1. Slide 1 APPA GASB Update September 24, 2007 The views expressed in this presentation are those of Mr. Galloway. Official positions of the GASB are determined only after extensive due process and deliberation.

2. Slide 2 Current Events

3. Slide 3 Effective Dates Periods beginning after Dec. 15, 2005 –Statement 43, OPEB Plan reporting— Phase I Periods beginning after June 15, 2006 –Statement 34 (Retroactive Infrastructure— Phase II Governments)

4. Slide 4 Effective Dates Periods beginning after Dec. 15, 2006 –Statement 43, OPEB Plan reporting—Phase II –Statement 45, OPEB Employer reporting—Phase I (& any termination benefits) –Statement 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenue

5. Slide 5 Effective Dates Periods beginning after June 15, 2007 –Statement 50, Pension Disclosures

6. Slide 6 Effective Dates Periods beginning after Dec. 15, 2007 –Statement 43, OPEB Plan reporting—Phase III –Statement 45, OPEB Employer reporting—Phase II –Statement 49, Accounting and Financial Reporting for Pollution Remediation Obligations. (Measurement required at beginning of period!)

7. Slide 7 Effective Dates Periods beginning after June 15, 2009 –Statement 51, Intangible Assets

8. Slide 8 Statements 43 & 45 Other Postemployment Benefits

9. Slide 9 Statement 43 (for Plans) Subject: reporting on steward- ship of plan assets by –(a) a trustee or plan administrator that is a governmental entity (stand- alone plan reporting) or –(b) an employer or plan sponsor with a fiduciary responsibility for the plan assets that includes the plan as a trust or agency fund in its own financial report Includes provisions for reporting –(a) plans administered as trusts and –(b) multiple-employer plans that are not administered as trusts

10. Slide 10 Statement 45 (for Employers) Primary Focus Today Subject: accounting and reporting by employers for their OPEB expenses and obligations Applies to all employers that provide OPEB (that is, the employer pays all or part of the cost of the benefits, including implicit rate subsidies) Requires accrual-basis accounting for expense Requires measurement and disclosure of actuarial accrued liabilities and funded status (UAAL)

11. Slide 11 OPEB Myths GASB has “created” the liability GASB is causing OPEB cutbacks Statement 45 requires plan funding Enormous liabilities will be recognized Fund balances will take a big hit

12. Slide 12 Some Implementation Planning Considerations Measure (Find Out the Financial Implications of Your Government’s OPEB Commitments) –Schedule and make arrangements for an actuarial valuation. –Prepare for the valuation. –Absorb the information developed by the valuation. Overcome initial shock by taking a few deep breaths. Calmly engage analytical faculties.

13. Accrual-Basis Illustration (Year 2 of Applying Statement 45) Normal cost (current service cost) $ 350,000 Amortization of the UAAL (for past periods)600,000 Annual required contribution (ARC)950,000 Interest on beginning net OPEB obligation 50,000 ARC adjustment (58,500) Annual OPEB cost = expense 941,500 Actual employer contribution (PAYG method of financing) (250,000) Increase in net OPEB obligation 691,500 Net OPEB obligation—beginning 650,000 Net OPEB obligation—ending 1,341,500

14. Slide 14 Additional Guidance: OPEB Implementation Guide A GASB staff document, issued in July 2005, created primarily to provide guidance (classified as level D GAAP) to preparers and auditors on the implementation of the Statements Includes: –258 questions and answers (212 on Statement 45 and 46 on Statement 43) –Standards sections, glossaries, and illustrations from the Statements –Additional illustrations related to the alternative measurement method For ordering information, see the GASB website, www.gasb.org

15. Slide 15 Statement 48 Sales and Pledges of Receivables and Future Revenues

16. Slide 16 Sales and Pledges Scope of the project—Government receives proceeds in exchange for the rights to future cash flows from: –Receivables: Delinquent property taxes Uncollected fines Mortgages Student loans –Future revenues

17. Slide 17 Sales and Pledges Sale or Borrowing? Borrowing by default, unless specific criteria are met Continuing involvement—control –Does the transferor government retain control, or is control relinquished? Criteria for receivables Criteria for future revenues

18. Slide 18 Intra-entity Transfers Guidance for all transfers of assets (sold or donated) between components of a common reporting entity, including individual funds. –No new basis, carrying value is retained –Difference is a transfer/subsidy Examples: Capital assets sold/donated (funds, C/U) Financial assets (investments, receivables) Future revenues

19. Slide 19 Disclosures Identification of specific revenue pledged and approximate amount of the pledge General purpose of the related debt Term of the commitment Proportion of the revenue stream (80%), if it can be estimated Pledged revenue (net) recognized compared to related principal and interest

20. Slide 20 Effective Date Periods beginning after December 15, 2006

21. Slide 21 Statement 50 Pension Disclosures

22. Slide 22 Pension Disclosures Goal is to conform the pension disclosures with the OPEB disclosures Notes to financial statements would disclose the funded status of the plan as of the most recent actuarial valuation date. –Defined benefit pension plans also would disclose actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI.

23. Slide 23 Project Timetable Periods beginning after June 15, 2007

24. Slide 24 Statement 49 Accounting and Financial Reporting for Pollution Remediation Obligations

25. If it’s toxic, corrosive, reactive or explosive, the waste that you have is a hazard. If it’s toxic, corrosive, reactive or explosive, then you have hazardous waste.

26. Slide 26 Types of Remediation Obligations Pre-cleanup activities: site assessment, feasibility study, design Cleanup activities: neutralization, containment, disposal activities Oversight and enforcement costs Operation and maintenance of the remedy and monitoring

27. Slide 27 Recognition Threshold Determine whether one of more components of a pollution remediation obligation are recognizable as a liability when... –Government knows or reasonably believes that a site is polluted, and –Obligating event occurs

28. Slide 28 Obligating Events Compelled to take remediation action because of pollution-caused imminent endangerment Violate pollution-prevention permit— for example, RCRA permit Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

29. Slide 29 Obligating Events (continued) Named, or evidence indicates government will be named, in lawsuit to participate in remediation –Excludes lawsuits having no merit Government commences, or legally obligates self to commence –Limited to portion legally required to complete

30. Slide 30 Implementation Ideas No need to inventory all polluted sites Send year-end inquiry to departments –Similar to contingent liability inquiries, but for obligating events

31. Slide 31 Recognition Recognize components of liability as they become reasonably estimable Recognition benchmarks –Receipt of an administrative order –Participation as a responsible party or PRP –Completion of corrective measure feasibility study –Issuance of authorization to proceed –Remediation design and implementation

32. Slide 32 Recognition Cost accumulation, not fair value Current value, not present value Expected cash flow technique would be required –Not FASB Statement No. 5, Accounting for Contingencies

33. Potential PaymentProbability(a) x (b) $060% $0 $20040%$80 Two Contingencies—FASB 5 Potential PaymentProbability(a) x (b) $060% $0 $20040%$80 $0 $1 Now it’s 100% probable. But how much do you record? $0

34. Two Contingencies— Expected Cash Flow Permutations of Potential Payments Joint Probabilities Contingency 1 Contingency 2 Total $0 36% $0$200 24% $200$0$20024% $200 $40016% 100%

35. Two Contingencies— Expected Cash Flow Permutation math $200 X.48 = $96 $400 X.16 = $64 $160 Shortcut math $200 X.4 = $80 $160 OR

36. Slide 36 Implementation Ideas Use average costs developed by state regulators –Modify to fit site if situation different

37. Slide 37 Capitalization Permitted in Limited Circumstances a.Cleanup to prepare property for sale (limited to fair value) b.Polluted property bought and cleaned for use (limited) c.Asset impaired and cleanup restores lost service utility (limited) d.Acquired capital assets have future alternative use. For example, land (limited to future service utility) For a. & b.—capitalize only if incurred within reasonable period

38. Slide 38 Expected Recoveries from PRPs and Insurance Reduce expense (and expenditure, if available) and... If not realized or realizable— –Net against remediation liabilities When realized or realizable –Accrete liability and report separate recovery assets (cash or receivable)

39. Slide 39 Recoveries example Expected outlays $10,000 Expected recoveries 3,000 Net remediation expense $7,000 If recovery not realized or realizable: Pollution remediation liability = $7,000 If recovery realized or realizable: Recovery asset (receivable) = $3,000 Pollution remediation liability = $10,000

40. Slide 40 Effective Date Fiscal periods beginning after December 15, 2007 Measure liabilities at beginning of that period so beginning net assets can be restated

41. Slide 41 Statement 51 Accounting and Financial Reporting for Intangible Assets

42. Slide 42 Definition An intangible asset as an asset that possesses all of the following characteristics: –Lack of physical substance –Nonfinancial nature –Initial useful life extending beyond a single reporting period.

43. Slide 43 Common Types of Intangibles Right-of-ways Other types of easements Patents, copyrights, trademarks Land use rights Licenses and permits Computer software –Purchased –Internally developed

44. Slide 44 Basic Guidance All intangible assets within scope should be classified as capital assets, and all existing authoritative guidance related to capital assets should be applied to these intangible assets.

45. Slide 45 Internally Generated Outlays incurred related to an internally generated intangible asset that is considered identifiable should be capitalized only upon the occurrence of all of the following: –Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the asset upon completion of the project; –Demonstration of the technical or technological feasibility for completing the project so that the asset will provide its expected service capacity; –Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset.

46. Slide 46 Amortization Existing guidance for depreciation of capital assets generally applies to amortizing intangible assets Exception for intangible assets with indefinite useful lives: –No factors currently exist that limit the useful life of the asset –Intangible assets with indefinite useful lives should not be amortized

47. Slide 47 Effective Date and Transition Periods beginning after June 15, 2009

48. Slide 48 Concepts Statement 4 Elements of Financial Statements

49. Slide 49 Purpose Continue development of conceptual framework Assist the Board in future standards setting Does not require any changes in existing reporting requirements

50. Slide 50 Elements Assets— –Resources with present service capacity that the government presently controls Liabilities— –Present obligations to sacrifice resources that the government has little or not discretion to avoid

51. Slide 51 Elements (continued) Outflows Inflows Deferred outflows –Consumption of net assets that is applicable to a future reporting period Deferred inflows –Acquisition of net assets that is applicable to a future reporting period

52. Slide 52 Due Process Documents ED on Derivatives and Hedging Forthcoming ED (January 2008) on Fund Balance and Fund Definitions ED on Land and Other Real Estate Investments in Endowments

53. Slide 53 Exposure Draft Accounting and Financial Reporting for Derivative Instruments

54. Slide 54 What is a Derivative for Financial Reporting Purposes? A derivative has: 1. One or more reference rates (underlyings) and one or more notional amounts 2. Leverage 3. Net settlement

55. Slide 55 GASB Environment— Derivative Users Pensions and endowments: foreign exchange derivatives Utilities and transit agencies: energy derivatives Governments active in debt market: interest rate swaps No investment banks

56. Slide 56 Proposed Accounting Fair value with hedge accounting Derivatives would be measured on the balance sheet at fair value Fair value changes would be reported on the “change statement” as investment income Exception: Effective HEDGES! –Changes in fair value of derivative would be reported on the balance sheet as deferrals— either deferred charges or deferred credits –Swap asset, deferred credit –Swap liability, deferred charge

57. Slide 57 Is a Hedge Effective? Methods of Evaluating Hedges Consistent critical terms Synthetic instrument Quantitative techniques –Linear regression –Dollar offset Others?

58. Slide 58 Disclosures Disclosures for HEDGING derivatives –Application of TB-2003 disclosures –Significant terms –Risks: Credit, Interest Rate, Basis, Termination, Rollover, Market-access, Foreign Currency No disclosure of hedge ineffectiveness Disclosures for INVESTMENT derivatives –Risks: Credit, Interest Rate, Foreign Currency Various other disclosures

59. Slide 59 Looking Forward Final standard second quarter of 2008 Proposed Standard would be effective for reporting periods beginning after June 15, 2009 Retroactive

60. Slide 60 Exposure Draft Land and Other Real Estate Held as Investments by Endowments

61. Slide 61 Land and Other Real Estate Statement 31, paragraph 2 –Historical costs is the default for reporting investments Land and real estate next step –Fair value—limited to endowments and permanent funds (not quasi-endowments) Investment Omnibus—a more comprehensive look at the “left behind” investments—after derivatives is completed

62. Slide 62 Other Current Projects

63. Slide 63 Other Current Projects Fund Balance and Governmental Fund Definitions Intergovernmental Financial Dependency Risk Service Efforts and Accomplishments Reporting –Concepts 2 update –Guidelines—due process document Concepts Statement –Recognition and Measurement Attributes Deliberations to begin later this year

64. Slide 64 SEA Reporting What the project is: –Focus on reporting –Focus on suggested guidelines –Focus on clarifying GASB’s role What the project is not: –Establishing performance measures –Establishing performance benchmarks –Establishing reporting standards

65. Slide 65 Other Projects

66. Slide 66 Research Agenda Economic Condition Reporting Electronic Financial Reporting Pension Accounting and Reporting Public and Private Partnerships Reporting Units/Statement 14 Revisited

67. Slide 67 Calling All Issues Agenda is full; however, emerging issues still need to be addressed If you have identified that warrants the GASB’s attention, please submit that issue via email to director@gasb.org Agenda reviewed three times a year the GASB

68. Slide 68 Questions? Telephone—(203) 847-0700 Web site—www.gasb.org