AUGUST 2013 POST-IMPLEMENTATION REVIEW REPORT on GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and GASB Statement No. 30, Risk Financing Omnibus
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401 Merritt 7, PO Box 5116 Norwalk, CT 06856-5116 tel: 203.847.0700 ww w.accountingfoundation.org August 20, 2013 The accompanying Post-Implementation Review Report on GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and GASB Statement No. 30, Risk Financing Omnibus, summarizes the FAF s post-implementation review (PIR or Review) team s research results and conclusions (collectively, Findings), and recommendations from its Review of Statements 10 and 30. The PIR process is an important part of our FASB and GASB standard-setting oversight responsibilities. Our oversight objectives are to improve the standard-setting process, in part, through a robust, independent, and credible PIR process. The PIR team s Review accomplishes the objectives we set out for the PIR process: (1) to determine whether Statements 10 and 30 are accomplishing their stated purpose, (2) to evaluate Statements 10 and 30 s implementation and continuing compliance costs and related benefits, and (3) to provide recommendations to improve the GASB s standard-setting process. To maintain the GASB s standardsetting independence, the PIR team does not make recommendations for the GASB to take standardsetting action. We have reviewed the Statements 10 and 30 Review team s procedures and the accompanying Statements 10 and 30 Report. We believe that the team performed a sufficient, independent, and credible Review of Statements 10 and 30. The team s summarized conclusions, with which we concur, are included in the Summary section of the Report. The Statements 10 and 30 Report addresses the technical, operational, and cost-effectiveness aspects of Statements 10 and 30. The GASB has reviewed the Statements 10 and 30 Report and the PIR team s detailed Findings. After additional review and consideration, the GASB will provide a timely response to the matters discussed in the Report and Findings. We would like to thank all of the individuals who provided input on Statements 10 and 30. We welcome your input on our PIR process at presidentsdesk@f-a-f.org. Sincerely, John Davidson Co-Chair Standard-Setting Process Oversight Committee FAF Board of Trustees Cynthia Eisenhauer Co-Chair Standard-Setting Process Oversight Committee FAF Board of Trustees
TABLE OF CONTENTS Summary... 1 Glossary of Acronyms and Terms... 2 Post-Implementation Review Report PIR Objectives and Procedures... 3 Background on Statements 10 and 30... 4 PIR Objective 1: Did Statements 10 and 30 Accomplish Their Stated Purpose?... 4 Did Statements 10 and 30 Resolve the Issues Underlying the Need for the Standards?... 4 Do Statements 10 and 30 Provide Decision-Useful Information?... 5 Are Statements 10 and 30 Operational?... 5 Did Statements 10 and 30 Result in Significant Unexpected Changes in Practice or Unanticipated Consequences?... 5 Conclusion on Objective 1... 5 PIR Objective 2: Statements 10 and 30 s Costs and Benefits... 6 Are Statements 10 and 30 s Implementation and Continuing Application Costs Consistent with the Costs the Board Considered and Stakeholders Expected? Are the Related Benefits Consistent with the Benefits the Board Intended?... 6 PIR Objective 3: Standard-Setting Process Improvements... 6 PIR Process... 6 Page
SUMMARY In 2010, the Trustees implemented a post-implementation review (PIR or Review) process as part of their FASB and GASB oversight responsibilities. The Trustees objectives for these Reviews are to determine whether a standard is accomplishing its stated purpose, evaluate its implementation and continuing compliance costs and related benefits, and provide recommendations to improve the standard-setting process. We focused our research procedures on achieving those objectives. Our interviews of stakeholders did not reach the level necessary to draw statistically valid inferences, but they were informative when considered with our other research. We reached our conclusions using our judgment, considering all the input received, and striving to be objective and balanced. Our research indicates the following: Statements 10 and 30 resolve the issues underlying their need. Preparers and experienced practitioners are able to understand and apply the standards as intended. The standards have increased consistency and comparability across governments insurance activities. The resulting information is reliable and decision useful for those who use it. The standards did not result in significant unexpected changes to financial reporting or operating practices, nor did they have any significant unanticipated consequences. Accordingly, we conclude that Statements 10 and 30 are accomplishing their stated purposes. Our research indicates that the implementation and continuing application costs appear to be consistent with the costs that the GASB considered and stakeholders expected, and the benefits appear to be consistent with what the GASB intended. We conclude that the standard-setting process worked well overall and contributed to successful standards. Other than correcting minor errors in the codification of Statements 10 and 30, we have no standard-setting process recommendations as a result of our Review. PIR: GASB Statements 10 and 30 Report 1
GLOSSARY OF ACRONYMS AND TERMS Board: The GASB FAF: Financial Accounting Foundation FAS 5: FASB Statement No. 5, Accounting for Contingencies, as amended by FASB Statements No. 16, Prior Period Adjustments, and No. 71, Accounting for the Effects of Certain Types of Regulation, and interpreted by FASB Interpretation No. 14, Reasonable Estimation of the Amount of a Loss FAS 60: FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, as amended by FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments FASB: Financial Accounting Standards Board GASB: Governmental Accounting Standards Board IBNR: Incurred but not reported claims Interpretation 4: GASB Interpretation No. 4, Accounting and Financial Reporting for Capitalization Contributions to Public Entity Risk Pools Oversight Committee: FAF s Trustees Standard-Setting Process Oversight Committee PERP: Public entity risk pool PIR: Post-implementation review Practitioner: A person who audits financial statements, performs other attest services, or prepares financial statements for clients Preparer: A person who prepares financial statements Review: Post-implementation review Statement 10: GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues (codified in Codification of Governmental Accounting and Financial Reporting Standards, Sections C50 and Po20) Statement 30: GASB Statement No. 30, Risk Financing Omnibus (codified in Codification of Governmental Accounting and Financial Reporting Standards, Sections C50 and Po20) Team: Post-implementation review team (or Our, We) Trustees: FAF Board of Trustees User: A creditor or other user of financial statements 2 PIR: GASB Statements 10 and 30 Report
POST-IMPLEMENTATION REVIEW REPORT PIR OBJECTIVES AND PROCEDURES The three primary PIR objectives are to (1) determine whether a standard is accomplishing its stated purpose, (2) evaluate its implementation and continuing compliance costs and related benefits, and (3) provide feedback to improve the standard-setting process (as opposed to recommending standard-setting actions). We divided the first objective further to determine whether: The standard resolved the issues underlying its need Decision-useful information is being reported to, and being used by, financial statement users The standard is operational Any significant unexpected changes to financial reporting or operating practices have occurred Any significant unanticipated consequences have occurred. Our criteria and procedures for reviewing selected accounting standards are described and posted on the FAF website (Evergreen Process Description). Generally, we will review significant standards that the GASB currently is not reassessing. Our procedures for the PIR of Statements 10 and 30 included reviewing the GASB s historical files, interviewing subject matter experts who are broadly representative of GASB stakeholders, reviewing academic publications, and reviewing footnote disclosures and other public information for selected governments. Because this research indicated no significant issues or concerns with the standards, we decided not to conduct the stakeholder surveys or questionnaires that we typically do in our reviews. We focused our research procedures on achieving the PIR objectives. Our interviews of stakeholders did not reach the level necessary to draw statistically valid inferences, but they were informative when considered with our other research. We came to our conclusions using our judgment, considering all the input received, and striving to be objective and balanced. After completing our research, we compiled a summary of our procedures, our research results, and our conclusions into our Findings. We reviewed our Findings with the FAF president and CEO and the Oversight Committee. We also reviewed our Findings with the GASB chairman and obtained his views on our preliminary conclusions. We resolved and clarified any differences before drafting our PIR report, which summarizes the contents of our Findings. We reviewed a draft of that Report with the Oversight Committee and the Trustees. After Trustee approval, we made our PIR Report available on the FAF website. PIR: GASB Statements 10 and 30 Report 3
BACKGROUND ON STATEMENTS 10 AND 30 Beginning in 1984, state and local governments found it increasingly difficult to renew insurance policies for coverage levels previously maintained at comparable premium rates. Faced with this difficult environment, many governmental entities began reducing insurance coverage or increasing the deductible on their policies, self-insuring (retaining risk), or utilizing some combination of these alternatives. The insurance crisis also gave rise to a movement toward the formation of selfinsurance pools by groups of state and local governmental entities (essentially, captive insurance entities). In response to the changing insurance environment, GASB stakeholders voiced concern over diversity and inconsistency in the accounting for insurance transactions. In October 1986, the Board added an insurance project to its technical agenda, which resulted in the issuance of Statement 10 in November 1989. In November 1993, the GASB issued an Implementation Guide for Statement 10. Certain risk financing issues identified during the preparation of the Implementation Guide could not be addressed in that document, which is limited to clarifying, explaining, or elaborating on the standards in Statement 10. Accordingly, in September 1993 the Board added a project to its technical agenda to provide guidance on those issues. That project resulted in the issuance in February 1996 of Statement 30 and a related pronouncement, Interpretation 4. (In the rest of this document, Interpretation 4 is included by reference to Statements 10 and 30.) The primary objectives of Statements 10 and 30 were to do the following: Establish appropriate recognition and measurement methods for claims liabilities and expenses/expenditures for governments that self-insure (retain risk) Establish appropriate recognition and measurement guidance for PERPs, based on privatesector insurance guidance but accommodating environmental factors of governments Increase consistency and comparability across governments insurance activities. PIR OBJECTIVE 1: DID STATEMENTS 10 AND 30 ACCOMPLISH THEIR STATED PURPOSE? Did Statements 10 and 30 Resolve the Issues Underlying the Need for the Standards? The objectives of Statements 10 and 30 above reflect the issues underlying the need for those standards. Our research indicates that the standards increased consistency and comparability across governments insurance activities by establishing recognition and measurement guidance for those activities. 4 PIR: GASB Statements 10 and 30 Report
Do Statements 10 and 30 Provide Decision-Useful Information? We organized our research around three aspects of decision-useful information: whether or not Statements 10 and 30 provide decision-useful information to financial statement users, whether or not the information provided in the financial statements is sufficient in the current environment, and whether certain information is less useful. Our research indicates that the standards provide decision-useful information about governments risk financing activities. Although the number and type of users for risk financing information appears to be somewhat more limited than for other types of financial information, the users we spoke to are using that information. Are Statements 10 and 30 Operational? The term operational refers to stakeholder views on whether or not the standard works in practice. It refers to whether preparers and practitioners understand and are able to apply the standards as intended and whether preparers are able to report the information reliably. Our research indicates that preparers and experienced practitioners understand and are able to apply the standards as intended. Although there may be inconsistent application of some disclosure requirements, preparers are otherwise able to report the information reliably. Did Statements 10 and 30 Result in Significant Unexpected Changes in Practice or Unanticipated Consequences? Our research indicates that the changes made to financial reporting and operating practices as a result of Statements 10 and 30 were of an expected type and magnitude. It also indicates that there have not been any significant unanticipated consequences as a result of Statements 10 and 30. Conclusion on Objective 1 Based on the results of our research, we conclude that Statements 10 and 30 are accomplishing their stated purposes. We note that the FASB is working on a project to amend their guidance for insurance activities. The GASB is monitoring that project and, when complete, will determine whether action by the GASB is appropriate. PIR: GASB Statements 10 and 30 Report 5
PIR OBJECTIVE 2: STATEMENTS 10 AND 30 S COSTS AND BENEFITS Are Statements 10 and 30 s Implementation and Continuing Application Costs Consistent with the Costs the Board Considered and Stakeholders Expected? Are the Related Benefits Consistent with the Benefits the Board Intended? Our review of the project files indicates that the Board concluded that the benefits of Statements 10 and 30 outweighed the costs of compliance. Our research indicates that the implementation and continuing application costs appear to be consistent with the costs that the Board considered and stakeholders expected, and the benefits appear to be consistent with what the Board intended. PIR OBJECTIVE 3: STANDARD-SETTING PROCESS IMPROVEMENTS Our third PIR objective is to provide feedback to improve the standard-setting process. To meet that objective we assess whether the results of our Review suggest that process improvements are needed. The GASB issued Statement 10 over 23 years ago and Statement 30 over 17 years ago. The GASB s standard-setting process has significantly changed since that time. The project files indicate significant stakeholder input went into the process used to develop the standards. During our review of the project files, we noted minor errors in the codification of Statements 10 and 30. We conclude that the standard-setting process worked well overall and contributed to successful standards. Other than correcting minor errors in the codification of Statements 10 and 30, we have no standard-setting process recommendations as a result of our Review. PIR PROCESS Stakeholder comments on the process used in a PIR normally are solicited through a survey on a standard. Because there was no survey for this Review, we received no stakeholder comments on the review process. GASB Statements 10 and 30 Post-Implementation Review Team: Wesley Galloway, Project Manager Kim Petrone, Director August 2013 6 PIR: GASB Statements 10 and 30 Report