GASB Update

1. GASB Update

2. New GASB Pronouncements

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

4. Background GASB Concepts Statement No. 4 introduces: Deferred outflows of resources Deferred inflows of resources GASB will identify which items should be classified in these categories GASB 65

5. Deferred Outflows Definition – a consumption of net assets by the government that is applicable to a future reporting period. Positive effect on net position, similar to assets. (Debit) Definition – resources with present service capacity that the government presently controls. Prepaid rent – Yes Advance to grantee (time requirement not met) – No Deferred Outflow Asset

6. Deferred Inflows Definition – an acquisition of net assets by the government that is applicable to a future reporting period. Negative effect on net position, similar to liabilities. (Credit) Definition – present obligations to sacrifice resources that the government has little or no discretion to avoid. Payment for services not yet performed? – Yes Proceeds from sale of future revenues? – No Deferred Inflows Liabilities

7. GASB 53 Hedging Derivatives Deferred Outflow – decrease in value Deferred Inflow – increase in value GASB 60 Service concession arrangements Deferred Inflow – Consideration received up front Decisions to date

8. Review items currently reported as assets or liabilities Three options: Continue to report as asset/liability Report as a deferred outflow/inflow of resources Report as an outflow/inflow of the period Goal

9. Asset Deferred Outflow • Resources provided by a grantor to a grantee when the only eligibility criterion that has not been met by the recipient is a time requirement • If other eligibility requirements are not met = receivable

10. Asset Deferred Outflow • Excess of the reacquisition price of refunded debt over its net carrying amount. $ 95 Outstanding debt $100 New debt issued $ 5 Deferred outflow (amortize in a systematic and rational manner)

11. Asset Deferred Outflow • Payments made within the financial reporting entity to purchase the right to future revenue • A loss on a sale-leaseback transaction • Certain items associated with lending activities and mortgage banking activities

12. Asset Outflow • Debt issuance costs (other than prepaid insurance) • Initial direct costs of operating leases • Acquisition costs related to insurance activities • Certain items associated with lending activities and mortgage banking activities

13. Liability Deferred Inflow • Revenue of a governmental fund that is not recognized solely because it is not yet considered to be available • Property taxes received or recognized as a receivable prior to the period they were intended to finance

14. Liability Deferred Inflow • The excess of the net carrying amount of refunded debt over its reacquisition price $100 Outstanding debt $ 95 New debt issued $ 5 Deferred inflow

15. Liability Deferred Inflow • Other imposed non-exchange revenues received or recognized as a receivable prior to the period when the use of the resources is either required of first permitted • Resources received from a grantor when the only eligibility criterion that has not been met by the recipient is a timing requirement • If other eligibility criteria not met = liability • Proceeds from the sale of future revenues

16. Liability Deferred Inflow • A reduction in the present value of the payments due from the lessee under a capital lease as a result of the lessor’s passing on the economic advantages of a refunding of tax-exempt debt

17. Liability Deferred Inflow • Payments received within the financial reporting entity for the right to future revenues • Gain on sale-leaseback transaction • Certain items associated with lending activities and mortgage-banking activities

18. Liability Inflow • Loan origination fees received (other than the portion related to points) in connection with lending activities • Certain items associated with lending activities and mortgage banking activities

19. Determination of Major Funds (10 percent and 5 percent tests) Application of 10 percent and 5 percent tests (use the combination) • Assets + deferred outflows of resources • Liabilities + deferred inflows of resources

20. Use of term “deferred” • Future practice • Use limited to deferred outflows/inflows of resources

21. Note Disclosure • This used to be classified as an asset, but is now classified as a deferred outflow. OR • This used to be classified as an asset, but is now classified as an outflow.

22. Financial statement periods beginning after December 15, 2012. Earlier application encouraged. Effective Date

23. Technical Corrections GASB Statement No. 66

24. GASB’s Objective Resolve conflicting guidance • Issuance of GASB 54 – Conflicts with GASB 10 • Issuance of GASB 62 – Conflicts with GASB 13 and 48

25. Conflicting Guidance Requires risk financing activities to be accounted for in either a general fund or internal service fund, if a single fund is used. Allows for certain risk financing activities to be reported in a special revenue fund. GASB 10 GASB 54

26. GASB 10 language limiting risk financing activities to general fund and internal service fund was deleted. Governments should base their fund type decision on the nature of the activity to be reported. Resolution

27. Conflicting Guidance Provides guidance on accounting for operating lease payments with scheduled rent increases that could be perceived as a prohibition against the use of the fair value method. Permits the fair value method of accounting for operating lease payments. GASB 62 GASB 13

28. GASB 62 was amended to specifically allow for recognition based on the fair value of the rental payments. Professional judgment should be used to determine whether rental payments are based on economic factors relating to the property or, instead are an inducement to the lessee. Resolution

29. Financial statement periods beginning after December 15, 2012. Earlier application encouraged. Effective Date

30. Accounting and Financial Reporting for Pensions GASB Statement No. 67 & 68

31. Statements affect only proprietary statements No effect on governmental funds Affects defined benefit pensions through plans administered as trusts or equivalent arrangements Replaces GASB 27 Introduction

32. Single Employer – pay according to experience (State has two) Agent Plan – each plan has own rates based on experience, but plan managed by someone else (State plus five cities) Cost Sharing – everyone pays same rate regardless of experience (Nearly all) Plan Types

33. Key Changes – Single and Agent Plans • Employer liability (What should the employer show) • Employer expense • Discount rate • Actuarial method (spread cost over service life of employee) • Amortization (how many years to defer, what is the amortization period)

34. Employer Liability Current: New: Total pension liability (TPL) (What have employees earned) Less: Fiduciary net position (FNP) (How much has the employer set aside) Net pension liability (NPL) (Employer liability will be the unpaid mortgage) Annual required contribution (ARC) (Mortgage payment supposed to pay for year) Less: Actual contributions(What you did pay on your mortgage for the year) Net pension obligation (NPO)

35. Employer liability – illustration Current: New: Total pension liability (TPL) $10,000 Less: Fiduciary net position (FNP) (8,500) Net pension liability (NPL) $ 1,500 Liability reported by employer:$1,500 Annual required contribution (ARC) $100 Less: Actual contributions (80) Net pension obligation (NPO) $ 20 Liability reported by employer: $ 20

36. Employer Expense Current: New: Calculation tied to cost Changes in the net pension liability (NPL) • Calculation tied to funding • ARC adjusted for the cumulative effect of prior differences between required contributions and actual contributions

37. Components of Expense • Annual service cost • Interest on the net pension liability • Projected earnings on plan investments • The full effect of any changes in benefit terms • Amortization of deferred outflows/inflows of resources

38. Discount rate Current: New: Modification necessary if it is expected that FNP will not be sufficient to pay benefits to active employees and retirees Single blended rate • Estimated long-term investment yield for the plan

39. Discount Rate – Single Blended Rate • Single rate equivalent to the combined effect of using the following rates: • For projected cash flows (including future contributions) up to the point the FNP will be sufficient • Long-term expected rate of return on plan investments • For projected cash flows beyond that point • A yield or index rate on tax-exempt 20-year, AA or higher rated municipal bonds.

40. Actuarial Method Current: New: No tie to actuarial method used for funding All employers will use the entry age method for accounting and financial reporting purposes • Whatever actuarial method is used for funding • Six acceptable methods • Must be applied within parameters defined by GASB

41. Amortization Circumstances that could affect the net pension liability (NPL) • Changes in benefit terms • Changes in economic and demographic assumptions • Differences between economic and demographic assumptions and actual experience (other than investment returns) (i.e. changes in life expectancy, inflation etc.) • Differences between expected and actual investment returns

42. Amortization Current: New: Amortize over a much shorter period Different periods, depending on the circumstances • Amortize over a period not to exceed 30 years

43. Amortization • Amortization period • Changes in benefit terms • Immediate recognition • Changes in economic and demographic assumptions (ie. People retire later than expected) • Closed period equal to the average remaining service period of plan members • Average remaining service period of retirees = 0

44. Amortization • Periods (continued) • Differences between economic and demographic assumptions and actual experienced (other than investment returns) • Closed period equal to average remaining service period of plan members • Average remaining service period of retirees = 0 • Differences between expected and actual investment returns • Closed 5-year period

45. Cost Sharing Plans Key changes: • Employer liability • Employer expense

46. Employer liability (cost-sharing) Current New Liability equal to the employer’s proportionate share of the total NPL of all participating employers • Liability only if employer contribution is less than the contractually required amount

47. Employer expense (cost-sharing) Current New Expense = employer’s proportionate share of total pension expense of all participating employers • Expense = contractually required contribution

48. Note Disclosure (cost Sharing) • Plan description • Information about the employer’s proportionate share of the collective net pension liability (NPL) • Assumptions and other inputs • Fiduciary net position (FNP) • Other information

49. RSI (cost Sharing) • 10-year schedules • Schedule of funding progress • Employer contributions • Agent and Single – Net Asset Schedule • URS will provide templates for notes and schedules

50. Potential Impact Considerations • How much work will implementation be? • URS implements many of the difficult elements of the standards • URS will provide amounts to be reported • URS will provide footnote and RSI templates