1. 1 Office of the Utah State Auditor GASB UPDATE

2. 2 Office of the Utah State Auditor New GASB Pronouncements StatementTitle12/316/30 65Items Previously Reported as Assets and Liabilities1314 66Technical Corrections1314 67Pensions (Plan)14 68Pensions (Employer)15 69Disposals of Government Operations1415 70Accounting and Financial Reporting for Nonexchange Financial Guarantees 14 71Pension Transition For Contributions Made Subsequent to the Measurement Date – an amendment of GASB 68 15

3. 3 Office of the Utah State Auditor Items Previously Reported as Assets and Liabilities GASB STATEMENT NO. 65

4. 4 Office of the Utah State Auditor GASB 65 Background –GASB Concepts Statement No. 4 introduces: Deferred outflows of resources Deferred inflows of resources –GASB will identify which items should be classified in these categories

5. 5 Office of the Utah State Auditor Deferred Outflows Definition – a consumption of net assets by the government that is applicable to a future reporting period. –Positive effect on net position, similar to assets. –(Debit) Definition – resources with present service capacity that the government presently controls. –Prepaid rent – Yes –Advance to grantee (time requirement not met) – No Deferred OutflowAsset

6. 6 Office of the Utah State Auditor Deferred Inflows Definition – an acquisition of net assets by the government that is applicable to a future reporting period. –Negative effect on net position, similar to liabilities. –(Credit) Definition – present obligations to sacrifice resources that the government has little or no discretion to avoid. –Payment for services not yet performed? – Yes –Proceeds from sale of future revenues? – No Deferred InflowsLiabilities

7. 7 Office of the Utah State Auditor Decisions to date GASB 53 –Hedging Derivatives Deferred Outflow – decrease in value Deferred Inflow – increase in value GASB 60 –Service concession arrangements Deferred Inflow – Consideration received up front

8. 8 Office of the Utah State Auditor Goal Review items currently reported as assets or liabilities Three options: 1.Continue to report as asset/liability 2.Report as a deferred outflow/inflow of resources 3.Report as an outflow/inflow of the period

9. 9 Office of the Utah State Auditor Asset Deferred Outflow Resources provided by a grantor to a grantee when the only eligibility criterion that has not been met by the recipient is a time requirement –If other eligibility requirements are not met = receivable

10. 10 Office of the Utah State Auditor Asset Deferred Outflow Excess of the reacquisition price of refunded debt over its net carrying amount. $ 95 Outstanding debt $100 New debt issued $ 5 Deferred outflow (amortize in a systematic and rational manner)

11. 11 Office of the Utah State Auditor Asset Deferred Outflow Payments made within the financial reporting entity to purchase the right to future revenue A loss on a sale-leaseback transaction Certain items associated with lending activities and mortgage banking activities

12. 12 Office of the Utah State Auditor Asset Outflow Debt issuance costs (other than prepaid insurance) Initial direct costs of operating leases Acquisition costs related to insurance activities Certain items associated with lending activities and mortgage banking activities

13. 13 Office of the Utah State Auditor Liability Deferred Inflow Revenue of a governmental fund that is not recognized solely because it is not yet considered to be available Property taxes received or recognized as a receivable prior to the period they were intended to finance

14. 14 Office of the Utah State Auditor Liability Deferred Inflow The excess of the net carrying amount of refunded debt over its reacquisition price $100 Outstanding debt $ 95 New debt issued $ 5 Deferred inflow

15. 15 Office of the Utah State Auditor Liability Deferred Inflow Other imposed non-exchange revenues received or recognized as a receivable prior to the period when the use of the resources is either required of first permitted Resources received from a grantor when the only eligibility criterion that has not been met by the recipient is a timing requirement –If other eligibility criteria not met = liability Proceeds from the sale of future revenues

16. 16 Office of the Utah State Auditor Liability Deferred Inflow A reduction in the present value of the payments due from the lessee under a capital lease as a result of the lessor’s passing on the economic advantages of a refunding of tax-exempt debt

17. 17 Office of the Utah State Auditor Liability Deferred Inflow Payments received within the financial reporting entity for the right to future revenues Gain on sale-leaseback transaction Certain items associated with lending activities and mortgage-banking activities

18. 18 Office of the Utah State Auditor Liability Inflow Loan origination fees received (other than the portion related to points) in connection with lending activities Certain items associated with lending activities and mortgage banking activities

19. 19 Office of the Utah State Auditor Determination of Major Funds (10 percent and 5 percent tests) Application of 10 percent and 5 percent tests (use the combination) Assets + deferred outflows of resources Liabilities + deferred inflows of resources

20. 20 Office of the Utah State Auditor Use of term “deferred” Future practice –Use limited to deferred outflows/inflows of resources

21. 21 Office of the Utah State Auditor Note Disclosure This used to be classified as an asset, but is now classified as a deferred outflow. OR This used to be classified as an asset, but is now classified as an outflow.

22. 22 Office of the Utah State Auditor Effective Date Financial statement periods beginning after December 15, 2012. Earlier application encouraged.

23. 23 Office of the Utah State Auditor Technical Corrections GASB STATEMENT NO. 66

24. 24 Office of the Utah State Auditor GASB’s Objective Resolve conflicting guidance Issuance of GASB 54 – Conflicts with GASB 10 Issuance of GASB 62 – Conflicts with GASB 13 and 48

25. 25 Office of the Utah State Auditor Conflicting Guidance Requires risk financing activities to be accounted for in either a general fund or internal service fund, if a single fund is used. Allows for certain risk financing activities to be reported in a special revenue fund. GASB 10GASB 54

26. 26 Office of the Utah State Auditor Resolution GASB 10 language limiting risk financing activities to general fund and internal service fund was deleted. Governments should base their fund type decision on the nature of the activity to be reported.

27. 27 Office of the Utah State Auditor Conflicting Guidance Provides guidance on accounting for operating lease payments with scheduled rent increases that could be perceived as a prohibition against the use of the fair value method. Permits the fair value method of accounting for operating lease payments. GASB 62GASB 13

28. 28 Office of the Utah State Auditor Resolution GASB 62 was amended to specifically allow for recognition based on the fair value of the rental payments. Professional judgment should be used to determine whether rental payments are based on economic factors relating to the property or, instead are an inducement to the lessee.

29. 29 Office of the Utah State Auditor Effective Date Financial statement periods beginning after December 15, 2012. Earlier application encouraged.

30. 30 Office of the Utah State Auditor Accounting and Financial Reporting for Pensions GASB STATEMENT NO. 67 & 68

31. 31 Office of the Utah State Auditor Introduction Statements affect only proprietary statements No effect on governmental funds Affects defined benefit pensions through plans administered as trusts or equivalent arrangements –Replaces GASB 27

32. 32 Office of the Utah State Auditor Plan Types Single Employer – pay according to experience (State has two) Agent Plan – each plan has own rates based on experience, but plan managed by someone else (State plus five cities) Cost Sharing – everyone pays same rate regardless of experience (Nearly all)

33. 33 Office of the Utah State Auditor Key Changes – Single and Agent Plans 1.Employer liability (What should the employer show) 2.Employer expense 3.Discount rate 4.Actuarial method (spread cost over service life of employee) 5.Amortization (how many years to defer, what is the amortization period)

34. 34 Office of the Utah State Auditor Employer Liability Current: Annual required contribution (ARC) (Mortgage payment supposed to pay for year) Less:Actual contributions (What you did pay on your mortgage for the year) Net pension obligation (NPO) New: Total pension liability (TPL) (What have employees earned) Less: Fiduciary net position (FNP) (How much has the employer set aside) Net pension liability (NPL) (Employer liability will be the unpaid mortgage)

35. 35 Office of the Utah State Auditor Employer liability – illustration Current: Annual required contribution (ARC) $100 Less:Actual contributions (80) Net pension obligation (NPO) $ 20 Liability reported by employer: $ 20 New: Total pension liability (TPL) $10,000 Less: Fiduciary net position (FNP) (8,500) Net pension liability (NPL) $ 1,500 Liability reported by employer:$1,500

36. 36 Office of the Utah State Auditor Employer Expense Current: Calculation tied to funding –ARC adjusted for the cumulative effect of prior differences between required contributions and actual contributions New: Calculation tied to cost –Changes in the net pension liability (NPL)

37. 37 Office of the Utah State Auditor Components of Expense Annual service cost Interest on the net pension liability Projected earnings on plan investments The full effect of any changes in benefit terms Amortization of deferred outflows/inflows of resources

38. 38 Office of the Utah State Auditor Discount rate Current: Estimated long-term investment yield for the plan New: Modification necessary if it is expected that FNP will not be sufficient to pay benefits to active employees and retirees –Single blended rate

39. 39 Office of the Utah State Auditor Discount Rate – Single Blended Rate Single rate equivalent to the combined effect of using the following rates: –For projected cash flows (including future contributions) up to the point the FNP will be sufficient Long-term expected rate of return on plan investments –For projected cash flows beyond that point A yield or index rate on tax-exempt 20-year, AA or higher rated municipal bonds.

40. 40 Office of the Utah State Auditor Actuarial Method Current: Whatever actuarial method is used for funding –Six acceptable methods –Must be applied within parameters defined by GASB New: No tie to actuarial method used for funding –All employers will use the entry age method for accounting and financial reporting purposes

41. 41 Office of the Utah State Auditor Amortization Circumstances that could affect the net pension liability (NPL) –Changes in benefit terms –Changes in economic and demographic assumptions –Differences between economic and demographic assumptions and actual experience (other than investment returns) (i.e. changes in life expectancy, inflation etc.) –Differences between expected and actual investment returns

42. 42 Office of the Utah State Auditor Amortization Current: Amortize over a period not to exceed 30 years New: Amortize over a much shorter period –Different periods, depending on the circumstances

43. 43 Office of the Utah State Auditor Amortization Amortization period –Changes in benefit terms Immediate recognition –Changes in economic and demographic assumptions (ie. People retire later than expected) Closed period equal to the average remaining service period of plan members –Average remaining service period of retirees = 0

44. 44 Office of the Utah State Auditor Amortization Periods (continued) –Differences between economic and demographic assumptions and actual experienced (other than investment returns) Closed period equal to average remaining service period of plan members –Average remaining service period of retirees = 0 –Differences between expected and actual investment returns Closed 5-year period

45. 45 Office of the Utah State Auditor Cost Sharing Plans Key changes: 1.Employer liability 2.Employer expense

46. 46 Office of the Utah State Auditor Employer liability (cost-sharing) Current Liability only if employer contribution is less than the contractually required amount New Liability equal to the employer’s proportionate share of the total NPL of all participating employers

47. 47 Office of the Utah State Auditor Employer expense (cost-sharing) Current Expense = contractually required contribution New Expense = employer’s proportionate share of total pension expense of all participating employers

48. 48 Office of the Utah State Auditor Note Disclosure (cost Sharing) Plan description Information about the employer’s proportionate share of the collective net pension liability (NPL) –Assumptions and other inputs –Fiduciary net position (FNP) Other information

49. 49 Office of the Utah State Auditor RSI (cost Sharing) 10-year schedules –Schedule of funding progress –Employer contributions –Agent and Single – Net Asset Schedule URS will provide templates for notes and schedules

50. 50 Office of the Utah State Auditor Potential Impact Considerations How much work will implementation be? –URS implements many of the difficult elements of the standards –URS will provide amounts to be reported –URS will provide footnote and RSI templates

51. 51 Office of the Utah State Auditor Potential Impact Considerations What if the additional liability creates a deficit fund balance or net position? –Pension standards apply to funds using the economic resources measurement focus (entity wide and proprietary fund). Entity wide statements do not adopt a budget. –State law prohibits a local government from making an appropriation in excess of the estimated expendable revenue for the budget period. Estimated Expendable Revenue = Estimated Revenue + Net Position Money Available to Spend – Required Reserve (usually 5% of total revenue from last completed fiscal year).

52. 52 Office of the Utah State Auditor Auditing Guidance Cost Sharing –Sufficient and Appropriate Audit Evidence Plan Auditor Must Express Opinion on Schedules –Schedule of Employer Allocations –Schedule of Pension Amounts by Employer

53. 53 Office of the Utah State Auditor Auditing Guidance Evaluate that plan’s schedules and reports are adequate Evaluate plan auditor’s –Competence –Independence Verify and recalculate amounts

54. 54 Office of the Utah State Auditor Auditing Guidance Single Employer and Cost Sharing URS Auditor’s Will Test Census Data –Date of Birth –Date of Hire –Years of Service –Eligible Compensation

55. 55 Office of the Utah State Auditor Effective Date GASB 67 (Plans) Financial statement periods beginning after June 15, 2013. GASB 68 (Employers) Financial statement periods beginning after June 15, 2014. Earlier application encouraged. –URS plans to early implement

56. 56 Office of the Utah State Auditor Government Combinations and Disposals of Operations GASB STATEMENT NO. 69

57. 57 Office of the Utah State Auditor Three Types of Combinations Merger Acquisition Transfer of operations

58. 58 Office of the Utah State Auditor Merger At least one entity ceases to exist –A+B=C (new entity) –A+B=B+ (B becomes larger) Service continuation (substantial portion of services) No exchange of significant consideration

59. 59 Office of the Utah State Auditor Acquisition At least one entity ceases to exist –A+B=C (new entity) –A+B=B+ (B becomes larger) Service continuation (substantial portion of services) Exchange of significant consideration (Difference from a merger)

60. 60 Office of the Utah State Auditor Transfer of Operations Identifiable services (ie. library, museum, etc.) Move the whole service Related assets and liabilities Service continuation (substantial portion of services) No significant consideration

61. 61 Office of the Utah State Auditor Treatment of Financial Statement Elements Merger –Carrying value (with adjustments -- if the two entities had different useful lives for the same assets you can adjust the useful lives for consistency.) Acquisition –Acquisition value Price to acquire similar assets Price to discharge liabilities as of acquisition date Transfer of operations –Carrying value (with adjustments)

62. 62 Office of the Utah State Auditor Consideration Not Equal to Net Position Consideration > net position acquired –Deferred outflow of resources Consideration < net position acquired –Meant to assist acquiring government? Yes = Recognize contribution No = Reduce acquisition value of noncurrent assets (other than investments reported at fair value) –Remainder = special item (if noncurrent assets are reduced to zero, the remainder should be recognized as a special item)

63. 63 Office of the Utah State Auditor Disposals Transferred operation = gain or loss on disposal

64. 64 Office of the Utah State Auditor Note Disclosures All combinations –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 Additional disclosures depending upon the type of combination.

65. 65 Office of the Utah State Auditor Effective Date Financial statement periods beginning after December 15, 2013. –Prospective implementation Earlier application encouraged.

66. 66 Office of the Utah State Auditor GASB STATEMENT NO. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

67. 67 Office of the Utah State Auditor Definition of Financial Guarantee Agreement to indemnify a third party if the issuer of the guaranteed obligation does not fulfill its obligation. Three separate parties –Issuer of the obligation being guaranteed –Those entitled to payment pursuant to the obligation –Guarantor

68. 68 Office of the Utah State Auditor Need for Guidance Private Sector –Financial guarantees almost always arise from exchange transactions Public Sector –Financial guarantees frequently arise independently (nonexchange financial guarantees)

69. 69 Office of the Utah State Auditor Scope Excludes: –Obligations related to revenue-supported debt –Obligations related to special assessments –“Joint and several” obligations –Obligations that are not legally binding

70. 70 Office of the Utah State Auditor Guarantors – Recognition Two-step approach –Consider qualitative factors and historical data that indicate likelihood of payments. –Point of recognition = “more likely that not” to occur.

71. 71 Office of the Utah State Auditor Guarantors – Qualitative Factors Issuer bankruptcy or financial reorganization Issuer breach of debt covenant

72. 72 Office of the Utah State Auditor Guarantors – Qualitative Factors (Continued) Indicator of significant financial difficulty –Issuer receipts intercepted –Debt holder concessions –Significant investment losses –Loss of a major revenue source –Significant increase in noncapital disbursements –Issuer subject to financial supervision

73. 73 Office of the Utah State Auditor Obligations with Similar Characteristics Example = student loan receivables Treatment –May need to consider qualitative factors and historical data from perspective of group as a whole.

74. 74 Office of the Utah State Auditor Guarantors – Point of Recognition “More likely than not” –Likelihood as little as 51 percent Contrast with normal treatment of contingencies –“Probable” (I would be surprised if it didn’t happen) Likelihood well in excess of 50 percent

75. 75 Office of the Utah State Auditor Guarantors – Valuing the Liability Discounted present value of estimated future payments –Range of possible values? Normal rules apply One amount = “best estimate” –Recognize that amount No amount better than any other –Recognize the minimum amount of the range.

76. 76 Office of the Utah State Auditor Guarantors – Governmental Funds Report an expenditure only when due and payable –Classify in the same manner as grant/financial assistance payments

77. 77 Office of the Utah State Auditor Guarantors – Disclosure Description –Legal authority for extending guarantees – Limits on extending guarantees –Types of obligations guaranteed –Relationship of guarantor to issuers –Length of guarantees –Arrangements for recovering payments from issuers Total guarantees outstanding

78. 78 Office of the Utah State Auditor Guarantors – Disclosure (Contintued) If liability recognized or payments made –Description of Timing of recognition Measurement of liability

79. 79 Office of the Utah State Auditor Guarantors – Disclosure (Contintued) Changes in liabilities –Beginning balances –Increases (including initial recognition) –Adjustments that increase estimates –Payments –Adjustments that decrease estimates –Ending balances

80. 80 Office of the Utah State Auditor Guarantors – Disclosure (Contintued) Cumulative payments on outstanding guarantees –Amounts expected to be recovered from issuers

81. 81 Office of the Utah State Auditor Issuer Accounting – Reporting Guaranteed obligation –Continue to report until legally released as obligor Ultimate decrease = revenue –Reclassify payments that must be reimbursed to guarantor

82. 82 Office of the Utah State Auditor Issuer Accounting – Reporting Receivable recognition –Normal rule against recognizing gain contingencies Exception = guarantees within the primary government (blended component unit) –Liability to issuer matched by issuer receivable

83. 83 Office of the Utah State Auditor Issuer – Note Disclosure If guaranteed obligations outstanding –Name of guarantor –Amount of guarantee –Length of guarantee – Amount paid during the current period –Cumulative amount paid on outstanding obligations –Requirement to repay the guarantor Outstanding amounts to be repaid

84. 84 Office of the Utah State Auditor Issuer – Note Disclosure (Continued) If payments made by guarantor during the current period (even if obligation is no longer outstanding) –Amount paid during the current period –Cumulative amount paid by the guarantor on guaranteed obligations outstanding –Requirements to repay guarantor Outstanding amounts to be repaid

85. 85 Office of the Utah State Auditor Effective Date Financial statement periods beginning after June 15, 2013 –Earlier application encouraged Application generally retroactive –Exception Prospective disclosure for cumulative payments –Disclose starting date

86. 86 Office of the Utah State Auditor GASB STATEMENT NO. 71 Pension Transition for Contributions Made Subsequent to the Measurement Date

87. 87 Office of the Utah State Auditor Background Transition guidance (employers) for pension related deferred outflows/inflows of resources (paragraph 137) –Beginning balances Reporting not required if impractical Must report all balances or none at all

88. 88 Office of the Utah State Auditor Net Pension Liability Measurement Date 12/31/11 6/30/12 6/30/13 6/30/14 Actuarial Valuation must be within this period. (30 months and 1 day) Actuarial Valuation must be updated to a measurement date within this period. (12 months and 1 day)

89. 89 Office of the Utah State Auditor Practical Challenge Potential Situation –Employer makes contribution for year prior to transition following the measurement date Result if the employer contribution is not reported as a deferred outflow of resources –Significant understatement of Beginning net pension liability Pension expense

90. 90 Office of the Utah State Auditor Solution Eliminate “all or nothing” approach –Report a deferred outflow of resources for employer contribution for the prior year made after the measurement date –Do not report any other pension-related deferred outflows or inflows of resources, if impractical to do so for all.

91. 91 Office of the Utah State Auditor Effective Date Apply simultaneously with the provisions of GASB 68. GASB 68 (Employers) Financial statement periods beginning after June 15, 2014.

92. 92 Office of the Utah State Auditor Contact Information (801) 538-1394 vchristensen@utah.gov Van Christensen