known facts) 36

Polling Question How will the new information on financial projections be presented? 37

Upcoming Potential Projects Research Agenda Electronic Financial Reporting Fair Value Measurement Fiduciary Responsibilities Leases 38

Auditing Standards Changes Clarity Standards Background Effective for audits for December 31, 2012 (next year s audits) Purpose to make US GAAS easier to read, understand and apply In theory, should result in few changes in practice; however the redrafting process has resulted in some wording changes that are anticipated to cause changes in practice (largest being Group Audits ) 39

Auditing Standard Changes (cont.) Our Implementation Progress Baker Tilly s firm Assurance Services planning to look at this beginning May 2012 Public Sector team looking at details earlier than this because of anticipated changes in our practice (started in Nov./Dec.) External involvement 40

Auditing Standard Changes (cont.) What Do I Need to Know about Clarity in General? Changes are anticipated in our practice area Typically changes result in more, not less, work on our audits Our firm supports changes that improve the quality of audit work We stay involved in reviewing these changes proactively to have a voice in the process balancing quality with risk and cost 41

Group Audits Background Anticipated to be the largest practice change from the clarity standards in our industry Effective with rest of clarity, beginning with December 31, 2012 audits Responsibilities of primary auditor ( group auditor ) will be greater than previous standards and will apply in many scenarios: When making references to another auditor in our report (common practice of separate component unit auditors) Separate teams within our firm, such as separate utility team that audits standalone enterprise fund financial information Decentralized or segregated accounting or management activities of clients 42

Group Audits (cont.) Background (cont.) Our implementation progress: Firm Assurance Services technical committee beginning research process Public Sector team formed to determine implementation plan 43

Group Audits (cont.) What Do I Need to Know About Group Audits? Preliminary thoughts on the impact to our audits When only internal groups are involved, we hope to revise existing work programs to adequately address standards in an efficient manner When external groups are involved, level of communication, effort and client involvement will increase When other firms are involved, will need to bring clients into this process 44

Group Audits (cont.) What Do I Need to Know About Group Audits? (cont.) When we make reference to another auditor in our reports (or assuming responsibility for their field work), there will be more work and responsibility on our end Assessing professional competence of component auditor Specific communication requirements between component and group auditors, as well as those charged with governance Materiality changes from potential aggregation risk New consideration of group wide controls Consideration of subsequent events through the group auditor s report date 45

Group Audits (cont.) What Do I Need to Know About Group Audits? (cont.) When other firms are part of the group audit, the audit process will change clients impacted should be aware of: There will be increased communication needs between primary government and components, as well as the audit firms of both Assessing professional competence of component auditor is a new concept that may be tricky politically Consideration of subsequent events through the group auditor s report date will likely need to involve significant assistance from primary government management 46

Questions & comments 47

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