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GASB Update – Latest and Greatest Presented by Beila Sherman, CPA, CA. Objectives. Overview of The Following: New GASB Implementation Dates GASB 54: Implementation Issues New GASBs What else is up?. GASB Implementation Dates. Effective Dates – Issued GASB Standards. June 30, 2012
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Overview of The Following:
New GASB Implementation Dates
GASB 54: Implementation Issues
What else is up?
June 30, 2012
GASB Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions
December 31, 2012
GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements
GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements
GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position
June 30, 2013
GASB Statement No. 61, The Financial Reporting Entity Omnibus, an amendment of GASB Statements No. 14 and No. 34
December 31, 2013
GASB Statement No. 65, Items Previously Reported as Assets and Liabilities
GASB Statement No. 66, Technical Corrections
June 30, 2014
GASB Statement No. 67, Financial Reporting for Pension Plans
June 30, 2015
GASB Statement No. 68, Accounting and Financial Reporting for Pensions – An Amendment to GASB No. 27 (Employers)
Committed Fund Balance – highest level of authority.
Negative unassigned fund balance in the general fund
Disclosure of encumbrances if significant
Special revenue fund
Minimum fund balance disclosure
Transfers vs. revenues and expenditures
Budgetary comparisons (can be different)
Assignments can take place after year end but commitments can not
Use of existing fund balance to balance the subsequent year’s budget should be assigned
GASB Comprehensive Implementation Guide
Refer to Chapter Z, Section 54
Should the classifications of unrestricted fund balance— committed, assigned, and unassigned—also be applied to unrestricted net assets in proprietary funds and in the government-wide statement of net assets?
No. The classifications of unrestricted fund balance should be used only in the governmental fund financial statements.
Paragraph 6 of Statement 54 states that long-term receivables and property held for resale should not be included in the calculation of nonspendable fund balance if the proceeds from their collection or sale are restricted, committed, or assigned. Does that provision also apply to other nonspendable items such as inventories and prepaid amounts?
Generally, no. Inventories and prepaid amounts reported in governmental funds are examples of nonspendable items that are not expected to be converted to cash, so it is expected that there would not be any restricted, committed, or assigned collections or sale proceeds associated with inventories or prepaid amounts.
Paragraph 6 of Statement 54 provides that the long-term amount of loans and notes receivable should be included in nonspendable fund balance unless the proceeds from their collection are restricted, committed, or assigned. Does that provision apply to interfund balances?
Yes. However, as a practical matter, it will only apply to interfund receivables in the general fund because all loans and notes receivable reported in other governmental funds, by definition, are restricted, committed, or assigned.
Paragraph 6 of Statement 54 states that if the proceeds from the collection of long-term receivables or the sale of properties held for resale are restricted, committed, or assigned, they should be included in those classifications rather than nonspendable fund balance. How should the provision in paragraph 19 of Statement 54 that requires nonspendable fund balance to be determined before classifying amounts as restricted, committed, or assigned be considered in light of the guidance in paragraph 6?
Governments should first determine which amounts meet the nonspendable criteria in paragraph 6 of Statement 54 and then whether any of the qualifying items should be reclassified to restricted, committed, or assigned classifications based on the guidance provided in that paragraph.
Paragraphs 22 and 25 of Statement 54 require that amounts for the two components of nonspendable fund balance-those that are not in spendable form and those that are contractually or legally required to be maintained intact – either be displayed on the face of the statement or disclosed in the notes. Are those components required to be separately classified as “resources not in spendable form” and “resources contractually and legally required to be maintained intact”?
No. It is not necessary to separately classify the components using the Statement 54 descriptions as long as amounts for the two components are discernable. For example, rather than presenting “Resources not in spendable form,” governments could instead label that amount as “Inventories and prepaid amounts.”
A government is awarded a transportation study grant with the condition that it is required to provide a 20 percent match of the grant award. The government receives the grant proceeds and deposits them in a separate special revenue fund. The government's matching amount is transferred in from the general fund. How should the amount transferred in be classified?
The government's 20 percent match becomes bound by the same constraints imposed by the grantor agency on the award. Therefore, in this example, both the grant proceeds and the government's matching amount would be classified as restricted fund balance.
A special revenue fund is used to account for the proceeds and use of federal grant money that is restricted to specified purposes. Does the interest earned on the investment of those resources also constitute a restricted revenue source?
If the grant agreement requires that interest earned on invested grant proceeds can be used only for the same purposes as the grant award, the interest should be considered a restricted revenue source. If the grant agreement does not include such a provision, then the interest earned, if retained in the fund, should be classified as assigned to the purpose of the fund.
Should the amount reported in governmental funds as restricted fund balance equal the amount reported as restricted net assets for governmental activities in the government-wide statement of net assets?
There are three reasons why those amounts will generally be different. First, the principal amount of a permanent fund is classified as nonspendable fund balance in the governmental fund financial statements but is included in restricted net assets in the government-wide statement of net assets. Second, reconciling items that represent basis of accounting differences may cause the amounts to be different. And, finally, internal service fund net assets are generally included with governmental activities.
Paragraph 10 of Statement 54 states that committed fund balance should include resources that have been specifically committed for use in satisfying contractual obligations. Under what circumstances is that expected to occur?
The agreement between a government and a counterparty (a capital lease agreement or out-of-court settlement award, for example) sufficiently binds the government to spending for a specific purpose and therefore constitutes the commitment. Often, scheduled payments to liquidate or reduce those contractual obligations are included in a government's budget and are expected to be paid from current-period revenues. Fund balance should be classified as committed only if the government commits existing resources, rather than future revenues, to satisfy the contractual obligation (to the extent that the obligation is not recognized as a fund liability).
A government transfers an amount to a special revenue fund and in doing so assigns that amount to the purpose of the fund. If the resources are not spent at year end, does that assignment carry over to the subsequent years?
Yes. The assignment is effective until the government commits or reassigns the resources to another purpose.
What effect does the legal adoption of budget and appropriation documents for the subsequent year have on fund balance classification?
An adopted appropriation ordinance, resolution, or similar legislation generally authorizes a government to spend budgeted revenues and other financing sources and, therefore, does not impose constraints on the use of existing resources. However, if a portion of existing fund balance is included as a budgetary resource in the subsequent year's budget to eliminate a projected excess of expected expenditures over expected revenues, then that portion of fund balance (in an amount no greater than is necessary to eliminate the excess) should be classified as assigned. The amount should not be classified as committed because the governing body does not have to take formal action to remove or modify that specific use-the purpose assignment expires with the appropriation.
In the situation described in the preceding question, does the assignment of existing fund balance to cover a projected budgetary deficit carry over to the following year?
No. The assignment terminates at the effective date of the next period's budget.
Paragraph 12 of Statement 54 requires that the formal action to commit an amount to a specific purpose should occur prior to the end of the reporting period. Does a similar provision apply to the action taken to assign fund balance amounts?
No. The determination of the purposes, as well as the amounts for assigned fund balances can be made after the end of the reporting period.
Expenditures have been made in a capital projects fund from resources advanced from the general fund in anticipation of bond proceeds that will be restricted to the purpose for which those expenditures have been made. Should the capital projects fund report negative restricted fund balance?
No. Paragraph 19 of Statement 54 provides that a negative balance should not be reported for restricted, committed, or assigned fund balance in any fund. In this example, the capital projects fund should report a negative unassigned fund balance.
Is the answer to the preceding question different if the capital projects fund also includes resources that are committed and assigned to other purposes?
Yes. The negative amount should first reduce assigned fund balances in that fund until they are completely eliminated. The amount of the negative balance that exceeds assigned fund balances should be reported as a negative unassigned fund balance. Committed fund balances should not be reduced by overexpenditure for other purposes in that fund.
What is the difference between a stabilization arrangement and a minimum fund balance policy?
How specific are the circumstances for use of stabilization resources required to be, in order for those resources to be classified as committed fund balance?
The required level of specificity is intended to convey the understanding that the resources would be available only under specific circumstances that are not expected to occur routinely. For example, a condition that stabilization resources become available for spending if revenues fall one percent below expectations is sufficiently specific but does not meet the requirement that the condition is not expected to occur routinely. In that situation, the amount set aside should not be classified as committed fund balance; however, the government would be required to provide the disclosures described in paragraph 26 of Statement 54.
By exercising its highest level of decision-making authority, a government has established a Budgetary Stabilization Fund and imposed a requirement that 15 percent of certain mineral rights royalties received should be set aside to provide for budgetary imbalances. That decision can only be reversed or modified by the government taking the same action. The conditions under which the resources can be used are sufficiently prescriptive to be reported as committed fund balance. Can the Budgetary Stabilization Fund be reported as a special revenue fund?
Yes. Because the foundation of the separate fund is a specific committed revenue source , it can be reported as a special revenue fund, provided that the revenues are recognized in the separate fund.
Should encumbrances be displayed on the face of the governmental funds balance sheet?
No. Encumbrances should not be displayed on the face of the financial statements. Generally, encumbered amounts should already be included in the restricted, committed, and assigned fund balance classifications.
Can encumbrances be included in unassigned fund balance in the general fund?
No. Executing a purchase order is tantamount to assigning the amount of the purchase order to a specific purpose; thus, the outstanding encumbrance amount would be included in assigned fund balance (unless the purchase order relates to restricted or committed resources).
Are governments required to disclose reasons why fund balance may have decreased below the established minimum or what corrective measures will be taken to restore it to the minimum level?
No. Paragraph 27 of Statement 54 only requires note disclosure of the policy that sets forth the minimum amount. The government should consider whether to discuss those issues in management's discussion and analysis in the context of discussing significant changes in fund balances.
Are governments required to use special revenue funds to report restricted or committed revenue sources?
No. Special revenue funds are not required, except to report the general fund of a blended component unit.
Yes. However, the fund is required to also include substantial restricted or committed revenues as its foundation. Assigned revenues or resources cannot be the foundation for establishing a special revenue fund.
In order to satisfy the criteria for reporting as a special revenue fund, are restricted or committed revenues required to constitute a substantial portion of the revenues in the fund?
The requirement is that restricted or committed revenues should comprise a substantial portion of the inflows of the fund. Inflows of the fund would include transfers or assigned revenues in addition to restricted or committed revenues.
A government establishes a special revenue fund to account for a restricted revenue, but the fund has a limited life expectancy. When inflows into the fund ultimately cease, does the remaining balance in that fund have to be reported as part of the general fund?
No. Provided that there are no continuing inflows into the fund (transfers from other funds, for example), the separate fund can continue to be reported until the restricted resources have been used for their specified purposes.
If a governing body passes a resolution (the highest level of decision-making authority, in this case) to annually transfer amounts from the general fund to a separate fund to be used for a specified purpose, do those amounts qualify as committed revenues so that the separate fund can be reported as a special revenue fund?
No. Transfers are not revenues. The transferred-in resources in this example do not provide the foundation of restricted or committed revenues required for a special revenue fund. The separate fund can, however, be reported as a special revenue fund if there are also substantial restricted or committed revenues recognized in that fund.
Are taxes levied for a specific purpose regarded as restricted for purposes of reporting in a special revenue fund?
If the taxes result from a separate dedicated levy that can only be used for the specific purpose for which they are levied, they constitute a restricted revenue. If, however, the taxes result from the general fund corporate levy and the purpose for which the taxes are intended to be spent is one of the many purposes underlying that levy, they are not restricted to that purpose.
Paragraph 31 states that if a fund no longer qualifies as a special revenue fund its remaining resources should be reported in the general fund. Can those resources be reported as part of another special revenue fund with a similar purpose (for, example, if both funds are transportation-related)?
Yes. Resources accounted for in a separate fund that does not meet the criteria to be reported as a special revenue fund can be reported as part of the general fund or as part of another fund with a similar purpose that does meet the criteria to be reported as a special revenue fund.
A government intends to purchase several movable storage facilities that will not meet its capitalization threshold. Can those acquisitions be made from a capital projects fund?
Yes. Capital projects funds may include expenditures for items that are capital in nature but do not qualify for reporting as capital assets under the government's capitalization policy.
A separate special revenue fund is used only to account for specific restricted resources. Can nonspendable fund balance be reported for that fund?
Yes. For example, if inventories or prepaid amounts are reported in that fund, the fund balance pertaining to those amounts should be classified as nonspendable.
If a governmental fund reports an inventory balance for items that will be sold, rather than used in providing services, should the fund balance pertaining to that inventory be classified as nonspendable?
Fund balance related to inventory should be classified as nonspendable, because the resources are not in a spendable form, unless the proceeds from the sales are restricted, committed, or assigned. Fund balance representing inventory balances held for sale should not be reclassified from the nonspendable category, even if the proceeds from sales are expected to be unassigned.
Does paragraph 24 of Statement 54 require disclosure of specific individual encumbrances by fund balance classification, if significant?
No. The requirement in paragraph 24 is to disclose the total amount of encumbrances by major fund and nonmajor funds in the aggregate, if significant. Disclosure of individual encumbrances is not required and classification of encumbered amounts as restricted, committed, or assigned also is not required.
Definition of a Derivative is:
Derivatives are financial arrangements that are leveraged (meaning they require minimal or no initial investment on the part of the government but nevertheless achieve changes in fair value that would have required a far larger initial investment).
The financial arrangements can be settled early with a cash payment or the transfer of an equivalent asset.
Statement No. 53 requires:
Fair value of derivatives be reported in the financial statements when using the full accrual basis.
Fair value and changes in fair value of a hedging derivative instrument are required to be deferred – reported as deferred inflows and deferred outflows on the balance sheet.
A hedging derivative instrument significantly reduces financial risk by substantially offsetting the changes in cash flows or fair values of the item the derivative is associated with.
Statement No. 53 requires (continued):
Deferral of changes in fair value will last until the transaction involving the hedged item ends.
If terminated or no longer an effective hedge (no longer significantly reduces risk) then accumulated gains or losses, if any, are reported as investment gain or loss in financial statements.
Requires significant disclosure
Statement No. 53 does not address investment derivatives.
Derivatives that are (1) associated with an item that is eligible to be hedged and (2) determined to be effective are considered a hedging derivative instrument and governments are required to report their hedging derivative instruments using hedge accounting provisions.
Items eligible to be hedged are reported in the financial statements using a measurement other than fair value.
Expose a government to a risk of losing cash flows or fair value.
Example of a “hedgeable” item is variable-rate debt, which exposes a government to the risk of increasing interest rates and therefore larger interest payments to the bondholders.
For the purpose of these standards, a derivative associated with a hedgeable item is known as a potential hedging derivative instrument.
A hedging derivative instrument is a potential hedging derivative instrument that is effective.
Effective means that the derivative significantly reduces an identified financial risk by providing changes in fair values or cash flows that substantially offset the changes in fair values or cash flows of the associated item being hedged.
Each year’s change in fair value would be added to the deferrals in the balance sheets.
If the hedging derivative instrument remains effective and continues until its planned conclusion, the deferrals will balance out the fair value of the derivative until that value declines to zero when it concludes.
Many hedges remain effective through the term of the derivative agreement – the derivative begins with a zero fair value, the annual changes in its fair value are deferred, and it ultimately concludes as planned and returns to zero fair value.
However, there are situations in which the hedge does not last as long as expected:
The hedging derivative instrument is terminated prior to its expected ending date.
The hedging derivative instrument ceases to be effective.
It is no longer probable that a hedged expected transaction will occur.
The hedged asset or liability is sold or retired, except for current or advance refundings.
In those circumstances, the deferred amounts are removed from the balance sheets and reported as investment income or loss in the flows of resources statements.
If the hedging derivative instrument hedges a liability that is reported as a current refunding (outstanding bonds are paid off immediately from the proceeds of newly issued bonds) or an advance refunding resulting in a defeasance of debt (the proceeds are not used to repay the outstanding bonds immediately, but are set aside with an escrow agent and invested to finance the regular debt service payments), then the deferred amounts are included in the amortization associated with the refunding. The deferred amounts are spread over the remaining term of the refunding and reported in the flows of resources statements in annual installments.
The swap in an example of a hedging derivative instrument. The value of the swap declines to zero when it concludes and there is no income or loss. However, when a hedging derivative instrument ends early or ceases to be effective, the accumulated deferrals from prior years would be reported as investment income or loss, plus or minus the changes in fair value for that year.
Effective for years ending June 30, 2012
Statement 53 requires immediate recognition of deferred amounts when swap is terminated
Statement 64 clarifies when a hedging relationship (and hedge accounting) continues
All criteria met:
Collectibility of swap payments is probable
Counterparty (or support provider) is replaced with an assignment or in-substance assignment
Act of default or termination by counterparty (or support provider)
Glossary of Statement 53 is amended to define:
Assignment – Occurs when a swap agreement is amended to replace an original swap counterparty, or the swap counterparty’s credit support provider, but all of the other terms of the swap agreement remain unchanged.
Glossary of Statement 53 is amended to define (continued):
In-Substance Assignment – provides that the four criteria are met:
Original counterparty, or counterparty’s credit support provider, is replaced
Original swap agreement ended and replacement swap agreement entered into on same date
Terms that affect changes in fair values and cash flows in original and replacement swap agreements are identical.
Any differences between the original swap agreements exit price and the replacement swap’s entry price is attributable to the original swap’s exit price being based on a computation specifically permitted under the original swap agreement.
Effective for years ending December 31, 2012
SCA is 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
Governments will enter into SCAs for a number of reasons:
Leverage existing facilities to generate additional resources in the form of upfront payments from the operator for the right to operate the facility
Facilitate construction and financing of new facilities or improvement of existing facilities
Provide services to the general populace in a more efficient and cost-effective manner
Assets most commonly used in SCAs are those for which fees for services are charged:
Roads and bridges
Water and sewer
Significant up-front payments (including installment arrangements and operator-constructed assets) are recognized:
An asset for up-front payment or the present value of installment payments or capital assets contributed
Any contractual obligations as liabilities,
And a corresponding deferred inflow of resources equal to the difference between (1) and (2).
Periodic amortization – recognized as revenue and the deferred inflow is reduced in a systemic and rational matter over the term of the agreement
Reporting the capital assets:
Transferor continues to report existing facility as capital asset
New facility or improvements to existing facility:
A new facility or improvements as capital asset at fair value when placed into operation
Any contractual obligations as liabilities,
And a corresponding deferred inflow of resources equal to the difference between (1) and (2).
New facility or improvements to existing facility:
Transferor does not depreciate capital asset if the agreement requires operator to return asset in its original or enhanced condition
Reports an intangible asset for the right to access and use the property:
Measured by the amount of up-front payment or contributed asset
Amortized over the life of the arrangement
Improvements made to the facility by the government operator increases the government operator’s intangible asset if the improvements increase the capacity or efficiency of the facility.
Intangible asset is not within the scope of GASB 51 and should not be reported as a capital asset
Reports a liability to restore facility to a specified condition if required by agreement and the facility is not in the expected condition
Governmental operator reports all revenues earned and expenses incurred
Unconditional payments treated like installments
The transferor recognizes conditional amounts when earned according to the agreement
Description of the arrangement
Nature and extent of rights retained or transferred
Nature and amounts of recognized assets and liabilities
GASB Statement No. 62Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncement
Effective for periods ended December 31, 2012
Primary objective is to directly incorporate the applicable provisions in FASB and AICPA pronouncements issued on or before November 30, 1989, into the state and local government accounting and financial reporting standards:
Paragraph 17 of Statement 34 requires application of pre-November 30, 1989, FASB statements, APB opinions and ARBs, unless they conflict with or contradict GASB pronouncements
FASB introduced its codification ASC, its original pronouncements are no longer authoritative, which is the main reason for this standard.
Accounting and reporting requirements adopted as is, modifying the language as appropriate to reflect the government environment without affecting the substance of the provisions
Provisions generally apply to governmental activities, business-type activities, and proprietary funds, unless identified in the Statement.
Election to apply all post-November 30, 1989 FASB pronouncements not in conflict with GASB pronouncements is eliminated (GASB 20)
Guidance from post-November 30, 1989 FASB pronouncements included in the FASB Codification that do not conflict with GASB pronouncements could still be applied as “other accounting literature.”
Topics and guidance brought into the GASB literature:
Capitalization of interest costs – capitalizing interest as part of the historical cost of constructing certain business-type activities
Statement of net assets classification – examples of current noncurrent assets and liabilities
Special and extraordinary items – defines and provides examples
Comparative financial statements
Regulated operations – general purpose financial statements for public utilities
Accounting changes and error corrections – changes versus estimates and policies
Contingencies – when should be recognized as a liability or in notes to financial statements
Extinguishments of debt – when certain types of governmental debt considered extinguished
Troubled debt restructuring
Leases – capital versus operating leases
Inputation of interest costs – difference between face amount and certain receivables or payables
Topics brought into the GASB literature (continued):
Sales of real estate
Real estate projects
Research and development arrangements
Cable television systems
Mortgage banking activities
Combinations is a current technical project
(From Comprehensive Implementation Guide)
The requirements of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, which are related to the direct incorporation of the applicable guidance from those FASB and AICPA pronouncements into the state and local government accounting and financial reporting standards, are effective for periods beginning after December 15, 2011, with early implementation encouraged. This appendix identifies questions and answers in this chapter that are affected by the provisions of that Statement and presents as marked changes amendments of the material that will be integrated into the chapter once that Statement is effective. For governments that implement Statement 62 before its required effective date, the questions and answers in this appendix also should be applied.
A government makes economic development loans to private parties at interest rates below commercially available lending rates. Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, paragraph 180,generally prescribes discounting loans or notes receivable that earn interest at below-market rates.
Is the government required to discount the loan at a higher imputed interest rate per Statement 62 and recognize additional interest income?
No. Because the government makes the low-interest loan to carry out governmental objectives it “makes the market” for the loan. The market rate is the rate that the government charges.
Paragraph 7 of Statement No. 29, The Use of Not-for-Profit Accounting and Financial Reporting Principles by Governmental Entities, stated that enterprise funds (business-type activities) “should not apply FASB Statements and Interpretations whose provisions are limited to not-for-profit organizations … or address issues concerning primarily such organizations.” However, Statement 29 was superseded by Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.
Can business-type activities apply FASB standards whose provisions are limited to or primarily address not-for-profit organizations?
No. Business-type activities are not considered not-for-profit activities and should not apply guidance for not-for-profit organizations.
Statement 37, paragraph 6, clarifies that construction-period interest on assets used in governmental activities should not be capitalized. If capital assets that will be used in enterprise funds are financed with general long-term debt, should a portion of the interest on that debt be capitalized as construction-period interest?
Generally, no. Paragraph 46 of Statement 34 states that interest on general long-term debt generally should not be allocated to functions or programs as a direct expense. Therefore, unless the debt is expected to be retired by the enterprise fund (see question 7.22.11), it is considered general long-term debt, and construction-period interest should not be included in the cost of the capital assets constructed.
The interest capitalization requirement in Statement 62, paragraphs 11–20,does not require or anticipate matching specific debt to specific assets. Generally, that Statement requires a portion of all interest expense to be allocated to the costs of all assets under construction during the period. Therefore, if the enterprise fund has any type of debt, the portion of the interest expense that theoretically could have been avoided generally should be capitalized as part of the cost of assets constructed during the period.
Should Build America Bonds and similar bonds discussed in question Z.33.25 be considered to be tax-exempt for the purpose of determining interest that should be capitalized for capital assets constructed with the proceeds of those bonds?
No. Those bonds are taxable and the requirements for tax-exempt borrowings in footnote 6 and paragraphs 19 and 20 of Statement 62 do not apply.
Once a depreciable asset's useful life is estimated, is it ever necessary to review the estimate in later years?
Yes. Because depreciation is a method of allocating an asset's cost over its useful life, a periodic review of this useful life is necessary for depreciation to reflect that allocation. Any change in useful life is applied prospectively in accordance with paragraph 69 of Statement 62. As many factors may affect the useful life of an asset, periodic reassessment of estimated useful lives may be appropriate. For example, equipment may not be replaced according to property management policies if appropriations for the replacement costs are not made. Planned preventative maintenance may not be performed, resulting in a reduction in the useful life of an asset. The use of the asset may have changed, or the asset may have been damaged or impaired by weather or other circumstances.
If a government elects to use the classified format in its government-wide statement of net assets, is it required to separately display restricted assets of governmental activities?
Statement 34 does not require separate presentation of restricted assets in the government-wide statement of net assets for either governmental activities or business-type activities; however, the decision to use the classified format may result in the presentation of a portion of restricted assets as “noncurrent.” The classified format distinguishes between current and noncurrent assets and liabilities as defined in paragraphs 29–44 of Statement 62. One of the requirements of that approach is that current assets should exclude assets that will not be used in current operations, are restricted for acquisition or construction of noncurrent assets, or are restricted for liquidation of long-term debt.
Resources accounted for in the general fund, special revenue funds, and debt service funds are generally expected to be used in current operations or to liquidate current obligations and thus generally would be considered current assets. Conversely, a portion of the resources accounted for in capital projects funds and permanent funds may meet the criteria for assets that should not be reported as current assets. (Question 7.22.3 discusses reporting restricted assets when the “order of liquidity” format is used.)
How should a government report the correction of an error in previously issued financial statements?
A correction of an error is addressed in Statement 62, paragraphs 88 and 89, which requires that the correction of an error be reported as restatements of beginning net assets/fund equity, not as a separately identified cumulative effect in the current-period statement of activities or proprietary fund statement of revenues, expenses, and changes in fund net assets. Paragraph 88 of Statement 62 states that a correction of an error should be reported as a prior period adjustment. Consistent with footnote 13 of Statement 34, governments should implement that requirement by either displaying the amount on the face of the statement as an adjustment to beginning net assets/fund balance, as previously reported, or by displaying beginning net assets/fund balances, as restated, with an explanation of the restatement in the notes to the financial statements. When comparative statements are presented, corresponding adjustments should be made to the transactions and balances for all periods presented to incorporate the retroactive application of the prior period adjustments, as discussed in paragraph 61 of Statement 62
Is a change in capitalization threshold a change in accounting principle that requires restatement of beginning net assets?
No. Use of a capitalization threshold is an application of accounting policy, and any change in capitalization threshold should appropriately ensure that all significant capital assets, collectively, are capitalized while considering the cost of record keeping for capital assets.
Unusual in nature and infrequent in occurrence are key characteristics of extraordinary and special items, as discussed in Statement 34, paragraphs 55 and 56, respectively. What is the difference between “unusual in nature” and “infrequent in occurrence”?
Statement 62, paragraphs 46–48, defines both terms as follows:
Special and extraordinary items are events and transactions that are distinguished either by their unusual nature or by the infrequency of their occurrence, or both. The following criteria should be met to classify an event or transaction as either unusual in nature or infrequent in occurrence:
a. Unusual nature—the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the government, taking into account the environment in which the government operates. (See paragraph 47 [below].)
b. Infrequency of occurrence—the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the government operates. (See paragraph 48 [below].)
Unusual Nature. The specific characteristics of the government, such as type and scope of operations and operating policies, should be considered in determining ordinary and typical activities of the government. The environment in which a government operates is a primary consideration in determining whether an underlying event or transaction is abnormal and significantly different from the ordinary and typical activities of the government. The environment of a government includes such factors as the characteristics of its business-type activities, the geographical location of its operations, and the nature and extent of governmental regulation. Thus, an event or transaction may be unusual in nature for one government but not for another because of differences in their respective environments. Unusual nature is not established by the fact that an event or transaction is beyond the control of management.
Infrequency of Occurrence. For purposes of applying [the guidance in paragraphs 45–50 of Statement 62], an event or transaction of a type not reasonably expected to recur in the foreseeable future is considered to occur infrequently. Determining the probability of recurrence of a particular event or transaction in the foreseeable future should take into account the environment in which a government operates. Accordingly, a specific transaction of one government might meet that criterion, and a similar transaction of another government might not because of different probabilities of recurrence. The past occurrence of an event or transaction for a particular government provides evidence to assess the probability of recurrence of that type of event or transaction in the foreseeable future.
Paragraph 99 of Statement 34 requires restricted assets to be reported separately in the proprietary fund statement of net assets. How should restricted assets be reported under the classified approach?
Restricted assets should often be reported as noncurrent assets. Statement 62, paragraph 31, excludes from current assets “cash and claims to cash which are restricted as to withdrawal or use for other than current operations, are designated for disbursement in the acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts.” Restricted assets that will be used in current operations—certain grants and contract revenues, for example—should be reported as current assets.
Do the additional display/disclosure requirements in para-graph 89 of Statement 34 (for significant transactions or other events that are either unusual or infrequent but are not within the control of management) for governmental funds also apply to proprietary funds?
Yes. Governments are required to display or disclose those events and transactions for their proprietary funds. The display/disclosure requirements in paragraph 89 apply the requirements in paragraphs 45–50 of Statement 62 to governmental fund reporting. Because proprietary funds also are subject to the requirements of Statement 62, it is not necessary to repeat the language in paragraph 89 for proprietary funds.
What disclosures should a phase 3 government that does not elect to retroactively report infrastructure make for infrastructure that is not included in the basic financial statements?
The requirements related to the selection of accounting policies and methods from existing acceptable alternatives in paragraph 93 of Statement 62 and the paragraph 115e of Statement 34 requirement to disclose the policy for capitalizing assets would apply. Phase 3 governments that do not elect to retroactively report infrastructure should include a statement in their summary of significant accounting policies on an ongoing basis such as “General infrastructure assets acquired prior to July 1, 2003, are not reported in the basic financial statements,” “General infrastructure assets include all roads and bridges and other infrastructure assets acquired subsequent to July 1, 2003,” or other language that indicates how infrastructure was capitalized.
When a government first implements Statement 34, if it has general obligation bonds outstanding resulting from an advance refunding, are the deferral and amortization requirements of Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, applicable? Should any premiums, discounts, and debt issuance costs related to general obligation bonds be calculated, deferred, and amortized pursuant to Statement 62, paragraphs 176–187?
No. Governments may, but are not required to, calculate those beginning balances at implementation. Paragraph 146 of Statement 34 allows governments to apply the provisions of all those pronouncements to governmental activities prospectively (except for governmental activity debt that is deep-discount or zero-coupon debt).
A government that has adopted the requirements of Statement 34 in a prior year is retroactively reporting some of its general infrastructure in the current year. Is this reported as a current-year addition to general capital assets?
No. Retroactive reporting of infrastructure is presented as an adjustment of a prior period, as was the adjustment to proprietary and fiduciary funds pursuant to the adoption of other provisions of Statement 34. Thus, beginning net assets and any affected note disclosures, such as beginning balances in the schedule of changes in capital assets, are restated. Guidance that should be followed when comparative statements are presented is provided in paragraph 61 of Statement 62. See question 7.22.16 for additional discussion of that guidance
Effective for years ending December 31, 2012
Concepts Statement 4 identifies 5 elements that make up a statement of financial position:
Deferred outflows of resources
Deferred inflows of resources
This differs from Statement 34, which requires the presentation of assets, liabilities, and net assets in a statement of financial position
GASB 63 addresses presentation issues associated with the new financial position elements created in Concepts Statement No. 4, Elements of Financial Statement
Deferred outflows of resources
Deferred inflows of resources
Resources with present service capacity that the government controls
Present obligations to sacrifice resources with little or no discretion to avoid
Deferred outflows of resources
A consumption of net assets by the government that is applicable to a future reporting period
Has a natural debit balance and, therefore, increases net position similar to assets
Has a positive effect on net position similar to assets
Deferred inflows of resources
An acquisition of net assets by the government that is applicable to a future reporting period
Has a natural credit balance and, therefore, decreases net position similar to liabilities
Has a negative effect on net position
The residual of all elements presented in a statement of financial position
Concept Statement 4 specifically states the deferred outflows of resources and deferred inflows of resources should only be used as specifically required in authoritative GASB pronouncements.
Currently deferred outflows of resources and deferred inflows of resources are only required in:
GASB 53 on derivative instruments
GASB 60 on service concession arrangements
GASB 65 on items previously presented as assets and liabilities (effective 12/31/13)
GASB 67 on pension plans
GASB 68 on pension plans - employers
Report each of the financial position elements in a separate section in the statements of financial position in the following order:
Deferred Outflows of Resources
Deferred Inflows of Resources
Allowed to report subtotals for:
Combination of assets and deferred outflows of resources
Combination of liabilities and deferred inflows of resources
The statements of financial position financial statements should be referred to as the Statement of Net Position
Preferred reporting format is: assets + deferred outflows – liabilities – deferred inflows = net position
Traditional balance sheet format is permitted:
Assets + deferred outflows = liabilities + deferred inflows + net position
Equity section referred to as net position instead of net assets and is reported in the following three components:
Net investment in capital assets
No change in the definitions of these net position components other than incorporating impact of deferred outflows and inflows
The statements of financial position for governmental fund financial statements should continue to be referred to as the Balance Sheet
Equity section continues to be referred to as fund balance
Report in fund balance classifications required by GASB Statement No. 54
* Assets + deferred outflows – liabilities – deferred inflows = net position
Assets + deferred outflows = liabilities + deferred inflows + net position
* Preferred Presentation
If components of the total deferred amounts are obscured by aggregation on the face of the statements - provide details of different types of deferred amounts.
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
Remember to include deferred items
Deferred outflows and deferred inflows are the only areas deferred is used
Policy notes will be effected
Effective December 31, 2013
Deferred outflows of resources
A consumption of net assets by the government that is applicable to a future reporting period
Has a natural debt balance
Has a positive effect on net position, similar to assets
Deferred inflows of resources
Acquisition of net assets by the government that is applicable to a future reporting period
Has a natural credit balance
Has a negative effect on net position, similar to liabilities
Deferred outflows of resources currently classified as assets:
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
Deferred inflows of resources currently classified as liabilities:
Grants received in advance of meeting timing requirement
Taxes received in advance
Deferred amounts from refunding of debt (credits)
Proceeds from sales of future revenues
Deferred gain from sale-leaseback
“Regulator” credits (gains or other reductions)
“Unavailable” revenue in governmental funds
Accounting gain/loss on debt refunding
Report as a deferred outflow of resources (loss) or deferred inflow of resources (gain) and recognize as a component of interest expense over shorter of life of old debt or new debt
Report separately from related bonds payable
Debt issuance costs
Debt issuance costs, other than prepaid insurance costs, should be recognized as an outflow of resources in the period incurred
Report prepaid insurance costs as an asset
Imposed nonexchange revenues:
Report as deferred inflows of resources, resources received or recognized as receivables before:
The period for which the taxes are levied for property taxes
The period when resources are required to be used or when use is first permitted for all other imposed nonexchange transactions for which time requirements are specified
Government-mandated and voluntary nonexchange transactions:
Resources received/provided in advance of one of the eligibility requirements being met other than time requirements:
Provider reports as an asset
Recipient reports as a liability
Resources received/provided in advance of time requirements being met (all other eligibility requirements are met):
Provider reports as deferred outflows of resources
Recipient reports as deferred inflow of resources
Revenue determined to be unavailable under modified accrual basis- report as deferred inflows of resources
Transactions of regulated entities:
Refunds imposed by a regulator should be recognized as liabilities
Report as deferred inflows:
Revenues generated by current rates intended to recover costs that are expected to be incurred in the future
Gains and other reductions of net allowable costs intended to reduce rates over future periods
Incurred costs expected to be recovered through future rates should continue to be reported as assets
In the Basis for Conclusions, GASB 65 affirms the following should continue to be reported as assets:
Including when a pension plan’s net position exceeds the total pension liability
Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements, other than time requirements, have not been met
Capitalized incurred costs related to regulated activities
The purchase of future revenues from a government outside the financial reporting entity
Initial subscriber installation costs in relation to cable television systems
In the Basis for Conclusions, GASB 65 affirms the following should continue to be reported as liabilities:
Resources received in advance in relation to a derived tax revenue nonexchange transaction
Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met
Resources received in advance of an exchange transactions
Excess of initial hookup revenue over direct selling costs in relation to cable television systems
Premium revenues for insurance entities and public entity risk pools received in advance
Commitment fees charged for entering into an agreement that obligates the government to make or acquire a loan or to satisfy an obligation of the other party under a specified condition, unless exercise is considered remote
Fees that are received for guaranteeing the funding of mortgage loans
Effective for years ended June 30, 2013
Determine whether the standards for defining and presenting the financial reporting entity in Statement 14, as amended:
Include the organizations that should be included
Exclude organizations that should not be included
Display and disclose the financial data of component units in the most appropriate and useful manner
Are consistent with the current conceptual framework
Component units are separate legal entities
Examples are CRAs, port authorities, mass transit systems, financing entities
Statement No. 14 requires inclusion if the potential component unit is fiscally dependent, the primary government has authority over the component units:
Setting taxes and charges, or
Statement 61 adds a requirement for a financial benefit or burden before inclusions is required
Statement 14 requires inclusion of a potential component unit if exclusion would make reporting entity’s statements “misleading or incomplete”
Statement 61 eliminates “incomplete,” and emphasizes that the determination would normally be based on financial relationships
Such as significant financial benefit to/burden on the primary government that is other than temporary
Increase the emphasis on financial relationships, financial accountability
Refocus and clarify the requirements to blend certain components units
Improve the recognition of ownership interests
Statement 14 requires blending if primary government & component unit have “substantively the same” governing body
For example, City Board also serves as the Board of the Community Redevelopment Agency
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 the component unit like a fund, program, or department of the primary government
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
Statement 61 clarifies that the funds of a blended component unit have the same characteristics, reporting alternatives, and limitations as those of the primary government
Major fund reporting
Could be combined with other funds for display
GASB 61 clarifies that the general fund of a blended component unit should continue to be reported as a special revenue fund of the primary government
GASB 61 clarifies that governments engaged only in business-type activities may use a single-column presentation, and the component unit may be blended by consolidating its financial statement data within the single column of the primary government and presenting combining information in the notes to the financial statements (or the multiple column approach).
If condensing combining information should include in the notes to the financial statements:
Condensed statement of net assets/net position
Condensed statement of revenues, expenses, and changes in net assets/net position
Condensed statement of cash flows
Clarifies the types of relationships that should generally affect the major component unit determination:
Primarily financial relationships
Significant transactions with the primary government
Significant financial benefit/burden relationship
Could be based on the nature of services provided by component unit
Eliminates consideration of each component unit’s significance relative to other component units
Major component units should be presented either:
In a separate column in the statement of net assets and activities
In combining statements of major component units in the basic financial statement following the fund financial statements, or
In the notes to the financial statement in a condensed financial statement format
Nonmajor component units should be aggregated in a single column. A combining schedule is not required but is allowed as supplementary information.
An asset should be recognized for an equity interest in:
A joint venture
A component unit
If the component unit is blended, the equity interest is eliminated in the blending process
Equity interests of minority participants would be classified in net assets as “Restricted net assets, nonexpendable”
Recognition and measurement is based on JV equity interest requirements in Statement 14
Clarifies that current disclosures require:
Rationale for including each component unit
Whether it is discretely presented, blended, or included as a fiduciary fund
No new disclosures, just clarifying what should be presented.
Effective for years ended December 31, 2013
Eliminates inconsistencies in standards:
Statement 54 and Statement 10 – The requirement for the general fund or an internal service fund, if single fund used for risk financing, has been deleted in its entirety
Statement 62 and Statements 13 and 48:
Paragraphs 222 and 227b in No. 62 guidance when operating lease payments that vary from a straight-line basis
Paragraph 442 of No. 62 states the initial investment in a purchased loan or group of loans should include the amount paid to seller plus any fees paid or less any fees received
Paragraph 460 of No. 62 provides guidance on servicing fees for mortgage loans and receivables that have been sold
Effective for years beginning after June 15, 2013
Key conceptual shift in reporting pension liabilities and expense under the economic resources measurement focus from a “funding” approach to an “earnings” approach for defined benefit plans:
Currently, no liability is reported if government fully funds its annual required contribution (single-employer and agent plans) or pays its contractually required contribution (cost-sharing plan)
GASB 67 Approach:
Pension liability will be reported as employees earn their pension benefits by providing services
Changes in pension liability will be immediately recognized as pension expense or reported as deferred outflows/inflows or resources depending on nature of change
No significant changes to accounting for pensions in governmental funds
Post employment benefits and termination benefits not included in provisions of No. 67
In year of implementation, treat as a prior period adjustment with restatement, if practical
GASB No. 67 distinguishes reporting by the types of plans involved. The definitions are largely unchanged from current practice:
Single-employer pension plans. Those plans in which pensions are provided to the employees of one employer.
Agent multiple-employer pension plans. Those plans in which plan assets are pooled for investment purposes, but are legally segregated to pay the pensions of each employer’s employees.
Cost-sharing multiple-employer pension plans. Those plans in which the participating employers pool or share their obligations to provide pensions to their employees, and plan assets can be used to pay the pensions of the employees of any participating employer.
A single pension plan can be reported under the new standards, even if separate tiers or classes of employees or retirees are included in the plan provisions, as long as all plan assets may be used to pay for any plan benefit.
The actual operations may not have to change because laws or contracts may require separate reserves or separate actuarial valuations.
GASB No. 67 contains provisions for two financial statements:
Statement of fiduciary net position. This includes information about assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position as of the end of the plan’s reporting period.
Statement of changes in fiduciary net position. This includes information about the additions to, deductions from, and net increase (or decrease) in net position for the reporting period.
The notes to the basic financial statements will be similar to what is prepared by the plans today.
For single-employer and cost sharing multiple-employer plans, disclosure will include the components of the net-pension liability (or asset) of the employer(s).
These components include the total pension liability, the plan’s fiduciary net position, the net pension liability (asset) of the employer(s), and the ratio of the plan’s fiduciary net position to the total pension liability of the employer(s)
Other disclosures include significant assumptions used in the valuation, the discount rate, and the date of the actuarial valuation.
Required supplementary information (RSI) for single-employer and cost sharing multiple-employer plans will include 10-year schedules which include:
A schedule of changes in net pension liability, including beginning and ending total pension liability and the net pension liability, and the annual changes to net position, including the components of those changes.
A separate 10-year schedule, including the total pension liability, the plan’s fiduciary net position, the net pension liability, and the ratio of plan fiduciary net position to total pension liability. Also included similar to today is the plan’s covered payroll and the ratio of the net pension liability to covered payroll.
If an actuarially determined employer contribution is calculated, a schedule of those contributions in comparison to contributions made to the plan from all sources. The sources should be separated as non-employer entities made to the plan from all sources. The sources should be separated as non-employer entities may contribute to the plan (primarily states for teacher plans.)
A 10-year schedule of money-weighted rates of return.
For agent multiple-employer plans, only the 10-year schedule of money-weighted rates of return will be presented. The other RSI will be presented within the employer’s notes to the basic financial statements and RSI.
Notes to required supplementary information are presented to explain changes within the schedules. (may include changes in benefit provisions, the size or composition of the population covered by the benefit terms, or assumptions used).
Amounts presented for prior years should not be restated for the effects of changes (e.g., benefit changes or changes in assumptions) that occurred subsequent to the end of the year for which the information is reported.
Defined contribution plans will include note disclosure similar to what we have now.
Will include a plan description similar to defined benefit plans.
Fair value of the plan investments unless they are already reported at fair value in the basic financial statements.
Effective for years beginning after June 15, 2014
GASB No. 68 covers:
the measurement of pension obligations that derive liabilities (or assets); and
The calculations behind pension expense.
Deferred outflows and deferred inflows of resources;
Methods and assumptions of pension calculations, including how to calculate the discount rate to be used and how to attribute the pension liability to various periods;
Note disclosure and required supplementary information; and
Defined contribution pension plan reporting.
GASB No. 68 requires employer to report either a liability or an asset on their statement of net assets (statement of net position), which is the net of the total pension liability and the assets irrevocably held in trust to pay benefits.
The date at which the liability is measured is no earlier than the end of the employer’s prior fiscal year
GASB No. 68 requires methods and assumptions in accordance with Actuarial Standards of Practice issued by the Actuarial Standards Board.
GASB will no longer dictate particular nuances and methods of actuarial standards.
If actuarial standards change, they will be automatically incorporated by reference into GASB No. 68
Actuaries will project benefits based solely on the benefit terms and assumptions that are in place as of the measurement date
Only cost of living adjustments that are substantially automatic or automatic are included as part of the valuation
Cost of living adjustments that are haphazardly approved are not included.
Only entry age actuarial cost method will be used to attribute the present value of benefits to an employee’s service
The service cost of an employee will be determined as a level percentage of pay.
GASB No. 68 requires that a government project when it will run out of plan assets to pay for benefits assuming a long-term rate of return in a similar fashion to what is contained in GASB No. 27.
Pension expense will no longer be the amount of cash that is sent to the plan based on an actuarially required contribution (ARC).
Pension expense will be derived from an accrual based methodology that is the accumulation of work-based benefits for a period
Interest on the total pension liability is also included in expense
Plan changes that solely affect retirees or inactive employees will be expensed
Changes that affect current employees will be a deferred inflow of resources and amortized over the estimated remaining service life of each employee
The difference between projected and actual investment return must be expensed (or offset if the expense is positive) over five years in a systematic and rational manner
If a net pension liability (or asset) exists that will be liquidated with current financial resources, then a fund financial statement entry will be needed
Expenditures will be recognized for the amounts paid to the plan, including amounts that will be expected to be liquidated with current financial resources
The notes to the basic financial statements will be similar to what is prepared by employers today
Required supplementary information (RSI) for single and agent employers will include 10-year schedules
Notes to RSI will include significant methods and assumptions, including trends and changes.
Do the new GASB Statements establish requirements for how governments should fund their pensions?
No. In the past, the accounting and financial reporting standards were closely associated with the approach that many governments take to funding their benefits – that is, toward contributing sufficient resources to a defined benefit pension plan to finance benefit payments when they come due. Consequently, many governments have established funding policies based on the GASB’s standards. However, after reexamining the prior standards for pensions, the GASB concluded that approaches to funding are not necessarily the best approach to accounting for and reporting pension benefits. Therefore, the new Statements mark a definitive separation of accounting and financial reporting from funding.
As just stated, the new pension Statements relate only to accounting and financial reporting, or how pension costs and obligations are measured and reported in external financial reports. How much governments actually contribute each year to a pension plan is a policy issue. Governments will likely report pension expense more quickly than under the prior standards; however, how or whether this information is used in assessing the amounts that governments will contribute to their pension plans is a public policy decision made by government officials.
No. The selection of an appropriate interest rate for discounting projected future benefit payments to their present value is based on what resources are projected to be used to make those payments:
Assets of the plan that have been invested using an investment strategy to achieve the assumed long-term expected rate of return and their earnings; or
The general resources of the government employer. As long as the projected plan net position related to current employees and inactive employees exceeds the projected benefit payments for those employees, the long-term expected rate of return on investments wills serve as the basis for discounting. This asset-based rate is appropriate because the earnings on the plan’s investments reduce the amount an employer will need to contribute to the plan.
If a government reaches a crossover point – when projected benefit payments for current employees and inactive employees exceed projected plan net position related to those employees – then benefit payments projected to be made from that point forward will be discounted using a high-quality municipal bond interest rate. This liability-based rate is appropriate because the plan would no longer be expected to have sufficient assets related to those employees to produce investment income that will reduce how much an employer will have to contribute. The pension liability would then resemble the employer’s outstanding debt and other typical long-term liabilities.
However, it is true – all other factors being equal – that the less well-funded a pension plan is, the more likely it will reach a crossover point and therefore have to discount some projected benefit payments using the municipal bond index rate. Under current economic conditions, municipal bond rates are lower than long-term expected returns on pension plan investments. Using a lower discount rate increases the present value of projected benefit payments and, thereby, increase the size of the pension liability.
Do the GASB’s standards allow governments to make their liabilities look smaller by using a discount rate based on unrealistically high expected rates of investment return?
No. The new Statements require that governments measure their pension liabilities using assumptions that are consistent with the standards of practice of the actuarial profession. If a government assumes a rate of return that is out of line with the actuarial standards, then it is misapplying the accounting standards rather than exploiting a loophole in the standards.
It is important to note that examining a pension plan’s investment return in any short-term period is not appropriate for drawing conclusions about the appropriateness of a government’s assump-tion about long-term investment earnings. The investment return in any given year or short-term period is likely to be either higher or lower than the assumed long-term return. However, an appropriate long-term investment return assumption will reflect expected average earnings over a long period, even though it may not be the same as actual earnings in any particular single or short-term period.
Governments will disclose information about their long-term investment return assumptions in the notes to the financial statements to assist in evaluating the reasonableness of those assump-tions. The information will include a brief description of how the long-term expected rate of return was determined, significant methods and assumptions used for that purpose, the assumed asset allocation of the pension plan’s portfolio, and the long-term expected real rate of return for each major asset class.
The guidance put forth in the new Statements pertaining to the selection of a discount rate is certainly an important element but it is only one part of the determination. Discounting is one of the basic three steps involved in measuring a government’s total pension liability – projecting, discounting, and attributing. (The measurement process is more fully described in separate fact sheets about accounting and financial reporting by governments that provide pension benefits.)
The amount of a government’s pension liability also depends on a variety of other factors such as:
The types of benefits a government has promised
The length of service of employees and their salaries in the final years of their employment
The life expectancy of retirees, which determines how long they will continue to receive benefits
The inflation rate, which affects both salaries and rates of return on investments
Yes. The comparability of the pension information that will result from the new Statements has been significantly improved. One of the features of the prior standards that many financial statement users have criticized is the variety of choices that employers could make when attributing the present value of projected benefit payments to past, present, and future periods. Governments previously were allowed to select from six different actuarial cost allocation methods, each of which could be applied in two ways – as a level dollar amount each year or as a level percentage of payroll in each year. In the view of many users, these options seriously diminished comparability. The new Statements, however, require that all governments use one type of actuarial cost method – called entry age – and apply it only as a level percentage of payroll.
It should be noted that, although governments are required to measure their pensions within the same parameters set forth in the standards, the resulting amounts will be different because of differences in the terms of the governments’ respective pension plans, differences in the demographics of the plan members, and differences in other relevant factors. In other words, because the governments are in different circumstances, their measurements will employ different assumptions.
It has been suggested that comparability would be greatly improved if all governments were required to use the same assumptions. However, taking a one-size-fits-all approach would ignore significant differences between governments – such as the mix of their investment portfolios and their actual earnings experience – that are relevant to determining the amount that governments are obligated to provide for pensions.
No. The GASB has never conducted research regarding the extent to which pension plans are funded in the aggregate. Funding relates to a public policy issue that is beyond the scope of the GASB’s activities.
OPEB – Accounting and Reporting
Conceptual Framework - Recognition of Elements of Financial Statements and Measurement Approaches
Economic Condition Reporting - Financial Projections
Fair Value Measurement and Application
Conceptual Framework (Modified Accrual Project)
Economic Condition Reporting
Fair Value Measurement and Application
Postemployment Benefit Accounting and Financial Reporting
Project undertaken to reexamine standards related to post-employment benefits in order to improve:
Accountability and transparency related to postemployment benefits
Decision-making usefulness of information to post-employment benefits for users of the financial statements
The Board reaffirmed its tentative decision to propose that an employer’s net obligation for post employment benefits, when determined by projecting future benefits, including probabilities of future events, discounting to present value using an appropriate rate attributing to the costs to periods using an appropriate actuarial cost allocation method, and subtracting net position accumulated in a qualifying trust (as defined in GASB No. 68) meets the definition of a liability.
Board not sure yet if the net liability is sufficiently reliable for recognition in the financial statements
Looking to issue final statement in June 2014
Proposed Effective Date is December 31, 2014
Combinations in which no consideration is provided
Transfers of operations
Combinations in which consideration is provided
Disposal of government operations
Service (operations) continuation requirement:
Distinguishes a combination from a contribution or purchase of assets and related liabilities
“Operations” is defined as an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities
Service continuation: Obligation or responsibility to continue to provide the services that were provided by the previously separate governments, organizations, or operations
When NO consideration is provided:
Government mergers – mergers of legally separate entities
Often guided by statute
Some states have passed or considered legislation to cause or encourage streamlining (too many layers)
Few successes for general purchase governments
Shared service alternative
Transfers of operations
When no consideration is given:
Assets and liabilities brought in at carrying values
Presumption of GAAP
Transfers of operations
Accounting principles, policies, and estimates
Capital asset impairment
When consideration is given:
Control versus ownership
Governmental reporting entity concept
Assets (and liabilities) at acquisition value
Recognize based on GAAP applicable to state and local governments
Market-based entry price measurements
Accounting for the difference
Goodwill – deferred outflow of resources
Contribution received or reduction of non-current assets
When consideration is given:
Contingent consideration arrangements
Reporting government acquisitions on a provisions basis
Initial measurement not finalized
Reporting in governmental funds
Reporting disposals of government operations:
Includes all disposals of operations (transfers or sales)
Gains and losses reported as special items
Costs associated with disposals of government operations
Should consider only costs directly associated with disposal
Description of the circumstances leading to the discontinuation
Operations revenues, expense, and non-operating items
For all government combinations
Brief description of the combination and identification of the entities involved
Date of the combination
Primary reasons for the combination
Additional information about mergers and transfers of operations
Carrying values recognized as of the merger date
Description of significant adjustments
Additional information about acquisitions
Brief description of consideration provided
Total amount of net assets acquired
Brief description of contingent consideration arrangements
Beila Sherman, CPA
450 East Las Olas Boulevard
Fort Lauderdale, Florida 33301