Brian J. Hemmerle, CPA, CFE February 2018

Brian J. Hemmerle, CPA, CFE February 2018
GASB Update 2018 Brian J. Hemmerle, CPA, CFE February 2018

About the Presenter Henry+Horne, Senior Manager, Governmental Services
Graduated from the University of Arizona Certified Public Accountant and Certified Fraud Examiner Experience in Municipalities, School Districts, State Agencies, Nonprofits and Industry Serves on the Board of Directors for the Girl Scouts Arizona Cactus Pine Council as the Treasurer Member of the AICPA, ASCPA, GFOA, GFOAz, AASBO GFOA Special Review Committee Member Brian J. Hemmerle, CPA, CFE

Today’s Topics GASB 75 – OPEB GASB 84 – Fiduciary Activities
GASB 86 – Certain Debt Extinguishment Issues GASB 84 – Fiduciary Activities GASB 87 – Leases

GASB 75 - OPEB

GASB 75 - OPEB This standard is effective for periods beginning after June 15, 2017, which means implementation should be for your year ended: June 30, 2018 September 30, 2018 December 31, 2018

GASB 75 - OPEB This Statement is for the employer, not the plan.
Statements of the OPEB can be issued separately, or as a fiduciary fund in the primary government statements (discussed later). Restate all periods presented in the first year.

Types of Plans Single employer plans – involve only one government
Multiple employer plans – include more than one government Agent multiple employer plans – separate accounts maintained for each employer PSPRS – Health Insurance Premium Supplement CORP – Health Insurance Premium Supplement Cost sharing multiple employer plans – governments pool costs EORP – Health Insurance Premium Supplement ASRS Health Insurance Premium Supplement Long-Term Disability Benefits

GASB 75 - OPEB Remember this:
Total OPEB Liability Plan’s fiduciary net position (plan assets) = Net OPEB Liability If your plan’s assets are administered by a irrevocable trust or equivalent arrangement, then you should report the Net OPEB Liability If not, then you should report the Total OPEB Liability because those assets shouldn’t be factored into the liability reported. Any plan with less than 100 members can use a method similar to Statements 43 and 45.

GASB 75 - OPEB Just like GASB 68
For Arizona plans, the measurement date will be one year earlier than period end date. Valuation year will be two years earlier than period end date. Example: Period End Date – June 30, 2018 Measurement Date – June 30, 2017 Valuation Date – June 30, 2016

GASB 75 - OPEB Just like GASB 68
Still have deferred inflows and outflows for Actuarial gains and losses Assumption changes Difference between expected and actual investment return Defer outflows for contributions during the year Etc. The actuaries and the State will give us this information. YEAH ACTUARIES!

GASB 75 - OPEB Just like GASB 68 Disclosures Name of plan Type of plan
Benefit terms, measurement date, valuation date Number of employees covered Required contribution amounts Contribution rates Availability of plan F/S Significant assumptions Mortality assumptions Experience study dates Schedule of changes in OPEB liability

GASB 75 - OPEB New disclosure
Sensitivity to healthcare cost trend rate (+/- 1%) In Arizona, this would only be applicable to single employer plans with an implicit/explicit health insurance subsidy that are based on healthcare costs. ASRS, PSPRS, CORP and EORP do not have health insurance subsidies based on healthcare costs, therefore, this is not a required disclosure. Instead, those plans have a fixed subsidy being paid out in the future for healthcare subsidies.

GASB 75 - OPEB Same as GASB 68 RSI
Changes in OPEB liability Components of OPEB liability and ratios Proportionate share of OPEB liability Employer contributions All RSI tables built out to 10 years of data

GASB 75 - OPEB Similar to GASB 68 journal entries
A prior period adjustment to get the OPEB liability on the books using the beginning measurement date. The State provided this information when we implemented 68; I assume this will be very similar. Go back to when you implemented 68 journal entries and mimic those entries for this year’s 75 implementation.

Schedule of Employer Allocations (AICPA)

Schedule of Pension Amounts by Employer (AICPA)

GASB 75 - OPEB Deferred employer contributions
Remember you have to defer your employer contributions for the LTD and Health Insurance Subsidies portion of ASRS, PSPRS, CORP and EORP for the period between the measurement date and the period end date. ER Contributions made between 7/1/2017 – 6/30/2018 Previously, you should have only been deferring the portion related to the pension contributions.

GASB 75 - OPEB Allocate your OPEB liability
Just like you allocated the pension liabilities Common to see allocation based on the fund or activity expected to liquidate through its resources

Available Resources GASB Implementation Guides GASB Website
ASRS Website PSPRS Website Auditor General Website

GASB 86 Certain Debt Extinguishment Issues

This standard is effective for periods beginning after June 15, 2017, which means implementation should be for your year ended: June 30, 2018 September 30, 2018 December 31, 2018

The purpose of this Statement is: Improve consistency in accounting for in-substance defeasance of debt using existing resources (not refunding proceeds) are placed in irrevocable trust for extinguishing debt. Improves accounting for prepaid insurance on debt that is extinguished. Improves notes to financial statements for debt defeased in substance.

In-substance defeasance of debt using existing resources (not refunding proceeds). Statement No. 7 is the existing guidance on how to account for advanced refundings or “in-substance defeasance of debt.” Some requirements of that statement are: The monetary assets used to extinguish the debt must be placed in an irrevocable trust. The monetary assets must be essentially risk free; if not risk free, you should disclose that fact in the year of defeasance and every year after in which that risk exists.

In-substance defeasance of debt using existing resources (not refunding proceeds). This GASB statement addresses how to account for advance refundings using monetary assets other then proceeds from refunded debt. Monetary assets should be enough to cover the future principal and interest required to pay off the debt The possibility of the government having to make future payments after extinguishment should be remote.

In-substance defeasance of debt using existing resources (not refunding proceeds). Risk free assets used in the irrevocable trust should be items such as: Direct obligations of the U.S. government Obligations guaranteed by the U.S. government Securities backed by U.S. government obligations as collateral and for which interest and principal payments on the collateral generally flow immediately through to the security holder.

In-substance defeasance of debt using existing resources (not refunding proceeds). When extinguishing debt with existing resources, using the economic resource measurement focus you will post: Debit Credit Debt (Including unamortized premiums/discounts, etc.) XX Deferred inflows from prior refundings XX Loss/Gain from early debt extinguishment XX or XX Asset (monetary, such as cash/investments) XX Deferred outflows from prior refundings XX

In-substance defeasance of debt using existing resources (not refunding proceeds). When extinguishing debt with existing resources, the Gain/Loss from early debt extinguishment should be presented as a separate line item on the face of the financial statements for all statements presented using the economic resources measurement focus.

In-substance defeasance of debt using existing resources (not refunding proceeds). When extinguishing debt with existing resources, using the current financial resource measurement focus you will post: Debit Credit Debt Service Expenditure XX Asset (monetary, such as cash/investments) XX

Accounting for prepaid insurance on debt that is extinguished. When early extinguishing debt, if any prepaid insurance was being amortized related to the old debt being extinguished: Don’t expense the remaining prepaid expense balance Instead, factor in that prepaid insurance balance in the gain/loss on extinguishment entry from the previous slides. Basically, a line for a credit to the remaining prepaid insurance and plug that in with the gain and loss.

Notes to financial statements for debt defeased in substance. Notes related to this activity should include a general description of the transaction such as: Amount of debt Amount of monetary assets Type of monetary assets placed with the escrow agent Reasons for the defeasance Cash flows required to service the defeased debt

Notes to financial statements for debt defeased in substance. Periods after the defeased debt transaction should disclose: The amount of debt defeased in substance that remains outstanding at each period end If risk free assets were not used to defease the debt Disclose risks such as the substitution of essentially risk-free assets

GASB 84 – Fiduciary Activities

This standard is effective for periods beginning after December 15, 2018, which means implementation should be for your year ended: December 31, 2019 June 30, 2020 September 30, 2020

GASB decided to look at fiduciary funds because: Definitions of some types of fiduciary funds were not clear. Early guidance never defined what fiduciary responsibilities meant for these funds. Inconsistency in how governments reported their fiduciary funds. Business-type activities reported fiduciary activities in different ways. Users of the statements perceived the need for agency funds to have a flows statement.

Four ways to determine a fiduciary fund: Component units providing pensions or OPEB plans Pension or OPEB plans that are not component units Component units not providing pensions or OPEB plans Other fiduciary activities

Component units providing pensions or OPEB plans are considered fiduciary funds if it meets one of the following: It is a pension or OPEB plan in a trust that meets the definitions set forth in GASB 67 or 74, respectively. A circumstance in which the assets from entities that are not part of the primary government are accumulated for pensions or OPEB as described in GASB 73 or 74, respectively.

To determine if the plan is a component unit, use the definitions of GASB Statement 14, as amended. When making that determination, GASB 84 stipulates pensions administered by a trust are often considered separate legal entities, and In determining whether those entities are component units, the primary government is considered to have a financial burden if it is legally obligated to make contributions to the pension or OPEB plan.

GASB 84 – Fiduciary Activities Appendix C - FLOWCHART
Are the assets held by a component unit? Yes Are those assets for pension or OPEB plans? Yes Are the assets in a trust and the plan falls under GASB 67 or 74? Do the assets (contributions) come from other entities (other than your government) and the plan still falls under GASB 67 or 74? No Yes Yes No Report as a Fiduciary Fund Report as Governmental or Business-type Activity

Pension or OPEB plans that are not component units are considered fiduciary funds if the primary government controls the assets: And the plans meet the definitions of Statement 67 or 74, respectively, or Circumstances in which assets from the entities are not part of the reporting entity are accumulated for pension or OPEB as described in Statements 73 or 74, respectively.

Control of Assets: If the reporting entity holds the assets, or Has the ability to direct the use, exchange or employment of the assets. Restrictions from legal or other external restraints that stipulate the assets are used only for specific purposes do not negate the control of the assets.

Are the assets held by a component unit? Does your government control the assets? Nothing to Report! No No Yes Yes Are those assets for pension or OPEB plans? Yes Are the assets in a trust and the plan falls under GASB 67 or 74? Do the assets (contributions) come from other entities (other then your government) and the plan still falls under GASB 67 or 74? No Yes Yes No Report as a Fiduciary Fund Report as Governmental or Business-type Activity

Component units not providing pensions or OPEB plans are considered fiduciary funds if the assets associated with the activity have one or more of the following: Administered through a trust or similar arrangement, in which the primary government (PG) is not a beneficiary, dedicated to providing benefits to recipients based on the terms and legally protected from creditors of the PG. Are for the benefit of individuals and the PG does not have administrative or direct financial involvement with the assets. Also the assets cannot have been derived from the PG’s provisions of goods or services to those individuals. Are for the benefit of organizations or other governments that are not part of the PG. Also the assets cannot have been derived from the PG’s provisions of goods or services to those organizations or governments.

Administrative involvement Monitors compliance with the requirements of the activity established by the government that does not receive the direct benefit of the activity Determines eligibility of expenditures established by the government that does not receive the direct benefit of the activity Can exercise discretion over how assets are allocated Direct financial involvement If the government provides matching resources for the activity

To determine if the legally separate entity is a component unit, use the definitions of GASB Statement 14, as amended. When making that determination, GASB 84 stipulates control of the assets is not a factor to be considered.

Are the assets held by a component unit? Does your government control the assets? Nothing to Report! No No Yes Yes Are those assets for pension or OPEB plans? Are the assets derived from your government’s own source revenue? No Yes Yes Are the assets in a trust and the plan falls under GASB 67 or 74? Do the assets (contributions) come from other entities (other than your government) and the plan still falls under GASB 67 or 74? No Yes Yes No Report as a Fiduciary Fund Report as Governmental or Business-type Activity

Other fiduciary activities are considered fiduciary funds if all of the following are met: The assets associated with the activity are controlled by the primary government (as previously described) The assets are not associated with the PG’s own source revenue, government-mandated nonexchange transactions or voluntary nonexchange transactions such as: Water, sewer revenue Sales taxes Income taxes Property taxes Donations/contributions Grants, with the exception of…

Grants that are pass-through grants for which the PG does not have administrative involvement or direct financial involvement. Administrative involvement Monitors compliance with the requirements of the activity established by the government that does not receive the direct benefit of the activity. Determines eligibility of expenditures established by the government that does not receive the direct benefit of the activity. Can exercise discretion over how assets are allocated. Direct financial involvement If the government provides matching resources for the activity.

Other fiduciary activities are considered fiduciary funds if all of the following are met (continued): c) The assets have one or more of these characteristics: Administered through a trust or similar arrangement, in which the primary government (PG) is not a beneficiary dedicated to providing benefits to recipients based on the terms and legally protected from creditors of the PG. Are for the benefit of individuals and the PG does not have administrative or direct financial involvement with the assets. Also the assets cannot have been derived from the PG’s provisions of goods or services to those individuals. Are for the benefit of organizations or other governments that are not part of the PG. Also the assets cannot have been derived from the PG’s provisions of goods or services to those organizations or governments.

Are the assets held by a component unit? Does your government control the assets? Nothing to Report! No No Yes Yes Are the assets derived from pass through grants for which your government does not have administrative involvement or direct financial involvement? No Are those assets for pension or OPEB plans? Are the assets derived from your government’s own source revenue? No Yes Yes Are the assets held in a trust, or equivalent arrangement, and your gov. is not a beneficiary? Yes Are the assets for the benefit of individuals and your gov. does not have administrative or direct financial involvement? No Are the assets in a trust and the plan falls under GASB 67 or 74? Do the assets (contributions) come from other entities (other then your government) and the plan still falls under GASB 67 or 74? No No No Yes Yes Yes Yes No Are the assets for the benefit of organizations or other governments that are not apart of your government? Report as a Fiduciary Fund Report as Governmental or Business-type Activity No Yes Report as Fiduciary Fund

New definitions for our 4 types of fiduciary funds: Pension (and other employee benefit) trust funds Investment trust funds Private-purpose trust funds Agency Funds Custodial Funds

Pension (and other employee benefit) trust funds are used to report: Pension and OPEB plans that are administered through trusts that meet the criteria of Statements 67 and 74, respectively. Other benefit plans for which: Resources are held in a trust that meets the criteria described earlier, and Contributions to the trust and earnings on those contributions are irrevocable.

Investment trust funds are used to report fiduciary activities: From external portions of investment pools Individual investment accounts held in a trust defined as: Investment services provided by a government entity for other, legally separate entities that are not part of the same reporting entity.

Private purpose trust funds are used to report fiduciary activities for assets held in a trust that do not meet the definition of: Pension (and other employee benefit) trust funds Investment trust funds

Custodial funds are used to report fiduciary activities that are not required to be reported in: Pension (and other employee benefit) trust funds Investment trust funds Private-purpose trust funds Note: The external portion of investment pools not held in a trust, that meet the requirements to be a fiduciary fund from previous slides, should be reported in a separate external investment pool fund column, under the custodial funds classification.

For business-type activities in which fiduciary assets should be recorded in a custodial fund, if those assets, upon receipt, are normally expected to be held for three months or less, they can be reported in Statement of Net Position of the business-type activities. Related additions and deduction to those activities should be presented as cash inflows and outflows in the operating activities category of the cash flow statement.

GASBS 87- Leases

GASBS 87- Leases This standard is effective for periods beginning after December 15, 2019, which means implementation should be for your year ended: December 31, 2020 June 30, 2021 September 30, 2021

GASBS 87- Leases Why did GASB need to change the lease guidance?
To align with changes to leases in the private sector Previous lease guidance pre-dates GASB and does not take into consideration the conceptual framework Lease transactions were structured in a way to avoid reporting the economic substance of the transaction

GASBS 87- Leases What was changed? Definition:
The definition of a lease has changed in the new standard. Definition: “A lease is a contract that conveys control of the right to use another entity’s nonfinancial asset as specified in the contract for a period of time in an exchange or exchange-like transaction.” All contracts that meet this definition should be accounted for under the new lease guidance.

GASBS 87- Leases Control means
The right to obtain the present service capacity from use of the underlying assets, and The right to determine the nature and manner of use of the underlying asset The GASB does not limit a lease to contracts that convey “substantially all” of the present service capacity from use of the underlying asset.

GASBS 87- Leases Non-financial assets: Exclusions: Buildings Land
Vehicles Equipment Exclusions: Intangible assets (mineral rights, patents, software, copyrights) Biological assets (timber, living plants, living animals) Service concession arrangements (GASB 60) Conduit debt financed assets, unless reported as such by the lessor Inventory Supplies contracts (power purchase agreements)

Lease Terms Lease term is the period during which a lessee has a noncancelable right to use the underlying asset, plus the following periods, if applicable: Periods covered by a lessee’s option to extend the lease if it is reasonably certain that the lessee will exercise that option Periods covered by a lessee’s option to terminate the lease if it is reasonably certain that the lessee will not exercise that option

Lease Terms Noncancelable: Reasonably certain:
You are legally obligated to be committed to the lease without any options to cancel. Reasonably certain: Apply judgement, higher threshold than probable. Consistent with GASB 62 definition of reasonably assured. Consider economic forecasts, benefits for and against exercising options, useful life of asset, is it needed for operations.

Lease Terms Periods for which both the lessee and lessor have an option to terminate the lease without permission of the other are cancelable and are excluded from the lease term. For example, a rolling month-to-month lease, or a lease that continues into a holdover period until a new lease is signed

Exemptions Short-term leases and contracts that transfer ownership are exempt: A lease that has a maximum possible term under the lease contract of 12 months or less, including option to extend, regardless of their probability of being exercised A contract that transfers ownership to the lessee by the end of the contract and does not contain termination clause that is not reasonably certain to be exercised should be reported as a financed purchase

Lessee Accounting At the commencement of the lease term the lessee should: Recognize a lease liability, and An intangible right-to-use lease asset

Lessee Accounting Lease Liability includes:
Fixed payments (less any lease incentives received from the lessor) Variable payments based on an index or rate, using the rate in effect at beginning of lease Variable payments that are fixed in substance Residual value guarantees reasonably certain Purchase options reasonably certain Termination penalties if reasonably certain

Lessee Accounting Lease Liability: Add all those items up and then…
Discount them back by the period determined, and The rate the lessor charges If the rate charged is not readily determined, then use the lessee’s incremental borrowing rate

Lessee Accounting Lease Asset:
Start with the value of the initial lease liability just calculated Plus any prepayments (at or before the beginning of the lease) Less any incentives received from the lessor Plus initial direct costs if they are ancillary charges to place the leased asset into use Equals the initial measurement of the lease asset. Initial direct costs should be expensed unless they are necessary to place the leased asset into use.

Lessee Accounting The lease asset should be amortized in a systematic and rational manner over the shorter of the lease term or the useful life The amortization of the lease asset should be reported as amortization expense, which may be combined with depreciation expense Debit Credit Amortization Expense 100,000 Lease asset ,000

Lessee Accounting The lease liability should be reduced by the principle portion of the subsequent financing payments, interest payments are still recorded as interest expense Debit Credit Interest Expense 20,000 Lease Liability 80,000 Cash ,000

Lessee Accounting Notes to the financial statements should include:
General description of leasing arrangements Total amount of leased assets and related accumulated amortization, disclosed separately from other capital assets Amount of lease assets by major classes of assets Principal and interest payments for next five years and in five year increments thereafter

Lessor Accounting At the commencement of the lease term, the lessor should recognize a lease receivable and a deferred inflow of resources Subsequently, the lessor should recognize the deferred inflow of resources as revenue in a systematic and rational manner of the lease term

Questions? Contact Us: (480) 839-4900 Brian Hemmerle, Ext. 304
Marilyn Mays, Ext. 305

Thank you!

Brian J. Hemmerle, CPA, CFE February 2018

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Brian J. Hemmerle, CPA, CFE February 2018

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