Technical update (webcast) YEAR-END GAAP TRAINING APRIL 2017 Technical update (webcast) Mark Thomas, Audit Partner, KPMG

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING APRIL 2017 Learning Objectives Be familiar with the new accounting pronouncements and understand the effects on the auxiliary organizations financial statements.

New GASB Pronouncements YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING APRIL 2017 New GASB Pronouncements GASB Statement No. 82, Pension Issues, March 2016 GASB Statement No. 83, Certain Asset Retirement Obligations, November 2016 GASB Statement No. 84, Fiduciary Activities, January 2017 GASB Statement No. 85, Omnibus, March 2017

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 82 GASB Statement No. 82, Pension Issues, March 2016 Effective date: for fiscal years beginning after June 15, 2016 (effective June 30, 2017) Addresses practical issues that were raised in the implementation of the new Pension Standard Presentation of payroll-related measures in required supplementary information Covered-employee (participants) payroll vs covered payroll Covered payroll is defined as the payroll on which contributions to a pension plan are based.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 82 (cont.) Selection of assumptions A “deviation” (used in Actuarial Standards of Practice) should not be considered to be in conformity with the requirements of Statements 67, 68 or 73. Classification of employer’s payments made by employers to satisfy employee contribution requirements.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 GASB Statement No. 83, Certain Asset Retirement Obligations, November 2016 Effective date: for fiscal years beginning after June 15, 2018 (effective June 30, 2019) Establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for AROs. An asset retirement obligation is a legally enforceable liability associated with the retirement of a tangible capital asset (that is the tangible capital asset is permanently removed from service).

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 (cont.) An entity that has a legal obligation to perform future asset retirement activities should recognize an ARO liability ARO results from the normal operations and include legally enforceable liabilities associated with all of the following activities: a. retirement of a tangible capital asset b. disposal of a replace part that is a component of a tangible capital asset c. Environmental remediation associated with the retirement of a tangible capital asset that results from the normal operation of the capital asset

YEAR-END GAAP TRAINING APRIL 2017 YEAR-END GAAP TRAINING ARO Examples Decommissioning of a power plant Removing a sewage treatment plant Decommissioning of a nuclear reactor

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 (cont.) Recognition – when liability is incurred (external and internal obligating event) and reasonably estimable External obligating event Approval of federal, state or local laws/regulations Creation of a legally binding contract Issuance of a court judgment Internal obligating event Occurrence of contamination Pattern of incurrence is based on the use of the tangible capital asset or placing the capital asset into operation Permanent abandonment Acquired tangible capital assets with an existing ARO

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 (cont.) Deferred Outflow of Resources – recognize when an ARO is recognized Initial Measurement of ARO - Based on the best estimate of the current value (using all available evidence) of outlays expected to be incurred If a tangible capital asset is permanently abandoned before it is placed into operation, it should be reported immediately as an outflow of resources (i.e. an expense)

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 (cont.) Subsequent Measurement of ARO a. Annual adjustment to current value for the effects of general inflation or deflation Significant change in estimated outlays – price increases/decreases; changes in technology; changes in legal or regulatory requirements; changes in type of equipment or services that will be used. if the liability increases/decreases before the time of retirement of the tangible capital asset: Adjust the corresponding deferred outflow of resources if the liability increases/decreases at or after the time of retirement of the tangible capital asset: recognize an outflow or inflow of resources

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 83 (cont.) Subsequent Measurement/Recognition of Deferred Outflow of Resources – systematic and rational manner a. over the entire estimated useful life of the tangible capital asset b. Remaining estimated useful life of the tangible capital asset Disclosure Requirements: General description of AROs and associated capital assets Methods and assumptions used to measure liabilities Estimated remaining useful life of the associated capital assets How any legally required funding and assurance provisions are met Amount of assets restricted for payment of the liabilities If an ARO has been incurred but is not recognized (not reasonably estimable), disclose the fact and reasons thereof.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 85 GASB Statement No. 85, Omnibus, March 2017 Effective date: for fiscal years beginning after June 15, 2017 (effective June 30, 2018) Enhance consistency in the application of accounting and financial reporting requirements including the following: Blending component units Goodwill Fair value measurement and application Postemployment benefits

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 85 (cont.) Blending component units Criteria for blending (Statement 14, par.53) for a primary government that is a business-type activity and uses a single column for financial statement presentation goodwill Recording acquisitions that occurred prior to the effective date of Statement 69, application of par.39 of Statement 69, and negative goodwill should not be reported. Fair value measurement and application Each unit of account of real estate held by insurance entities should be classified either as an investment (dependent of the definition in Statement 72) or as a capital asset Money market investments and participating interest-earning investment contracts (described in Statement 72) may be measured at amortized cost to the extent permitted by Statement 31 par.9.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING Statement 85 (cont.) Post employment benefits - Timing of measurement - Recognition and Measurement (on-behalf payments) - Presentation of payroll-related measures in RSI - Classification of Employer-paid member contributions for OPEB - Alternative measurement method for OPEB - OPEB provided through certain Multiple-Employer Defined Benefit OPEB Plans

Knowledge Check Question #1 MAY 2017 YEAR-END GAAP TRAINING Knowledge Check Question #1 Which of the following is not within the scope of Statement 83? Retirement of a tangible capital asset Environmental remediation associated with the retirement of a tangible capital asset that results from the normal operation of the capital asset Obligations for pollution remediation, such as asbestos removal, that result from the other-than- normal operation of a tangible capital asset Disposal of a replace part that is a component of a tangible capital asset

Knowledge Check Answer #1 MAY 2017 YEAR-END GAAP TRAINING Knowledge Check Answer #1 Answer - c. Obligations for pollution remediation, such as asbestos removal, that result from the other-than- normal operation of a tangible capital asset

Selected Recently Issued ASUs MAY 2017 YEAR-END GAAP TRAINING Selected Recently Issued ASUs ASU 2016-02, Leases ASU 2016-14, Not-for-profit entities ASU 2016-15, Statement of cash flows

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING ASU 2016-02, Leases Effective Date: Effective for fiscal years beginning after December 15, 2018. Early application is permitted. Modified Retrospective Transition – Lessees and lessors will apply the new guidance at the beginning of the earliest period presented in the financial statements in which they first apply the new standard. This may significantly change comparative period balance sheets from what was previously reported for many lessees. Key Fact: This standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING ASU 2016-02 (cont.) Key Impacts: Lessees will recognize most leases on Balance Sheet. New judgments are required to identify a lease. Lessee reassessments will require new processes and controls. Expanded quantitative and qualitative disclosures. Could potentially impact debt covenant ratio’s.

ASU 2016-14, Not-for-Profit Entities MAY 2017 YEAR-END GAAP TRAINING ASU 2016-14, Not-for-Profit Entities Effective Date: Effective for fiscal years beginning after December 15, 2017. Early application is permitted. Key Facts: Reduces the number of net asset classes presented from three to two: with donor restrictions and without donor restrictions; Requires all NFPs to present expenses by their functional and their natural classifications in one location in the financial statements; Requires NFPs to provide quantitative and qualitative information about management of liquid resources and availability of financial assets to meet cash needs within one year of the balance sheet date; Retains the option to present operating cash flows using either the direct or indirect method;

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING ASU 2016-14 (cont.) Key Facts (cont.): Requires NFPs to net investment expenses against investment return, thereby eliminating the option for gross presentation. The netted investment expenses are limited to external and direct internal investment expenses incurred during the period. Key Impacts: Eliminating the distinction between temporary and permanent restrictions will reduce reporting complexity and enhance understandability. Presenting expenses by nature and function will provide financial statement users with greater transparency about how an NFP uses its resources.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING ASU 2016-14 (cont.) Key Impacts (cont.): Enhancing liquidity and availability disclosures is intended to provide financial statement users with additional information about how an NFP manages its cash needs and how limits on resources may affect liquidity and financial flexibility. Liquidity information - Qualitative information about how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date Availability information - Quantitative information either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, about the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date

ASU 2016-15, Statement of Cash Flows MAY 2017 YEAR-END GAAP TRAINING ASU 2016-15, Statement of Cash Flows Effective Date: Effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. Disclose in the first annual period after adoption the nature of, and reason for, the change in accounting principle and describe the prior period information that has been retrospectively adjusted. Key Impact Reduce diversity in practice for classifying cash payments and receipts in the statement of cash flows for a number of common transactions.

YEAR-END GAAP TRAINING 25 MAY 2017 ASU 2016-15 (cont.) Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments Statement of Cash Flows Issue Consensus Issue 1 – Debt Prepayment or Extinguishment Costs. How should an entity classify a cash payment for debt prepayment or extinguishment costs? Classify as a cash outflow for financing activities. Issue 2 – Settlement of Zero-Coupon Bonds. How should an entity classify the cash payment for the statement of a zero-coupon bond? In addition to zero coupon bonds, the scope of this issue would include bonds issued at a discount with an insignificant cash coupon. For bonds within the scope of this issue, at settlement, classify the portion of the cash payment attributable to the accreted interest as a cash outflow for operating activities, and the portion attributable to the principal (original proceeds) as a cash outflow for financing activities. At settlement, classify the entire cash payment associated with other bonds issued at a discount (i.e., bonds excluded from the scope of this issue) as a cash outflow for financing activities. Issue 3 – Contingent Consideration Payments Made after a Business Combination. How should an entity classify a cash payment made after a business combination to settle a contingent consideration liability? Classify amounts that were not paid soon after the business combination took place into separate cash outflows for financing activities and operating activities. Classify as a cash outflow for financing activities the portion of the cash payment that is less than or equal to the amount of the liability recognized at the acquisition date for the contingent consideration, and classify the remainder of the cash outflow as an operating activity.

ASU 2016-15 (cont.) 26 YEAR-END GAAP TRAINING MAY 2017 Statement of Cash Flows Issue Consensus Issue 4 – Proceeds from the Settlement of Insurance Claims. How should an entity classify proceeds from the settlement of insurance claims? Classify the proceeds based on the nature of the loss. Reasonable judgment may be required to determine how to identify and classify each loss that is included in a lump-sum settlement. Issue 5 – Proceeds from the Settlement of Corporate-Owned Life Insurance (COLI) Policies. How should an entity classify insurance premiums paid and proceeds received from the settlement of a COLI policy? Classify premiums paid as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. Classify cash proceeds received as a cash inflow from investing activities. Issue 6 – Distributions Received from Equity Method Investees. How should an entity (an investor) classify distributions received from an equity method investee? Make an accounting policy election to use either the cumulative-earnings approach or the look-through approach for all investees. Cumulative-Earnings Approach. Presume that all distributions are returns on the investment, and classify them as operating inflows. However, if the investor’s cumulative distributions less distributions in prior years that were determined to be return of investment exceed the investor’s cumulative equity in earnings, consider the current period distribution up to this excess to be a return of the investment, and classify the amount as an investing inflow. Look-Through Approach. Classify distributions received based on the specific facts and circumstances. If the entity does not have the information necessary to evaluate the specific facts and circumstances of a distribution received from an investee, it would apply the cumulative-earnings.

ASU 2016-15 (cont.) 27 YEAR-END GAAP TRAINING MAY 2017 Statement of Cash Flows Issue Consensus Issue 7 – Beneficial Interests In Securitization Transactions. How should a transferor present the beneficial interest obtained in a securitization of financial assets? How should the transferor classify cash receipts from its beneficial interest in a securitization of trade receivables? The transferor would disclose the receipt of a beneficial interest in a securitization of financial assets as a noncash activity. The transferor would classify cash receipts from its beneficial interest in securitized trade receivables as a cash inflow from investing activities. Issue 8 – Application of the Predominance Principle. When should an entity separate cash receipts and cash payments and classify them into more than one class of cash flows? When should an entity classify the aggregate of those cash receipts and payments into one class of cash flows based on predominance? In the absence of specific guidance, use reasonable judgement to separate the identifiable sources and uses of an aggregate cash receipt or payment. Classify each separately identifiable source or use based on its nature. If cash receipts and payment have aspects of more than one class of cash flows and cannot be separated by source or use, the classification depends on the activity that likely would be the predominant source or use of cash flows.

Knowledge Check Question #2 YEAR-END GAAP TRAINING 28 MAY 2017 Knowledge Check Question #2 True or False: ASU 2016-14 reduces the number of net asset classes presented from three to two?

Knowledge Check Answer #2 YEAR-END GAAP TRAINING 29 MAY 2017 Knowledge Check Answer #2 True or False: True – ASU 2016-14 reduces the net asset classification to two: with donor restrictions and without donor restrictions.

YEAR-END GAAP TRAINING MAY 2017 YEAR-END GAAP TRAINING APRIL 2017 Questions? Presenter’s Contact Details Mark Thomas KPMG LLP 949-885-5630 mtthomas@kpmg.com