APPA September 18, 2006

1. –Update APPA September 18, 2006 Views expressed are those of Wesley Galloway. Official positions of the GASB are established via due process.

2. New in 2006 • April – PV on Derivatives and Hedging • June – TB 2006-1: Medicare Part D • Aug. – Con. 4: Elements of Financial Statements • Sept. – Stmt. 48: Sales & Pledges of Receivables and Future Revenue • Oct. – ED on Intangible Assets • Nov. – Stmt 49: Pollution Remediation Obligations

3. Other Current Agenda Projects • Conceptual framework • Measurement attributes • Intergovernmental financial dependency risks • Economic condition reporting • Electronic reporting • Government combinations • Fiduciary responsibilities • In-kind contributions • Financial performance measures • Service efforts and accomplishments • Intergovernmental Risks

4. Calling All Issues • Agenda is full; however, emerging issues still need to be addressed • Three times a year the GASB assesses potential projects after receiving input from the GASAC • If you have identified an issue that warrants the GASB’s attention, please submit that issue via email to director@gasb.org

5. GASB’s Strategic Plan Scorecard • Users’ satisfaction with the usefulness of governmental financial reports and GASB standards • Preparers’ and attestors’ satisfaction with the quality of GASB standards • Increase in the percentage of governmental entities that adopt and use GASB financial reporting standards

6. Pollution Remediation Obligations— Exposure Draft

7. Scope of ED Pollution REMEDIATION Obligations • Excludes prevention or control obligations • Excludes asset retirement obligations—including landfills (Statement 18) • Excludes fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4)

8. 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.

9. 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)

10. Obligating Events (continued) • Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation • Excludes lawsuits having no merit • Govt. commences, or legally obligates self to commence • Limited to portion legally required to complete

11. Recognition • Component approach • Recognize components of liability as they become reasonably estimable • Recognition benchmarks • Cost accumulation, not fair value • Current value, not present value • Expected cash flow technique

12. Two ContingenciesNeither is Probable $1 Now it’s 100% probable. But how much do you record?

13. Two Contingencies—Expected Cash Flows

14. Which Outlays? • All direct outlays attributable to remediation • All outlays—not just incremental costs • Consistent with Statement 18 • Includes payroll, pension, and OPEB • May include indirect outlays • General overhead • A matter of professional judgment

15. Capitalization Permitted When: • Cleanup to prepare property for sale (limited to fair value) • Polluted property bought and cleaned for use (limited) • Asset impaired and cleanup restores lost service utility (limited) • Acquire PP&E that have future alternative use, e.g., land (limited to future service utility) • For a. & b.—capitalize only if incurred within reasonable period

16. Expected Recoveries from PRPs & Insurance 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

17. Financial Reporting Display • Government-wide • Program cost, or • Special item, or • Extraordinary item • No separate display of liability required • Governmental funds • Expenditures recognized when liquidated with expendable available resources • No pollution liability, only payables for goods and services used

18. Disclosures • For recognized liabilities and recoveries • Nature and source of the pollution remediation obligation—for example, federal or state law • Liability, if not apparent on statement • Methods and assumptions • Potential for change in estimate • Estimated recoveries reducing the liability

19. Disclosures • For liabilities (or portions thereof) not yet recognized because not reasonably estimable • General description of nature of the pollution remediation obligation • Supersedes FAS 5 disclosure of “reasonably possible”

20. Effective Date & Transition • Period beginning after June 15, 2007 • Measure liabilities at beginning of that period so beginning net assets can be restated • But apply retroactively if you can • No early application

21. Derivatives Project First added to the Technical Agenda in 1994. Current study started in 2002.

22. What Is the Objective of the Derivatives Project? • To consider establishing additional financial reporting and disclosure requirements for derivatives accounting. • Within the context of the governmental environment and the governmental reporting model

23. How Should Derivatives Be Reported? The Trillion Dollar Question

24. What Alternatives Has the GASB Explored? • Historical cost without modification • Context-based approach • Fair value with hedge accounting • Fair value without modification

25. Fair Value Without Modification • Pros • Reflects the economic reality of the transaction • Little or no complexity in implementation • Cons • Potential for significant volatility in the change statements • Does not take into consideration the mixed-attribute model

26. Fair Value With Hedge Accounting • The suspension of accounting conventions to arrive at a predetermined outcome primarily because of mixed-attribute model. • FASB world—qualifying hedges • Cash flow hedges—changes in effective hedges reported in comprehensive income • Fair value hedges—changes reported as an adjustment of associated asset or liability • GASB world—qualifying hedges • Deferred until terminated

27. Fair Value with Hedge Accounting • Pros • Fair value recognize the economic reality of the transactions • Deferrals recognize the effects of a mixed-attribute model • Reduces volatility in the change statements • Cons • Suspends normal accounting conventions—change statement does not reflect the economic substance of the transaction • Deferrals would not meet the traditional definitions of assets and liabilities • Complexity—need to develop qualifying criteria

28. Tentative Decision • Fair value with hedge accounting • Changes in fair value of derivative are deferred for qualifying transactions • Changes in fair value of derivative would not be deferred if the asset is reported at fair value

29. What is a Hedge? • Management’s objective is to establish a hedge—reduce a specified risk • Hedging instrument is a derivative • Derivative is associated with a hedgeable item

30. Hedgeable Item • Single asset or liability • Groups of similar assets or liabilities—same risk exposure • Firm commitment • Forecasted transaction—probable

31. Hedge Effectiveness • Consistent critical terms • Synthetic instrument • Quantitative Techniques

32. Project Timetable • Preliminary Views—April 2006 • Exposure Draft—January 2007 • Final—December 2007

33. Summary & Questions