GASB Update The views expressed in this presentation are those of Mr. Sundstrom. Official positions of the GASB are determined only after extensive due process and deliberation.

Current Board Members Member David Vaudt, Chair Jim Brown Bill Fish Michael Granof David Sundstrom Jan Sylvis Marcia Taylor Term Expires 2020—single term 2017—first term 2016—first term 2015—first term 2014—first term

Effective Dates—FYE June 30  Statement 60—Service Concession Arrangements -Statement 61—Financial Reporting Entity -Statement 62—Codification of AICPA and FASB Pronouncements -Statement 63—Deferrals Presentation  Statement 65—Assets and Liabilities—Reclassification and Recognition -Statement 66—Technical Corrections -Statement 67—Pension Plans -Statement 70—Nonexchange Financial Guarantees  Statement 68—Pension Accounting for Employer and Nonemployer Contributing Entities -Statement 69—Government Combinations and Disposals of Government Operations 3

Recently Issued Pronouncements Statements 69 and 70

Statement 69 Government Combinations and Disposals of Operations Effective for Periods Beginning After December 15, 2013

What Is Covered?  Combinations in which no consideration is provided -Government mergers -Transfers of operations  Integrated set of activities conducted and managed for the purpose of providing identifiable service associated with assets and liabilities  Combinations in which consideration is provided -Government acquisitions  Disposal of government operations reporting 6

How Should Mergers and Transfers of Operations Be Reported?  Assets and liabilities at carrying values -Presumption of GAAP  Mergers  New entity—Date of merger  Continuing entity—Beginning of fiscal year  Transfers of operations—Date of transfer  Adjustments  Accounting principles, policies, and estimates  Capital asset impairment  Transaction eliminations 7

How Should Acquisitions Be Reported?  Assets (and liabilities) at acquisition value -GAAP applicable to state and local governments is used for recognition -Market-based entry price measurements -Exceptions  Accounting for the difference -Goodwill–deferred outflow of resources -Contribution received or reduction of non-current assets 8

How Should The Disposals of Government Operations Be Reported?  Governments would report disposals of operations for all disposals of operations (transfers or sales). -Gains and losses reported as special items  Costs associated with disposals of government operations -Should consider all costs associated with disposals of operations 9

Statement 70 Nonexchange Financial Guarantees Effective for periods beginning after June 15, 2013

What Are Nonexchange Financial Guarantees?  Based the same definition of nonexchange that is found in Statement 33  Excludes exchange and exchange-like transactions  Entities addressed -Providers of financial guarantees -Recipients of financial guarantees 11

When Should The Guarantee Be Recognized?  Provider of financial guarantee -When qualitative factors and historical data, if any, indicate that it is more likely than not that a government will make a payment on nonexchange financial guarantees it extended, the government should recognize a liability  Recipient of financial guarantee -When nonexchange financial guarantee is legally released as an obligor from the obligation and from any liability to the guarantor, the government should recognize revenue 12

How Should The Guarantee Be Measured?  Provider of financial guarantee -Amount equal to the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee  If there is no best estimate, the discounted present value of the minimum amount in that range should be recognized  Recipient of financial guarantee -Amount equal to the reduction of the guaranteed liability should be recognized 13

2013

Statement 60 Service Concession Arrangements Effective for Periods Beginning After December 15, 2011

What Is An SCA?  The transferor conveys to the operator -Right and related obligation to provide public services through the operation of a capital asset -In exchange for significant consideration  The operator collects and is compensated from fees from third parties  The transferor determines or has the ability to modify or approve -What services the operator is required to provide -To whom the operator is required to provide the services, and -Prices or rates that can be charged for the services.  The transferor is entitled to significant residual interest in the service utility of the facility at the end of the arrangement 16

How Should Facilities Be Reported?  A new facility purchased or constructed by the operator or  An existing facility that has been improved by the operator, then the transferor should report -The new facility or the improvement as a capital asset at fair value when it is placed in operation, with -Any contractual obligations recorded as liabilities, along with a corresponding deferred inflow of resources 17

How Should Upfront Or Installment Payments Be Reported?  Up-front payment received or present value of installment payments reported as an asset  Any contractual obligations recorded as liabilities along with a related deferred inflow of resources  Revenue should be recognized as the deferred inflow of resources is reduced. -Systematic and rational manner over the term of the arrangement beginning when the facility is placed into operation. 18

When Should Liabilities Be Reported?  Liabilities should be recorded at their present value if a contractual obligation is significant and meets either of the following criteria: -The contractual obligation directly relates to the facility  Could relate to ownership of the facility or  Could arise from the responsibility to assure that the facility remains fit for the particular purpose of the arrangement –For example, obligations for capital improvements, insurance, or maintenance on the facility -The contractual obligation relates to a commitment made to maintain a minimum or specific level of service in connection with the operation of the facility  For example, providing a specific level of police and emergency services for the facility or providing a minimum level of maintenance to areas surrounding the facility 19

Statement 61 The Financial Reporting Entity— Omnibus Effective for Periods Beginning After June 15, 2012

What Are The Significant Effects?  Increase the emphasis on financial relationships  Raises the bar for inclusion  Refocus and clarify the requirements to blend certain component units  Improve the recognition of ownership interests -Joint ventures -Component units -Investments 21

What Are The Changes To The Inclusion Criteria?  Statement 14 requires inclusion if Potential Component Unit is fiscally dependant. That is, Primary Government has authority over: -Budget, or -Setting taxes and charges, or -Issuing debt  Statement 61 adds a requirement for a financial benefit or burden before inclusion is required. 22

How Have The Blending Requirements Been Narrowed?  Statement 14 requires blending if Primary Government and Component Unit have “substantively the same” governing body  Statement 61 modifies that requirement to also include: -A financial benefit/burden relationship, or -Primary Government has “operational responsibility” for Component Unit  Primary Government’s personnel manage activities of Component Unit like a fund, program, or department of the primary government 23

How Have The Blending Requirements Been Broadened?  Component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government will now be blended -Even if the component unit provides services to constituents or other governments, rather than exclusively or almost exclusively to the primary government 24

How Are The Current Disclosures Clarified?  Rationale for including each component unit  Whether it is discretely presented, blended, or included as a fiduciary fund  Disclosures focus on the relationship of the primary government and the component units 25

Statement 62 Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements Effective for Periods Beginning After December 15, 2011

How Are The Standards Impacted?  Statement 20 is superseded -All applicable pre-November 30, 1989 standards are contained in the GASB’s codification -All potentially applicable post-November 30, 1989 non-GASB standards will be “other accounting literature”  Guidance on 29 topics is brought into the GASB literature 27

Statement 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Effective for Periods Beginning After December 15, 2011

What Are The New Elements?  Deferred outflows of resources -A consumption of net assets by the government that is applicable to a future reporting period -Has a positive effect on net position, similar to assets  Deferred inflows of resources -An acquisition of net assets by the government that is applicable to a future reporting period -Has a negative effect on net position, similar to liabilities  Net position -The residual of all elements presented in a statement of financial position -= assets + deferred outflows – liabilities – deferred inflows 29

How Are These Changes Displayed?  Deferred outflows should be reported in a separate section following assets  Similarly, deferred inflows should be reported in a separate section following liabilities  Net Position components resemble net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows -Net investment in capital assets -Restricted -Unrestricted  Governmental funds continue to report fund balance 30

What Qualifies For Reporting As A Deferral?  Prior Standards -Statement 53—Accounting and Financial Reporting for Derivative Instruments -Statement 60—Service Concession Arrangements  Post-issuance Standards -Statement 65—Items Previously Reported as Assets and Liabilities -Statement 68—Pensions -Statement 69—Government Combinations 31

2014

Statement 65 Items Previously Reported as Assets and Liabilities Effective for Periods Beginning After December 15, 2012

What Should Be Classified As Deferred Inflows of Resources?  Governmental funds—resources not available for expenditure  Grants received in advance of meeting timing requirement  Deferred amounts from refunding of debt (credits)  Proceeds from sales of future revenues  Deferred gain from sale-leaseback  “Regulatory” credits 34

What Should Be Classified As Deferred Outflows of Resources?  Grant paid in advance of meeting timing requirement  Deferred amounts from refunding of debt (debits)  Cost to acquire rights to future revenues (intra-entity)  Deferred loss from sale-leaseback 35

What Should Be Classified As Outflows of Resources?  Debt issuance costs (other than insurance)  Initial costs incurred by lessor in an operating lease  Acquisition costs for risk pools  Loan origination costs 36

What Should Be Classified As Inflows of Resources?  Loan origination fees  Commitment fees (after exercise or expiration) 37

Statement 66 Technical Corrections— 2012 Effective for Periods Beginning After December 15, 2012

What Are The Clarifications?  Statement 62 with -Statement 13—Leases -Statement 48  Purchase of a loan or group of loans  Servicing fees related to mortgage loans  Statement 10 with -Statement 54—Risk financing pools 39

2014 and 2015 Pensions – GASB 68

Statement 68 Accounting and Financial Reporting for Pensions Statement 67 Financial Reporting for Pension Plans 41

Defined Benefit Pensions  Liabilities to the pension plan (payables)  Liabilities to employees for pensions -“Net pension liability” (NPL)  Total pension liability (TPL), net of pension plan’s fiduciary net position –TPL = actuarial present value of projected benefit payments attributed to past periods –Fiduciary net position as measured by pension plan -Single/agent employers recognize 100 percent of NPL -Cost-sharing employers recognize proportionate shares of collective NPL 42

Total Pension Liability Measurement

40 Basic Three-Step Measurement Approach ) Project Benefit Payments 2) Discount Future Payments Present Value of Payments 3) Attribute to Employee Service Periods

Actuarial Assumptions  Selection of all actuarial assumptions should be made in accordance with Actuarial Standards of Practice (unless specific guidance is provided by the GASB). 45

Projection of Benefits  The projection of pension benefit payments should include the effects of projected future salary increases and future service credits, if part of the benefits formula, as well as automatic COLAs  Ad hoc COLAs would be incorporated into projections of pension benefit payments only if an employer’s practice indicates that the COLAs are substantively automatic 46

Discount Rate  Should be a single rate that reflects: -The long-term expected rate of return on plan investments that are expected to be used to finance the payment of benefits to the extent that  Plan net position is projected to be sufficient to make projected benefit payments, and  Assets are expected to be invested using a strategy to achieve that return -A yield or index rate for 20-year, tax exempt general obligation bonds with an average rating of AA/Aa or higher to the extent that the conditions for the use of the long-term expected rate of return are not met 47

48 Crossover Point $ (millions) Years

Attribution Method  Single actuarial cost allocation method: -Based on entry age normal principles -Applied as a level percentage of payroll -Over periods beginning in first period in which the employee’s services lead to benefits under the plan (without regard to conditional service-related provisions such as vesting) and ending in last period of the employee’s service 49

Timing and Frequency of Measurement  The net pension liability is measured as of a date (the measurement date) no earlier than the end of its prior fiscal year, consistently applied from period to period  Total pension liability component of the net pension liability at the measurement date is determined either by -An actuarial valuation as of that date or -The use of update procedures to roll forward amounts to the measurement date from an actuarial valuation as of a date no more than 30 months (plus 1 day) prior to the fiscal year-end  For financial reporting purposes, actuarial valuations at least biennially -More frequent valuations are encouraged 50

Pension Expense Measurement

Immediate Expense Recognition  Expense recognition would be immediate for: -Pension benefits earned during the reporting period (service cost or normal cost) -Projected investment earnings on pension plan investments (long-term expected rate of return) -Interest cost on the total pension liability -Changes in benefit terms that affect the total pension liability 52

Deferred Expense Recognition  Expense would be deferred and recognized over a period equal to the average remaining service periods of active and inactive (including retirees) employees for: -Differences between expected and actual changes in economic and demographic factors -Changes in assumptions about economic and demographic factors  Differences between actual and projected earnings on plan investments would be deferred and recognized as pension expense over a five- year, closed period 53

Implications of the New Pensions Statements  Changes in the employer’s net liability likely to be recognized in pension expense more quickly 54

Cost-Sharing Multiple Employer Plans

Cost-Sharing Employers  A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the net pension liability of all the employers in the cost-sharing plan.  Approach uses a basis for allocation of proportionate share based on the employer’s contribution effort relative to that of all contributors 56

Additional Deferrals  Change in proportion -Net effect deferred -Expense recognition period—average expected remaining service lives of all employees  Contributions during the measurement period -Difference between the amount of contributions and the amount of the entity’s proportionate share -Expense recognition period—average expected remaining service lives of all employees 57

Governmental Funds Recognition

Modified Accrual  Net pension liabilities are normally expected to be liquidated with expendable available financial resources to the extent that pension benefits have matured—that is, pension benefit payments are due and plan net position is not sufficient for payments of benefits.  Liabilities to defined benefit pension plans, as well as liabilities for defined contribution pensions, are normally expected to be liquidated with expendable available financial resources when amounts are due pursuant to contractual arrangements or legal requirements. 59

What’s Next and Beyond  Two Implementation Guides -Initial guidance for pension plans was released in June Employer and nonemployer contributing entity guidance will follow in January 2014  Phase 2 of Postemployment Benefits project -OPEB and pensions not within scope of Statements 67/68 -Exposure Draft expected to be released in mid

Current Agenda Projects

Overview  Conceptual Framework -Measurement -Recognition  Fair Value Measurement and Application  Fiduciary Responsibilities  Leases  Other Postemployment Benefits  GAAP Hierarchy  Pension Employer Implementation Guide  Pensions—Deferral Transition 62

Research Agenda Projec ts

Pre-Agenda Research  Financial Reporting Model—Statement 34  Tax Abatement Disclosures 64

Questions? 65 Web site—