GASB UPDATE Technical Agenda and Practical Implementation Tips Robert H. Attmore, Chairman, GASB Eric S. Berman, CPA NASACT August 2010

Accounting and Financial Reporting For Intangible Assets GASB 51 – A very shallow dive

What Are They? An intangible asset is an asset that possesses all of the following characteristics: Lack of physical substance Nonfinancial nature Initial useful life extending beyond a single reporting period 3

Common Types of Intangible Assets Right-of-way easements Other types of easements Patents, copyrights, trademarks Land use rights Licenses and permits Computer software Purchased or licensed Internally generated 4

How Do You Account for Them? All intangible assets subject to Statement 51 should be classified as capital assets: All existing authoritative guidance related to capital assets should be applied to these intangible assets Because intangibles are considered capital assets, not reported as assets in governmental fund financial statements 5

Internally Generated Intangibles – e.g. Software – supersedes AICPA SOP 98-1 PreliminaryDevelopmentOperations Determination of objective of project and is feasible Demonstration that intent is there to complete the project Management authorizes and commits to funding Software is coded, tested and implemented Software is accepted and operating EXPENSECAPITALIZEEXPENSE Future betterments that add to useful life - Capitalize

Amortization Existing guidance for depreciation of capital assets generally applies to amortizing intangible assets Exception for intangible assets with indefinite useful lives: No factors currently exist that limit the useful life of the asset Estimating a useful life does not mean indefinite useful life Permanent right-of-way easement versus computer software Intangible assets with indefinite useful lives should not be amortized 7

8 Statement 53 Accounting and Financial Reporting for Derivative Instruments Note – Only the BASICS

Types of Derivatives that Accountants Encounter

Executive Summary of GASB Statement No. 53 What is a derivative? It is a contract that has settlement factors which could be one or more reference rates, notional amounts, payment provisions or any combination It has leverage It can be settled net

Executive Summary of GASB Statement No. 53 What are settlement factors? Reference Rate – an interest rate, security price, commodity price, exchange rate, other variables Notional Amount(s) – the face amount of the contract, which includes the number of units, shares, bushels, pounds etc.

Executive Summary of GASB Statement No. 53 Requirements of the statement: Derivatives should be reported on the statement of net assets at fair value except for synthetic guaranteed investment contracts Unless hedging derivative, changes in fair values are part of investment revenue in statement of activities, changes etc. If hedging, then changes are deferred inflows or outflows If hedged derivative is terminated, P&L event

Executive Summary of GASB Statement No. 53 How to measure fair value Market price if there is a market Discounted expected cash flows One of a number of different pricing models and methods IF using a pricing service and the method to calculate is NOT disclosed by the service, then management must make an assessment of propriety based on the information received

Executive Summary of GASB Statement No. 53 Termination occurs when Hedging derivative not effective Government becomes exposed to adverse changes in fair values or cash flows Hedged asset or liability is sold or retired, refunded or defeased Derivative is terminated Forward transaction occurs (e.g. sale of bonds or purchase of commodity) Reporting – investment revenue, balance sheet activity caption increase (decrease) upon hedge termination

GASB Effective DatesFYE June 30 June 30, 2010 – Statement 45Phase III – Statement 51Intangible Assets – Statement 53Derivative Instruments – Statement 57OPEB Measurements, except paragraph 8 – Statement 58Chapter 9 Bankruptcies June 30, 2011 – Statement 54Fund Balance Reporting June 30, 2012 – Statement 57OPEB Measurements, paragraph 8 15

Pension Accounting and Financial Reporting Preliminary Views

Scope of the Postemployment Benefits Project Basic approach for pension benefits Who should report the liability? How should the liability be measured? Salary projections, service credits, discount rate, etc. ? Cost sharing plan reporting for employers Pension plan reporting What disclosures are needed? Other postemployment benefits 17

Pension Accounting and Financial Reporting Preliminary Viewsscope Employer measurement and recognition issues Items currently being discussed Plan reporting Note disclosures 18

Who has the obligation? The pension plan becomes the primary obligor, and the employer becomes the secondary obligor, for the pension obligation to the extent that plan assets have been accumulated to provide for the payment of benefits to employees or their beneficiaries when due. The employer remains the primary obligor for the pension obligation to the extent that it is unfunded. 19

Net Pension Liability The unfunded accrued benefit obligation meets the definition of a liability (that is, it is a present obligation, and the employer has little or no discretion to avoid a sacrifice of its resources to satisfy the obligation) and is measurable with sufficient reliability to be recognized as a liability in basic financial statements of a sole or agent employer. 20

Projection of Future Benefit Payments The effects of the following projected future changes should be included in the projection of benefits for the purpose of measurement of the pension liability: Automatic cost-of-living adjustments (COLAs) Projected future ad hoc COLAs, referring in this context to COLAs that are dependent upon a decision to grant by a responsible authority, when those adjustments are substantially the same as automatic COLAs Projected future salary increases in circumstances in which the pension benefit formula is based on future compensation levels Projected future service credits, both in determining an employees probable eligibility for benefits and in the projection of benefits in circumstances in which the pension benefit formula is based on years of service. 21

Discount Rate Should be a single rate that reflects: The long-term expected rate of return on plan investments to the extent that current and expected future plan net assets available for pension benefits are projected to be sufficient to make benefit payments A high-quality municipal bond index rate beyond the point at which plan net assets available for pension benefits are projected to be fully depleted. 22

Attribution Method Entry age normal Level percent of payroll Benefits should be attributed to periods beginning in the first period in which the employees services lead to benefits under the plan (whether or not the benefits are conditional on further service, as is the case, for example, with vesting provisions) and ending in the last period of the employees service 23

Pension ExpenseDeferrals Differences that result from the following events should be recognized as components of pension expense over periods representative of the expected remaining service lives, if any, of individual employees, considering separately (a) the aggregate effect on the liabilities of active employees to which the change applies and (b) the aggregate effect on the liabilities of inactive employees Assumed and actual experience with regard to demographic and economic factors affecting the measurement of the employers pension liability, Effects of changes in the demographic and economic assumptions used in the measurement of the employers pension liability, and Effects of benefit changes that are applied retroactively to past periods of service of plan members. An effect is that such changes related to past periods of service of inactive (including retired) plan members at the time of the event would be recognized immediately. 24

Investment EarningsCorridor Recognition of pension investment earnings above or below the expected long-term rate of return should be deferred so long as the net cumulative amount of deferred outflow or net cumulative amount of deferred inflow remains within a corridor 15 percent above and below the fair value of investments. However, if the net cumulative deferred balance at the end of a financial reporting period falls outside the corridor, the amount outside the corridor should be recognized as a component of pension expense immediately. 25

Multiple-Employer Cost Sharing Plans The Plans Unfunded Pension Liability (calculated in accordance with the preliminary views just discussed) and related deferrals, if any, would be allocated to the participating employers. The allocation method is open for comment; however, it could be based on the employers share of the total annual contractually required contributions to the plan. 26

Timetable Preliminary Viewswas released on June 16 Comment deadlineSeptember 17 Public hearingswill be held in October 2010 October 13Dallas October 14San Francisco October 27New York City 27

28 Current GASB Projects Pension Accounting and Financial Reporting Service Concession Arrangements (formerly known as Public Private Partnerships) Codification of Certain FASB and AICPA Pronouncements (pre-November 1989) Statement 14 Reexamination (Financial Reporting Entity) Recognition and Measurement Attributes – CS Statement of Net Position Economic Condition Reporting: Fiscal Sustainability