GASB Update Baltimore AGA

1. GASB UpdateBaltimore AGA Dean Michael Mead September 17, 2014 The views expressed in this presentation are those of Mr. Mead. Official positions of the GASB on accounting matters are determined only after extensive due process and deliberation.

2. Overview • News from the GASB • Implementation Issues Related to Pensions • Communicating about Deferrals • Proposals • GAAP Hierarchy & Comprehensive Implementation Guide • OPEB • Fair Value Measurement and Application • Upcoming Proposals • Tax Abatement Disclosures • Leases • Fiduciary Responsibilities

3. GASB News • New chairman, David Vaudt, started July 1, 2013 – former state auditor of Iowa • All GASB pronouncements are available free on the website, www.gasb.org, including Statements, Concepts Statements, Interpretations, Technical Bulletins, and Implementation Guides • Online version of GARS now available through website • Basic view is free • The GASB Report has gone electronic and is now free • New quarterly electronic newsletter, GASB Outlook, also is available free • Sign up for both on the GASB website

4. Implementation of Statements 67 and 68 on Pensions

5. Implementation Guide to Statement 67 • Reporting by pension plans • Approved in June 2012 • Available to download free from the GASB website; printed copies can still be purchased • 99 questions and answers on topics including: • What constitutes a qualifying trust • Distinguishing between defined benefit and defined contribution plans • Financials statements, notes, and RSI • Measurement of the liability • Illustrations, topical index, full text of the Standards section

6. Implementation Guide to Statement 68 • Reporting by pension plans • Approved in December 2012 • Available to download free from the GASB website; printed copies can still be purchased • 272 questions and answers on topics including: • Special funding situations • Measurement of the liability • Determining a cost-sharing employer’s proportionate share • Notes and RSI • Transition • Illustrations, topical index, full text of the Standards section

7. Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date

8. Conflict in the Transition Provisions • Statement 68 allows reporting of pension-related deferrals at transition only if all amounts can be determined • At the same time, Statement 68 requires that contributions made to a pension plan subsequent to the measurement of the pension liability be reported initially as deferred outflows of resources and then recognized as pension expense in the following period • So, what do you do about contributions made after the measurement of the initial beginning net pension liability for the period of implementation of Statement 68, but before the start of that period?

9. Pension Transition Amendments • Amends transition provisions of Statement 68 • In all circumstances in which a contribution has been made between the measurement date of the beginning net pension liability and the beginning of the initial period of implementation of Statement 68, recognize the amount of the contribution as a beginning deferred outflow of resources • Eliminates potential understatement of restated beginning net position and expense in the first year of implementation • Other deferred outflows of resources/inflows of resources reported only if it is practical to determine all such amounts • Effective simultaneously with Statement 68

10. Request to Delay Implementation of Statement 68

11. Request to Delay Statement 68 • Some stakeholder groups requested an indefinite delay in implementation date until related auditing procedures have been implemented for a sufficient period • The concern was expressed that governments in multiple-employer pension plans will receive a modified audit opinion on their financial statements in the interim • Other individuals, organizations, and stakeholder groups requested that the implementation date of Statement 68 not be changed • Some of these groups urged the GASB and other organizations to find a solution that does not involve a delay in implementation

12. What Is the Issue? • Audit guidance proposed or being considered at that time by the AICPA’s State and Local Government Expert Panel • Addresses how existing audit guidance might be applied to Statement 68, particularly with regard to evaluating the completeness and accuracy of census data (information about the plan members) • Recommends that plans prepare schedules of information for that purpose • Considering recommending that agent plans obtain (1) a Service Organization Controls (SOC) 1 (type 2) report on their internal controls over additions to and deduction from individual employer accounts, or (2) an audit opinion on changes in fiduciary net position of each participating employer • Concern was that governments will receive modified audit opinions while these procedures are being worked out

13. How Did the GASB Respond? • Shortly after receiving the request for delay, the GASB: • Discussed the issue with the GASAC • Interviewed financial statement users to obtain their views on the possibility of delay and the reaction to audit opinion modifications in these circumstances • Interviewed auditors to better understand the SOC 1 (type 2) procedures, their experience with conducting them for the first time with new clients, and the potential for modified opinions • Examined financial reports of state-sponsored local government pension plans • Considered the reasons for and implications of implementation delays by other standards setters

14. How Did the GASB Respond? • Prepared a prospectus for a project that would consider four potential courses of action: • Delay the effective date of Statement 68 for all employers • Delay the effective date of Statement 68 for only agent employers • Delay the effective date of Statement 68 for only agent and cost-sharing employers • Do not delay the effective date of Statement 68 • Discussed the prospectus during a public meeting and voted unanimously not to delay the effective date of Statement 68

15. What Happens Now? • The GASB is making a concerted effort to educate stakeholders and the general public about the possibility of modified audit opinions in these circumstances and what they mean • Working to help governments avoid criticism for circumstances that are beyond their control and for which they bear no blame • Organizing a stakeholder resource group to consider activities, materials, and so on

16. Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

17. Statement No. 65, Items Formerly Reported as Assets and Liabilities

18. Elements of Financial Statements(Concepts Statement 4) • Assets: resources with present service capacity that the government presently controls • Deferred outflow 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 • Liabilities: present obligations to sacrifice resources that the government has little or no discretion to avoid • Deferred inflow 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

19. Elements of Financial Statements(Concepts Statement 4) • Net position • The residual of all elements presented in a statement of financial position • = assets + deferred outflows – liabilities – deferred inflows • Outflow of resources: a consumption of net asset by the government that is applicable to the reporting period • Inflow of resources: an acquisition of net assets by the government that is applicable to the reporting period

20. So…What Are Deferred Outflows and Inflows? • An inflow or outflow of resources has occurred • Flows related to the current period – revenues, expenses, expenditures, gains, losses, and so on • Flows related to future periods – deferred outflows and deferred inflows • Deferred outflows and inflows will eventually be recognized as expenses/expenditures and revenues • The outflows and inflows themselves are not deferred – the recognition of them as outflows and inflows is what is put off until a future period. • Deferrals are expenses/expenditures and revenues waiting to happen

21. Why? The Practical Answers • Statements 53, 60, 67 & 68 require deferrals • Statement 53 requires that annual changes in the fair value of hedging derivative instruments be reported as deferred inflows and deferred outflows of resources. • Statement 60 requires that upfront payments received by a government in a service concession arrangement be reported as deferred inflows of resources and recognized as revenue over the term of the arrangement. • Statements 67 & 68 defer certain pension costs and introduce them into pension expense systematically and rationally over multiple years • Deferrals are not assets and liabilities – they are neither resources with service potential nor obligations to sacrifice resources

22. Deferrals Raise Two Main Questions • “Where in the financial statements should deferrals be reported?” • “What should be done about all of the deferrals that are being reported as assets and liabilities?” • The Board knew that items now reported as assets and liabilities were likely deferrals, but Concepts Statement 4 clearly states that governments should report only those deferrals specifically required by the accounting standards

23. Proposals: Hierarchy of Generally Accepted Accounting Principles and Comprehensive Implementation Guide

24. The GAAP Hierarchy under Statement 55 • Officially established accounting principles—GASB Statements and Interpretations. • GASB Technical Bulletins and, if specifically made applicable to state and local governmental entities by the AICPA and cleared by the GASB, AICPA Industry Audit and Accounting Guides, and AICPA Statements of Position. • AICPA Practice Bulletins if specifically made applicable to state and local governmental entities and cleared by the GASB, as well as consensus positions of a group of accountants organized by the GASB that attempts to reach consensus positions on accounting issues applicable to state and local governmental entities. • Implementation guides (Q&As) published by the GASB staff, as well as practices that are widely recognized and prevalent in state and local government.

25. Proposed GAAP Levels Tentatively decided to reduce the GAAP hierarchy to: • Two Authoritative Categories • GASB Statements • Periodically incorporated in the Codification • Subject to AICPA Rule 203 • GASB Technical Bulletins, implementation guides (Q&As), and if specifically made applicable to state and local governmental entities by the AICPA and cleared by the GASB: • AICPA Industry Audit and Accounting Guides • AICPA Statements of Position • AICPA Practice Bulletins • Nonauthoritative

26. Authoritative GAAP Category (a) guidance must be: • Formally approved by the GASB • For the purpose of creating, amending, superseding, interpreting, clarifying, explaining, or elaborating on standards, AND • Exposed for a period of public comment Category (b) guidance must be: • Cleared by the GASB • Specifically made applicable to state and local governmental entities, AND • Exposed for a period of public comment

27. Placement of Literature • Discontinuation of Interpretations • Guidance from existing Interpretations and will be incorporated into a Statement by reference • Comprehensive Implementation Guide (CIG) • Tentatively classified as category (b) authoritative • Revised due process • Public exposure of guidance in the existing CIG and updates to the CIG going forward • Board clearance of the final document • Evaluation of individual Q&As prior to exposure • Remove or improve Q&As that only restate guidance directly from related statements • Move illustrations to the nonauthoritative appendixes

28. Nonauthoritative GAAP • Should first consider authoritative guidance for similar transactions or events, before considering nonauthoritative guidance • Nonauthoritative guidance should not conflict with or contradict authoritative GAAP • In evaluating the appropriateness of nonauthoritative literature, consider all of the following: • Consistency with the GASB Concepts Statements • Relevance to particular circumstances • Specificity of the guidance • General recognition of the issuer or author as an authority

29. Nonauthoritative GAAP (continued) • Sources of nonauthoritative accounting guidance and literature include: • GASB Concepts Statements • Pronouncements of the FASB, FASAB, IPSASB, and IASB • AICPA issue Papers • Technical Information Services Inquiries and Replies included in AICPA Technical Practice Aids • Practices that are widely recognized and prevalent in state and local government • Pronouncements of other professional associations or regulatory agencies • Accounting textbooks, handbooks, and articles

30. Exposure Documents • Proposed Statement would supersede Statement 55 • Exposure Draft approved in December 2013 • Proposed Implementation Guide would supersede all previous implementation guides • Exposure Draft approved in December 2013 • Comment period through December 2014

31. Proposal: Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions

32. Background on the Proposals • Pre-agenda research evaluating the effectiveness of existing standards on postemployment benefits began in 2006 • Project added to current technical agenda in 2008 • Two-phased project • Pensions administered through trusts • Statements 67 and 68 issued in June 2012 • Implementation Guides issued in June 2013 (Statement 67) and January 2014 (Statement 68) • OPEB and pensions not within scope of Statements 67/68 • Three Exposure Drafts approved by Board in May 2014 • Final Statements anticipated for June 2015

33. Fundamental Approach • Fundamental approach for OPEB is the same as required for pensions in Statement 68 • Viewed in the context of an ongoing, career-long employment relationship • Focus on the cost to taxpayers over time of providing government services • Accounting-based versus funding-based approach to measurement

34. Scope & Applicability • Applies same definition of OPEB as used in Statement 45 • All postemployment healthcare benefits • Postemployment benefits not provided through a pension plan • Addresses both defined benefit OPEB and defined contribution OPEB • Applies to employers & nonemployer contributing entities that have a legal obligation to make contributions directly to an OPEB plan or to make benefit payments as those payments come due • Special funding situations • Other circumstances

35. Scope & Applicability • Differentiates requirements based on whether OPEB is provided through plans administered through trusts in which the following criteria are met: • Employer/nonemployer contributions irrevocable • Plan assets dedicated to providing OPEB • Plan assets legally protected from creditors • If any part of the OPEB plan is administered through a trust that meets the specified criteria, apply the requirements for OPEB provided through an OPEB plan administered through a trust that meets the criteria

36. Defined Benefit OPEB Liabilities • Liability to a defined benefit plan • Liability to employees for OPEB • Consistent approach applied to all employers regardless of whether OPEB is administered through trust in which the specified criteria are met • Recognize: • OPEB liability • OPEB expense • Deferred outflows/inflows of resources related to OPEB

37. Liability to Employees for OPEB • Based on total OPEB liability—the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee service • Is OPEB administered through a trust that meets the specified criteria? • Yes—recognize net OPEB liability (total OPEB liability, net of OPEB plan fiduciary net position) • No—recognize total OPEB liability

38. Liability to Employees for OPEB: Measurement—Timing • Measurement date • As of date no earlier than end of prior fiscal year • Actuarial valuation date of total OPEB liability • If not measurement date, as of date no more than 30 months (+1 day) prior to FYE • Actuarial valuations at least every 2 years (more frequent valuations encouraged) • Should reflect changes between the date of the actuarial valuation and the measurement date

39. Total OPEB Liability: Measurement Approach • Three broad steps • Project benefit payments • Discount projected benefit payments to actuarial present value • Attribute actuarial present value to periods • Methods and assumptions • Generally, assumptions in conformity with Actuarial Standards of Practice • Fewer alternatives than in Statement 45 for methods and assumptions for GAAP reporting purposes • No changes to actuarial methods and assumptions used to determine funding amounts would be required

40. Total OPEB Liability: Measurement—Projection • Projections would include current employees (active and inactive) in accordance with: • Benefit terms • Any additional legal agreement(s) in force at the measurement date • Projections would exclude benefits provided through certain allocated insurance contracts

41. Total OPEB Liability: Measurement—Projection • Projections would incorporate expectations, if relevant, of: • Salary changes • Service credits • Automatic postemployment benefit changes (including COLAs) • Ad hoc postemployment benefit changes (including COLAs) if substantively automatic • Taxes or other assessments expected to be imposed on benefit payments • Consider established pattern of practice with regard to sharing of benefit-related costs with inactive employees

42. Total OPEB Liability: Measurement—Projection • Based on claims costs or age-adjusted premiums approximating claims costs, in accordance with Actuarial Standards of Practice • Not reduced by subsidies expected to be received for making benefit payments unless payments are providing Medicare benefits • Consider legal or contractual caps if determined to be effective

43. Total OPEB Liability: Measurement—Discounting • Single discount rate that reflects: • Long-term expected rate of return on OPEB plan investments to extent that plan fiduciary net position from specified resources is: • Projected to be sufficient to make benefit payments • Expected to be invested using a strategy to achieve that return • Yield or index rate for 20-year, tax-exempt general obligation municipal bond rated AA/Aa (or equivalent) or higher, to extent that conditions for long-term expected rate of return are not met • Calculated using the same process as required for pensions in Statement 68 • If not administered through a trust in which the specified criteria is met, the tax-exempt municipal bond rate is required to be used

44. Total OPEB Liability: Measurement—Attribution • Single method • Entry age actuarial cost method • Level percentage of pay • Applied on an employee-by-employee basis • Beginning in 1st period of benefit accrual and through all assumed exit age(s) through retirement • Same benefit terms to determine service cost as to determine actuarial present value of projected benefit payments

45. Total OPEB Liability: Measurement—Alternative Method • As in Statement 45, an alternative measurement method may be applied if fewer than 100 employees (active and inactive) are provided with benefits through the OPEB plan as of the beginning of the measurement period • Generally, same simplifications to assumptions can be used • Reference to U.S. Office of Personnel Management regarding age-based turnover experience rather than default tables

46. OPEB Plan Fiduciary Net Position Relevant only for OPEB administered through trust in which specified criteria are met Measured as of the same date as the total OPEB liability (measurement date) Measured using the same requirements as used for the defined benefit OPEB plan’s statement of fiduciary net position, including measurement of investments at fair value

47. Changes in Liability • Recognize most changes in liability for the current reporting period in OPEB expense in full in the current period, for example: • Service cost • Interest on total OPEB liability • Effect of benefit changes • Projected earnings on OPEB plan investments

48. Changes in Liability • Exceptions to recognizing changes in the liability in OPEB expense in full in the current period: • Changes in total OPEB liability: • Differences between expected and actual experience with regard to economic and demographic factors in the measurement of the total OPEB liability • Changes of assumptions in the measurement of the total OPEB liability • For OPEB administered through trust in which specified criteria are met: • Difference between projected and actual earnings on OPEB plan investments • Employer contributions

49. Changes in Liability

50. Changes in Liability: Employer Contributions • Relevant only for OPEB administered through trust in which specified criteria are met • During the measurement period: • Directly reduce liability (no expense impact) • Subsequent to measurement date: • Deferred outflow of resources related to OPEB • Directly reduce liability in next reporting period (no expense impact)