GASB Implementation Update

1. GASB Implementation Update FGFOA Orlando, Florida Monday, May 21, 2007

2. Newly Issued Standards Sales, pledges, and transfers of assets and future revenues GASB Statement No. 48 Pollution remediation GASB Statement No. 49 Medicare Part D GASB Technical Bulletin 2006-1 New Implementation Guide questions

3. Sales, Pledges, and Transfers of Assets and Future Revenues GASB Statement No. 48

4. Scope Resources in exchange for future cash flows Collections of specific receivables Specific future revenue streams Disclosure guidance on pledged/sold revenues Intra-entity transfers Supersedes guidance in TB 2004-1

5. Basic assumptions Collateralized borrowing v. sale Presumption = collateralized borrowing Specific criteria must be met for sale A sale cannot result in the current recognition of future revenues

6. Pledges/Sales of Receivables Counterparty outside of financial reporting entity

7. Pledges of receivables Pledger Continue to report pledged receivables Accrual treatment Proceeds offset by liability Liability reduced by collections remitted Modified accrual treatment Other financing source for proceeds Expenditures for amounts remitted

8. Pledges of receivables (cont.) Counterparty Receivable Reduced by receipts

9. Criteria for sale Buyer can pledge or sell Seller cannot unilaterally substitute Agreement cannot be canceled Seller is isolated from collections Buyer has separate legal standing Seller has no access to cash (next slide) Buyer is protected from seller’s creditors

10. Seller’s servicing of accounts “Access” rule not violated if: Payments made only from collections on specific accounts (no advances) Remittance occurs without delay Earnings accrue to buyer Proceeds treated as pay off of accounts sold

11. Sales of receivables Seller Remove individual accounts at carrying value Accrual treatment Gain/loss Modified accrual treatment Revenue Buyer Purchased receivable at purchase price

12. Residuals (surplus collections) Seller Asset Initial period Adjustment to gain/loss Subsequent periods Revenue Buyer Liability When probable and measurable

13. Recourse obligations (deficient collections) Seller Liability when probable and measurable

14. Pledges/Sales of Future Revenues Counterparty outside of financial reporting entity

15. Pledges of future revenues Pledger Continue to report pledged revenues Accrual treatment Proceeds offset by liability Liability reduced by collections remitted Modified accrual treatment Other financing source for proceeds Expenditures for amounts remitted

16. Pledges of future revenues (cont.) Counterparty Receivable Reduced by receipts

17. Criteria for sale No active involvement (i.e., substantive action or performance) Revenue from exchange of goods or services Revenue from levies or assessments Revenue requiring applications Revenue with performance contingencies

18. Criteria for sale (cont.) Buyer can pledge or sell Seller is isolated from collections Seller has no access to cash (next slide) No prohibition against transfer or assignment Agreement cannot be cancelled

19. Seller servicing of revenues “Access” rule not violated if Payments made only from collections on specific accounts (no advances) Remittance occurs without delay Earnings accrue to transferee

20. Sales of future revenues Seller (Deferred) revenue Normally recognize over duration of agreement Buyer Asset for amount paid Amortize over duration of agreement Receivable/revenue when recognition criteria met

21. Residuals (surplus revenues) Seller Asset At same time as revenue recognition criteria are met for revenue Buyer Liability When probable and measurable

22. Intra-Entity Transfers

23. Sale of receivables -Separate statements Seller Remove individual accounts Accrual – gain/loss Modified accrual - revenue Counterparty Receivable at carrying amount Accrual – gain/loss Modified accrual - expenditure

24. Sale of receivables -within reporting entity Seller Remove individual accounts Transfer/subsidy Counterparty Receivable at carrying amount Transfer/subsidy

25. Transfers Without Exchange or Recourse(legally separate financing authority to securitize future revenue)

26. Pledge of future revenue to financing authority Primary government Not a liability Component unit Not an asset

27. Revenue recognition Primary government Revenue recognized as usual Simultaneous recognition of expense/expenditure Component unit Revenue recognized when primary government recognizes expense/expenditure

28. Disclosure

29. For all sales and pledges of future revenues Each year secured debt outstanding: Specific revenue and approximate amount Secured debt and its purpose Period of commitment Proportion of revenue stream pledged Pledged revenue compared to debt service Amount of pledged revenue disclosed may be netted per contract

30. For sales of future revenues In year of sale Specific revenue sold Estimated amount and assumptions used Period of sale Proportion of total specific revenue sold Proceeds compared to present value and assumptions used

31. Effective date Starting fiscal year ending 12/31/07 Deferral of revenue may be implemented prospectively Earlier application encouraged

32. Pollution Remediation Obligations GASB Statement No. 49

33. Scope Include: Existing pollution Not remediation associated with the future retirement of an asset Exclude: Prevention and control Non-remediation costs (fines, penalties) Nonexchange transactions (e.g., grants)

34. Elements of remediation Must include all direct outlays May include indirect outlays Includes outlays for equipment and facilities Same treatment as in GASB Statement No. 18

35. Basic treatment Normally expense and liability (accrual basis) Occasionally capitalized

36. Obligating events Imminent endangerment Violation of permit or license Regulator names or will name as responsible party Lawsuit to compel remediation (unless without merit) Voluntary commencement or voluntary legal obligation to commence

37. Timing of recognition Component measurable within a range Consider/re-evaluate at each benchmark Receipt of administrative order Participation in site assessment/investigation Completion of feasibility study Issuance of an authorization to proceed Remediation design and implementation (through post-remediation monitoring)

38. Measurement Measure at current value No need to include profit or risk premium if government itself will perform the work Use expected cash flow technique Probability-weighted cash flows Include recoveries

39. Contrast with traditional measurement Traditional measurement Only recognized if probable If estimate within range Best estimate within range If no best estimate, low end of range No gain contingencies

40. Contrast with traditional measurement (cont.) Expected cash flow technique Recognize even remote contingencies If estimate within range – weight amounts within range Net against anticipated recoveries

41. Illustration of estimated cash flows technique Estimated cash flows (3 scenarios) Probability $100 x 10% = $ 10 $200 x 60% = 120 $300 x 30% = 90 100% $220

42. Accounting forrecoveries Not yet realized or realizable Net against liability Realized or realizable Separate recovery asset

43. Illustration of treatmentof recoveries A B Remediation costs ($1,500,000) ($1,500,000) Recovery amounts $975,000 $975,000 Realized/realizable? Yes No Remediation liability ($1,500,000) ($525,000) Recovery asset $975,000 Net impact ($525,000) ($525,000)

44. Capitalization Prepare property for sale (time limit) Not to exceed estimated fair value Lower initial cost (time limit) No fair value cap (consider original estimate) Impairment with decline in service utility Consider similar asset less book value as cap Property with future alternative use Service utility after remediation

45. Governmental funds Expenditure upon receipt of goods or services Report net of recoveries (if measurable and available)

46. Disclosure Nature and source of obligations Amount/methods and assumptions/potential for change Estimated recoveries reducing liability Description of activity if not estimable

47. Implementation Liability reported as of the start of fiscal year 12/31/08 Earlier application encouraged

48. Medicare Part D GASB Technical Bulletin 2006-1

49. Background Medicare Prescription Drug Improvement and Modernization Act of 2003 Subsidized prescription drug coverage for elderly (started 1/1/06) Two options: Medicare Part D payments to retirees Reimbursement to employers with equivalent plans Retiree drug subsidy (RDS)

50. Basic concept RDS to be treated separate and apart from the other postemployment benefits (OPEB) being reimbursed No netting for accounting purposes No netting for actuarial purposes

52. Effective date Components Revenue recognition – immediately OPEB expense – simultaneously with related standard

53. New Implementation Guide Questions 2006 GASB Comprehensive Implementation Guide

54. Use of private-sector standards Cut-off date of November 30, 1989 FASB standards as amended as of that date Later amendments inoperative

55. Reporting model Debt-funded reserve accounts Relevant portion of debt not capital-related Exclude from calculation of invested in capital assets net of related debt

56. Reporting model (cont.) Reporting entity disclosure for fiduciary-type component units Requirement to disclose “how” unit reported Fiduciary funds not properly described as either “blended” or “discretely presented” Indicate simply that units are presented in fiduciary fund financial statements

57. Reporting model (cont.) Reporting correction of an error Two options Beginning balance restated Adjustment in notes Beginning balance followed by adjustment line No difference for change in accounting principle

58. Reporting model (cont.) Replacement of infrastructure reported using modified approach All replacement and removal costs are preservation costs (expensed in period in which incurred) Separate treatment of any portion of cost that provided more capacity or greater efficiency

59. Reporting model (cont.) Matching contribution to endowment Match amount qualifies as restricted net assets because of contractual constraint

60. Impairments Recoveries from others’ insurer Treated the same as recoveries from the government’s own insurer

61. OPEB Potential return of “excess assets” to employers Disqualifies arrangement as trust or equivalent arrangement Unless and until all plan obligations settled and no remaining risk

62. OPEB (cont.) Criteria for defined contribution plan Requires individual accounts Excludes situations where benefits are set by pension board

63. OPEB (cont.) Option to receive either cash or healthcare Anticipate employee elections and treat as two plans Requirement for annual approval of funding Irrelevant – focus on pattern of funding (substantive plan)

64. OPEB (cont.) “Excess” pension resources to be applied to OPEB Two separate plans Allocation of contributions and resources between plans

65. OPEB (cont.) Discount rate if earmarked resources available Use rate based on anticipated resources to be used

66. OPEB (cont.) Healthcare for retired volunteer firefighters Qualifies as OPEB even though not employees

67. OPEB (cont.) Long-term rate of return v. rate of return on long-term investments Effect of manner of payment on trust status Disbursements to other parties does not disqualify Consistent with underlying criteria of trust

68. Statistical section General bonded debt Include general obligation debt reported in business-type activities Debt limitations (if more than one) Use narrower limitation May mention other as well

69. Termination benefits (cont.) COBRA Separated employees pay blended premium Neither large-scale nor age-related? Use blended premium, thus no OPEB Either large-scale or age-related Present value of difference between age-adjusted premium and blended premium = OPEB cost

70. Medicare Part D Prohibition against netting prescription drug costs against anticipated federal reimbursements for purposes of projecting benefit costs May present additional information on portion of liability expected to be reimbursed Notes to the financial statements Supplementary information