Presented By Joel Knopp, CPA Audit Manager GASB 63/65 Implementation Presented By Joel Knopp, CPA Audit Manager

GASB 63/65 Implementation Concepts Statement No. 4 – Elements of Financial Statements GASB 63 – Reporting Deferred Outflows, Inflows and Net Position GASB 65 – Items Previously Classified as Assets and Liabilities

Concepts Statement No. 4

Background to GASB 63 and 65 Issued in June 2007 Establishes definitions for 7 elements that make up government financial statements: Assets Liabilities Deferred outflow of resources Deferred inflow of resources Net position Outflow of resources Inflow of resources

New Definitions New definitions focus on “Resources” Assets – resources with present service capacity that the government presently controls Liabilities – present obligations to sacrifice resources that the government has little or no discretion to avoid Deferred outflow of resources – a consumption of net assets by the government that is applicable to a future reporting period Deferred inflow of resources – an acquisition of net assets by the government that is applicable to a future reporting period

Asset Definition Assets – resources with present service capacity that the government presently controls Present service capacity – existing capability to enable the government to provide services and fulfill its mission Not associated with charges to recipients of the service Does not need to be able to be sold May be tangible or intangible Regulatory powers of a government – a resource but no present service capacity until exercised

Asset Definition (Con’t.) Control of an asset – ability of the government to utilize the resource’s present service capacity and to determine the nature and manner of the use Directly use the present service capacity to provide services or benefit Exchange the present service capacity for another asset Generally arises from contractual rights or legal ownership Sometimes a government can receive the benefit from the present service capacity of a resource but does not control the resource

Liability Definition Liabilities – present obligations to sacrifice resources that the government has little or no discretion to avoid Present obligation – a duty or responsibility to sacrifice resources that the government has little or no discretion to avoid based on a past event Legally enforceable from legislation (nonexchange) Constructive liability arising from exchange transaction Event must have occurred Commitments to provide services or acquire assets in the future do not constitute liabilities (ex., approval of budget, establishment of grant program)

Outflow of Resources Definition Outflow of Resources (expenses/expenditures) – a consumption of net assets by the government that is applicable to the reporting period Consumption of net assets results in: 1) a decrease in assets in excess of any related decrease in liabilities (ex., use of cash to make direct aid payments to recipients; loss of a building through fire) or; 2) an increase in liabilities in excess of any related increase in assets (ex., accrued payroll)

Inflow of Resources Definition Inflow of Resources (revenues) – an acquisition of net assets by the government that is applicable to the reporting period Acquisition of net assets results in: 1) an increase in assets in excess of any related increase in liabilities (ex., sale of taxable merchandise by a vendor) or; 2) a decrease in liabilities in excess of any related decrease in assets (ex., performing the eligibility conditions of a grant received in advance)

Applicability of the Reporting Period Measurement focus is critical to determining the nature and period to which an outflow or inflow of resources is applicable. Concept of “interperiod equity” the state in which current period inflows of resources equal current period cost of services so that the burden of the cost of services is borne by present-year taxpayers and revenue providers Economic resources focus (full accrual presentation) A relevant metric to assess accountability

Deferred Outflows of Resources Definition Deferred Outflow of Resources – a consumption of net assets by the government that is applicable to a future reporting period Same definition as “outflows of resources,” except that the outflow is applicable to a future reporting period, rather than to the current reporting period

Deferred Inflows of Resources Definition Deferred Inflow of Resources – an acquisition of net assets by the government that is applicable to a future reporting period Same definition as “inflows of resources,” except that the inflow is applicable to a future reporting period, rather than to the current reporting period

Net Position Definition Net Position – the residual of all other elements included in the statement of financial position Difference between (a) assets and deferred outflows of resources and (b) liabilities and deferred inflows of resources Theoretically equals the cumulative total of all resource flows statement activity from inception May be a positive or negative balance

Application of Definitions Recognition of deferred outflows of resources and deferred inflows of resources should be limited to those instances identified by GASB in authoritative pronouncements Scope of resources measured may be different, depending upon the measurement focus (full accrual vs. modified accrual vs. cash)

GASB 63

GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources and Net Position Issued June 2011 Effective for fiscal years beginning after December 15, 2011 Applies to Florida governments FYE 6/30/2013 and 9/30/2013

For Governmental Funds For Proprietary Funds Net approach is encouraged Balance Sheet approach is allowed For Governmental Funds Balance Sheet approach still appropriate Difference is still called Fund Balance

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

Statement of Net Position Assets + Deferred Outflows = Total Assets and Deferred Outflows Liabilities + Deferred Inflows = Total Liabilities and Deferred Inflows Net Position

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 assets components under Statement 34, but include the effects of deferred outflows and deferred inflows Governmental funds continue to report fund balance

Net Investment in Capital Assets Consists of capital assets, net of accumulated depreciation reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets Deferred outflows/inflows attributable to the capital assets or related debt should also be included in this component Unspent debt proceeds or deferred inflows should not be included in the calculation

Net Investment in Capital Assets “Capital-related debt” also includes construction retainages and accounts payable attributable to that construction (Implementation Guide 7.23.14) Net investment in capital assets should not include the portion of capital debt that was used to establish a bond and interest reserve (Implementation Guide 7.24.25)

Restricted Net Position Consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets - What liability will be liquidated with the restricted assets reported? Restricted component of net position should include the portion of capital debt that was used to establish a bond and interest reserve (Implementation Guide 7.24.25)

Example Sample City has the following financial statement elements in its Statement of Net Position: How do you calculate the net position components? Unrestricted Cash $ 2,000 Restricted Assets - Capital 4,000 Restricted Assets - Debt Service 1,000 Capital Assets, Net 15,500 Deferred Outflow - Derivative Construction A/P and Retainage (500) Capital Improvement Bonds (10,000) Net Position (13,000)

Example (Con’t.) Sample City Investment in Capital Restricted Unrestricted Total Unrestricted Cash $ 2,000 Restricted Assets - Capital $ 4,000 4,000 Restricted Assets - Debt Service 1,000 Capital Assets, Net $ 15,500 15,500 Deferred Outflow - Derivative Construction A/P and Retainage (500) Capital Improvement Bonds (5,000) - (10,000) $ 11,000 $ - $ 13,000

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

GASB 65

Items Previously Classified as Assets and Liabilities GASB Statement No. 65 Items Previously Classified as Assets and Liabilities Objective: Establishes accounting and financial reporting standards so certain items previously reported as assets and liabilities are now either: Reclassified as deferred outflows of resources or deferred inflows of resources Recognized as outflows of resources (expenses/ expenditures) or inflows of resources (revenues)

Before Statement 65 Recognition of deferred outflows of resources and deferred inflows of resources should be limited to those instances identified by GASB in authoritative pronouncements Before GASB 65, there was only: Statement 53 - Accounting and Financial Reporting for Derivative Instruments Statement 60 - Service Concession Arrangements

Scope and Applicability Amends or supersedes guidance for: Certain items previously required to be reported as assets and liabilities Requirements for the determination of major funds Addresses other statement of net position and governmental funds balance sheet presentation issues Applies to full accrual statements only, with the exception of specific paragraphs that also apply to governmental funds

Refundings of Debt For current and advance refundings: The difference between the reacquisition price and the net carrying amount of the old debt should be recognized as a deferred outflow or deferred inflow of resources Previously reported as deferred amount on refunding and reported as deduction or addition to new debt Recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter

Refundings of Debt (Con’t.) For lease provision changes resulting from a refunding by the Lessor of tax-exempt debt where: The perceived economic advantages of the refunding are passed through to the Lessee and The revised lease agreement is classified as a capital lease by the Lessee Then, the Lessee should adjust the lease obligation to the PV of the future minimum lease payments using the effective interest rate under the revised lease The difference is reported as a deferred outflow or inflow of resources.

Refundings of Debt – GFOA vs. GASB GFOA Position Application of proceeds from current refunding should be reported as debt service expenditures (2012 GAAFR pgs 473-474, Q8.27b in General Purpose Checklist) GASB Position Payments to escrow agents associated with current refundings should be reported as “other financing use” (GASB Codification D20.601 and AICPA A&A Guide, SLG, Paragraph 8.99)

Nonexchange Transactions Imposed Nonexchange Revenue Transactions: When resources or enforceable legal claim to resources are received before: The period for which property taxes are levied The period when resources are required to be used or use is first permitted by enabling legislation Then, deferred inflow of resources should be reported.

Nonexchange Transactions (Con’t.) Government-mandated Nonexchange Transactions and Voluntary Nonexchange Transactions: Resources transmitted before eligibility criteria are met (excluding time requirements) should be reported as assets by the provider and as liabilities by the recipient Resources received before time requirements are met but after all other eligibility criteria have been met, should be reported as deferred outflows of resources by the provider and deferred inflows of resources by the recipient

Sales of Future Revenues When a government receives proceeds in exchange for the right to cash flows from specific future revenue sources, the transferor government should report the proceeds as deferred inflow of resources and recognize as revenue over the duration of the sales agreement Previously reported as deferred revenue

Intra-Entity Transfers of Future Revenues When a sale/transfer of future revenues occurs within the same financial reporting entity (ex., primary government and component unit): Transferee government should report the amount paid as a deferred outflow of resources Transferor government should report the amount received as a deferred inflow of resources Recognized over the duration of the sales agreement Previously reported as deferred charge and deferred revenue

Debt Issuance Costs Old - GASB 62, para. 187, stated that “Issue costs should be reported in the statement of net assets as deferred charges” New - GASB 65, para. 15, states that “Debt issuance costs, except any portion related to prepaid insurance costs, should be recognized as an expense in the period incurred Prepaid insurance costs should be reported as an asset and recognized over the duration of the related debt

Initial Direct Costs of Operating Leases Old - GASB 62, para. 227c., stated that “Initial direct costs should be deferred and allocated over the lease term…” New - GASB 65, para. 17, states that “The Lessor should recognize initial direct costs of an operating lease as an expense/expenditure in the period incurred.”

Sale-Leaseback Transactions The gain or loss on the sale of property that is accompanied by a leaseback of all or any part of the property for all or part of its remaining economic life should be recorded as a deferred inflow of resources or deferred outflow of resources.

Acquisition Costs Related to Insurance Activities Old - GASB 62, para. 412 and 413, stated that “costs that vary with and are primarily related to the acquisition and renewal of insurance contracts should be capitalized and charged to expense in proportion to premium revenue…” New - GASB 65, para. 20, states that “Acquisition costs should be recognized as an expense in the period incurred.”

Lending Activities Discussed in Paragraphs 431-451 of GASB 62 Loan origination fees, except for points – Recognize as revenue in period received Points received by government lender – Report as deferred inflow of resources and recognize over the duration of the related loan Loan origination costs – Recognize as expense in the period incurred

Mortgage Banking Activities Discussed in Paragraphs 452-475 of GASB 62 If loan is held for investment, loan origination fees except for points, and loan origination costs – Recognize as revenue or expense Points received by government lender – Report as deferred inflow of resources and recognize over the duration of the related loan If loan is held for sale, all origination fees and costs should be reported as deferred inflows and deferred outflows until the loan is sold Once loan is sold, deferred inflows/outflows are recognized as revenues/expenses

Regulated Operations Rate actions of a regulator can result in a liability or a deferred inflow of resources being imposed on a regulated business-type activity If the obligation is to the customers, then report as a liability (ex., regulator requires refunds to customers) If an acquisition of nets assets from customers that is applicable to a future reporting period, then report as deferred inflow of resources (ex., regulator established current rates intended to recover costs that are expected to be incurred in the future) If gain or reduction of costs to be given to customers over future periods, report as deferred inflow of resources

Revenue Recognition in Governmental Funds Governmental fund revenues are recognized when they become both measurable and available. When an asset is recorded in a governmental fund but the revenue is not available, the government should report a deferred inflow of resources until the revenue becomes available.

Use of the Term “Deferred” Use of the term “Deferred” should be limited to items reported as deferred outflows of resources or deferred inflows of resources Major Fund Criteria Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for determining which elements meet criteria for major fund determination

Effective Date and Transition Effective for periods beginning after 12/15/2012 (FL FYE 6/30/14 and 9/30/14); earlier application is encouraged Accounting changes adopted to conform to the provisions of GASB 65 should be applied retroactively by restating for all periods presented, if practical If not practical, the cumulative effect, if any, should be reported as a restatement of beginning net position or fund balance for the earliest period restated Disclose the nature of the restatement and its effect

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