GASB Update Mike Behme, CPA, Director - BKD CPAs & Advisors Lora Sidor, MBA, CPA, CFE - Assistant Controller Wright State University This is an interactive session where participants are encouraged to select topics to discuss and ask questions. Use the “menu” to have participants select items to talk about. The menu is hyperlinked to the appropriate slide and is after each section, so you can easily navigate to the next desired section.

Today’s Agenda

GASB Statement No. 83, Certain Asset Retirement Obligations

GASB 83, Certain Asset Retirement Obligations To establish accounting & financial reporting standards for legal obligations to retire certain capital assets Previous guidance did not include obligations of these types of asset retirement obligations Effective for fiscal years beginning after June 15, 2018, early application is encouraged The GASB approved Statement 84 in January 2017. This standard aims to provide additional guidance on what is a fiduciary activity and how to report them. The standard will replace the former agency fund type with custodial funds, which will report all fiduciary activities that are not in trusts. It also provides guidance on fiduciary fund financial statements, though pension and OPEB plans will still follow GASB 67 and 74, respectively.

GASB 83 – Certain Asset Retirement Obligations Asset retirement obligations: Legally enforceable liability associated with retirement of tangible capital asset Retirement: Permanent removal of a capital asset from service (such as from sale, abandonment, recycling or disposal) Includes Decommissioning of nuclear power plant Disposal of radioactive material from retired X-ray machine Restoration of land by removing wind turbines In the first path, if a government has a component unit that holds assets for postemployment benefit, the government should report those assets in a fiduciary fund if the plan is administered through a trust that meets the criteria in paragraph 3 of Statement 67 for pensions or Statement 74 for OPEB. That criteria, if you recall, is that the contributions to the trust be irrevocable, the plan assets are dedicated to providing benefits under the arrangement, and the trust is legally protected from the government’s creditors. A government should also report assets in a fiduciary fund if the component unit is accumulating assets from entities that are not part of the reporting entity for either pensions (described in paragraph 116 of Statement 73) or OPEB (paragraph 59 of Statement 74). If the component unit holds assets for postemployment benefits that are not any of these arrangements, the activity is reported with governmental or business-type activities.

ARO – Recognition & Measurement In the first path, if a government has a component unit that holds assets for postemployment benefit, the government should report those assets in a fiduciary fund if the plan is administered through a trust that meets the criteria in paragraph 3 of Statement 67 for pensions or Statement 74 for OPEB. That criteria, if you recall, is that the contributions to the trust be irrevocable, the plan assets are dedicated to providing benefits under the arrangement, and the trust is legally protected from the government’s creditors. A government should also report assets in a fiduciary fund if the component unit is accumulating assets from entities that are not part of the reporting entity for either pensions (described in paragraph 116 of Statement 73) or OPEB (paragraph 59 of Statement 74). If the component unit holds assets for postemployment benefits that are not any of these arrangements, the activity is reported with governmental or business-type activities.

ARO – Disclosures General description of ARO & associated tangible capital assets Include source of AROs (federal, state, or local laws & regulations, contracts, or court judgments) Methods & assumptions used to measure ARO liabilities Estimated remaining useful life of tangible capital assets How financial assurance requirements, if any, are being met Amount of assets restricted for payment of ARO liabilities, if not separately displayed in financial statements If there is an ARO (or portion of ARO) that is incurred but not yet recognized because it cannot be reasonably estimated, that fact & the reasons therefore The GASB approved Statement 84 in January 2017. This standard aims to provide additional guidance on what is a fiduciary activity and how to report them. The standard will replace the former agency fund type with custodial funds, which will report all fiduciary activities that are not in trusts. It also provides guidance on fiduciary fund financial statements, though pension and OPEB plans will still follow GASB 67 and 74, respectively.

GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings & Direct Placements

Defines debt for disclosure purposes GASB 88, CERTAIN DISCLOSURES RELATED TO DEBT, INCLUDING DIRECT BORROWINGS & DIRECT PLACEMENTS Defines debt for disclosure purposes Establishes additional note disclosure requirements Effective for reporting periods beginning after June 15, 2018 Statement No. 88 was issued to improve financial reporting related to debt, particularly related to direct borrowings and direct placements. There was some concern expressed by the user community that as some governments have been using direct borrowings (for example, entering into a loan agreement with a lender) and direct placements (for example, a government issuing a debt security directly to an investor), information that is typically disclosed related to more standard types of government debt is not disclosed as consistently for these other debt vehicles. There may also be terms and conditions associated with direct borrowings or direct placements that are not associated with general obligation or revenue bonds that a government may issue more frequently. So, Statement No. 88 is intended to address those concerns, while also defining debt for disclosure purposes. The statement is effective for periods beginning after June 15, 2018.

For purposes of disclosures in notes to financial statements Debt Is A liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation established Debt Does Not Include The Statement defines debt for disclosure purposes only (not for legal or compliance purposes) as follows: debt is – read definition. The statement has a footnote reference on the word “fixed” that says interest to be accrued and subsequently paid (such as interest on variable-rate debt) or interest to be added to the principal amount of the obligation (such as interest on capital appreciation bonds) does not preclude the amount to be settled from being considered fixed. The footnote was added to make it clear that those types of debt are considered debt for disclosure purposes. The statement specifically excludes leases, except for those reported as a financed purchase of the underlying assets, and accounts payable from the definition of debt. Leases, except for contracts reported as a financed purchase of the underlying asset or accounts payable

Amount of unused lines of credit Assets pledged as collateral for debt New disclosures Amount of unused lines of credit Assets pledged as collateral for debt Terms specified in debt agreements related to significant Events of default with finance-related consequences Termination events with finance-related consequences Subjective acceleration clauses Separate disclosures The Statement requires the following information to be disclosed, in addition to the debt disclosures already required by other Statements: read items. These disclosures are required for direct borrowings, direct placements, and other debt, including GO and revenue bonds. Typically, these items are not associated with debt other than direct borrowings and direct placements, but should be disclosed if they are. Governments should also separate information in debt disclosures regarding direct borrowings and direct placements from other debt. This includes existing disclosures – the roll-forward of activity and the 5-year maturity schedules as examples.

GASB Statement No. 84, Fiduciary Activities

GASB 84, Fiduciary Activities Definition of fiduciary activity Report fiduciary funds Trust funds Custodial funds Fiduciary fund financial statements Effective for periods beginning after December 15, 2018 The GASB approved Statement 84 in January 2017. This standard aims to provide additional guidance on what is a fiduciary activity and how to report them. The standard will replace the former agency fund type with custodial funds, which will report all fiduciary activities that are not in trusts. It also provides guidance on fiduciary fund financial statements, though pension and OPEB plans will still follow GASB 67 and 74, respectively.

GASB 84 Implementation Guide ANTICIPATED TIMELINE Comment period January – February 2019 Final guide cleared in May 2019 The Board added an implementation guide project to its agenda in December 2017. The exposure draft is expected to be available for comment in January and February 2019, with a final guide cleared in May of 2019. Some of the issues expected to be considered for the implementation guide include – see slide.

GASB 84 Implementation Guide Potential Issues Addressed Interaction with Statement No. 14, The Financial Reporting Entity, as amended Application to pension & OPEB arrangements Application to activities that are not pension & OPEB Determination of fiduciary fund type Reporting fiduciary activities in fiduciary fund financial statements Reporting of fiduciary activities by standalone BTAs The Board added an implementation guide project to its agenda in December 2017. The exposure draft is expected to be available for comment in January and February 2019, with a final guide cleared in May of 2019. Some of the issues expected to be considered for the implementation guide include – see slide.

When Should a Public Entity Report Assets in a Fiduciary Fund?

Four Paths to the Determination Component units that provide postemployment benefits Component units that do not provide postemployment benefits Postemployment benefit arrangements that are not component units Statement No. 84 provides four paths to consider when a government should report assets in a fiduciary fund. The first two paths involve situations in which the assets are held by a component unit, either for postemployment benefits or for other activities. The third and fourth paths are for situations in which there is not a component unit involved, but the primary government is holding assets for postemployment benefits or for all other activities. One of the most helpful resources right now is Appendix C of the statement, which provides a flowchart to aid in the application. The Appendix is non-authoritative, so it does not replace understanding the statement itself, but it can be useful when determining when a government should use a fiduciary fund. Other activities Appendix C of the Statement provides a nonauthoritative flowchart to aid in the application

Component Units That Hold Assets for Postemployment Benefits (Path 1) Fiduciary if they are one of the following arrangements A pension plan administered through a trust that meets criteria in paragraph 3 of Statement 67 An OPEB plan administered through a trust that meets criteria in paragraph 3 of Statement 74 Assets from entities that are not part of reporting entity are accumulated for pensions as described in paragraph 116 of Statement 73 Assets from entities that are not part of reporting entity are accumulated for OPEB as described in paragraph 59 of Statement 74 If not, activity would be reported with governmental or business-type activities In the first path, if a government has a component unit that holds assets for postemployment benefit, the government should report those assets in a fiduciary fund if the plan is administered through a trust that meets the criteria in paragraph 3 of Statement 67 for pensions or Statement 74 for OPEB. That criteria, if you recall, is that the contributions to the trust be irrevocable, the plan assets are dedicated to providing benefits under the arrangement, and the trust is legally protected from the government’s creditors. A government should also report assets in a fiduciary fund if the component unit is accumulating assets from entities that are not part of the reporting entity for either pensions (described in paragraph 116 of Statement 73) or OPEB (paragraph 59 of Statement 74). If the component unit holds assets for postemployment benefits that are not any of these arrangements, the activity is reported with governmental or business-type activities.

Component Units That Hold Assets Not For Postemployment Benefits (Path 2) Fiduciary if assets are one or more of the following Administered through a trust or equivalent arrangement in which government is not a beneficiary Dedicated to providing benefits to recipients Legally protected from creditors of government For benefit of individuals Government does not have administrative or direct financial involvement Not derived from government’s provision of goods or services to those individuals In the second path, the government is still evaluating assets held by a component unit, but this time for purposes other than a postemployment benefit arrangements. If that occurs, the government should report the assets in a fiduciary fund if it meets one or more of the following three criteria, which focus on the trust (or equivalent arrangement) and the beneficiaries of the assets. If the assets are – read first bullet – those assets should be reported in a fiduciary fund. The next two criteria are very similar, but one focuses on situations in which individuals are expected to benefit from the assets, while the other is for organizations or other governments. If the assets are for the benefits of individuals, the government does not have administrative or direct financial involvement, and the asset are not derived from the government's provision of goods to those individuals, the government should report the assets in a fiduciary fund. We’ll talk about administrative or direct financial involvement in a minute. Finally, if the assets are accumulated for the benefit of organization or other governments that are not part of the financial reporting entity and are not derived from the government’s provision of goods or services to those organizations or governments, a fiduciary fund should be used. If none of the criteria are met, the activity would be reported with governmental or business-type activities. For benefit of organizations or other governments that are not part of financial reporting entity Not derived from government’s provision of goods or services to those organizations or other governments

Administrative or Direct Financial Involvement ADMINISTRATIVE INVOLVEMENT EXAMPLES Monitors compliance with requirements of activity that are established by the government or by a resource provider that does not receive direct benefits of the activity Determines eligible expenditures that are established by the government or a resource provider that does not receive direct benefits of the activity Ability to exercise discretion in how assets are allocated DIRECT FINANCIAL INVOLVEMENT EXAMPLE Provides matching resources for activities Some examples of administrative involvement include: see slide. Direct financial involvement would be something like providing matching resources for the activities. If the government has administrative or direct financial involvement, the activity would not be reported as a fiduciary activity.

Postemployment Benefits That Are Not Component Units (Path 3) Fiduciary activity if government controls the assets of the arrangement & arrangement is one of arrangements described in Path 1 A government controls assets if Government holds the assets Government has ability to direct use, exchange or employment of the assets in a manner that provides benefits to specified or intended beneficiaries If assets are not held by a component unit & the government does not control assets, activity is not reported In path three, we see the first path that does not involve a component unit. Note that the difference here is that the “plan” is not a component unit. If there is not a component unit, the government much determine if it controls the assets, in addition to meeting the criteria described in Path 1. So what does control mean? The government controls the assets if it holds the assets or has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended beneficiaries. If the government does not control the assets and they are not held by a component unit, the assets are NOT REPORTED by the government.

Other Activities (Path 4) If assets are not held by a component unit & are not held for a pension or OPEB arrangement, activity is fiduciary if all three of the following are met The government controls the assets The assets are not derived either Solely from government’s own-source revenues, or From government-mandated or voluntary nonexchange transactions (except pass-through grants for which the government does not have administrative or direct financial involvement) One of the criteria in Path 2 is met Assets are administered through a trust or equivalent arrangement, dedicated to providing benefits, legally protected Assets are for benefit of individuals, no administrative or direct financial involvement, not derived from provision of goods or services Assets are for benefit of organizations or other governments, not derived from provision of goods or services In the final path, we see a parallel to path 2, but in this situation there is no component unit. The activity is considered to be fiduciary if ALL THREE of the following are met – the government controls the assets (similar to Path 3); the assets are not derived either from the government's own-source revenues or from government-mandated or voluntary nonexchange transaction (one exception here); AND one of the criteria in path 2 are met. This is one spot where the appendix was very helpful, particularly in the “not derived” exception area.

Fiduciary Fund Types Pension trust funds, investment trust funds, private-purpose trust funds Trust agreement or equivalent arrangement should be present If not & is a fiduciary activity, report in a custodial fund Custodial funds Trust or equivalent arrangement is not present External portions of investment pools that are not held in trust should be reported in separate column under custodial fund umbrella Statement No 84 defined four types of fiduciary funds to be used and is very clear that to use a pension trust fund, investment trust fund, or private-purpose trust fund, a trust of equivalent arrangement should be present. If that trust or equivalent arrangement is not present, a custodial fund should be used. Statement 84 also specifies that external portion of investment pools that are not held in trust should be reported as a separate column, but still under the custodial fund umbrella.

GASB Statement No. 90, Majority Equity Interests

GASB 90 – Majority Equity Interests Improve consistency in measurement & comparability of majority equity interests in legally separate organizations Investment or component unit Component unit presentation when a government acquires 100% equity interest Measure as described in Statement No. 69, Government Combinations and Disposals of Government Operations Effective for periods beginning after December 15, 2018 – early application encouraged Apply retrospectively, except for certain provisions Objective is to a) enhance information the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and b) to simplify accounting for certain interest cost. Statement requires that interest cost incurred during the period of construction be recognized an expense in the period in which it is incurred in financial statements prepared using the economic resources measurement focus. This would remove the requirement that those costs be included in the historical cost of a capital asset for BTAs and enterprise funds. The treatment of interest in gov’t funds as an expenditure is unchanged. Changes adopted should be applied prospectively – for CIP, interest cost incurred after the beginning of the first reporting period to which the Statement is applied should not be capitalized. Therefore, governments would not need to remove any previously-capitalized amounts, even for CIP. Effective for periods beginning after December 15, 2018, with earlier application encouraged.

GASB Statement No. 87, Leases

GASB 87, Leases Current – operating or capital leases GASB 87 eliminates operating lease category New Definition of a Lease A contract that conveys control of the right to use another entity’s nonfinancial asset (underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction GASB 87 establishes a uniform approach to accounting for and reporting leases based on the principle that all leases are, in substance, financings. Establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. A lease is defined as a contract the conveys control of the right to use another entity’s nonfinancial asset (e.g. buildings, land, vehicles and equipment) in an exchange or exchange-like transaction (non-exchange transaction, i.e. lease land/building for $1/year, is not covered under Statement 87).

Scope Exceptions Short-term leases – defined as leases with maximum possible term of 12 months or less, including options to extend Contracts for services Leases that transfer ownership (financed purchase) Leases of inventory, intangible assets, biological assets Contracts that meet definition of service concession arrangements Supply contracts such as power purchase agreements Leases of investment assets & certain regulated leases (lessor only) Statement No. 87 does not apply to the following items: Short-Term Leases – A lease that at commencement of the lease term, has a maximum possible term under the lease contract of 12 months or less. Contracts for Services – Are explicitly EXCLUDED from the scope of this statement, unless the contract contains both a lease component and a service component. Statement Exclusions (does not apply to): Leases that transfer ownership at the end of the lease term (financed purchase of asset) – but DOES NOT include a lease with a bargain purchase option Licensing contracts for computer software Leases of intangible assets Leases of biological assets Leases of inventory Contracts that meet the definition of a Service Concession Arrangement Leases in which the underlying asset is financed with outstanding conduit debt Supply contracts, such as power purchase agreements (and likely coal contracts) Certificates of Participation were NOT excluded from the scope of Statement 87.

Lessee will recognize lease liability & intangible right-to-use asset Asset is reported as a capital asset Rent expense replaced with interest & amortization expense Interest recognized on lease liability & amortization on intangible lease asset over lease term (or underlying asset useful life, if shorter) Lessee Recognition Lease Liability – Initially measured at the PV of payments expected to be made during the lease term (including some other factors). Variable payments that are fixed in substance (i.e. Common Area Maintenance), should NOT be included in the measurement of the lease liability, but recognized as an outflow of resources. Lease Asset – Initially measured at the amount of the lease liability, plus any lease payments made before commencement of the lease, and any initial direct costs that are ancillary charges necessary to place the lease asset into service, less any lease incentives received from the lessor prior to commencement of the lease. Lease asset would be classified as an intangible lease asset and included within capital assets. Amortization of lease asset can be included within depreciation expense.

Lessees & lessors need to disaggregate non-lease components Lessor will recognize lease receivable & deferred inflow at lease inception Lease revenue recognized over lease term with corresponding reduction in deferred inflow Interest income on lease receivable recognized using the effective interest method Lessor will not derecognize the underlying asset Lessees & lessors need to disaggregate non-lease components i.e., service components, & contracts with multiple lease components Same model is used for the lessor side – just in reverse

Between blended component units & primary government Reporting requirements of GASB 87 do not apply Assets & related debt included in governmentwide financial statements Statement 87 provides guidance for intra-entity leases, including both when the lessee or lessor is a blended component unit or discretely presented. If the lessee or lessor is included as a blended component unit, the provisions of GASB 87 do not apply. The debt and assets of the lessor should be reported as if they were the primary government’s assets and debt.

Between discretely presented component units & primary government SAME TREATMENT AS ANY OTHER LEASE UNDER GASB 87 RECEIVABLES & PAYABLES UNDER LEASING TRANSACTIONS Should not be aggregated with other receivables & payables between the governments Should not be aggregated with lease receivables & payables with organizations outside the reporting entity If the lease arrangement is between the primary gov’t and DPCU (or between DPCU’s), they are treated in the same manner as any other lease under provisions of statement 87. However, related receivables and payables should not be combined with other amounts due to or from the governments included in the reporting entity, nor should they be combined with lease receivables and payables with organizations outside the reporting entity.

Effective for Periods Beginning after December 15, 2019 The statement is effective for period beginning after December 15, 2019, so we have some time to implement this standard. However, you may need that time. A great first step is to have an inventory of all contracts that might meet the definition of lease to begin to have an idea of the number of contracts that will need to be evaluated.

Implementation Guide Tentative Timeline Exposure draft – March 2019 Final – June 2019 Potential Topics Scope & application of definition of a lease Lease term & short-term leases Recognition, measurement, disclosure Leases with multiple components Intra-entity & related-party leases The GASB has added a project for an implementation guide specific to Statement No. 87. The tentative timeline is for an exposure draft to be available in March of 2019, with a final guide cleared in June of 2019. The potential topics cover basically all aspects of the statement, including, but not limited to – call out a few in the list above.

GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period

GASB 89, Accounting for Interest Cost Incurred Before the End of a Construction Period Interest cost during period of construction should be expensed as incurred No longer included in historical cost of a capital asset in BTA or enterprise funds going forward Effective for periods beginning after December 15, 2019 Apply prospectively – early application encouraged Objective is to a) enhance information the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and b) to simplify accounting for certain interest cost. Statement requires that interest cost incurred during the period of construction be recognized an expense in the period in which it is incurred in financial statements prepared using the economic resources measurement focus. This would remove the requirement that those costs be included in the historical cost of a capital asset for BTAs and enterprise funds. The treatment of interest in gov’t funds as an expenditure is unchanged. Changes adopted should be applied prospectively – for CIP, interest cost incurred after the beginning of the first reporting period to which the Statement is applied should not be capitalized. Therefore, governments would not need to remove any previously-capitalized amounts, even for CIP. Effective for periods beginning after December 15, 2018, with earlier application encouraged.

Mike Behme // mbehme@bkd.com Lora Sidor // lora.sidor@wright.edu Questions? Mike Behme // mbehme@bkd.com Lora Sidor // lora.sidor@wright.edu

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.