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Technical Update Presented by Chris Ray Partner – KPMG LLP KPMG LLP. Agenda. New GASB Pronouncements GASB Statement No. 49 GASB Statement No. 51 GASB Statement No. 52 GASB Statement No. 53 GASB Statement No. 54 GASB Statement No. 55 GASB Statement No. 56

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Technical Update Presented by Chris Ray Partner – KPMG LLP KPMG LLP

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Technical update presented by chris ray partner kpmg llp kpmg llp l.jpg

Technical UpdatePresented by Chris RayPartner – KPMG LLPKPMG LLP


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Agenda

  • New GASB Pronouncements

    • GASB Statement No. 49

    • GASB Statement No. 51

    • GASB Statement No. 52

    • GASB Statement No. 53

    • GASB Statement No. 54

    • GASB Statement No. 55

    • GASB Statement No. 56

    • GASB Technical Bulletin No. 2008-1

  • GASB Pronouncements Effective For Fiscal 2009

  • Summary of New GASB Pronouncements

  • Current GASB Exposure Drafts

  • Statement on Auditing Standards No. 115


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GASB Pronouncements Effective for Fiscal 2009

  • GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations

  • GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments

  • GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments

  • GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards

  • GASB Technical Bulletin No. 2008-1, Determining the Annual Required Contribution Adjustment for Postemployment Benefits


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GASB Statement No. 49Accounting and Financial Reporting for Pollution Remediation Obligations (Effective: Fiscal Year 2009)

  • Statement 49 requires recognition of a pollution remediation obligation when one of five specified obligating events occurs:

    • The government is compelled to take pollution remediation action because of an imminent endangerment.

    • The government violates a pollution prevention-related permit or license.

    • The government is named, or evidence indicates that it will be named, by a regulator as a responsible party or potentially responsible party (PRP) for remediation, or as a government responsible for sharing costs.

    • The government is named, or evidence indicates that it will be named, in a lawsuit to compel participation in pollution remediation.

    • The government commences or legally obligates itself to commence pollution remediation.

  • Obligations should be measured using the expected cash flow technique

  • Obligation may be measured and recognized in components

  • Certain outlays may be capitalized in accrual-based financial statements

  • Guidance is provided on accounting for expected recoveries


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GASB Statement No. 49 – continued

  • For recognized pollution remediation liabilities and recoveries, must disclose:

    • Nature and source of pollution remediation obligations

    • Amount of the estimated liability

    • Methods and assumptions used for the estimate

    • Potential for changes in estimates

    • Estimated recoveries that reduce the measurement of the liability.

    • General description of the nature of pollution remediation activities for liabilities (or components thereof) that are not reasonably estimable.


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GASB Statement No. 51Accounting and Financial Reporting for Intangible Assets(Effective: Fiscal Year 2010)

  • Examples of Intangible Assets

    • Easements

    • Water Rights

    • Timber rights

    • Patents

    • Trademarks

    • Computer Software

  • Requires all intangible assets not specifically excluded by its scope provisions to be classified as capital assets

  • Addresses the nature of these intangible assets

  • Recognition and amortization

  • Retroactive application is required for phase 1 or 2 governments


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GASB Statement No. 52Land and Other Real Estate held as Investments by Endowments (Effective: Fiscal Year 2009)

  • Requires permanent and term endowments to report land and other real estate held as investments at fair value

  • Recognize changes in fair value as investment income

  • Land and other real estate held as investment by quasi-endowments requires the use of historical cost accounting


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GASB Statement No. 53Accounting and Financial Reporting for Derivative Instruments (Effective: Fiscal Year 2010)

  • Provides a comprehensive framework for the measurement, recognition, and disclosure of derivative instrument transactions entered into by state and local governments

  • Examples of derivatives used by governments include interest rate and commodity swaps, interest rate locks, options, swaptions, forward contracts, and future contracts

  • Derivative instruments should be measured at fair value, except for the measurement of fully benefit-responsive synthetic guaranteed investment contracts. Changes in fair value should be reported as follows:

    • For investment derivative instruments, including derivative instruments that are determined to be ineffective: investment revenue classification on the statement of revenues, expenses, and changes in net assets

    • For hedging derivative instruments: Under hedge accounting, deferred inflows or deferred outflows on the statement of net assets.

  • Potential hedging derivative instruments should be evaluated for effectiveness as of the end of each reporting period using one of the methods described in the Statement

  • Disclosure requirements


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GASB Statement No. 54Fund Balance Reporting and Governmental Fund Type Definitions (Effective: Fiscal Year 2011)

  • Establishes accounting and financial reporting standards for all governments that report governmental funds

  • Establishes criteria for classifying fund balances into specifically defined classifications and clarifies definitions for governmental fund types

  • Classifications comprise a hierarchy based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent


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GASB Statement No. 55The Hierarchy of Generally Accepted Accounting Principles (GAAP) for State and Local Governments (Effective: Upon Issuance (March 2009))

  • Incorporates the GAAP hierarchy for state and local governments into the GASB’s authoritative standards

  • The GAAP hierarchy consists of the sources of accounting principles used in the preparation of financial statements of state and local governmental entities that are presented in conformity with GAAP, and the framework for selecting those principles

  • Not a substantial revision from the GAAP hierarchy that currently exists in the AICPA SAS No. 69, The Meaning of Present Fairly in Conformity with GAAP


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GASB Statement No. 56Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards (Effective: Upon Issuance (March 2009))

  • Incorporates certain accounting and financial reporting guidance presented in the AICPA’s Statements on Auditing Standards into the GASB’s authoritative literature

  • Establishes accounting and financial reporting standards for:

    • Related party transactions

    • Going concern considerations

    • Subsequent events


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GASB Technical Bulletin No. 2008-1Determining the Annual Required Contribution Adjustment for Postemployment Benefits (Effective: Fiscal Year 2009)

  • Clarifies the requirements of GASB Statement Nos. 27 and 45 for calculating the annual required contribution (ARC) adjustment

  • Applies to situations in which the actuarial valuation separately identifies the actual amount that is included in the ARC related to the amortization of past employer contribution deficiencies or excess contributions to a pension or other postemployment benefit (OPEB) plan (the known amount).


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Current GASB Exposure Drafts

  • Pension Accounting and Financial Reporting(Comment Deadline: July 31, 2009)

  • Suggested Guidelines for Voluntary Reporting of SEA Performance Information(Comment Deadline: October 31, 2008)


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Exposure Draft - Pension Accounting and Financial Reporting

  • The GASB’s standards for accounting for and reporting on the pension benefits that governments provide to their employees have been in effect for over a decade.

  • In 2006, the GASB began a research project to examine whether those standards are effective.

  • The supplement issued by GASB related to Pension Accounting and Financial Reporting accompanies an Invitation to Comment that describes key issues raised during the research project and explores potential approaches to addressing them.

    • The purpose of the Invitation to Comment is to seek public input on the importance of those issues to transparency, accountability, and decision usefulness and the appropriateness of the alternative approaches to pension accounting and financial reporting.

    • This supplement begins with background information about state and local government pension benefits.


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Key Issues Raised in the Pension Accounting and Financial Reporting Exposure Draft

  • What transaction or event should governments account for and report in their financial reports?

  • Does a government’s promise to provide pension benefits when its employees retire constitute a liability that can be reported in the financial statements? How and when should the cost of pension benefits be reported?

  • How should the potential impact of future changes in benefits be incorporated into actuarial calculations? How should the discount rate be determined?

  • Which actuarial methods should be allowed for the purpose of deferring the recognition of certain pension costs to future years?

  • Is participation in a cost-sharing plan, as opposed to a sole or agent plan substantively different enough to justify a different approach to accounting and financial reporting for pensions?

  • What liability should be reported by pension plans? Should plans present a statement of changes in the pension obligation?


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Exposure Draft - Suggested Guidelines for Voluntary Reporting of SEA Performance Information

  • Without information about a government’s service efforts and accomplishments (SEA), it is impossible to know how efficiently or cost effectively roads were paved, how well children were educated, or the impact of police services on crime, and how that performance may have changed over time.

  • The six qualitative characteristics of SEA performance information, which are drawn from GASB Concepts Statement No. 2, Service Efforts and Accomplishments Reporting, are:

    • Relevance

    • Understandability

    • Comparability

    • Timeliness

    • Consistency

    • Reliability.


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Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit

  • SAS 115 supersedes SAS 112 of the same title

  • The provisions of SAS No. 115 will be applied for fiscal year ending 2009.

  • SAS 115 closely aligns the definitions of the various levels of control deficiencies and the related guidance for evaluating control deficiencies with the definitions and guidance in PCAOB Auditing Standard No. 5, An Audit of Internal Control That I s Integrated with an Audit of Financial Statements (AS 5) and SSAE 15.


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Statement on Auditing Standards No. 115, Continued

Government Auditing Standards

  • In November 2008, GAO issued interim guidance on reporting deficiencies in internal control in financial statement only and integrated audits performed in accordance with GAS. As a result of GAO's interim guidance, auditors may use the definitions of material weakness and significant deficiency in SAS 115 and SSAE 15 when either of those standards is implemented. GAO has provided the following interim guidance until the next GAS update for complying with internal control reporting requirements:

    • Internal control reporting requirements in GAS paragraph 5.11 are satisfied by including in the GAS report all identified material weaknesses and significant deficiencies following the new definitions and requirements from SAS 115 and SSAE 15.

    • All other relevant GAS requirements related to reporting deficiencies in internal control are required, such as developing findings and providing recommendations


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Statement on Auditing Standards No. 115, Continued

  • SAS 115 establishes standards and provides guidance on communicating matters relating to an entity's internal control over financial reporting identified in an audit of a non-issuer's financial statements. The SAS:

    • provides the following revised definitions of the terms material weakness and significant deficiency :

      • A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected, on a timely basis.

      • A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

    • revises the list of deficiencies in internal control that are indicators of material weaknesses to consist of:

      • identification of fraud, whether or not material, on the part of senior management;

      • restatement of previously issued financial statements to reflect the correction of a material misstatement due to error or fraud;

      • identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity's internal control; and

      • ineffective oversight of the entity's financial reporting and internal control by those charged with governance.

    • no longer includes a list of deficiencies that ordinarily would be considered at least significant deficiencies.

  • The changes in definitions of significant deficiency and material weakness ordinarily would not result in a different conclusion regarding the severity of a particular deficiency in comparison to the definitions in SAS 112. Rather, the revisions are intended to be more clear and consistent with the provisions of AS 5.


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Evaluating Deficiencies Identified as Part of the Audit

  • The auditor is required to evaluate the severity of each deficiency in internal control identified during the audit to determine whether the deficiency, individually or in combination, is a significant deficiency or a material weakness.

  • The severity of a deficiency depends on

    • the magnitude of the potential misstatement resulting from the deficiency or deficiencies; and

    • whether there is a reasonable possibility that the entity’s controls will fail to prevent, or detect and correct a misstatement of an account balance or disclosure.

  • The severity of a deficiency does not depend on whether a misstatement actually occurred.


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Evaluating Deficiencies Identified as Part of the Audit, Continued

  • Factors that affect the magnitude of a misstatement that might result from a deficiency or deficiencies include, but are not limited to, the following:

    • The financial statement amounts or total of transactions exposed to the deficiency

    • The volume of activity (in the current period or expected in future periods) in the account or class of transactions exposed to the deficiency

  • In evaluating the magnitude of the potential misstatement, the maximum amount by which an account balance or total of transactions can be overstated generally is the recorded amount, whereas understatements could be larger.


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Evaluating Deficiencies Identified as Part of the Audit, Continued

  • Risk factors affect whether there is a reasonable possibility that a deficiency, or a combination of deficiencies, will result in a misstatement of an account balance or disclosure. The factors include, but are not limited to, the following:

    • The nature of the financial statement accounts, classes of transactions, disclosures, and assertions involved

    • The susceptibility of the related asset or liability to loss or fraud

    • The subjectivity, complexity, or extent of judgment required to determine the amount involved

    • The interaction or relationship of the control with other controls

    • The interaction among the deficiencies

    • The possible future consequences of the deficiency


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Evaluating Deficiencies Identified as Part of the Audit, Continued

  • The evaluation of whether a deficiency presents a reasonable possibility of misstatement may be made without quantifying the probability of occurrence as a specific percentage or range. Also, in many cases, the probability of a small misstatement will be greater than the probability of a large misstatement.

  • Multiple deficiencies that affect the same significant account or disclosure, relevant assertion, or component of internal control increase the likelihood of material misstatement and may, in combination, constitute a significant deficiency or a material weakness, even though such deficiencies individually may be less severe.

  • Therefore, the auditor are required to determine whether deficiencies that affect the same significant account or disclosure, relevant assertion, or component of internal control collectively result in a significant deficiency or a material weakness.


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Evaluating Deficiencies Identified as Part of the Audit, Continued

  • When performing substantive procedures or tests of the operating effectiveness of controls, the auditor may obtain evidence that a control does not operate effectively; for example, by identifying a misstatement that was not prevented, or detected and corrected by the control.

  • Management may inform the auditor, or the auditor may otherwise become aware, of the existence of compensating controls that, if effective, may limit the severity of the deficiency and prevent it from being a significant deficiency or a material weakness.

  • In these circumstances, although the auditor is not required to consider the effects of compensating controls for purposes of this SAS, the auditor may consider the effects of compensating controls related to a deficiency in operation provided the auditor has tested the compensating controls for operating effectiveness as part of the financial statement audit. Compensating controls can limit the severity of the deficiency, but do not eliminate the deficiency.


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Evaluating Deficiencies Identified as Part of the Audit, Continued

  • Indicators of material weaknesses in internal control include:

    • identification of fraud, whether or not material, on the part of senior management;

    • restatement of previously issued financial statements to reflect the correction of a material misstatement due to error or fraud;

    • identification by the auditor of a material misstatement of the financial statements under audit in circumstances that indicate that the misstatement would not have been detected by the entity’s internal control; and

    • ineffective oversight of the entity’s financial reporting and internal control by those charged with governance.

  • If the auditor determines that a deficiency, or a combination of deficiencies, is not a material weakness, the auditor should consider whether prudent officials, having knowledge of the same facts and circumstances, would likely reach the same conclusion.


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