2018 GASB Update

1. 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 • GASB Statement Nos. 83 – 89 • Current projects • Financial Reporting Model (ITC) • Revenue & Expense Recognition • Implementation Guides

3. 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. 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

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

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 – 60-90 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