GASB Update WGFOA Winter Conference

1. GASB UpdateWGFOA Winter Conference Presented by: Jake Lenell, Principal, CliftonLarsonAllen

2. Effective Dates – Years beginning after • December 15, 2012 (December 31, 2013 and June 30, 2014 year ends) • Statement 65 – Items Previously Reported as Assets and Liabilities • Statement 66 - Technical Corrections - 2012 - an amendment of GASB Statements No 10 and No 62 • June 15, 2013 (June 30, 2014 and December 31, 2014 year ends) • Statement 67 – Financial Reporting for Pension Plans - an amendment of GASB Statement No 25 • Statement 70 - Accounting and Financial Reporting for Nonexchange Financial Guarantees • December 15, 2013 (June 30, 2015) • Statement 69 - Government Combinations and Disposals of Government Operations • June 15, 2014 (June 30, 2015) • Statement 68 – Accounting and Financial Reporting for Pension Plans - an amendment of GASB Statement No 27 • Statement 71 - Pension Transition for Contributions Made Subsequent to Measurement Date - an amendment of GASB Statement No. 68

3. GASB No. 65 Items Previously Reported as Assets and Liabilities

4. Background • Certain items previously identified as assets and liabilities are not really considered to be assets or liabilities • The use of the concept of deferred inflows and outflows was established to handle these items • This statement establishes those items which are now to be recast as deferred inflows and outflows

5. Deferred Inflows/Outflows • Previously restricted only to use in hedging and Service Concession arrangements • Deferred Outflows • A consumption of net position that is applicable to a future accounting period (e.g. deferred loss on refunding) • Shown as a separate category below assets • Deferred Inflows • An acquisition of net position that is applicable to a future accounting period (e.g. Unavailable revenue in a governmental fund) • Shown as a separate category below liabilities

6. Areas of Specific Guidance • Refundings of Debt • Debt issuance costs • Nonexchange transactions • Sales of Future Revenues • Leases • Acquisition costs related to insurance activities • Lending activities • Mortgage Banking activities • Regulated Operations • Revenue recognition in governmental funds • Use of the term Deferred • Major Fund criteria - effects

7. Specific Guidance • Debt refundings • Gain or Loss from a refunding resulting from a refunding • Deferred Inflow – Gain • Deferred Outflow - Loss • Debt Issuance costs • Report as a period expense when incurred, no longer amortized over the life of the debt

8. Specific Guidance • Imposed Nonexchange transactions • Deferred inflows when resources are received or reported as a receivable before: • The period for which property taxes are levied • The period when resources are required to be used or first permitted

9. Specific Guidance • Government-Mandated or Voluntary Nonexchange transactions • Resources received/provided before time requirements are met, but eligibility requirements have been met • Provider reports a deferred outflow • Recipient reports a deferred inflow • Resources received/provided before eligibility requirements have been met • Provider reports an asset • Recipient reports a liability

10. Specific Guidance (continued) • Sale of Future Revenues • Transferor reports a deferred inflow for resources in both the government-wide and fund financial statements • Only exception is found in GASB 48, para 14 and has to do with revenue not previously recognized due to uncertainty of inability to measure • Intra-entity sales - recognize as deferred inflow and outflow until all revenue recognition criteria met(GASB 48, para. 15)

11. Specific Guidance (continued) • Leases • Operating lease – lessor • Record initial direct costs (acquisition, legal, etc) as a period cost • Sale/-Leaseback transaction • Gain/loss on sale/leaseback should be recorded as either a deferred inflow or outflow, as applicable • Revenue recognition in Governmental Funds • Revenue not recognized because of availability criteria should be reported as deferred inflows (e.g. property taxes)

12. Specific Guidance (continued) • Use of the term Deferred in GASB financial statements • Limited only to use in connection with “Deferred Inflows” and “Deferred Outflows” • Major Fund Criteria • Utilize deferred Outflows as part of assets and deferred inflows as part of liabilities in the calculations in determining major funds

13. GASB No. 66an amendment of GASB No. 10 and 62 Technical Corrections – 2012

14. Fixed… • GASB No. 54, removed the limitation on using general fund or internal service fund for risk financing activities. • GASB No. 62, 13, and 48. Clarified language on issues related to: • Operating leases • Recognition of premium or discount on purchase of loans. • Servicing fees for receivables that have been sold.

15. GASB No. 69 Government Combinations and Disposal of Government Operations

16. Background • APB Opinion No. 16, Business Combinations • Pooling of interests • Purchase method • Superseded by FASB No. 141 – Business Combinations • Did not apply to nonprofit organizations • Eliminated pooling of interests • FASB No. 164 – NFP Entities: Mergers and Acquisitions • Governments used superseded guidance in APB Opinion No. 16 • Needed some GAAP for governments

17. Scope and Applicability • Establishes standards for government combinations and disposals of government operations • Government merger • Government acquisition • Transfer of operations • Transactions • Combinations of legally separate entities • NFP, For profit, government (new or continuing government is formed) • Mergers and acquisition of activities less than the entire legally separate entity

18. Scope and Applicability (cont.) • “Operations” – integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities • Examples: fire department, golf course, parking garage, etc. • Disposal of “operations” • Statement does not apply to: • Assets and liabilities not considered an operation • Organizations that remain legally separate (GASB 14) • Equity interests in an organization (GASB 14)

19. Definitions • Government merger – combination of legally separate entities without significant consideration exchanged. • Government acquisition - combination of legally separate entities or operations with significant consideration exchanged. • Transfer of operations – combination of operations without significant consideration

20. Consideration • Assets • Assumption of liabilities • Contingent assets • NOT assumption of negative net position

21. Merger • Government merger – combination of legally separate entities without significant consideration exchanged. • Two or more are now one • Can be a new entity or continuance of one of the previous entities • Similar to the former “pooling” method • Test for impairment • Eliminate transactions between the parties

22. Merger Measurement Rules • Effective date • New entity • Date of the merger • Existing entity • Beginning of the reporting period, regardless of the date of merger • Value • Carrying Value, with some adjustments allowed • Impairment • Methodologies • Change in estimates are current period transactions

23. Acquisition • Government acquisition - combination of legally separate entities or operations with significant consideration exchanged. • Similar to the former “Purchase” method • Intangible asset (i.e. goodwill-deferred outflow) • Detailed measurement rules

24. Acquisition Measurement Rules • Acquisition date • Control of assets • Obligated for the liabilities • Acquisition value – market-based entry price • Price that would be paid for acquiring similar assets, having similar service capacity or discharging the liabilities assumed • Exceptions • OPEB, pensions, compensated absences • Landfill, pollution remediation • Investments • Deferred inflows and outflows

25. Acquisition Measurement Rules • Consideration greater than Acquisition Value • Deferred outflows of resources • Recognized in a systematic and rational manner • Consideration less than Acquisition Value • Reduce noncurrent assets; or • Contribution revenue if intended

26. Transfer • Transfer of operations – combination of operations without significant consideration • Value • Carrying Value, with some adjustments allowed • Impairment • Methodologies • Transfer date • Control of assets • Obligated for the liabilities

27. Disposals • Gain or loss should be recorded as a special item

28. Disclosures • Description of the combination, date, and reason • Amounts recognized • Significant adjustments

29. GASB No. 70 Accounting and Financial Reporting for Nonexchange Financial Guarantees

30. Background • Investors are looking for more credit enhancements and assurances on obligations • Minimize the possibility of nonpayment • Government often provide guarantees and receive guarantees for free • Belief nonpayment is not likely • Currently, a liability is recorded when • It is probable the government will be required to pay and amount can be reasonability estimated

31. Scope and Applicability • Government provides a financial guarantee as a nonexchange transaction • Government receives a financial guarantee as a nonexchange transaction • Key considerations • Three legally separate entities (component units qualify) • Not deemed guarantees for this statement • Withholding or garnishing revenues • Pledges of future revenues • Joint-and-several obligations

32. Three Legally Separate Entities

33. Government as the Grantor • Assess the issuer’s ability pay using qualitative factors • If the government is more likely than not required to pay the issuer’s debt, then “book it” • More than 50% likelihood • Book - • The discounted present value of expected cash flows as the result of the guarantee, or • If the estimate is a range, and likelihood is equal, the discounted present value of the minimum expected cash flows (low part of the range)

34. Qualitative Factors • Bankruptcy or financial reorganizations • Breach of debt contract • Covenants • Coverage ratios • Default • Other financial difficulty indicators • Loss of major revenue source • Debt holder concessions • Using earmarked funding to pay debt

35. “Book It” • Journal entry • DR: Expense/Expenditures • CR: Nonexchange Financial Guarantee Liability • Government-wide Financial Statements, and • Fund Financial Statement to the extent the liability is normally expected to be liquidated with expendable available financial resources.

36. Government as a Guarantor to a Group • You could analyze individually, or • You could analyze as a group using qualitative factor of the group - • Historical trends • Economic factors • Etc. • May book a liability similar to an allowance on bad debt, historical trends

37. Practical Timing Issue • The process should be ongoing and the books and records should be adjusted when the government becomes more likely than not to pay the debt of the issuer.

38. Disclosures

39. Government as Issuer • Footnote disclosure explaining the guarantee • If the government is required to repay the guarantor, then the liability should be reclassified as a liability to guarantor when the guarantor begins to pay the debt. • If the government is legally released from the debt, a revenue is recognized for guarantor’s assumption of the liability.

40. Disclosure

41. Intra-Entity • Primary government guarantees a blended component unit’s debt • Blended component unit guarantees a primary government's debt • Blended component unit guarantees another blended component unit • A receivable should be booked in the amount of the liability booked by the guarantor.

42. Jake Lenell, CPA, Principal, Public Sector Group Jacob.Lenell@claconnect.com 414-721-7572