Precision Experience Assurance GASB Update Purvis Gray & Company LLP June, 2011 Mark A. White CPA, Partner Purvis Gray & Company, LLP Ocala, Florida

Precision Experience Assurance Accounting Profession Reacts to New GASB Statements

Precision Experience Assurance Historical Perspective  GASB was established by the Financial Accounting Foundation (FAF) in 1984  They were delegated the authority to establish GAAP for state and local governments—authoritative  GASB Statement No. 34 issued in 1999(effective )  This equal 34 Statements in the first 16 years  GASB Statement No. 62 issued in 2011  This equals 28 Statements in the last 12 years  GASB No. 34 established the financial reporting framework that was previously lacking and now the dam has been broken open and the new pronouncements are flowing!

Precision Experience Assurance Recent GASB Statements  No. 53-Accounting and Financial Reporting for Derivative Instruments  No. 54-Fund Balance Reporting and Governmental Fund Type Definitions  No. 55-The Hierarchy of GAAP for SLG’s  No. 56-Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards

Precision Experience Assurance Recent GASB Statements  No. 57-OPEB Measurement by Agent Employers and Agent Multiple-Employer Plans  No. 58-Accounting and Financial Reporting for Chapter 9 Bankruptcies  No. 59-Financial Instrument Omnibus  No. 60-Accounting and Financial Reporting for Service Concession Arrangements  No. 61- The Financial Reporting Entity: Omnibus

Precision Experience Assurance Recent GASB Statements  No. 62-Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements  ED-Financial Reporting of Deferred Outflows and Inflows of Resources and net Position  PV-Pension Accounting and Financial Reporting by Employers

Precision Experience Assurance GASB No. 55 – GAAP Hierarchy  GASB is responsible for establishing GAAP for SLG’s, however the current GAAP hierarchy is set forth in the AICPA SAS No. 69—The Meaning of Present Fairly IAW GAAP. This statement incorporates the hierarchy of GAAP for SLG’s into the GASB’s authoritative literature. Hierarchy is;  GASB Statements and Interpretations  GASB Technical Bulletins and if made applicable to SLG’s, AICPA Industry Audit & Accounting Guides & SOP’s  AICPA Practice Bulletins if specifically made applicable to SLG’s and cleared by GASB  Implementation Guides published by GASB staff and widely recognized practices in SLG’s

Precision Experience Assurance GASB No Financial Reporting Guidance Found in AICPA SAS’s  The objective of this statement in to incorporate into the GASB’s authoritative literature certain accounting and financial reporting guidance that currently is presented only in the AICPA’s SAS’s.  The presentation of principles used in preparation of FS is more appropriately included in accounting and financial reporting rather than auditing literature. The standard addresses three issues not found in the accounting literature;  related party transactions,  going concern considerations and  subsequent events.  Does not change what you already know about these three areas already, rather it puts them in authoritative accounting literature rather than SAS’s.

Precision Experience Assurance GASB No. 57 – OPEB Agent Plans  Current standards for sole and agent employers provide that an employer may use the alternative measurement method if  the employer is a sole employer with fewer than 100 total plan members, or  the employer is an agent employer with fewer than 100 plan members and, for some reason, the agent multiple-employer plan either is not required to or does not choose to issue annual financial reports that include actuarial information at the plan administrative level.  The latter stipulations effectively disqualify agent employers from using the alternative method if the agent multiple-employer plan as a whole has 100 or more total plan members, is administered as a qualifying trust, and issues an annual financial report prepared in conformity with Statement 43.  The effects would be to permit aggregation of information derived in part from actuarial valuations and in part from use of the alternative measurement method, and to permit some employers to measure on a triennial schedule different from the plan’s two-year schedule. Considerations related to this issue are generally similar to those related to the request to permit some employers to obtain actuarial valuations on a triennial schedule.

Precision Experience Assurance GASB No. 58 – Bankruptcies  The objective of this Statement is to provide accounting and financial reporting guidance for governments that have petitioned for protection from creditors by filing for bankruptcy under Chapter 9 of the United States Bankruptcy Code.  It requires governments to re-measure liabilities that are adjusted in bankruptcy when the bankruptcy court confirms (that is, approves) a new payment plan

Precision Experience Assurance GASB No. 59 – Financial Instruments  Statement 31 provides guidance on the reporting of external investment pools. When the investments of an external investment pool meet certain credit quality and maturity requirements (2a7-like pools), Statement 31 provides that investments may be measured at amortized cost and that participants in the pool also may report their positions at amortized cost.  However, important authoritative guidance that clarifies what is a 2a7-like pool is only contained in the Comprehensive Implementation Guide (level “d” in the hierarchy of generally accepted accounting principles [GAAP hierarchy]).  In order to be able to use amortized cost, the investments held by a mutual fund must be of very high credit quality and short maturity. The high credit quality requirement is intended to limit the investment portfolio’s credit risk; the short maturity requirement is intended to limit interest rate risk.  In Securities and Exchange Commission (SEC) practice, mutual funds that meet the requirements of rule 2a7 are permitted to be labeled as money market funds.  The GASB’s intent was that a 2a7-like external investment pool is a governmental external investment pool that, if it was under the supervision (had filed with) the SEC, would meet all requirements for money market funds. This intent was clearly spelled out in the Comprehensive Implementation Guide.

Precision Experience Assurance GASB No. 60-Concession Arrangements  There is no single, widely-accepted definition of the term public/private partnership (PPP). However, many descriptions characterize a PPP as an arrangement between a government and a private sector entity to deliver a governmental asset (normally infrastructure or a public facility) and, often, the related public service (in some cases, the arrangement may be solely for the delivery of the public service related to an existing governmental asset).  The allocation of risks to the parties involved in a PPP can be quite complex. Because of this, determining the accounting and financial reporting for the property associated with these arrangements involves the consideration of conceptual topics including control over the use of the property, the bearing of risks and rewards related to the property, and governmental accountability for infrastructure assets and the services they provide. Examples of PPPs include:  A hospital authority transferring its assets, liabilities and hospital operations to a not-for-profit hospital system through a lease and management agreement, with the hospital authority’s ongoing operations being limited to issuing conduit debt for the not-for-profit hospital system and serving as a “pass-through” for governmental grants.  A university leasing land to a third-party developer for construction of a dormitory building, with the building being leased back to the university or the units being leased directly to university students and faculty by the developer.  A state leasing a portion of its turnpike system to a private consortium in exchange for an up-front payment.  A state entering into an agreement with a private consortium to build and then operate a tollway in exchange for an up-front payment.

Precision Experience Assurance GASB No. 61 – Financial Reporting Entity  The requirements of Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, to address reporting entity issues that have arisen since the issuance of those Statements. This Statement modifies certain requirements for inclusion of component units in the financial reporting entity. For organizations that previously were required to be included as component units by meeting the fiscal dependency criterion, a financial benefit or burden relationship also would need to be present between the primary government and that organization for it to be included in the reporting entity as a component unit.  Further, for organizations that do not meet the financial accountability criteria for inclusion as component units but that, nevertheless, should be included because the primary government’s management determines that it would be misleading to exclude them, this Statement clarifies the manner in which that determination should be made and the types of relationships that generally should be considered in making the determination.

Precision Experience Assurance GASB No. 62 – Pre 11/30/89 FASB Codification  GASB Statement 34, paragraph 17 provides that FASB and AICPA pronouncements issued on or before November 30, 1989, should be applied to the reporting of governmental and business-type activities "unless those pronouncements conflict with or contradict GASB pronouncements."  This means that financial statement preparers are currently required to identify which provisions within the FASB and AICPA pronouncements are applicable to them and generally is open to interpretation by financial statement preparers regarding what provisions in the FASB and AICPA pronouncements are considered conflicting and contradictory.  The project would benefit preparers and auditors by clearly identifying which FASB and AICPA pronouncement provisions to apply to state and local governments  The need for this project is made more urgent by the July 1, 2009, launch of the FASB Accounting Standards Codification, which supersedes all previous FASB and AICPA pronouncements as the official authoritative literature.  The objective of this project is to specifically identify provisions in Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions, Accounting Research Bulletins of the AICPA Committee on Accounting Procedure, and AICPA Accounting Interpretations, issued on or before November 30, 1989 (collectively, the "FASB pronouncements"), as referenced in paragraph 17 of GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, that do not conflict with or contradict GASB pronouncements and to incorporate those provisions into the GASB’s literature.  The statement literally contains the pre 11/30/89 codification

Precision Experience Assurance FYE Effective Dates  September 30, 2010  Statement No. 53 – Derivatives  September 30, 2011  Statement No. 54 – Fund Balance  Statement No. 59 – Financial Instrument Omnibus  September 30, 2012  Statement No. 57, paragraph 8 – OPEB Amendment  September 30, 2013  Statement No. 60 – Concession Arrangements  Statement No. 61 – Reporting Entity Omnibus  Statement No. 62 – Codification Pre 89’ FASB

Precision Experience Assurance Statement No. 53 Accounting and Financial Reporting for Derivative Instruments 16

Precision Experience Assurance Summary of No. 53 -Derivatives  Derivatives generally fit into two general categories;  Hedging derivative if effectiveness test is met  Record at FMV and defer the gain or loss  Investment derivative if effectiveness test is not met  Record at FMV with the other side of the entry going to investment gain or loss - OUCH!!  Thus most of the statement deals with meeting hedge effectiveness—the prize!  There are multiple quantitative methods to test effectiveness-pricing point measurements primarily  Effectiveness does not mean you are “in the money”

Precision Experience Assurance Common Derivative Instruments  Interest Rate Swaps  Futures contracts--NYMEX  Options—exchange-traded and others  Swaptions

Precision Experience Assurance Interest Rate Swap Example 19 Swap counterparty State or local government Variable-rate bond holders Variable-rate coupon payments; SIFMA Variable payment received: 67% of 1- month LIBOR Fixed payment 5.0%

Precision Experience Assurance Synthetic Instrument Method (Cash Flow Hedges) Swap Notional Amount $ 10,000,000 Pay Fixed - Receive Variable From Counterparty Swap Fixed Rate 4% SWAP Index 70% 1 Mo. LIBOR Fixed Swap Variable Swap Net Variable Pmnt. To Receipt From Derivative Bond Total Synthetic FYE Counterparty (Pmnt) Receipt Interest Payments Rate 9/30/2010 $ (400,000) $ 100,000 $ (300,000) $ (95,000) $ (395,000) 3.95% Analysis of Synthetic Instrument Test Synthetic Rate 3.95% Swap Fixed Rate 4.00% Percentage Ratio 98.75% Is Ratio Between 90% and 111%?Pass 20

Precision Experience Assurance Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions 21

Precision Experience Assurance Summary of Statement No. 54  Fund Balance Classifications  New fund balance presentation hierarchy is based primarily on the degree of spending constraints placed upon use of resources for specific purposes versus availability for appropriation  The five new presentation classifications go from non- spendable down through three levels of less binding spending constraints to an unassigned level, which is available for any spending of the government. 22

Precision Experience Assurance New Fund Balance Presentation Classifications  Non-spendable—Inventory, long-term receivables, minority interest  Restricted—must be legally enforceable,  Committed—Formal action of governing body  Assigned—Similar to designations expressing intent  Unassigned—Available for any purpose 23

Precision Experience Assurance Restricted Fund Balance Constraint on use must be legally enforceable, and typically externally imposed by creditors, grantors, contributors, or laws or regulations of other governments

Precision Experience Assurance Committed Fund Balance  Constraint on use is imposed by the government itself, using its highest level of decision making authority  Amounts classified as “committed” are not subject to legal enforceability like restricted resources; however, spending constraint can be removed or changed only by taking the same highest level action  Action to constrain resources should occur prior to end of fiscal year, though the exact amount may be determined subsequently 25

Precision Experience Assurance Assigned Fund Balance  Amounts intended to be used for specific purposes  Intent is expressed by  The governing body itself, or  A body (budget or finance committee) or an official authorized by the governing body to assign resources for specific purposes  Residual amounts in governmental funds other than the general fund are assigned 26

Precision Experience Assurance Difference Between Committed and Assigned  Committed requires:  The commitment be made by the governing body  The action be formal and reversible only by the same action  A specified purpose  Assigned really only for specified purposes in the general fund – allows for management’s intentions  In other funds, assigned is simply a residual for amounts that don’t meet the committed criteria

Precision Experience Assurance Unassigned Fund Balance  Available for any purpose  Reported only in the general fund, except in cases of negative fund balance  Negative balances in other governmental funds are reported as unassigned 28

Precision Experience Assurance Other Key Provisions of Statement 54  Fund Type Definitions Clarified  Special revenue  Capital projects  Debt service  Paragraph 30 requirements highlighted 29

Precision Experience Assurance Special Revenue Funds Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. 30

Precision Experience Assurance Accounting Profession Reluctantly Accepts New GASB Statements

Precision Experience Assurance Preliminary Views-Pension Accounting and Financial Reporting  Currently a pension liability is reported only when a government contributes less than the annual required contribution calculated by actuaries  Pension benefits are compensation promised by governments to their employees in exchange for work performed.  The government is primarily responsible for the any unfunded portion of the pension obligation.  The unfunded portion of the pension should be reported as a net pension liability in the financial statements of the government.

Precision Experience Assurance Timetable  Preliminary Views—was released on June 16, 2010  Public hearings—were held in October 2010  Exposure Draft expected to be issued in June

Precision Experience Assurance 34 Other GASB Current Projects  Statement of Net Position  Deferred Inflows and Deferred Outflows: Omnibus  Economic Condition Reporting: Fiscal Sustainability  Recognition and Measurement Attributes— Conceptual Framework Project  Government Combinations  Statement 53—Derivative Termination Provisions 34

Precision Experience Assurance GASB Research Agenda  Electronic Financial Reporting  Fair Value Measurement  Fiduciary Responsibilities  Financial Guarantees 35

Precision Experience Assurance GASB Update Purvis Gray & Company LLP June, 2011 Mark A. White CPA, Partner Purvis Gray & Company, LLP Ocala, Florida