©2014 CliftonLarsonAllen LLP CLAconnect.com See CLA PowerPoint User Guide for instructions to insert an image or change the icon on the business card.

©2014 CliftonLarsonAllen LLP CLAconnect.com See CLA PowerPoint User Guide for instructions to insert an image or change the icon on the business card. Find it at the bottom of the myCLA / Firm Resources / Materials / Templates page. See CLA PowerPoint User Guide for instructions to insert an image or change the icon on the business card. Find it at the bottom of the myCLA / Firm Resources / Materials / Templates page. GFOA Summer Conference GASB Update August 8, 2014

©2014 CliftonLarsonAllen LLP Effective Dates – Years beginning after December 15, 2012 (June 30, 2014) –Statement 65 – Items Previously Reported as Assets and Liabilities –Statement 66 - Technical Corrections - 2012 - an amendment of GASB Statements No. 10 and No 62 June 15, 2013 (June 30, 2014) –Statement 67 – Financial Reporting for Pension Plans - an amendment of GASB Statement No. 25 –Statement 70 - Accounting and Financial Reporting for Nonexchange Financial Guarantees December 15, 2013 (June 30, 2015) –Statement 69 - Government Combinations and Disposals of Government Operations June 15, 2014 (June 30, 2015) –Statement 68 – Accounting and Financial Reporting for Pension Plans - an amendment of GASB Statement No 27 –Statement 71 - Pension Transition for Contributions Made Subsequent to Measurement Date - an amendment of GASB Statement No. 68 2

©2014 CliftonLarsonAllen LLP Background Certain items previously identified as assets and liabilities are not really considered to be assets or liabilities The use of the concept of deferred inflows and outflows was established to handle these items This statement establishes those items which are now to be recast as deferred inflows and outflows

©2014 CliftonLarsonAllen LLP Deferred Inflows/Outflows Previously restricted only to use in hedging and Service Concession arrangements Deferred Outflows –A consumption of net position that is applicable to a future accounting period (e.g. dfd loss on refunding) –Shown as a separate category below assets Deferred Inflows –An acquisition of net position that is applicable to a future accounting period (e.g. Unavailable revenue in a governmental fund) –Shown as a separate category below liabilities

©2014 CliftonLarsonAllen LLP Areas of Specific Guidance Refunding of Debt Nonexchange transactions Sales of Future Revenues Debt issuance costs Leases Acquisition costs related to insurance activities Lending activities Mortgage Banking activities Regulated Operations Revenue recognition in governmental funds Use of the term Deferred Major Fund criteria - effects

©2014 CliftonLarsonAllen LLP Specific Guidance Debt refunding –Gain or Loss from a refunding resulting in a defeasance ◊ Deferred Inflow – Gain ◊ Deferred Outflow - Loss Nonexchange transactions –Deferred inflows when resources are received or reported as a receivable before: ◊ The period for which property taxes are levied ◊ The period when resources are required to be used or first permitted –Deferred outflows are reported for resources received before time requirements are met, but eligibility requirements have been met

©2014 CliftonLarsonAllen LLP Specific Guidance (continued) Debt Issuance costs –Report as a period expense when incurred, no longer amortized over the life of the debt Sale of Future Revenues –Transferor reports a deferred inflow for resources in both the government-wide and fund financial statements –Only exception is found in GASB 48, para. 14 and has to do with revenue not previously recognized due to uncertainty of inability to measure –Intra-entity sales - recognize as deferred inflow and outflow until all revenue recognition criteria met(GASB 48, para. 15)

©2014 CliftonLarsonAllen LLP Specific Guidance (continued) Leases –Operating lease – lessor ◊ Record initial direct costs (acquisition, legal, etc) as a period cost –Sale/-Leaseback transaction ◊ Gain/loss on sale/leaseback should be recorded as either a deferred inflow or outflow, as applicable Revenue recognition in Governmental Funds –Revenue not recognized because of availability criteria should be reported as deferred inflows (e.g. property taxes)

©2014 CliftonLarsonAllen LLP Specific Guidance (continued) Use of the term Deferred in GASB financial statements –Limited only to use in connection with “Deferred Inflows” and “Deferred Outflows” Major Fund Criteria –Utilize deferred Outflows as part of assets and deferred inflows as part of liabilities in the calculations in determining major funds

©2014 CliftonLarsonAllen LLP Fixed… GASB No. 54, removed the limitation on using general fund or internal service fund for risk financing activities GASB No. 62, 13, and 48. Clarified language on issues related to: –Operating leases –Recognition of premium or discount on purchase of loans –Servicing fees for receivables that have been sold 12

©2014 CliftonLarsonAllen LLP Scope and Applicability Replaces previous guidance under GASB No. 25, Financial Reporting for Defined Pension Plans and Note Disclosures Establishes financial reporting standards for pension plans administered through trusts in which: –Contributions to the plans and related earnings are irrevocable –Plan assets are dedicated to providing pensions to plan members in accordance with benefit terms –Plan assets are legally protected from creditors of employers, nonemployer contributing entities and plan administrators Applicable for defined benefit plans and defined contribution plans Does not include OPEB plans

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans Recognition, measurement and presentation of the financial statement amounts generally similar to current guidance –Incorporates deferred outflows of resources and deferred inflows of resources, where applicable

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Required Financial Statements Statement of Fiduciary Net Position –Assets + Dfd Outflows – Liabilities – Dfd Inflows = Fiduciary Net Position Statement of Changes in Fiduciary Net Position

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Notes to the Financial Statements: –Plan description –Allocated insurance contracts excluded from plan assets –Plan investments, including investment policy, determination of fair value, annual money-weighted rate of return and identification of investments that represent 5% or more of plan net position –Receivables - terms of any long term contracts for contributions to the plan –Deferred retirement option program (DROP) balances –Policy for reserves of plan net position

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Notes to the Financial Statements: –Components of the net pension liability, including ◊ Total pension liability ◊ Pension plan’s fiduciary net position ◊ Net pension liability ◊ Pension plan’s fiduciary net position as a percentage of total pension liability –Significant assumptions used to measure the total pension liability –Date of actuarial valuation and if applicable, disclosure that roll forward procedures were used to roll forward the total pension liability from the actuarial valuation date to the plan’s fiscal year end

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Required Supplementary Information: –10 year schedule of ◊ Changes in net pension liability ◊ Net pension liability ◊ Contributions ◊ Annual money –weighted rate of return –Encouraged to present all years retroactively in implementation year ◊ If retroactive information is not available for all 10 years, only include those years where information is available in transition year and until 10 yrs of such information is available Notes to the Required Schedules: –Significant methods and assumptions used in calculating the actuarially determined contributions

©2014 CliftonLarsonAllen LLP Schedule of Changes in Net Pension Liability Last 10 Fiscal Years Schedules of Required Supplementary Information SCHEDULE OF CHANGES IN THE SCHOOL DISTRICTS’ NET PENSION LIABILITY Last 10 Fiscal Years

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Net Pension Liability –Total pension liability, net of plan’s fiduciary net position Measurement of Total Pension Liability –Timing and frequency of actuarial valuations ◊ As of plan’s most recent fiscal year end or ◊ The use of update procedures to roll forward to plan’s most recent fiscal year end from actuarial valuation ◊ Actuarial valuation date can be no more than 24 months prior to plan’s fiscal year end

©2014 CliftonLarsonAllen LLP Defined Benefit Pension Plans (continued) Measurement of Total Pension Liability –Discount rate ◊ Long term expected rate of return on investments that are expected to be used to finance payment of benefits, to the extent that net position is sufficient to make projected benefits and assets are invested using a strategy to achieve that return, ◊ Yield or index rate for 20 yr, tax exempt general obligation municipal bonds with an average rating of AA/Aa or higher to the extent the conditions used for the long term expected rate of return are not met. –Actuarial cost method ◊ Entry age actuarial cost method should be used to attribute the actuarial present value of projected benefit payments to periods

©2014 CliftonLarsonAllen LLP Defined Contribution Plans Footnote disclosures should include: –Identification of the pension plan as a defined contribution pension plan –Classes of members covered –Number of plan members –Participating employers for multiple-employer plans –Nonemployer contributing entities, if applicable –The authority under which the plan is established or may be amended.

©2014 CliftonLarsonAllen LLP Additional Resources GASB Toolkit (available at the GASB website) –Guide to Implementation of GASB Statement 67 on Financial Reporting for Pension Plans –Podcast discussing the types of pension plans affected by Statement 67 and most significant changes –Article on the key implementation issues –Summary and Full Text of Statement 67

©2014 CliftonLarsonAllen LLP Background Investors are looking for more credit enhancements and assurances on obligations –Minimize the possibility of nonpayment Government often provide guarantees and receive guarantees for free –Belief nonpayment is not likely Currently, a liability is recorded when –It is probable the government will be required to pay and amount can be reasonability estimated

©2014 CliftonLarsonAllen LLP Scope and Applicability Government provides a financial guarantee as a nonexchange transaction Government receives a financial guarantee as a nonexchange transaction Key considerations –Three legally separate entities (component units qualify) –Not deemed guarantees for this statement ◊ Withholding or garnishing revenues ◊ Pledges of future revenues ◊ Joint-and-several obligations

©2014 CliftonLarsonAllen LLP Government as the Grantor Assess the issuer’s ability to pay using qualitative factors If the government is more likely than not required to pay the issuer’s debt, then “book it” –More than 50% likelihood Book - –The discounted present value of expected cash flows as the result of the guarantee, or –If cash flows are within a range, the discounted present value of the minimum expected cash flows (low part of the range)

©2014 CliftonLarsonAllen LLP Qualitative Factors Bankruptcy or financial reorganizations Breach of debt contract –Covenants –Coverage ratios –Default Other financial difficulty indicators –Loss of major revenue source –Debt holder concessions –Using earmarked funding to pay debt

©2014 CliftonLarsonAllen LLP “Book It” Journal entry –DR: Expense/Expenditures –CR: Nonexchange Financial Guarantee Government-wide Financial Statements, and Fund Financial Statement to the extent the liability is normally expected to be liquidated with expendable available financial resources.

©2014 CliftonLarsonAllen LLP Government as a Guarantor to a Group You could analyze individually, or You could analyze as a group using qualitative factor of the group - –Historical trends –Economic factors –Etc. May book a liability similar to an allowance on bad debt, historical trends

©2014 CliftonLarsonAllen LLP Practical Timing Issue The process should be ongoing and the books and records should be adjusted when the government becomes more likely than not to pay the debt of the issuer.

©2014 CliftonLarsonAllen LLP Government as Issuer Footnote disclosure explaining the guarantee If the government is required to repay the guarantor, then the liability should be reclassified as a liability to guarantor when the guarantor begins to pay the debt. If the government is legally released from the debt, a revenue is recognized for guarantor’s assumption of the liability.

©2014 CliftonLarsonAllen LLP Intra-Entity Primary government guarantees a blended component unit’s debt Blended component unit guarantees a primary government's debt Blended component unit guarantees another blended component unit A receivable should be booked in the amount of the liability booked by the guarantor

©2014 CliftonLarsonAllen LLP Background Part of the effort which goes back to GASB 34 to make government statements more usable, comparable and on par with the corporate world –Investors understand full accrual accounting and get confused with multiple levels of government reporting Gives a better perspective as to both financial position and financial condition

©2014 CliftonLarsonAllen LLP Scope and Applicability Applies to: –Employers in single-employer and agent multiple- employer defined benefit plans –Employers in cost-sharing plans –Special funding situations ◊ One government makes payments on behalf of another –Employers in defined contribution plans

©2014 CliftonLarsonAllen LLP Defined Benefit Pensions Employer liability –Current: Difference between the annual required contribution (ARC) and actual contributions = Net pension obligation ◊ Only record a liability if required funding not made –New: Difference between the total pension liability and the fiduciary net position = Net pension liability ◊ Record net liability of the governmental entity –Measured as of a date no earlier than the end of the employer’s prior fiscal year (measurement date)

©2014 CliftonLarsonAllen LLP Defined Benefit Plans (continued) Changes in the pension liability – –Service cost, interest on the pension liability and changes in benefit terms ◊ Recorded as pension expense immediately –Changes in economic and demographic assumptions and differences between economic and demographic assumptions and actual experience ◊ Amortized over a closed period equal to the average remaining service period for plan members ◊ Current portion recorded as pension expense ◊ Remaining portion recorded as deferred outflows or deferred inflows of resources

©2014 CliftonLarsonAllen LLP Defined Benefit Plans (continued) Changes in the pension liability (continued) – –Differences between expected and actual rates of investment returns ◊ Amortized over a closed 5 year period (including current period) ◊ Current portion recorded as pension expense ◊ Remaining portion recorded as deferred outflows or deferred inflows of resources Employer contributions made subsequent to the measurement date of the net pension liability are recorded as deferred outflows of resources

©2014 CliftonLarsonAllen LLP Defined Benefit Plans (continued) Actuarial valuations –Required at least every two years –Total pension liability should be determined by ◊ An actuarial valuation as of the measurement date which must be within 1 year and 1 day of the report date or ◊ The use of update procedures to roll forward from the actuarial valuation to the measurement date no more than 30 months and 1 day before employers year end –Entry age method only ◊ Consistency –multiple methods no longer accepted ◊ No tie to actuarial method used for funding ◊ Service cost determined as a percentage of pay

©2014 CliftonLarsonAllen LLP Timing of Measurement of Total Pension Liability 48 June 2014 Plan Prior Year-End Plan Current Year-End December 2014 June 2015 December 2015 Pension Expense (measurement period) Deferred Outflows of Resources Employer Current Year-End Employer Prior Year-End Measurement date will most likely correspond to year-end of plan. Employer contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer’s fiscal year should be recognized as a deferred outflow of resources. Measurement Date

©2014 CliftonLarsonAllen LLP Example – Impact of Using Prior Year Measurement Date 49 June 2013 Plan Year-End June 2014 Pension Expense (measurement period) Deferred Outflows of Resources Employer Current Year-End Employer Prior Year-End Measurement Date Plan Year-End June 2015

©2014 CliftonLarsonAllen LLP Example – Impact of Using Current Year Measurement Date 50 June 2013 Plan Year-End Plan Year-End June 2014 Pension Expense (measurement period) Employer Current Year-End Employer Prior Year-End Measurement Date Plan Year-End June 2015

©2014 CliftonLarsonAllen LLP Projection of Benefit Payments Projections Include: –Automatic cost of living adjustments (COLAs) and other automatic retroactive benefit changes –Ad hoc COLAs and ad hoc retroactive benefit changes – substantively automatic –Projected future salary increases – if benefit formula is based on future levels –Projected future service credits (when determining probability of eligibility for benefits and when formula is based on years of service)

©2014 CliftonLarsonAllen LLP New Blended Discount Rate Single rate reflective of: –Long-term expected rate of return to extent plan net position for specified source is: ◊ Projected sufficient to make benefit payments ◊ Expected to be invested using long-term investment strategy Otherwise, index rate for a tax-exempt 20-year GO rated AA/Aa (or equivalent) or higher

©2014 CliftonLarsonAllen LLP Example Scenario- Discount Rate (cont’d) New Calculation: Blended rate Calculation StepExample Funded % X Historical Rate of Return 75% X 8% 6% Unfunded % X Tax Exempt 20yr Rate 25% X 4% 1% Blended Discount Rate6% + 1% = 7%

©2014 CliftonLarsonAllen LLP Cost Sharing Plans Cost Sharing Employers –Current : ◊ Liability recorded only if the actual employer contribution is less than annual required contribution ◊ Expense is equal to annual required contribution –New: ◊ Liability is equal to the employers’ proportionate share of the total net pension liability of all participating employers Will now allow readers to determine overall liabilities currently not easily determinable More pressure to adequately fund ◊ Expense is equal to the employer’s proportionate share of the pension expense of all participating employers ◊ Both liability and expense are reported as of the date reported by the plan – No need to adjust/rollforward to actual report date of the government

©2014 CliftonLarsonAllen LLP Cost Sharing Plans (continued) Employer’s recognize their proportionate share of collective: –Net pension liability –Pension expense –Deferred outflows of resources –Deferred inflows of resources This will provide audit challenges

©2014 CliftonLarsonAllen LLP Special Funding Situations Nonemployer entity legally responsible for making contributions directly to a pension plan for the employees of another entity and either: –The amount of contributions for which the nonemployer entity legally is responsible is not dependent upon one or more events unrelated to pensions or –The nonemployer is the only entity with a legal obligation to make contributions directly to the pension plan Nonemployer contributor accounting patterned on accounting for employers in cost-sharing plans

©2014 CliftonLarsonAllen LLP Defined Contribution Plans No significant changes Expense – Amount of contributions (employee and employer) to the employee accounts, net of forfeited amounts Liability – Difference between the amount of the expense recorded and amount paid to the plan

©2014 CliftonLarsonAllen LLP Note Disclosures Description of the Plan Assumptions Used to Measure Total Pension Liability Brief Description of Changes in Benefit Terms and Assumptions that Affect Measurement of Total Pension Liability

©2014 CliftonLarsonAllen LLP Required Supplementary Information – Cost-Sharing Employer Plan SCHEDULE OF THE DISTRICT’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

©2014 CliftonLarsonAllen LLP Required Supplementary Information – Special Funding Situation SCHEDULE OF THE DISTRICT’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

©2014 CliftonLarsonAllen LLP Required Supplementary Information – Special Funding Situation: Nonemployer Contributing Entity SCHEDULE OF THE STATE’S PROPORTIONATE SHARE OF THE NET PENSION LIABILITY Teachers Pension Plan Last 10 Fiscal Years*

©2014 CliftonLarsonAllen LLP Required Supplementary Information – Special Funding Situation: Nonemployer Contributing Entity (continued) SCHEDULE OF THE STATE CONTRIBUTIONS Teachers Pension Plan Last 10 Fiscal Years*

©2014 CliftonLarsonAllen LLP Additional Guidance AICPA White Paper: Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting –Provides guidance on employer challenges related to recognizing proportionate share of collective pension amounts and related auditor issues –Recommends cost-sharing plans calculate each employer’s allocation percentage and collective pension amounts ◊ Prepare a Schedule of Employer Contributions and related Notes to the Schedule ◊ Plan engage its auditor to form an opinion on the schedule in accordance with AU-C section 805, Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement

©2014 CliftonLarsonAllen LLP Additional Guidance (continued) GASB Toolkit (available at the GASB website) –Guide to Implementation of GASB Statement 68 on Accounting and Financial Reporting for Pensions –Videos outlining key issues, discussing stakeholder outreach, and top implementation issues –Podcasts discussing the most significant changes to accounting and financial reporting for pensions –Background documents and fact sheets –A “Setting the Record Straight” document addressing common misperceptions about the new pension standards

©2014 CliftonLarsonAllen LLP Background APB Opinion No. 16, Business Combinations –Pooling of interests –Purchase method –Superseded by FASB No. 141 – Business Combinations ◊ Did not apply to nonprofit organizations ◊ Eliminated pooling of interests FASB No. 164 – NFP Entities: Mergers and Acquisitions Governments used superseded guidance in APB Opinion No. 16 Needed some GAAP for governments

©2014 CliftonLarsonAllen LLP Scope and Applicability Establishes standards for government combinations and disposals of government operations –Government merger –Government acquisition –Transfer of operations Transactions –Combinations of legally separate entities ◊ NFP, For profit, government (new or continuing government is formed) –Mergers and acquisition of activities less than the entire legally separate entity

©2014 CliftonLarsonAllen LLP Scope and Applicability (cont.) –“Operations” – integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities ◊ Examples: fire department, golf course, parking garage, etc. Disposal of “operations” Statement does not apply to: –Assets and liabilities not considered an operation ◊ Line items –Organizations that remain legally separate (GASB 14) –Equity interests in an organization (GASB 14)

©2014 CliftonLarsonAllen LLP Definitions Government merger – combination of legally separate entities without significant consideration exchanged Transfer of operations – combination of operations without significant consideration Government acquisition - combination of legally separate entities or operations with significant consideration exchanged 75

©2014 CliftonLarsonAllen LLP Merger Government merger – combination of legally separate entities without significant consideration exchanged Two or more are now one –Pooled, but don’t use the word pooled. –No revaluations –Test for impairment –Eliminate transactions between the parties 77

©2014 CliftonLarsonAllen LLP Transfer Transfer of operations – combination of operations without significant consideration “Pooling” with an equity modification –Net position transferred is a special item 78

©2014 CliftonLarsonAllen LLP Acquisition Government acquisition - combination of legally separate entities or operations with significant consideration exchanged Purchase method (sort of) –Intangible asset (i.e. goodwill-deferred outflow) Detailed measurement rules 79

©2014 CliftonLarsonAllen LLP Measurement Rules Acquisition date –Control of assets –Obligated for the liabilities Acquisition value – market-based entry price –Price that would be paid for acquiring similar assets, having similar service capacity or discharging the liabilities assumed Exceptions –OPEB, pensions, compensated absences –Landfill, pollution remediation –Investments –Deferred inflows and outflows

©2014 CliftonLarsonAllen LLP Background GASB 68 requires: –Recognition of a net pension liability measured as of a date no earlier than the end of its prior fiscal year ◊ If a contribution is made between the measurement date and the end of the reporting period, its recognized as a deferred outflow of resources –Recognition of deferred outflows and inflows of resources for other pension-related events ◊ Differences arising between expected and actual experience in relation to economic and/or demographic factors ◊ Effects of changes of assumptions about future economic or demographic factors ◊ Differences between projected and actual investment earnings

©2014 CliftonLarsonAllen LLP Background (continued) At transition, if it’s not practical to determine the amounts of all deferred inflows and outflows of resources related to pensions, no beginning balances for deferred inflows and outflows be reported Potential for significant misstatement of beginning net position and subsequent expense in accrual based statements if the employer does not recognize its contributions made after the measurement date of the beginning net pension liability as deferred outflows of resources at transition

©2014 CliftonLarsonAllen LLP Summary When it’s not practical to determine all amounts of deferred inflows and outflows of resources related to pensions, GASB 71 states: ◊ Employers should recognize a beginning deferred outflow of resources for pension contributions, if any made subsequent to the measurement date of the beginning net pension liability ◊ No beginning balances for other deferred inflows and outflows of resources related to pensions should be recognized

©2014 CliftonLarsonAllen LLP 86 ©2014 CliftonLarsonAllen LLP CLAconnect.com twitter.com/ CLAconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen Dennis J. Osuch, CPA Principal, State and Local Government Dennis.Osuch@CLAconnect.com 86

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