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Governmental Accounting Standards Update

Frank Crawford, CPAwww.crawfordcpas.com

frank@crawfordcpas.com

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Recently Issued or Effective GASB Pronouncements

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New Pronouncements—2004

Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans—April

Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pension Plans—June

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New Pronouncements—2006 Statement No. 49, Accounting and Financial

Reporting for Pollution Remediation Obligations—November

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New Pronouncements—2007 Statement No.50, Pension Disclosures-—

May Statement No. 51, Accounting and Financial

Reporting for Intangible Assets—June Statement No. 52, Land and Other Real

Estate Held as Investments by Endowments

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New Pronouncements—2008 Statement No. 53, Accounting and Financial

Reporting for Derivative Instruments—June Technical Bulletin No. 2008-1, Determining

the Annual Required Contribution Adjustment for Postemployment Benefits

New Pronouncements—2009 Statement No. 54, Fund Balance and

Governmental Fund Type Definitions—February

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

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

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Effective Dates Immediate

◦ Statement 55◦ Statement 56

June 30, 2009◦ Statement 45—Phase 2◦ Statement 43—Phase 3◦ Statement 49◦ Statement 52◦ TB 2008-1 (Generally)

June 30, 2010◦ Statement 45—Phase 3◦ Statement 51◦ Statement 53

June 30, 2011◦ Statement 54

Statement 45 (for Employers) Subject: accounting and reporting

by employers for their OPEB expenses and obligations

Applies to all employers that provide OPEB (that is, the employer pays all or part of the cost of the benefits, including implicit rate subsidies)

Requires accrual-basis accounting for expense and measurement and disclosure of funded status (UAAL)

Statement 43 (for Plans)

Subject: reporting on stewardship of plan assets by

A trustee or plan administrator (stand-alone plan reporting) or

An employer or plan sponsor with a fiduciary responsibility for the plan assets that includes the plan as a trust or agency fund in its own financial report

“Postemployment Benefits”As Defined in GASB Statements

“Postemployment benefits”—benefits provided after separation from employment as part of the total compensation for services, including:◦ Pension benefits—

Retirement income Other benefits (except postemployment healthcare) if provided

through a defined benefit pension plan◦ Other postemployment benefits (OPEB)—

Postemployment healthcare benefits Other forms (for example, life insurance) if provided separately

from a defined benefit pension plan

OPEB “Plan”—Predominant Meanings in Statements 45 and 43

In Statement 45 (employer reporting):◦ “Plan” usually refers to an employer’s substantive commitment

or agreement to provide OPEB—including, for example, provisions or understandings regarding plan membership, eligibility for benefits, types of benefits, points at which benefits will begin and end, and method of financing benefits

In Statement 43 (plan reporting):◦ “Plan” usually refers to a trust or agency fund used to administer

the financing of OPEB and the payment of benefits (that is, to assets under the stewardship of an administering entity)—regardless of the financing policy adopted

The Substantive Plan Benefits should be projected based on the current substantive plan

(the plan as understood by the employer and plan members), including changes made and communicated to plan members, at the time of the actuarial valuation and (or including) the historical pattern of sharing of costs between employer and plan members to that point◦ Anticipated future changes in plan design should not be included in the

projection of benefits A legal or contractual benefit cap (as distinguished from a cap on

contributions), should be considered in the projection of benefits if the cap is deemed effective

Postemployment Benefits:Substance of the Transaction Postemployment benefits (pensions and OPEB) are part of the

compensation for services rendered by employees; they are part of an exchange transaction between employer and employees

Benefits are “earned,” and obligations accrue or accumulate, during employment, but benefits are not taken until after employment (potentially long time lag between incurring and paying the obligation)

The (accrual-basis) cost of benefits for a period is part of the total cost of government services for that period, whether or not the employer chooses to fund it concurrently

GASB 25/27Measurement Approach Harmonizes accounting requirements with funding concepts and methods to

the maximum extent appropriate for accrual accounting purposes Although OPEB plans generally are not funded, this approach still is

“funding friendly” for OPEB, because an employer that chooses to fund (now or later) need not use different measures for accounting and funding purposes

Statement 45 does not include any requirement with respect to an employer’s method of financing or budgeting of OPEB; for example, it does not require that an employer fund the benefits using the actuarial methods required for accounting purposes

Statement 45: measurement and recognition

Broad measurement steps

Project cash outflows for benefits Discount projected benefits to present value (PV) Allocate the PV of projected benefits to periods

using an acceptable actuarial cost method

4025 62 80

Age when hired

Present age

Assumed age at retirement

Life Expectancy

Service Period

Measurement approach illustrated

Employee Age Timeline

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Measurement approach illustrated

25 62 80

1) Project Benefits

2) Discount

Actuarial Present Value

3) Actuarial cost method

$4,500 $15,000 $14,000. . .

Disclosure of Funded Status and Funding Progress

Employers also will be required to disclose the funded status of the benefits as of the most recent valuation and to present as RSI multi-year trend information about funding progress, including the following information:

◦ Actuarial accrued liability (AAL)◦ Actuarial value of plan assets◦ Unfunded actuarial accrued liability (UAAL) (AAL minus plan assets)◦ Funded ratio (actuarial value of plan assets/AAL)◦ Ratio of UAAL to covered payroll◦ Notes to RSI regarding changes affecting the interpretation of trends in the

amounts reported

Implicit Rate Subsidies

An employer’s commitment to permit retirees to participate in the same group as active employees by paying the blended premium involves a real cost to the employer◦ For example, if claims costs are $6,000 per retiree, and the

retiree pays a blended premium of $3,600, the employer generally pays the difference, or $2,400 per retiree

The preceding is a function of the significant effect of age on claims costs (that is, claims costs for retirees in a combined group generally will be significantly higher than claims costs for active employees in the group)

Implicit Rate Subsidies The “implicit” subsidy is no less “real” than an explicit

contribution; it is a hard cash outlay (only obscured by the averaging)◦ For example, if the preceding employer nominally pays the

$3,600 blended premium for each active employee, but the cost of coverage (claims costs) for an active employee is only $2,800, the excess of $800 per active employee has nothing to do with providing coverage for active employees; it is a cash contribution by the employer toward the higher cost of coverage for retirees

Illustration of Funded Status Information

Govt. A Govt. BUnfunded Partially(PAYG) Funded

Actuarial accrued liabilities (AAL) (a) $13,500,000 $13,500,000Actuarial value of plan assets (b) -0-- 9,000,000

Unfunded actuarial accrued liabilities (UAAL) (a-b) 13,500,000 4,500,000

Funded ratio (b/a) 0.0% 66.7%Covered payroll (c) $7,600,000 $7,600,000UAAL as a % of covered payroll (a-b/c) 177.6% 59.2%

Effective Dates Staggered implementation based on a government’s

phase for implementing GASB 34 Statement 45 will be effective for the employer’s fiscal

year beginning after December 15, 2006 (Phase 1), 2007 (Phase 2), or 2008 (Phase 3)

Statement 43 will be effective for the plan’s fiscal year beginning after December 15, 2005 (if largest employer is Phase 1), 2006 (if largest is Phase 2), or 2007 (if largest is Phase 3)

Earlier implementation is encouraged

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Statement 49 — Accounting and Financial Reporting for Pollution Remediation Obligations

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Scope

Pollution REMEDIATION Obligations◦ Excludes prevention or control obligations◦ Excludes asset retirement obligations—

including landfills (Statement 18)◦ Excludes fines, penalties, toxic torts, product or

process safety outlays (NCGA Statement 4)

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Obligating Events

a. Compelled to take remediation action because of pollution-caused imminent endangerment

b. Violate pollution-prevention permit—for example, RCRA permit

c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

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Obligating Events (continued)d. Named, or evidence indicates govt. will be

named, in lawsuit to participate in remediation Excludes lawsuits having no merit

e. Govt. commences, or legally obligates self to commence Limited to portion legally required to complete

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Recognition Component approach

◦ Recognize components of liability as they become reasonably estimable

◦ Recognition benchmarks Cost accumulation, not fair value Current value, not present value Expected cash flow technique

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Two Contingencies—FAS 5 Recognition

Potential Payment Probability (a) x (b)

$0 60% $0$200 40% $80

$80

Potential Payment Probability (a) x (b)

$0 60% $0

$200 40% $80

$80

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Two Contingencies—FAS 5 Recognition Potential Payment Probability (a) x (b)

$0 60% $0

$200 40% $80

$80

Potential Payment Probability (a) x (b)

$0 60% $0

$200 40% $80

$80

$1

Now it’s 100% probable. But how much do you record?

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Which Outlays? All direct outlays attributable to remediation

◦ All outlays—not just incremental costs◦ Consistent with Statement 18◦ Includes payroll, pension, and OPEB

May include indirect outlays◦ General overhead◦ A matter of professional judgment

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Capitalization Criteria:

a. Cleanup to prepare property for sale (limited to fair value)

b. Polluted property bought and cleaned for use (limited)

c. Asset impaired and cleanup restores lost service utility (limited)

d. Acquire PP&E that have future alternative use, e.g., land (limited to future service utility)

For a. & b.—capitalize only if incurred within reasonable period

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Expected Recoveries from PRPs and Insurance Reduce expense (and expenditure, if

available) and . . . If not realized or realizable—

◦ Net against remediation liabilities When realized or realizable

◦ Accrete liability and report separate recovery assets (cash or receivable)

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Recoveries example

Expected outlays $10,000 Expected recoveries 3,000 Net remediation expense $7,000

If recovery not realized or realizable:• Pollution remediation liability = $7,000

If recovery realized or realizable:• Recovery asset (receivable) = $3,000• Pollution remediation liability = $10,000

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Financial Reporting Display

Government-wide◦ Program cost, or◦ Special item, or◦ Extraordinary item◦ No separate display of liability required

Governmental funds◦ Expenditures recognized when liquidated with

expendable available resources◦ No pollution liability, only payables for goods

and services used

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Effective Date & Transition Period beginning after December 15, 2007 Measure liabilities at beginning of that

period so beginning net assets can be restated

Apply retroactively if you have sufficient objective verifiable information to apply to prior periods

Early application encouraged

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GASB Statement No. 50

Pension DisclosuresAn amendment of GASB Statements No. 25 and No. 27

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Pension Disclosures Goal is to conform the pension disclosures

with the OPEB disclosures Notes to financial statements would disclose

the funded status of the plan as of the most recent actuarial valuation date. ◦ Defined benefit pension plans also would disclose

actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI.

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Effective Date Generally effective for periods beginning

after June 15, 2007

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GASB Statement No. 51

Accounting and Financial Reporting for Intangible Assets

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Background Paragraph 19 of GASB Statement 34

◦ Capital assets include, “land, improvements to land, easements, buildings, building improvements, vehicles, machinery, equipment, works of art and historical treasures, infrastructure, and all other tangible or intangible assets that are used in operations and that have initial useful lives that extend beyond a single reporting period” (emphasis added).

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Overarching Question What are the “intangible assets that are used in

operations” that are mentioned in Statement 34, paragraph 19?◦ APB Opinion 17, Intangible Assets

Issued in 1970 and had been authoritative guidance for governments prior to Statement 34

Did not define intangible assets, but listed them Patents Trademarks Copyrights

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Description An intangible asset is an asset that

possesses all of the following characteristics:◦ Lack of physical substance ◦ Nonfinancial nature◦ Initial useful life extending beyond a single

reporting period

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Lack of Physical Substance Intangible assets usually result from legal or

contractual rights and clearly have no physical substance.◦ Trademarks, copyrights, royalty interests

What about intangible assets closely related to tangible assets?◦ Right-of-way easement for a road◦ Water rights

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Right-of-Way Easement A right-of-way easement for a road depends on a

tangible asset—land—to enable a government to provide transportation services.

What is the asset?◦ The asset is not the land or the road.◦ The asset is the right-of-way easement (a right to use

the land for a specific purpose). It is a contractual right that does not have physical

substance.

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Lack of Physical Substance Accounts receivables and investment

securities do not have physical substance. Are they intangible assets?

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Nonfinancial in Nature Second characteristic of intangible assets is

that they are nonfinancial in nature.◦ Must not be in monetary form

Like cash and investment securities◦ Must be neither a claim nor a right to assets in

monetary form Like receivables

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Initial Useful Life Extending Beyond a Single Reporting Period

All capital assets, not just intangible assets, must have an useful life that extends beyond one reporting period.

IF NOT, expense when incurred.

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Common Types of Intangible Assets

Right-of-way easements Other types of easements Patents, copyrights, trademarks Land use rights Water rights Licenses and permits Computer software

◦ Purchased or licensed◦ Internally generated

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Scope Exceptions Intangible assets acquired or created

primarily for directly obtaining income or profit◦ Copyrights on books or recordings given to a

university so they can earn royalties Capital leases Goodwill from a combination transaction

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Basic Reporting Guidance All existing authoritative guidance related to

capital assets should be applied to these intangible assets◦ Purchased intangible assets recognized at

historical purchase price◦ Donated intangible assets recognized at fair value

when acquired

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Basic Reporting Guidance All intangible assets subject to Statement

should be classified as part of capital assets in government-wide, proprietary fund, and fiduciary fund statement of net assets.◦ Because intangible assets are considered capital

assets, they are reported as expenditures (not assets) in governmental fund financial statements.

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Basic Reporting Guidance Capital assets (including intangibles) that

are being depreciated or amortized are reported separately from capital assets that are not being depreciated or amortized.

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Amortization Allocation of the cost of intangible assets over their

estimated useful lives. Existing guidance for depreciation of capital assets

generally applies to amortizing intangible assets.◦ Amortization expense reported for intangible assets

with finite useful lives. Amortization period for contractual or legal rights

limited to period of expected service capacity.

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Amortization Example

Town has a right to use water from a lake for 20 years. What is the amortization period?

Same scenario, but town for a nominal amount has the right to renew the water rights for an additional 10 years. Amortization period?

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Amortization Example

Town has a right to use water from a lake for 20 years. What is the amortization period?◦ 20 years

Same scenario, but town for a nominal amount has the right to renew the water rights for an additional 10 years. Amortization period?◦ 30 years—assuming evidence exists town would

seek renewal

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Amortization

No amortization for intangible assets with indefinite useful lives◦ No factors (legal, contractual, technological, or

otherwise) currently exist that limit the useful life of the asset

How will a right-of-way easement for land under a road normally be reported?◦Part of capital assets not being

depreciated or amortized

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Internally Generated Internally generated intangible assets (IGIA) are

assets that are:◦ Created or produced by the government or an entity

contracted by the government; or◦ Acquired from a third party but require more than

minimal incremental effort to achieve expected service capacity

Examples◦ Computer software◦ Patents◦ Copyrights◦ Trademarks

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Internally Generated Statement provides a specified-conditions

approach to recognizing outlays associated with IGIA

Outlays incurred related to an IGIA that is considered identifiable should be capitalized only upon the occurrence of all three criteria on following slide.

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Internally Generated Three capitalization criteria

◦ Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the asset upon completion of the project;

◦ Demonstration of the technical or technological feasibility for completing the project so that the asset will provide its expected service capacity;

◦ Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset

Outlays incurred prior to meeting criteria should be expensed as incurred

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Internally Generated Computer Software

Specific guidance on applying the specified-conditions approach for recognition of internally generated computer software is provided

Internally generated computer software includes software developed:◦ By government’s own employees◦ By third party on behalf of government◦ Commercially but requiring more than minimal

incremental effort to put into operations

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Internally Generated Computer Software Guidance generally based on development stages

similar to AICPA SOP 98-1 Three stages

◦ Preliminary project stage Needs and alternatives for software developed

◦ Application development stage Design, software configuration and interfacing, coding, and

testing◦ Post-implementation/operation stage

Training and software maintenance

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Internally Generated Computer Software

Outlays associated with preliminary project and post-implementation/ operation stages should be expensed as incurred.

Outlays associated with application development stage should be capitalized if:◦ Preliminary project stage complete, and◦ Management implicitly or explicitly authorizes and

commits to funding.

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Impairment of Internally Generated Intangible Assets Stoppage during development

◦ Stopping development of computer software Impaired intangible assets reported at lower

of carrying value or fair value in statement of net assets.

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Effective Date and Transition

Effective date is fiscal periods beginning after June 15, 2009

Provisions generally should be retroactively applied

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Effective Date and Transition Exceptions for retroactively reporting intangible

assets:◦ Permitted but not required for IGIA and intangible

assets with indefinite useful lives at transition Right-of-way easements for land under roads not required

to be retroactively reported.◦ Required for all other intangible assets acquired in

fiscal years ending after June 30, 1980 by phase 1 or 2 governments

◦ Encouraged but not required for all other intangible assets of phase 3 governments

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GASB Statement No. 52

Land and Other Real Estate Held as Investments by Endowments

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Purpose Establish financial reporting standards for

land and other real estate held as investments by endowments

Endowments include:◦ Permanent and term endowments

Principal generally maintained in perpetuity or for a stated period of time or until the occurrence of an event

◦ Permanent funds

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Financial Reporting Reported at fair value in statement of net

assets Changes in fair value reported as

investment income Make applicable Statement 31, paragraph

15 disclosures◦ Method to estimate fair value if not market prices

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Effective Date For periods beginning after June 15, 2008

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GASB Statement No. 53 Accounting and Financial Reporting for Derivative Instruments

Issued June 2008

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Examples of Derivatives Interest rate swap

◦ Variable-rate to fixed-rate◦ Fixed-rate to variable-rate

Basis swap◦ Exchange payments based on the changes of two variable

rates Swaption

◦ Gives the purchaser of the option the right, but not the obligation, to enter into an interest rate swap

Commodity swap◦ Reduce exposure to a commodity’s price risk

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Principle

Fair value with hedge accounting◦ Changes in fair value of derivative are deferred for qualifying

transactions◦ Changes in fair value of derivative would not be deferred if

The related asset (for example, investment) is reported at fair value The hedge does not meet the effective criteria

How is that operationalized?

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Hedge Effectiveness

Consistent critical terms Quantitative techniques

◦ Synthetic instrument◦ Dollar offset◦ Regression◦ Other qualifying quantitative methods

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Effective Date and Transition

Effective for financial periods beginning after June 15, 2009

Implementation guide approved by the Board at the January 2009 meeting

GASB Technical Bulletin No. 2008-1

Determining the Annual Required Contribution Adjustment for Postemployment Benefits

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ARC Adjustment TB clarifies that actual amount of interest

(and principal, if any) may be used to make ARC adjustment.◦ That is, actual amounts may replace the estimate

of ARC adjustment that comes from method described in: Statement 27, paragraph 13 Statement 45, paragraph 16

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Effective Date For periods ending after December 15, 2008

(or for OPEB at least simultaneously with implementation of Statement 45)

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GASB Statement No. 54Fund Balance Reportingand Governmental Fund Type Definitions

Issued February 2009

Fund Balance Components Nonspendable fund balance Restricted fund balance Committed fund balance Assigned fund balance Unassigned fund balance

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Spendable

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Fund Balance Components

Nonspendable Fund Balance includes amounts that cannot be spent because they are either: (a) not in spendable form or

◦Inventories, prepaids, long-term loans

(b) legally or contractually required to be maintained intact.

◦Principal of a permanent fund

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Fund Balance Components

Restricted Fund Balance:Amounts that are restricted to specific purposes, pursuant to the definition of restricted in paragraph 34 of Statement 34, as amended by Statement No. 46.

◦ External parties◦ Constitution◦ Enabling legislation

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Fund Balance Components

Committed Fund Balance:Amounts that are committed for specific purposes by formal action of the government’s highest level of decision-making authority.

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Fund Balance Components

Assigned Fund Balance:Amounts that are intended by the government to be used for specific purposes, but are neither restricted nor committed.

◦ All amounts in other governmental funds not restricted or committed.

◦ Amounts in general fund intended for specific use

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Fund Balance Components

Unassigned Fund Balance:Residual classification for the general fund

◦ Has not been assigned to other funds and is not restricted, committed, or assigned to specific purposes within the general fund.

◦ Residuals for expired purposes in other funds

Stabilization Arrangements Refers to economic stabilization, revenue

stabilization, budgetary stabilization, and other similar intended “rainy day” funds.◦ Authority to set aside

Statute Ordinance Resolution Charter Constitution

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Stabilization Arrangements General Fund

◦ Restricted or committed, if meet criteria◦ Unassigned, if do not meet criteria

Special Revenue Fund◦ Only if resources derive from a specific restricted

or committed revenue source

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Note Disclosures Committed Fund Balance

◦ Government’s highest level of decision-making authority

◦ Formal action required to be taken to establish, modify, or rescind a fund balance commitment

Assigned Fund Balance◦ Body or official authorized to assign◦ Governmental policy

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Note Disclosures Disclose significant encumbrances by major

funds and nonmajor funds in aggregate Nonspendable fund balance (if not

separated on face)◦ Amount not in spendable form◦ Amount legally or contractually required to be

maintained intact

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Note Disclosures Restricted, committed, or assigned fund

balance◦ If displayed in aggregate on face

Disclose major restricted resources Disclose major commitments Disclose major assignments

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Note Disclosures Stabilization arrangements

◦ Authority for establishing By statute or ordinance?

◦ Requirements for adding to stabilization amounts◦ Conditions for spending amounts◦ Stabilization balance, if not apparent on face

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Note Disclosures Minimum fund balance policy

◦ May have in lieu of stabilization amounts◦ Describe policy for determining minimum amount

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Governmental Fund Type Definitions

General fund◦ Used to account for all financial resources not

accounted for in another fund Capital projects funds

◦ Used to account for financial resources that are restricted, committed, or assigned to expenditure for capital outlays Unless financed by proprietary funds or assets

to be held in trust for those outside government

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Governmental Fund Type Definitions Debt service funds

◦ Used to account for financial resources that are restricted, committed, or assigned to expenditure for principal and interest

Permanent funds◦ Used to account for resources restricted with

respect to “earnings” for support of government’s own programs

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Governmental Fund Type Definitions Special revenue funds

◦ Account for proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects Not used for resources held in trust for those outside

government.

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Special Revenue Funds Restricted or committed resources should be

“substantial” portion of inflows reported in fund. ◦ If not, should be reported in general fund. Investment earnings and transfers in may be

reported if restricted, committed, or assigned to specified purpose of fund.

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Effective Date and Transition For FYE June 30, 2011 and thereafter For fund balance reclassifications

◦ Restate fund balance for all prior periods presented

◦ Changes to fund balance information in statistical section may be applied prospectively

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Other GASB Projects

Current Projects◦ Postemployment Benefits Accounting and

Reporting ITC—Comment deadline is July 31, 2009

◦ Public and Private Partnerships◦ Reporting Units/Statement 14 Revisited◦ Recognition and Measurement Attributes

(Concepts Statement)◦ Service Efforts and Accomplishments—

Suggested Reporting Guidelines for Voluntary Reporting

Other GASB Projects Practice Issues

◦ Chapter 9 Bankruptcies◦ Codification of AICPA Accounting Guidance

included in Statements of Auditing Standards◦ Comprehensive Implementation Guide◦ Financial Instruments Omnibus◦ GAAP Heirarchy

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Other GASB Projects Research Agenda

◦ Chapter 9 Bankruptcy◦ Economic Condition Reporting◦ Electronic Financial Reporting◦ FASB Pronouncements (pre-1989)◦ Fair Value Measurement◦ Investment Omnibus

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GASB Resources

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GASB Website—www.gasb.org Downloads and ordering information

(Exposure documents, Statements, Q&As) Summaries of standards Project pages Technical inquiry form Staff contacts

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Questions?