1. Financial Reporting and Auditing - GASB Update Krista Edoff, Partner

2. Course Objectives  Understand the accounting and financial reporting of recently issued GASB standards that are effective in the current and upcoming years  Understand the projects currently being assessed by GASB and the potential implications for your organization in the future. 2

3. GASB Effective Dates  Periods beginning after December 15, 2013  GASB 69: Government Combinations and Disposal of Government Operations  Periods beginning after June 15, 2014  GASB 68: Accounting & Financial Reporting for Pensions  GASB 71: Pension Transition for Contributions Made Subsequent to the Measurement Date – an amendment to GASB68  Periods beginning after June 15, 2015  GASB 72: Fair Value Measurement and Application 3

4. GASB Statement 69 Government Combinations and Disposals of Government Operations

5. Purpose  Objective is to improve financial reporting by addressing accounting and financial reporting for government combinations and disposals of government operations  Guidance previously applied to government combinations was developed for nongovernmental entities and, therefore, addressed conditions and circumstances that would generally not be present in government combinations 5 5

6. Background  Transactions may involve:  Combinations of legally separate entities, such as Governmental entity with other governmental entities Governmental entity with not-for-profit or for-profit entities if the new or continuing organization is a government  Government combinations also include mergers and acquisitions of activities that comprise less than an entire legally separate entity and involve only the assets and liabilities previously used by an entity to provide specific goods or services  An operation is an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets or liabilities 6

7. Combinations 7 Definition Combinations: ConsiderationContinuing EntityNew Entity MergerNo One or more entities cease to exist and their operations are absorbed into and provided by one or more continuing governments. Two or more entities cease to exist as legally separate entities and are combined to form one or more new governments. Transfer of Operations No A government transfers operations to another existing government. Governments agree to combine operations and transfer assets and liabilities to a new government. AcquisitionYes A government acquires another entity or its operations in exchange for significant consideration. N/A

8. Combinations 8 Accounting Combinations: DateRecognition Merger - NewMerger Date Carrying Value as reported in separate financial statements of the merging entities Merger - ContinuingBeginning of Reporting Period Carrying Value as reported in separate financial statements of the merging entities Transfer - NewTransfer Date Carrying Value as reported in separate financial statements of transferor entities Transfer - ContinuingTransfer Date Carrying Value as reported in separate financial statements of transferor entities AcquisitionAcquisition DateAcquisition Value - market based entry price

9. Exceptions to Acquisition Value  Measure assets, deferred outflows of resources, liabilities, or deferred inflows of resources related to the acquired entity’s financial statements as follows:  Employment benefit arrangements, such as compensated absences, pensions, other postemployment benefits, or termination benefits – use the accounting and financial reporting requirements for state and local governments that are applicable to those transactions to the extent such benefits are not terminated  Municipal solid waste landfill closure and postclosure care costs or obligations for pollution remediation – use the accounting and financial reporting requirements for state and local governments that are applicable to those transactions  Investments, including derivatives that are required to be reported at fair value, using the accounting and financial reporting requirements for state and local governments that are applicable to those transactions  Deferred outflows of resources and deferred inflows of resources should be measured at the carrying values previously reported by the acquired government, except for those that relate to effective hedging arrangements as provided for in paragraph 20 of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments 9

10. Note Disclosures  For each government combination (all types), the government should include the following information in the notes to financial statements:  A brief description of the government combination, including identification of the entities involved in the combination and whether the participating entities were included within the same financial reporting entity  The date of the combination  A brief description of the primary reasons for the combination 10

11. Note Disclosures, Continued  Government Mergers and Transfers of Operations - new government or continuing government should disclose the following information:  The amounts recognized as of the merger date or the effective transfer date as follows: (1) Total assets—distinguishing between current assets, capital assets, and other assets (2) Total deferred outflows of resources (3) Total liabilities—distinguishing between current and long- term amounts (4) Total deferred inflows of resources (5) Total net position by component 11

12. Note Disclosures, Continued  Government Acquisitions - In the period in which an acquisition occurs, the acquiring government should disclose the following information:  A brief description of the consideration provided  The total amount of net position acquired as of the date of acquisition  A brief description of contingent consideration arrangements, including the basis for determining the amount of payments that are contingent 12

13. Disposal of Operations  Recognition:  Recognize a gain/loss on the disposal of operations as a special item in the period in which the disposal occurs, based on either the effective transfer date of a transfer of operations or the date of sale for operations that are sold  Disclosure:  Identify the operations and provide a brief description of the facts and circumstances leading to the disposal  Disclose the following if not separately presented in the financial statements: Total expenses, operating and non-operating Total revenues, operating and non-operating Governmental fund revenues and expenditures 13

14. Pension Accounting and Reporting GASB Statements 68 and 71

15. 15 GASB 68 Scope and Applicability  Applies to plans administered through trusts or equivalent arrangements  Does not apply to OPEB  Statement No. 68 (Employers) is effective for fiscal years beginning after June 15, 2014 15

16. Employer Financial Statements  Single or agent employers, without a special funding situation, recognize a liability equal to the net pension liability  Single or agent plans with special funding situations and cost-sharing plans recognize proportionate share of the collective net pension liability  Determined by comparing employer’s projected long- term contribution effort to the collective projected long-term contribution effort 16

17. Employer Net Pension Liability  Measurement of the Net Pension Liability  Total pension liability - actuarial PV of projected benefit payments attributed to past service  Discounted, likely, to a rate of return lower than pre- GASB 67/68 requirements 17 Total pension liability Less: Plan’s fiduciary net position Net Pension Liability

18. Measurement of Total Pension Liability  Only entry age actuarial cost method  Fair value of investments used to determine employer’s net pension liability  Projected benefits also includes ad hoc postemployment benefits if substantively automatic  Discount rate based on long-term expected rate of return only for period that plan’s net position is projected to be sufficient to make benefit payments  Several different actuarial cost methods  Actuarial valuation of investments used to determine employer’s ARC  Projected benefits only included plan or contractually agreed to benefits  Discount rate based on investment return assumption 18  GASB 67/68 (new)  GASB 25/27 (old)

19. Changes in Net Pension Liability  Include in pension expense immediately  Changes in total pension liability resulting from current-period service cost and interest on total pension liability  Changes in benefit terms and projected earnings on plan’s investments  Defer recognition over a closed period based on service lives of all active and inactive employees  Changes of economic and demographic assumptions  Differences between actual and expected experience  Defer recognition over a five-year closed period  Difference between projected earnings on plan investments and actual experience  Defer recognition for one year only  Contributions made subsequent to the measurement date of the net pension liability, but before the end of the reporting period 19

20. Note Disclosures and RSI  Note disclosures are expanded to include:  More descriptive information on plan assumptions  Information on the changes in the total pension liability and net pension liability  Calculation of discount rate, target allocation and long-term expected rate of return by asset classes  Net pension liability with a discount rate 1% higher and 1% lower than the discount rate used  New 10-year RSI tables will show trends:  Schedule of changes in the net pension liability and related ratios  Schedule of contributions compared to required contributions and related ratios  Plans will show a schedule of the money-weighted rate of return 20

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24. Fair Value Measurement and Application GASB Statement 72

25. Purpose  Objective is to improve financial reporting by clarifying the definition of fair value, establishing general principles for measuring fair value, providing additional fair value application guidance and enhancing disclosures about fair value measurement 25

26. Fair Value Measurement  Defines fair value as “price received for asset or paid for transfer of liability in an orderly transaction between market participants at the measurement date”  Fair value is an exit price at the measurement date  Measurement of an asset or liability depends on the unit of account of the asset or liability. The unit of account is level at which asset or liability is aggregated/disaggregated  Valuation techniques: market, cost or income approaches 26

27. Fair Value Measurement  Investments should be measured at fair value, except:  Investments in nonparticipating interest-earning investment contracts  Investment in unallocated insurance contracts  Money market investments  Participating interest-earning investment contracts maturing < 1 year  Investments in or held by 2a7-like external investment pools  Synthetic guaranteed investment contracts  Investments in life insurance contracts ` 27

28. Fair Value Measurement  Fair Value Hierarchy (Level 1, 2 and 3)  Level 1 – inputs are quoted prices in active markets for identical assets  Level 2 - inputs are significant other observable inputs  Level 3 - inputs are significant unobservable inputs 28

29. Fair Value Measurement  Fair Value Disclosures  Should be organized by type of asset or liability  For recurring and nonrecurring fair value measurement: Fair value at end of reporting period (example, next slide) Level of fair value hierarchy (example, next slide) Valuation technique, and any changes, used in fair value measurement 29

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31. Future Projects

32. Current Projects  Listing on GASB website – Current Projects  Updated as of March 10, 2015  One new project added to date in 2015  Two projects continue to be on HOLD  All other projects have been updated in 2015 32

33. Current Projects In Deliberation  OPEB  GAAP Hierarchy  Tax Abatement Disclosures  Lease Accounting  Fiduciary Responsibilities  Irrevocable Charitable Trusts  Blending Requirements for Certain Bsn-Type Activities  Asset Retirement Obligation  External Investment Pools On Hold  Conceptual Framework  Economic Conditions Reporting 33

34. Conceptual Framework  Financial statements prepared using the economic resources measurement focus, recognize and report items when:  The item meets the definition of an element  The item is measurable with a sufficient degree of reliability  Financial statements prepared using the current financial resources measurement focus would be replaced with “near-term financial resources measurement focus” 34

35. Economic Conditions Reporting  This project seeks to define fiscal sustainability and require certain elements within the financial statements to allow users to assess the government’s fiscal sustainability.  Preliminary views called for management to provide certain 5-year projected financial information within the Statistical Section of the financial statements. 35

36. OPEB Project  Considerations to improve accountability, transparency and usefulness of OPEB reporting  Reviewing accounting requirements, disclosures, supplementary information and other relevant information  Expect issuance of final Statement by June 2015, with plan implementation likely in 2016 and employer implementation likely in 2017 36

37. GAAP Hierarchy Project  Possible Changes in Structure  Fewer levels, reducing to two authoritative and one nonauthoritative  Level 1- would require formal GASB approval and exposed to public comment (statements and interpretations)  Level 2- GASB technical bulletins, GASB implementation guides and AICPA pronouncements cleared by GASB  Nonauthoritative - FASB Codification, GASB Concepts Statements and other accounting literature 37

38. Tax Abatement Disclosures  Examine potential disclosures of tax abatements  Items being considered:  Tax abatement programs and agreements  Current amount of tax abatements  Expect issuance of final statement August 2015 38

39. Leases  Reexamine issues associated with lease accounting  Items being considered:  Are current standards appropriate?  Should there be distinction between lease types?  Exposure draft issued November 2014; statement expected to be final in November 2016 39

40. Fiduciary Responsibilities  Examine financial reporting of fiduciary activities  Items being considered:  Clarify private-purpose trust fund vs agency fund  Clarify reporting for BTA engaging in fiduciary activity  Consider requiring agency fund combining statement  Exposure draft is scheduled for issuance October 2015 40

41. Irrevocable Charitable Trusts  Project considers recognition, measurement and disclosure of beneficial interests in resources held by third parties outside the reporting entity  Project expands guidance on recognition, measurement and disclosure for split-interest agreements where the government or its CU administer the assets  Exposure Draft expected for May 2015 41

42. Blending Requirements  Scope of the project is to clarify blending requirements, specifically for special purpose governments:  When governments are sole corporate members of an LLC with no separate governing board  When governments are sole corporate members of an incorporated non-profit component units  Exposure Draft expected for June 2015 42

43. Asset Retirement Obligation  Asset Retirement Obligation  Other than landfills – power and sewer plants  Propose definition from FASB Codification Topic 410  Obligation would include legal, but not constructive obligations  Defines recognition and triggering events  Exposure Draft expected for December 2015 43

44. External Investment Pools  This project looks to improve financial reporting by external investment pools and pool participants that report positions in investment pools by addressing recognition and measurement of investment pools and their disclosures.  Exposure draft expected for June 2015. 44