National State Auditors Association 33 rd Annual Conference

1. National State Auditors Association 33rd Annual Conference GASB Update Robert H. Attmore, Chairman Governmental Accounting Standards Board June 15, 2011 The views expressed in this presentation are those of Mr. Attmore. Official positions of the GASB are established only after extensive public due process and deliberations

2. Effective Dates—June 30 FYE • June 30, 2011 • Statement 54 – Fund Balance Reporting • Statement 59 – Financial Instruments Omnibus • June 30, 2012 • Statement 57, paragraph 8 – OPEB Measurements • Statement 64 – Derivatives: Hedge Accounting Termination Provisions • June 30, 2013 • Statement 60 – Service Concession Arrangements • Statement 61 – The Financial Reporting Entity • Statement 62 – Codification of FASB and AICPA Pronouncements • Statement 63 – Reporting Deferred Outflows, Deferred Inflows and Net Position

3. The Year in Review—Final Documents • Statement 59—Financial Instruments Omnibus • Statement 60—Service Concession Arrangements • Statement 61—Reporting Entity Omnibus • Statement 62—Codification of Pre-89 FASB and AICPA Pronouncements • Suggested Guidelines for Voluntary Reporting— Service Efforts and Accomplishments • Comprehensive Implementation Guide & Mid- year Supplement

4. The Year in Review—Due Process Documents • Exposure Drafts • Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position (expected to be Statement 63) • Derivative Instruments: Hedge Termination Provisions (expected to be Statement 64) • Preliminary Views • Pension Accounting and Financial Reporting by Employers

5. Exposure Draft:Statement of Net Position Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

6. Background • Concepts Statement 4 identifies 5 elements that make up a statement of financial position: • Assets • Liabilities • Deferred outflows of resources • Deferred inflows of resources • Net position • This differs from the composition currently required by Statement 34, which requires the presentation of assets, liabilities, and net assets in a statement of financial position • Statements 53 and 60 identify deferrals

7. Definitions • Deferred outflows of resources • A consumption of net assets by the government that is applicable to a future reporting period • Has a positive effect on net position, similar to assets • Deferred inflows of resources • An acquisition of net assets by the government that is applicable to a future reporting period • Has a negative effect on net position, similar to liabilities • Net position • The residual of all elements presented in a statement of financial position

8. Proposed Provisions • Deferred outflows should be reported in a separate section following assets • Similarly, deferred inflows should be reported in a separate section following liabilities • Net Position components resemble net asset components under Statement 34, but include the effects of deferred outflows and deferred inflows • Net investment in capital assets • Restricted • Unrestricted

9. Disclosures Governments should provide details of different types of deferred amounts in the notes if significant components of the total deferred amounts are obscured by aggregation on the face of the statements

10. Effective Date and Transition • Effective for periods beginning after December 15, 2011 • Earlier application is encouraged • Accounting changes adopted to conform to should be applied retroactively by reclassifying all prior periods presented.

11. Related Project on the Current Agenda:Deferred Inflows and Outflows: Omnibus Concepts Statement 4 provides that recognition of deferrals should be limited to those instances specifically identified by GASB The Board has a separate project to identify items now reported as assets or liabilities that do not meet those conceptual definitions, but do meet the definitions of deferrals that would be subject to requirements of this proposed Statement

12. Expected Timeline July 2011: issue Exposure Draft October 2011: comment period deadline January 2012: issue final Statement

13. Exposure Draft Derivative instruments: application of hedge accounting termination provisions

14. Background • Proposal developed because of questions regarding application of termination of hedge accounting provisions in Statement 53 • Objective is to improve financial reporting for state and local governments by clarifying what constitutes a termination event for hedge accounting purposes • Would amend Statement 53

15. Termination of Hedge Accounting A hedging relationship is maintained and hedge accounting should continue to be applied when all of the following criteria are met: • Collectability of swap payments is considered to be probable • The counterparty of the interest rate swap or commodity swap, or counterparty’s credit support provider, is replaced with assignment or in-substance assignment, and • The government enters into assignment or in-substance assignment in response to swap counterparty, or swap counterparty’s credit support provider, committing or experiencing an act of default or termination event as described in swap agreement

16. Assignment Assignment: Occurs when a swap agreement is amended to replace the original counterparty, or the counterparty’s credit support provider, but all other terms of swap agreement remain unchanged

17. In-substance Assignment In-substance assignment: • Original counterparty, or counterparty’s credit support provider, is replaced • Original swap agreement is ended and the replacement swap agreement is entered into on same date • Terms that affect changes in fair values and cash flows in original and replacement swap agreements are identical

18. Proposed Effective Dateand Transition • Effective for periods beginning after June 15, 2011, earlier application encouraged • Restatement of the financial statements for prior periods • Disclosure of nature of the financial statement restatement

19. Preliminary Views Pension Accounting and Financial Reporting by employers

20. Project Timeline • Staff research completed in 2008 • Invitation to Comment issued in 2009 • Preliminary Views issued in 2010 • Exposure Draft(s) expected to be issued in June 2011

21. Basics • Defined pension benefits originate from exchanges between the employer and employees of salaries and benefits for employee services and are part of the total compensation for employee services

22. Fundamental Approach • Pension cost viewed in the context of an ongoing, career-long employment relationship • Accounting-based versus funding-based approach to measurement • Focus on the cost over time to taxpayers of providing governmental services

23. Tentative Decisions • An employer is primarily responsible for the unfunded pension obligation and secondarily responsible for the portion of the total pension obligation for which plan net assets have been accumulated in trust • The difference between the pension obligation and plan assets would be reported as a net pension liability in the financial statements of the government

24. 1) Project Benefits Measurement Approach Illustrated 25 40 62 80 2) Discount Present Value 3) Attribution

25. Actuarial Assumptions • Selection of all actuarial assumptions should be made in accordance with Actuarial Standards of Practice (unless specific guidance is provided by the GASB).

26. Attribution Method • Single allocation method • Based on entry age normal principles • The definition will exclude the use of approaches in which measurements of service costs are not individually based. • Level percentage of payroll • Over periods beginning in first period in which the employee’s services lead to benefits under the plan (without regard to conditional service-related provisions such as vesting) and ending in last period of the employee’s service

27. Projections • The projection of pension benefit payments should include the effects of projected future salary increases and future service credits, as well as automatic COLAs • Ad hoc COLAs would be incorporated into projections of pension benefit payments if an employer’s practice indicates that the COLAs are substantively automatic

28. Discount Rate • Should be a single rate that reflects: • The long-term expected rate of return on plan investments to the extent that current and expected future plan net assets available for pension benefits are projected to be sufficient to make benefit payments • A high-quality municipal bond index rate beyond the point at which plan net assets available for pension benefits are projected to be fully depleted

29. Measurement of Plan Assets • Plan net assets held in trust for pension benefits component of the employer’s net pension liability should be measured in the same way that it is measured in the statement of plan net assets, including measurement of investments at fair value.

30. Expense Recognition • Immediate recognition as expense: • Pension benefits earned • Interest cost on the beginning balance of the total pension liability • Changes in plan net assets not related to investments • Changes in pension plan terms that affect the total pension liability

31. Expense Recognition • Recognize as expense over a period equal to the remaining service periods of employees: • Differences between expected and actual changes in economic and demographic factors • Changes in assumptions • Differences between actual and projected earnings on plan investments should be recognized as pension expense over a five-year, closed period

32. Note Disclosures • General benefits and plan information • Assumptions used in measurement • Components of the change in the total pension liability, plan net assets, and net liability • Components of the pension expense • Components of the change in the deferred outflows (inflows)

33. RSI – 10 Year Schedules Of: • Changes in the net pension liability • Total liability, plan net assets, net liability, net assets as a % of the total liability, and net liability as a % of covered payroll • Actuarially calculated employer contributions needed, actual contributions made, the difference between them, and contributions made as a % of covered payroll

34. Cost-Sharing Employers

35. Recognition • A government participating in a cost-sharing plan would report a liability in its own financial statements that is equivalent to its proportionate share of the collective unfunded obligation of the cost-sharing plan. • Approach uses a basis for allocation of proportionate share based on the employer’s expected contribution effort relative to that of all contributors

36. What’s Next For Pensions? • Two Exposure Drafts—June 2011 • Public hearings—October 2011 • Final standards—second quarter 2012

37. Questions? Web site—www.gasb.org