California Society of Municipal Finance Officers GASB Update The views expressed in this presentation are those of Mr. Bean. Official positions of the GASB are determined only after extensive due process and deliberation.

Effective Dates—June  Statement 57, paragraph 8—Agent OPEB Plans  Statement 59—Financial Instruments Omnibus  Statement 64—Derivative Terminations 2013  Statement 60—Service Concession Arrangements  Statement 61—Reporting Entity  Statement 62—Codification of AICPA and FASB  Statement 63—Deferrals Presentation 2014  Statement 65—Assets and Liabilities— Reclassification and Recognition  Statement 66—Technical Corrections 2

Effective date—periods beginning after June 15, 2012 Statement 61 The Financial Reporting Entity—Omnibus

A Reexamination Determine whether the standards for defining and presenting the financial reporting entity in Statement 14, as amended:  Include the organizations that should be included  Exclude organizations that should not be included  Display and disclose the financial data of component units in the most appropriate and useful manner  Are consistent with the current conceptual framework 4

Overview The most significant effects of the amendments are to:  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 5

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. 6

Inclusion Criteria Statement 14 requires inclusion of a Potential Component Unit if exclusion would make reporting entity’s statements “misleading or incomplete” Statement 61 eliminates “incomplete,” and emphasizes that the determination would normally be based on financial relationships  Such as significant financial benefit to/burden on the Primary Government that is other than temporary 7

Blending Requirements Statement 14 requires blending if Primary Government and Component Unit have “substantively the same” governing body Statement 61 expands 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 8

Blending Requirements The blending criteria is broadened to include component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government  Even if the component unit provides services to constituents or other governments, rather than exclusively or almost exclusively to the primary government 9

Blending Requirements Clarifies that the funds of a blended Component Unit have the same characteristics, reporting alternatives, and limitations as those of the Primary Government  Major fund reporting  Could be combined with other funds for display 10

Blending Requirements Clarifies how to blend component units in a business-type activity (BTA) reporting model: In the three basic statements:  For a multiple column BTA Additional column(s), as if funds of the Primary Government  For a single column BTA Consolidate Component Unit data into the single column  Present combining information in the notes Additional column(s), with Primary Government total column 11

Major Component Units Clarifies the types of relationships that should generally affect the major Component Unit determination:  Primarily financial relationships Significant transactions with the Primary Government Significant financial benefit/burden relationship  Could be based on the nature of services provided by Component Unit Eliminates consideration of each Component Unit’s significance relative to other Component Units 12

Reporting Equity Interests An asset should be recognized for an equity interest in:  A joint venture  A partnership  An investment  A component unit If the component unit is blended, the equity interest is eliminated in the blending process Minority interests would be classified in net assets as “Restricted, nonexpendable” Recognition and Measurement is based on Joint Venture equity interest requirements in Statement 14 13

Note Disclosures Clarifies that current disclosures require:  Rationale for including each component unit  Whether it is discretely presented, blended, or included as a fiduciary fund (Practical consideration: Can aggregate similar Component Units for disclosure) No new disclosures 14

Statement 62 Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements Effective date—periods beginning after December 15, 2011

Five Classifications Conflict with or contradict GASB standards  FASB Statement 4—Gain or loss on debt extinguishments  FASB Statement 43—Compensated absences Are not applicable to governments  FASB Statement 84—Convertible debt  FASB Statement 89—Changing prices Rarely applicable (excluded)  FASB Statement 19 –Oil and Gas Are applicable to governments  FASB Statement 5—Contingencies  FASB Statement 34—Capitalization of interest Will be addressed in GASB projects (applicable, but excluded)  APB Opinion16—Business combinations 16

Basic Guidance Statement 20 is superseded  All applicable pre-11/30/89 standards are contained in the GASB’s codification  All potentially applicable post-11/30/89 non-GASB standards will be “other accounting literature” Guidance on 29 topics is brought into the GASB literature, including:  Capitalization of interest costs (FAS 34)  Statement of net assets classification (ARB 43, APB 12, and FAS 6) 17

Significant Topics Special and extraordinary items (APB 30) Comparative financial statements (ARB 43) Related parties (FAS 57) Prior-period adjustments (FAS 16 & APB 9) Accounting changes and error corrections (APB 20 and FIN 20) Contingencies (FAS 5 and FIN 14) Extinguishments of debt (APB 26 and FAS 76) Troubled debt restructuring (FAS 15) Inventory (ARB 43) Leases (FAS 13, 22, and 98 and FIN 23, 26, and 27) 18

Specialized Topics Sales of real estate (FAS 66) Real estate projects (FAS 67) Research and development arrangements (FAS 68) Broadcasters (FAS 63) Cable television systems (FAS 51) Insurance enterprises (FAS 60) Lending activities (FAS 91) Mortgage banking activities (FAS 65) Regulated operations (FAS 71, 90, and 101) 19

Early Implementation— What are the Issues? GASB Statement 20, paragraph 7 option Guidance for government combinations FASB/IASB lease project 20

Statement 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Effective date—periods beginning after December 15, 2011

Background Concepts Statement 4 identifies 5 elements that make up a statement of financial position:  Assets  Liabilities  Deferred outflows of resources  Deferred inflows of resources  Net position This differs from the composition currently required by Statement 34, which requires the presentation of assets, liabilities, and net assets in a statement of financial position 22

Definitions 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 23

Display Requirements 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 24

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Disclosures Provide details of different types of deferred amounts if components of the total deferred amounts are obscured by aggregation on the face of the statements If the amount reported for a component of net position is significantly affected by the difference between deferred inflows or outflows and their related assets or liabilities—provide an explanation in the notes 26

Deferred Outflows/Inflows Statement 53—Accounting and Financial Reporting for Derivative Instruments Statement 60—Service Concession Arrangements 27

Related Project—Items Previously Reported as Assets and Liabilities Concepts Statement 4 provides that recognition of deferrals should be limited to those instances specifically identified by GASB The Board added a project to identify deferrals (for example, deferred revenue, prepaid expenses) that would be subject to requirements of Statement 63.  Currently reported as assets or liabilities. Should they be deferred outflows/inflows, or expenses/revenues? 28

Proposed Deferred Inflows of Resources 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 29

Proposed 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 30

Items that Remain Liabilities Derived tax revenue received in advance Premium revenues (risk pools) Grants received in advance of meeting eligibility requirements (other than timing) 31

Items that Remain Assets Grants paid in advance of meeting eligibility requirements (other than timing) Rights to future revenues acquired from outside the reporting entity “Regulatory” assets 32

Proposed 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 33

Proposed Inflows of Resources Loan origination fees Commitment fees (after exercise or expiration) 34

35 Other Projects in Process Recognition and Measurement Concepts (PV) Economic Condition Reporting—Financial Projections (PV) Pension Accounting and Reporting (Plan and Employer EDs) Technical Corrections—Final standard scheduled to be released in March Government Combinations—ED scheduled to be released in March Financial Guarantees—ED scheduled to be released in June Fair Value—Measurement and Application Other Postemployment Benefits 35

GASB’s Conceptual Framework Project Recognition and Measurement

Recognition and Measurement Approaches Concepts Statement— Objectives Develop recognition criteria for whether information should be reported in state and local government financial statements and when that information should be reported  Economic resources  Near-term financial resources Consider the measurement approaches that conceptually should be used in government financial statements  Initial values  Re-measured values 37

Economic Condition Reporting: Financial Projections

Project Objectives Develop a definition for fiscal sustainability Consider whether additional guidance or guidelines should be provided based on the information needed by users Determine the preferable methods of communicating any additional information, if applicable Basic Facts about GASB’s Project can be found at df df 39

What is Fiscal Sustainability? Fiscal sustainability is a government’s ability and willingness to generate inflows of resources necessary to honor current service commitments and to meet financial obligations as they come due, without transferring financial obligations to future periods that do not result in commensurate benefits. 40

Preliminary Views—Components Projections:  Total cash inflows and major individual cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations in cash inflows  Total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of fluctuations in cash outflows  Total financial obligations and major individual financial obligations, including bonds, pensions, other postemployment benefits, and long-term contracts, with explanations of the known causes of fluctuations in financial obligations  Annual debt service payments (principal and interest) Narrative discussion of the major intergovernmental service interdependencies that exist and the nature of those service interdependencies 41

Preliminary Views Financial projections should be:  Based on current policy in affect the projection periods.,  Informed by historical information, and  Adjusted for known events and conditions that affect the projection periods.  Current policy includes policy changes that have been formally adopted by the end of the reporting period but that will not be effective until future periods. The identification and development of assumptions for making financial projections should be guided by a principles-based approach.  Such an approach would set forth principles that require assumptions to be based on relevant historical information, as well as events and conditions that have occurred and affect the projection periods.  These assumptions should be (a) consistent with each other (where appropriate) and with the information used as the basis for the assumptions and (b) comprehensive by considering significant trends, events, and conditions Inflows and outflows should be projected on a cash basis of accounting, and financial obligations should be projected on an accrual basis of accounting Annual financial projections should be made for a minimum of five individual years beyond the reporting period for the purpose of external reporting All of the components of fiscal sustainability information are essential for placing the basic financial statements and notes to the basic financial statements in an operational or economic context and therefore should be required and communicated as required supplementary information

Financial Projections—Timetable March 16, 2012 comment deadline Public hearings have been scheduled for March and April

Research Agenda Electronic Financial Reporting Fiduciary Responsibilities Leases GAAP Hierarchy 44

Questions? 45 Web site—