What’s New in Governmental Accounting and Auditing

GASB Statement No. 65, Items Previously Reported as Assets and Liabilities Requires certain items to be reclassified as deferred outflows, deferred inflows, revenues or expense: Difference between the reacquisition price and the net carrying amount resulting from refunding debt should be reported as deferred outflows or deferred inflows Property taxes received before the levy period should be reported as deferred inflows Proceeds from the sale of future revenues reported as deferred inflows Resources received from grantor when the only eligibility criterion that hasn’t been met is a time requirement should be reported as deferred inflow Revenue of a governmental fund that is not recognized solely because it is not yet “available” should be reported as deferred inflow

GASB Statement No. 65, Items Previously Reported as Assets and Liabilities Requires certain items to be reclassified as deferred outflows or deferred inflows (cont.): Debt issuance costs should be recognized as an expense (write off any beginning balance upon implementation) Gain or loss resulting from sale-leaseback transactions should be reported as deferred inflows/outflows Loan origination fees and direct loan origination costs should be recognized as revenue and expense, but points should be deferred inflow If loan is held for sale, everything is reported as deferred inflows/outflows Can no longer use the term “deferred revenue” in the financial statements Effective date: years ending December 31, 2013 (June 30, 2014)

GASB Statement No. 66, Technical Corrections 2012 - an amendment of GASB Statements No. 10 and 62 Amends Statement No. 10 by removing provision that limits fund-based reporting of an entity’s risk-financing activities to the general fund and internal service fund types Risk-financing activities can now be reported in any fund type based on the nature of the activity to be reported Amends Statement No. 62 by modifying guidance on accounting for operating lease payments that vary from straight-line and clarifies how to apply Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, to be consistent with Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity

Pension Accounting and Financial Reporting

GASB Statement No. 67, Financial Reporting for Pension Plans Amends GASB 25, Financial Reporting for Defined Benefit Pension Plans, and applies to plan statements Financial statements are basically the same as under GASB 25 Required to report the components of net pension liability of the employer Net pension liability is the total pension liability less the plan’s fiduciary net position Actuarial valuations required at least every two years Discount rate will be long-term rate to extent of plan net position and bond rate once net position is depleted; calculate one blended rate

GASB Statement No. 67, Financial Reporting for Pension Plans Amends GASB 25, Financial Reporting for Defined Benefit Pension Plans, and applies to plan statements (cont.) Entry age normal actuarial cost method as a level percentage of pay is required Enhanced note disclosures RSI to include 10 years of information as follows: Schedule of changes in net pension liability and related ratios Schedule of employer contributions, if actuarially determined Schedule of investment returns Effective date: years ending June 30, 2014

GASB Statement No. 68, Accounting and Financial Reporting for Pensions Amends GASB 27, Accounting for Pensions by State and Local Governmental Employers, and GASB 50, Pension Disclosures, and applies to employer reporting of pension plans that are qualified trusts Government is required to recognize the net pension liability in full accrual statements The net pension liability is equal to total pension liability less plan fiduciary net position Requires more expense to be recognized immediately than in the past Changes in total pension liability resulting from current-period service cost, interest on total pension liability and changes in benefit terms must be recognized immediately

GASB Statement No. 68, Accounting and Financial Reporting for Pensions Changes in economic and demographic assumptions, differences between expected and actual experience are required to be included in pension expense in a systematic, rational manner over closed period equal to average expected remaining service lives of all employees provided benefits (active and inactive employees) Differences between projected earnings and actual earnings to be included in pension expense over five years For modified accrual statements, net pension liability recognized to the extent it is liquidated with available expendable resources Significant change for cost-sharing multiple employer plans  

GASB Statement No. 68, Accounting and Financial Reporting for Pensions Applies concepts of deferred inflows and outflows for any changes in net pension liability that are not included in pension expense Employer contributions subsequent to the measurement date should be reported as deferred outflows Enhanced note disclosure and RSI schedules required by GASB 67 Effective date: years ending June 30, 2015  

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Applies to mergers, acquisitions or transfers of operations, but does not apply to acquisition of another organization that continues to exist as a separate entity or acquisition of an equity interest in a separate entity Government merger is a combination of legally separate entities where no significant consideration is exchanged, and either: Two or more governments cease to exist as legally separate entities and are combined to form one new government, or One or more legally separate governments cease to exist and their operations are absorbed into one or more continuing governments If a new government is created, the assets, liabilities, and deferred inflows/outflows are measured at the carrying values of merging entities Continuing governments report carrying values as if combination occurred at beginning of the continuing government’s year  

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Government merger (cont.): Adjustments might be needed and impairment should be considered Need to eliminate any transactions between the merging governments that occurred before the combination Government acquisition is a combination in which one government acquires another (or the operations of another) in exchange for significant consideration Acquired entity becomes part of the acquiring government Measured at acquisition value except compensated absences, OPEB, pensions, termination benefit obligations, landfill closure costs, investments and derivatives must follow GASB standards   

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Government acquisition (cont.) Acquisition value is a market-based entry price defined as one based on an orderly transaction and represents price that would be paid for acquiring similar assets at the acquisition date Cannot recognize acquired goodwill Consideration may be financial (e.g., cash) and nonfinancial (e.g., capital assets) and may exceed the net position acquired, in which case the difference is reported as deferred outflows and amortized in a rational systematic manner  

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Government acquisition (cont.) If consideration paid is less than net position acquired, reduce the acquisition values of noncurrent assets. If allocation reduces the noncurrent assets to zero, the remainder will be a Special Item in the financial statements Can recognize a contribution in certain cases when the seller intends to accept a lower price in order to provide economic aid to the acquiring government (negative book value by itself does not constitute consideration unless the intent is to make a contribution) Acquisition costs are expensed  

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Transfer of operations is a government combination involving the operations of a government with no significant consideration exchanged Transfer of operations could be through annexation, redistricting or shared service arrangements (for example – public safety) Transfer of operations to a new government, such as formation of a library district or governments combining operations and transferring assets and liabilities to a new government Transferee government reports net fund balance received as a Special Item in statement of revenue, expenditures and changes in fund balance An example of an operation would be an entire fire department but not a single truck The transferred operation must continue to provide essentially the same services as prior to transfer  

GASB Statement No. 69, Government Combinations and Disposals of Government Operations Disposing government recognizes gain or loss as a Special Item Only include costs directly associated with the disposal Examples are included in Appendix C Effective date: years ending December 31, 2014  

GASB Statement No. 70, Accounting and Financial Reporting for Non-exchange Financial Guarantees A non-exchange financial guarantee is a guarantee of an obligation of a legally separate entity, including component units, which requires guarantor to indemnify a third-party holder under specified conditions whereby guarantor does not receive anything in return (non-exchange transaction) Does not apply to special assessment debt Requires a government to recognize a liability when there are qualitative factors that make it more likely than not (more than 50%) that the government will make a payment on the guarantee “More likely than not” differs from GASB 62 and FASB 5 definition with regard to contingencies which require liability if “probable”  

GASB Statement No. 70, Accounting and Financial Reporting for Non-exchange Financial Guarantees Qualitative factors to consider include: Bankruptcy Breach of debt contract (failure to meet debt covenants) Financial difficulty Amount recognized is the best estimate of the present value of future outflows expected to be incurred If only a range is available and no probability in the range is better than another, use minimum amount of the range Recognize expense and liability in full accrual statements but subject to expenditure recognition criteria in modified accrual statements (must be due and payable) Expenditure classification should be same manner as for grants or financial assistance payments to others  

GASB Statement No. 70, Accounting and Financial Reporting for Non-exchange Financial Guarantees For governments that issue guaranteed obligation, if required to repay a guarantor who makes payment on the obligation, the issuing government should reclassify that portion of the debt as a liability to the guarantor government The issuing government continues to report the liability until it is legally released If a government guarantees an obligation of a discretely presented component unit, there could be two liabilities outstanding and no receivable. However, if the component unit is blended they would record a receivable from the guarantor Lots of disclosures required Examples are included in Appendix C Effective date: years ending June 30, 2014  

GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date Amends GASB Statement No. 68, Accounting and Financial Reporting for Pensions, which requires an employer to recognize a net pension liability at the measurement date, which must be no earlier than the end of its prior fiscal year Once GASB 68 is implemented, contributions made between the measurement date and the end of the governments’ reporting periods would be reported as deferred outflow of resources GASB Statement No. 68 stated that if it is not practical to determine amounts of all deferred inflows/outflows at transition, then governments will report no deferred inflows or outflows, which would result in an understatement of beginning net position  

GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date To correct this potential understatement, the proposed Statement would require a state or local government, when transitioning to the new pension standards, to recognize a beginning deferred outflow of resources for its pension contributions made during the time between the measurement date of the beginning net pension liability and the beginning of the initial fiscal year of implementation This amount would be recognized regardless of whether it is practical to determine the beginning amounts of all other deferred outflows of resources and deferred inflows of resources related to pensions Effective date: when GASB Statement No. 68 is implemented  

GASB Exposure Draft, Implementation Guide No. 20XX-1 The GASB Comprehensive Implementation Guide is currently Level D GAAP and, therefore, has not been subjected to broad public exposure This pronouncement will elevate the Guide to Level B GAAP To accomplish this, GASB has put the Guide out for public exposure and due process Deadline for submitting written comments is December 31, 2014 Effective date: years ending June 30, 2016, or when The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments is implemented  

GASB Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments This pronouncement supersedes GASB Statement No. 55 and elevates the Comprehensive Implementation Guide to Level B GAAP GASB Statements continue to be Level A GAAP Technical Bulletins, Implementation Guides and literature of the AICPA that has been specifically cleared by GASB constitute Level B GAAP Effective date: years ending June 30, 2016, with early application permitted  

GASB Exposure Draft, Measurement of Elements of Financial Statements The objective of this concept’s statement is to identify concepts for the Board to consider when developing standards It does not require a change in existing GAAP, nor does it amend, modify or interpret existing GAAP This proposed concept’s statement would establish two measurement approaches to be used in financial statements as follows: Initial transaction date-based measurement represents the price or amount assigned when an asset was acquired or liability incurred Current financial statement date-based measurement is the amount assigned when an asset or liability is re-measured as of the financial statement date  

GASB Exposure Draft, Measurement of Elements of Financial Statements Establishes four measurement attributes: Historical cost - price paid to acquire an asset or amount received to incur liability Fair value - price received to sell an asset or paid to transfer a liability Replacement cost – price that would be paid to acquire an asset with equivalent service potential Settlement amount - amount for which an asset could be realized or a liability liquidated, other than in an active market  

GASB Exposure Draft, Fair Value Measurement and Application Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (same as FASB Statement No. 157) Considered an exit price and not adjusted for transaction costs (these are expensed) Need to use the principal market, which is the market with the greatest volume and level of activity for that asset or liability If no principle market exists, use the most advantageous market, which is the market that maximizes the price that would be received Valuation techniques should maximize use of relevant observable inputs and can use market, cost or income approaches Incorporates the fair value hierarchy of inputs from FAS 157 (Level 1, 2 and 3)  

GASB Preliminary Views, Fair Value Measurement and Application Takes into account the highest and best use for a nonfinancial asset Will also apply to liabilities such as interest rate swaps, taking into account nonperformance risk Defines an investment as a security or other asset that a government holds primarily for the purpose of income or profit, and its present service capacity is based solely on its ability to generate cash or to be sold to generate cash Certain investments would be excluded from fair value measurement, including investments in 2a7-like pools, investments in money market instruments with maturity less than one year, investments in life insurance policies, investments in common stock that are eligible for equity method, and investments in nonparticipating interest-earning investment contracts Additional disclosures required for investments in entities that calculate net asset value per share  

Current GASB Projects Other Postemployment Benefits (OPEB) Two proposals due to be issued in June - one relates to reporting by the OPEB Plan and the other relates to reporting by government employers Government employers will be required to recognize on the face of the financial statements a net OPEB liability Will follow requirements of GASB 68, Accounting and Financial Reporting for Pensions Leases Exposure draft expected in November 2014 Will require assets and liabilities to be recorded based on present value of future payments