Auxiliary Organizations Technical Update Mark Thomas, Partner KPMG LLP May 19, 2015

Learning Objective: Be familiar with the new accounting pronouncements and understand its effect to the California State University System financial statements May 2015Year-End GAAP Training2

GASB Pronouncements GASB Statement No. 68, Accounting and Financial Reporting for Pensions, Issued June 2012 GASB Statement No. 69, Government Combinations and Disposals of Government Operations GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date—an amendment of GASB Statement No. 68 GASB Statement No. 72, Fair Value Measurement and Application May 2015Year-End GAAP Training3

GASB 68 Overview Addresses accounting and financial reporting for pensions that are provided to the employees of state and local governmental employers Employers should report in their financial statements a net unfunded pension liability Moving from a funding approach to an earned approach An employer should recognize its proportionate share of the collective net pension liability, pension expense, and deferred inflows/outflows of a cost-sharing plan May 2015Year-End GAAP Training4

Statement No. 72 GASB Statement No. 72, Fair Value Measurement and Application Issued February 2015 Effective for periods beginning after June 15, 2015 (effective June 30, 2016) Addresses accounting and financial reporting issues related to fair value measurements. May 2015Year-End GAAP Training5

Investments Investments – Defined as a security or other asset that (a)government holds primarily for the purpose of income or profit and (b)has a present service capacity based solely on its ability to generate cash or to be sold to generate cash. GASB 72 generally requires investments to be measured at fair value May 2015Year-End GAAP Training6

Investments A government is permitted in certain circumstances to establish the fair value of an investments that does not have a readily determinable fair value by using the net asset value per share (or its equivalent) May 2015Year-End GAAP Training7

Fair Value definition Fair Value – 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. Assumes highest and best use: Physically possible Legally permissible Financially feasible May 2015Year-End GAAP Training8

Valuation Techniques Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Market Approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets and liabilities. May 2015Year-End GAAP Training9

Valuation Techniques Cost Approach – reflects the amount that would be required to replace the present service capacity of an asset. Income Approach – converts future amounts to a single current amount. May 2015Year-End GAAP Training10

Fair Value Hierarchy Level 1 inputs – quoted market prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs – inputs other than quoted prices – included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs – unobservable inputs, such as management’s assumption of the default rate among underlying mortgages of a mortgage- backed securities. May 2015Year-End GAAP Training11

Fair Value of Liabilities Measurement of the fair value of a liability assumes that the liability is transferred to a market participant at the measurement date. May 2015Year-End GAAP Training12

Fair Value Measurement Exceptions Type of InvestmentsMeasurementApplicable Guidance Investments in nonparticipating interest-earning investment contracts Cost-based measureStatement 31, par. 8 Investments in unallocated insurance contracts Interest-earning investment contracts Statement 31, par. 8 Statement 59, par. 4 Money market investments and participating interest-earning investment contracts with maturity of < one year and are held by government other than external investment pools Amortized costStatement 31, par. 9 May 2015Year-End GAAP Training13

Fair Value Measurement Exceptions Type of InvestmentsMeasurementApplicable Guidance Investments held by 2a7-like external investment pools Amortized costStatement 31, par. 16 Fully benefit-responsiveness synthetic guaranteed investment contracts Contract valueStatement 53, par. 67 Investments in life insurance contracts Cash surrender value May 2015Year-End GAAP Training14

Fair Value Disclosures Fair value amounts Level of fair value hierarchy Valuation techniques Organize disclosures by type of asset or liability reported at fair value Additional disclosures regarding investments in certain entities that calculate net asset value per share (or its equivalent). May 2015Year-End GAAP Training15

Coming Soon... GASB Statements 73-75: Accounting and Financial Reporting for Other Postemployment Benefits (Plan and Employer) AICPA’s Audits of State and Local Governments – 2015 Edition May 2015Year-End GAAP Training16

Question #1 This valuation technique uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities. a.Income approach b.Cost approach c.Market approach d.Net asset value approach May 2015Year-End GAAP Training17

Answer #1 Answer: c. Market approach May 2015Year-End GAAP Training18

FASB Accounting Standards Update ASU Revenue from Contracts with Customers ASU – Presentation of Financial Statements – Going Concern ASU – Income Statement – Extraordinary and Unusual Items ASU Consolidation ASU – Interest – Imputation of Interest ASU – Compensation – Retirement Benefits ASU – Intangibles – Goodwill and Other – Internal-Use Software May 2015Year-End GAAP Training19

ASU : Revenue from Contracts with Customers Effective date: FY2019 for CSU The Core Principle and the Five-Step Model May 2015Year-End GAAP Training20 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation

ASU : Presentation of Financial Statements – Going Concern Effective date: FY2017 for CSU Disclosure required when there is substantial doubt or when substantial doubt has been alleviated primarily by management plans. Substantial doubt exists when it is probable that entity will not meet obligations (for a period of one year from the financial statements issuance date) May 2015Year-End GAAP Training21

Question #2 Which of the following is NOT one of the five steps to the revenue standard? a.Determine the transaction price b.Determine if the good was shipped or service performed c.Allocate the transaction price to the performance obligations in the contract d.Identify the contract with a customer May 2015Year-End GAAP Training22

Answer #2 b. Determine if the good was shipped or service performed May 2015Year-End GAAP Training23

Coming Soon... Proposed ASU: Changes to Not-for-Profit Financial Statements Net Asset Classification Intermediate Measures of Operations Statements of Cash Flows Other Key Changes May 2015Year-End GAAP Training24

Changes to Not-for Profit Financial Statements Net Asset Classes – reduce the number of net asset classes from three to two: Net Asset without Donor Restrictions (UR) Net Assets with Donor Restrictions (TR and PR Disclosures: Donor Restrictions and Board Designations Underwater Endowment Deficiencies Reclassified to NA with Donor Restrictions Additional Disclosures May 2015Year-End GAAP Training25

Changes to Not-for Profit Financial Statements Intermediate Measures of Operations Defined required intermediate operating measures based on two dimensions: Mission Dimension – business and charitable activity Availability Dimension – whether resources are available for current year activities Two Measures (Subtotals) – Presentation of Transfers: Operating Excess (Deficit) Before Transfers Operating Excess (Deficit) After Transfers May 2015Year-End GAAP Training26

Changes to Not-for Profit Financial Statements Statement of Cash Flows Direct method required Indirect reconciliation requirement eliminated Recategorization: -Cash flows on long-lived assets (from investing to operating) -Interest and dividends (from operating to investing) -Interest on Debt (from operating to financing) -Cash gifts restricted for acquisition of long-lived assets (from operating to financing) May 2015Year-End GAAP Training27

Changes to Not-for Profit Financial Statements Other Key Changes Reporting of Operating Expenses by Nature and Function Matrix not required but will be most practical Definition of management and general defined Implementation guidance on which activities report direct conduct and direct supervision of program activities Investment Return and Expenses Expenses netted in income May 2015Year-End GAAP Training28

Changes to Not-for Profit Financial Statements Investment Return and Expenses, continued…. Netted expenses include external expenses and direct internal expenses Disclosure of components of gross investment return no longer required Liquidity Disclosures Quantitative: Financial assets and financial liabilities Qualitative: Information about how the entity manages liquidity Time horizon used to manage liquidity. May 2015Year-End GAAP Training29

Q&A May 2015Year-End GAAP Training30

May 2015Year-End GAAP Training31