1. UNC School of Government
2018 GASB Update
NCGFOA
2018 Summer Conference
Wrightsville Beach, NC
Presented by
Gregory S. Allison, CPA
Teaching Professor
UNC School of Government

2. Planned Agenda Recent GASB pronouncements Current projects
GASB Statement Nos. 83 – 89
Current projects
Financial Reporting Model (ITC)
Revenue & Expense Recognition
Implementation Guides

3. Certain Asset Retirement Obligations
GASB Statement No. 83
Certain Asset Retirement Obligations

4. Overview of Standard
Provides guidance on retirement of capital assets that potentially create long-term liabilities related to closure
Similar concept to landfill closure/post-closure and pollution remediation obligations

5. Examples of Asset Retirements
Decommission a nuclear reactor
Remove and dispose an x-ray machine
Remove and dispose of wind turbines
Closure and removal of a sewage treatment facility

6. Potential Retirement Costs Excludes….
Cost of planning to sell/dispose tangible capital assets
Prepping an asset for alternative use
Pollution mitigation and landfill closure
Routine maintenance
Replacement of capital asset parts

7. When is an obligation incurred?
Timing is based on a combination of an external and an internal event
External?
Approval of federal/state/local law/regulation
Creation of a legally binding contract
Issuance of a court judgment
Internal?
Contamination
Actual use of the asset itself
Permanent abandonment before even placed in use

8. Other Elements of the Standard
Valuation calculations
“…should be based on the best estimate of current value of the outlays expected to be incurred”
Outflows of resources / deferred outflows of resources recognized
After initial measurement – current value of ARO adjusted annually
Required note disclosures (of course!)
Implementation date – FY beginning after 12/15/18

9. GASB Statement No. 84
Fiduciary Activities

10. Fiduciary Fund Reporting
Fiduciary fund types for legally entrusted arrangements
Pension (and other employee benefit) trust funds
Pension plans
OPEB trust
Investment trust funds – external investment pools
Private-purpose trust funds
Legally entrusted assets that are not pension or OPEB assets
Government named as trustee but not the beneficiary
May be expendable or nonexpendable in nature

11. Fiduciary Fund Reporting (cont.)
Fiduciary fund type for such activities not legally entrusted
Custodial funds
Such funds may have equity

12. Fiduciary Financial Statements
Statement of Fiduciary Net Position
Statement of Changes in Fiduciary Net Position

13. Implementation Date Fiscal years that begin after December 15, 2018
i.e., FYE 6/30/20

14. GASB Statement No. 85
Omnibus 2017

15. Overview
An Omnibus is basically a “catch-all” that is used to clean up or clarify previously issued guidance
Omnbus 2017 covers 4 main topics:
Blending component units
Goodwill
Fair value measurement and application
OPEB

16. Certain Debt Extinguishments
GASB Statement No. 86
Certain Debt Extinguishments

17. Certain Debt Extinguishments
Designed to provide guidance for in-substance defeasance of debt where existing resources are placed in a irrevocable trust
Does not apply to the refunding bond proceeds
Also guidance on reporting prepaid insurance on extinguished debt and the note disclosures for debt defease in-substance

18. In-Substance Defeasance with Existing Resources
Applicable when only existing resources are being used
In statements using the economic resource measurement focus
Recognize difference between reacquisition price (i.e., amount required to be placed in trust) and the net carrying value of the debt defeased as a separate gain or loss

19. Prepaid Insurance on Extinguished Debt
Any remaining prepaid insurance on extinguished debt (either legal or in-substance defeasance) should be included in the net carrying amount for the purpose of calculating the difference between reacquisition and the net carrying amount of the debt

20. Various Note Disclosures
Usually monetary assets placed in trust are supposed to be risk free
If such assets are NOT prohibited, governments should disclose that fact

21. Implementation Effective for periods beginning after June 15, 2017
FYE 6/30/18

22. GASB Statement No. 87
Leases

23. Scope and Approach
“A lease is defined as a contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction.”
All leases are financings of the right to use an underlying asset
Therefore, single approach applied to accounting for all leases with a few exceptions
Lessee recognizes a liability and a capital asset
Lessor recognizes a receivable and a deferred inflow of resources
Statement does not apply to leases for intangible assets (computer software), biological assets, service concession arrangements, supply contracts
PV chptr. 1 ¶10,

24. Lease Term
Period during which a lessee has a noncancelable right to use an underlying asset
Fiscal funding/cancellation clauses should not affect the lease term unless it is reasonably certain that it is going to be exercised
A short term lease has a maximum ORIGINAL term of one year; lessees and lessors reflect outflows and inflows of resources, respectively
PV chptr. 3 ¶3, 5, 6
“If only the lessor has an option to terminate or cancel the lease after a certain point in time, or if the lessee and lessor both have that option, any periods following that date would be considered cancellable periods and would be excluded from the lease term. Neither the lessee nor the lessor would have an enforceable obligation against the other party for those cancellable periods. However, if only the lessee has an option to terminate the lease, the option would be evaluated under paragraph 2b of this chapter because the lessee can enforce the contract against the lessor, at the lessee’s discretion.” [PV chptr. 3 ¶3]
“The proposed requirement in paragraph 6 [reassessment of lease term] would impose less of a burden on preparers because there would be little or no judgment involved or ongoing reassessments to make. Both lessees and lessors would know whether an option has been exercised and therefore would be in a position to reassess the lease term.” [PV chptr. 3 ¶7]

25. Initial Reporting - Lessee
Recognize lease liability
PV of payments expected to be made in lease term
Recognize capital asset
Sum of lease liability adjusted for lease payments at or before the lease started and initial direct costs necessary to place asset into service

26. Initial Reporting - Lessor
Recognize lease receivable
PV of payments received over lease term
Recognize deferred inflow of resources
Lessor should not derecognize asset underlying the lease
Accounting for depreciation and impairments continue
If asset must be returned in original condition, do not depreciate

27. Subsequent Reporting - Lessee
Lease asset amortized in a systematic and rational manner
Shorter of lease term or underlying life of asset
If lease contains purchase option that lessee is reasonably certain to exercise, amortize over useful life of asset
For non-depreciable assets, no lease amortization
Lease amortization reported as an outflow of resources – expense
Discount on present value is amortized in a systematic way as an outflow of resources (interest expense)

28. Subsequent Reporting - Lessor
Discount on receivable amortized as interest revenue at a constant periodic rate of return
Recognize inflows of resources (revenues) over lease term in a systematic and rational manner

29. Other Items
Governmental Fund accounting – no real change from current GAAP
Implementation for periods beginning after 12/15/18
FYE 6/30/20

30. GASB Statement No. 88
Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements

31. Disclosure Definition of Debt
A liability arising from an obligation to pay cash (or use other assets) to settle an amount fixed at the onset of the agreement
Does not include operating leases and accounts payable

32. New Disclosure Requirements
Unused amounts of lines of credit
Assets pledged as collateral
Specified terms in agreements related to significant
Events of default with finance-related consequences
Termination events with such consequences
Subjective acceleration clauses

33. Disclosures (cont.)
Requirement to separate debt disclosures related to direct borrowings/placements from other types of debt
Effective for fiscal years beginning after June 15, 2018
FYE 6/30/90

34. GASB Statement No. 89 Accounting for Interest Cost Incurred before the
End of a Construction Period

35. Interest Capitalization
Interest cost will simply be expensed in the period incurred
Implementation will be prospectively
Effective for fiscal periods beginning after 12/15/19 (FYE 6/30/21 in North Carolina) – earlier application encouraged

36. The New Reporting Model Project – Invitation to Comment
Financial Reporting Model Improvements –
Governmental Funds

37. Background Issued in December 2016
Preliminary Views anticipated in July 2018
Exposure Draft anticipated in April 2020
Final standard anticipated in November 2021

38. Key Considerations in the ITC
MD&A
Government-wide statement formats and cash flow possibilities
Major fund reporting for debt service funds?
Governmental fund financial statements
MFBA
Formats?

39. Key Considerations (cont.)
Proprietary fund “operating” focus
Fiduciary funds still in the basic financial statements
Budgetary information relegated totally to RSI?
Other options to reduce complexity

40. Key Considerations (cont.)
Governmental Funds – focus of ITC document
3 MFBAs;
Near-term financial resources recognition approach
Short-term (working capital) financial resources recognition approach
Long-term financial resources recognition approach
Statement format
Cash flow statement

41. Near-Term Approach
Nearest approach to the approach in the governmental funds, but it ceases to be modified accrual
To varying degrees, the fund’s characteristics would change
Revenues possibly could become “inflows of resources; Expenditures could become “outflows of resources”

42. Near-Term Approach (cont.)
Inflows are those acquired in the current period or within an availability period (similar to now – days)
Specific availability guidance may be addressed later
Assets are those that are some form of liquidity
Liabilities are those payable at year-end but to be liquidated shortly thereafter

43. Near-Term Approach (cont.)
No prepaids and inventory reported
Interest payable recognized if due shortly after year end (BIG CHANGE)
Other liabilities due shortly after year end

44. Short-Term Approach
A step in the wrong direction…closer and closer to accrual accounting
Focuses on the current fiscal year and related transactions that occur in the subsequent year
Basically, availability becomes one year and the term “current liability” means the same as it does in the proprietary funds (i.e., one year)

45. Short-Term Approach (cont.)
Prepaid assets and inventory remain
All liabilities due within one year (including principal and interest)
General availability period of one year
Cash flow statement would be needed

46. Long-Term Approach
Just think private sector with just a few exceptions
No reporting of capital assets
No reporting of principal portion of long-term capital-related debt
No depreciation
Would need statements of cash flow

47. Current Status of Reporting Model ITC Deliberations
Long-term approach rejected outright
Near-term and short-term were individually rejected
Hybrid approach of the two (near and short) has emerged

48. Current Status (cont.) Hybrid considerations
Referred to as short-term financial resources
One year availability period
Accrued interest due in one year will be recognized
TANs/RANs reported as liabilities
Exclude recognition of the current portion of long-term assets and liabilities

49. Projects in the Pipeline
Revenue and expense recognition
Financial reporting model improvements

50. Revenue and Expense Recognition
Invitation to Comment issued January 2018
Preliminary Views anticipated May/June 2020
Exposure Draft anticipated December 2021
Final standard Spring 2023

51. Key Considerations in the ITC
Exchange/nonexchange model
Performance obligation/no performance obligation model
Alternative model

52. Exchange/Nonexchange Model
Exchange transaction?
Recognize revenue and expense on an earnings recognition approach
Government controls a resource or incurs an obligation, AND
Event not applicable to a future period
Nonexchange transaction?
Recognize based on GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions
Derived tax revenues
Imposed nonexchange revenues
Government-mandated and voluntary nonexchange transactions

53. Performance Obligation/No Performance Obligation Model
Performance obligation defined:
A promise in a binding arrangement between a government and another party to provide distinct goods or services to a specific beneficiary
A binding arrangements includes contracts, grant agreements, enabling legislation, etc.
Recognize revenue when there is a transfer of goods and services to a beneficiary for consideration expected to be received
Recognize expense when there is a receipt of goods or services from another party in return for consideration committed to be paid

54. Performance Obligation Determinants
Determine consideration
Allocate consideration to performance obligation
Recognize revenue/expense as each performance obligation is fulfilled

55. No Performance Obligation
Recognize based on GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions

56. Alternative Models Exchange transaction? Nonexchange transaction?
Follow the performance obligation approach
Nonexchange transaction?
Recognize based on GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions