GASB Implementation Update

CSMFO

Palm Springs, CA

February 22, 2006

New guidance to be covered

Capital asset impairments (GASB 42) Statistical reporting (GASB 44)

Detailed session later Restrictions associated with enabling

legislation (GASB 46) Termination benefits (GASB 47)

Capital Asset Impairments

GASB Statement No. 42

Key issue

Accounting for assets that are impaired, but still in service

Private-sector

Authoritative guidance FASB Statement No. 144

Approach Identify circumstances indicative of potential

asset impairment Apply “recoverability” test

Example of recoverability test

Carrying value $50,000

Estimated future cash inflows

Use of asset $ 27,000

Salvage value $10,000

Total estimated future inflows $37,000

Carrying value over inflows $13,000

Result: Write down to fair value

Potential relevance of FASB guidance to public sector Relevant

Business-type activities that recover cost Less relevant

Subsidized business-type activities Irrelevant

Governmental activities

GASB approach

Rejected option One approach for business-type activities that

recover cost Another approach for other situations

Selected option One approach for all situations based on decline

in service potential (v. cash flows)

Step 1: Is there an indicator of impairment? Evidence of physical damage Changes in legal or environmental factors Technological changes or obsolescence Changes in manner or duration of use Construction stoppage

Note: change in demand is not, of itself, an indicator of impairment

Step 2: Is the impairment permanent? Only permanent impairments recognized

All impairments presumed to be permanent

Step 3: Is the “test of impairment” met?

Event or change must be outside the normal life cycle of the capital asset

The magnitude of the decline in service value must be large Typically discussed by governing body or

reported in the media

Step 4: What is the dollar amount of the impairment? What portion of the book value of the asset

is equivalent to the service potential lost as a result of the impairment? Method will depend upon nature of the

impairment

Reason Measurement

Evidence of physical damage

Changes in legal or environmental factors

Technological changes or obsolescence

Restoration cost approach

Service units approach

Service units approach

Reason Measurement

Change in manner or duration of use

Construction stoppage

Two alternatives Service units approach Deflated depreciated

replacement cost approach

Lower of carrying value or fair value

Restoration cost approach

Used when evidence of physical damage Create ratio:

Restoration cost/replacement cost Deflated restoration cost/historical cost

Apply to carrying value

Service units approach

Used for Changes in legal or environmental factors Technological changes or obsolescence Changes in manner or duration of use

Compare previous service potential to current service potential Ratio Remaining units at original unit cost

Deflated depreciated replacement cost approach Used for change in manner or duration of

use Compare book value of asset with what

would have been the book value of an asset acquired for the purpose for which now used

Lower of carrying value or fair value approach Construction stoppage (other than

temporary)

Subsequent recoveries

May not be recognized, even to the extent of previously recognized losses

Step 5: How should insurance recoveries be handled Applicable generally Treatment

Only recognize when realized or realizable Same year as loss? Net (as in examples) Restoration/replacement is a separate

transaction (as in examples) Other financing source in govt. funds

Potentially extraordinary item

Step 6: How should the impairment be reported? Three possibilities

Extraordinary item Special item

Must be subject to management control Program/operating expense

Effective date

Fiscal periods starting after 12/15/04 Earlier application encouraged

Statistical Reporting

GASB Statement No. 44

Financial position v. economic condition Financial position

Assets Liabilities Difference

Economic condition Financial position Fiscal capacity Service capacity

Need for change

Existing authoritative guidance framed too narrowly

Inconsistent application Lack of description in NCGA Statement 1 Lack of examples in NCGA Statement 1

Newly available information

Basic changes

Organize guidance based on objectives that are generally applicable

Detailed descriptions and illustrative material

Incorporation of data from SGAS 34

Five objectives

Provide information on financial trends. How has a government's financial position changed over time?

Provide information on revenue capacity. What is the government's ability to generate own-source revenues?

Five objectives (cont.)

Provide information on debt capacity. What is a government's debt burden and is it able to issue additional debt?

Provide demographic and economic information. What is the government's socioeconomic environment and how does the government compare to past periods and other governments?

Five objectives (cont.)

Provide operating information. How does the government operate? What are its resources? What is the context for understanding and

assessing its economic condition?

Financial Trend Data

Specific presentations

Information about net assets (10 years) Information about changes in net assets (10

years) Information about fund balances (10 years) Information about changes in fund balances

(10 years)

Information on Revenue Capacity

Specific presentations

Information about the revenue base (10 years)

Information about revenue rates (10 years) Information about principal payers or

remitters (current year and 9 years previous) Information about property tax levies and

collections (10 years)

Debt Capacity Information

Specific presentations

Ratios of outstanding debt (10 years) Ratios of general bonded debt (10 years) Information about direct and overlapping

debt (current year) Information about debt limitations (current

year and 9 years previous) Information about pledged revenue

coverage ( 10 years)

Demographic and Economic Information

Specific presentations

Demographic and economic indicators (10 years)

Information on principal employers (current year and 9 years previous)

Operating Information

Specific presentations

Number of government employees (10 years)

Demand for or level of service (10 years) Indicators of volume, nature, or use of

capital assets (10 years)

Effective date

Periods beginning after 6/15/05

Restrictions Associated with Enabling Legislation

GASB Statement 46

Definition of enabling legislation

Two elements Authorization to raise resources Legally enforceable requirement that those

resources be used for the purpose for which raised

Are such resources “restricted”?

Local level Typically there is legal enforceability by the

state State level

Sovereignty means there is nothing to stop a state from subsequently unilaterally changing the law

Compare to other types of legal restrictions

Treatment – general rule

“Tantamount to a legally binding agreement between the government and the resource providers (the taxpayers)”

Normally properly classified as “restricted,” but should be reported separately within the restricted net assets category (compare expendable and nonexpendable)

Potential reclassification

May be needed if… Resources subsequently spent for some other

purpose Subsequent legislation specifically changed the

purpose for which existing balances may be spent

Compare changes for resources raised subsequently

Never automatic Always judged separately by source

Effective date

Fiscal years beginning after 6/15/05 Early implementation encouraged

Termination Benefits

GASB Statement No. 47

Definition

Incentive for voluntary early termination Settlement for involuntary early termination

Termination benefits v. post-employment benefits Post-employment benefits (pensions/OPEB)

Related to the past Compensation for prior service

Termination benefits Related to the present Cost of discontinuing future service

Change from scope of prior guidance Previous guidance limited to special

termination benefits Voluntary Short duration

Now extended to all types of termination benefits Voluntary and involuntary Regardless of duration

Examples (voluntary)

Cash payments Enhancements to existing pension and other

postemployment benefits (OPEB) Healthcare that otherwise would not be

provided COBRA

Examples (involuntary)

Severance pay Continued access to health insurance

through the employer’s group insurance Career counseling and outplacement

services COBRA

Distinguishing termination from post-employment benefits Intended or viewed as compensation or as

incentive to terminate? Conditioned on termination prior to normal

retirement age? Duration so long as to function in essence

as part of the post-employment package?

Elements of cost

Benefits themselves Related fringe benefits Indirect effect upon other types of benefits

Exception for effect on defined benefit pension benefits and OPEB

Measurement target

Discounted present value of expected future benefit payments Application differs depending upon whether

benefit relates to healthcare

Measurement of healthcare-related benefits Two approaches

Total claims costs Age-adjusted premiums approximating claims

costs Option = unadjusted premiums (if neither large-scale

nor age-related)

Use OPEB guidance if benefits offered through existing defined benefit OPEB plan

Measurement of benefits not related to healthcare Option = current cost levels (if specific

amounts not payable on fixed or determinable dates)

Recognition – accrual basis

Voluntary termination benefits Offer accepted Measurable

Involuntary termination benefits Plan approved and communicated Measurable Defer and amortize amounts related to services

yet to be provided

Recognition – modified accrual basis When due and payable

Note disclosure

Description Year employer becomes obligated Each year service must be performed in

connection with involuntary plans Cost and change in actuarial accrued

liability Year employer becomes obligated

Note disclosure (cont.)

Significant methods and assumptions used As long as liability reported

Amounts not recognized because not measurable

Effective date

Portions related to OPEB Simultaneous with implementation of GASB 45

Other provisions Fiscal years beginning after 6/15/05

Early implementation encouraged

Applicable to all unpaid amounts at transition