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GASB Implementation Update

GASB Implementation Update. CSMFO Palm Springs, CA February 22, 2006. New guidance to be covered. Capital asset impairments (GASB 42) Statistical reporting (GASB 44) Detailed session later Restrictions associated with enabling legislation (GASB 46) Termination benefits (GASB 47).

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GASB Implementation Update

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  1. GASB Implementation Update CSMFO Palm Springs, CA February 22, 2006

  2. New guidance to be covered • Capital asset impairments (GASB 42) • Statistical reporting (GASB 44) • Detailed session later • Restrictions associated with enabling legislation (GASB 46) • Termination benefits (GASB 47)

  3. Capital Asset Impairments GASB Statement No. 42

  4. Key issue • Accounting for assets that are impaired, but still in service

  5. Private-sector • Authoritative guidance • FASB Statement No. 144 • Approach • Identify circumstances indicative of potential asset impairment • Apply “recoverability” test

  6. Example of recoverability test Carrying value $50,000 Estimated future cash inflows Use of asset $ 27,000 Salvage value $10,000 Total estimated future inflows $37,000 Carrying value over inflows $13,000 Result: Write down to fair value

  7. Potential relevance of FASB guidance to public sector • Relevant • Business-type activities that recover cost • Less relevant • Subsidized business-type activities • Irrelevant • Governmental activities

  8. GASB approach • Rejected option • One approach for business-type activities that recover cost • Another approach for other situations • Selected option • One approach for all situations based on decline in service potential (v. cash flows)

  9. Step 1: Is there an indicator of impairment? • Evidence of physical damage • Changes in legal or environmental factors • Technological changes or obsolescence • Changes in manner or duration of use • Construction stoppage Note: change in demand is not, of itself, an indicator of impairment

  10. Step 2: Is the impairment permanent? • Only permanent impairments recognized • All impairments presumed to be permanent

  11. Step 3: Is the “test of impairment” met? • Event or change must be outside the normal life cycle of the capital asset • The magnitude of the decline in service value must be large • Typically discussed by governing body or reported in the media

  12. Step 4: What is the dollar amount of the impairment? • What portion of the book value of the asset is equivalent to the service potential lost as a result of the impairment? • Method will depend upon nature of the impairment

  13. Evidence of physical damage Changes in legal or environmental factors Technological changes or obsolescence Restoration cost approach Service units approach Service units approach Reason Measurement

  14. Change in manner or duration of use Construction stoppage Two alternatives Service units approach Deflated depreciated replacement cost approach Lower of carrying value or fair value Reason Measurement

  15. Restoration cost approach • Used when evidence of physical damage • Create ratio: • Restoration cost/replacement cost • Deflated restoration cost/historical cost • Apply to carrying value

  16. Service units approach • Used for • Changes in legal or environmental factors • Technological changes or obsolescence • Changes in manner or duration of use • Compare previous service potential to current service potential • Ratio • Remaining units at original unit cost

  17. Deflated depreciated replacement cost approach • Used for change in manner or duration of use • Compare book value of asset with what would have been the book value of an asset acquired for the purpose for which now used

  18. Lower of carrying value or fair value approach • Construction stoppage (other than temporary)

  19. Subsequent recoveries May not be recognized, even to the extent of previously recognized losses

  20. Step 5: How should insurance recoveries be handled • Applicable generally • Treatment • Only recognize when realized or realizable • Same year as loss? Net (as in examples) • Restoration/replacement is a separate transaction (as in examples) • Other financing source in govt. funds • Potentially extraordinary item

  21. Step 6: How should the impairment be reported? • Three possibilities • Extraordinary item • Special item • Must be subject to management control • Program/operating expense

  22. Effective date • Fiscal periods starting after 12/15/04 • Earlier application encouraged

  23. Statistical Reporting GASB Statement No. 44

  24. Financial position v. economic condition • Financial position • Assets • Liabilities • Difference • Economic condition • Financial position • Fiscal capacity • Service capacity

  25. Need for change • Existing authoritative guidance framed too narrowly • Inconsistent application • Lack of description in NCGA Statement 1 • Lack of examples in NCGA Statement 1 • Newly available information

  26. Basic changes • Organize guidance based on objectives that are generally applicable • Detailed descriptions and illustrative material • Incorporation of data from SGAS 34

  27. Five objectives • Provide information on financial trends. How has a government's financial position changed over time? • Provide information on revenue capacity. What is the government's ability to generate own-source revenues?

  28. Five objectives (cont.) • Provide information on debt capacity. What is a government's debt burden and is it able to issue additional debt? • Provide demographic and economic information. What is the government's socioeconomic environment and how does the government compare to past periods and other governments?

  29. Five objectives (cont.) • Provide operating information. • How does the government operate? • What are its resources? • What is the context for understanding and assessing its economic condition?

  30. Financial Trend Data

  31. Specific presentations • Information about net assets (10 years) • Information about changes in net assets (10 years) • Information about fund balances (10 years) • Information about changes in fund balances (10 years)

  32. Information on Revenue Capacity

  33. Specific presentations • Information about the revenue base (10 years) • Information about revenue rates (10 years) • Information about principal payers or remitters (current year and 9 years previous) • Information about property tax levies and collections (10 years)

  34. Debt Capacity Information

  35. Specific presentations • Ratios of outstanding debt (10 years) • Ratios of general bonded debt (10 years) • Information about direct and overlapping debt (current year) • Information about debt limitations (current year and 9 years previous) • Information about pledged revenue coverage ( 10 years)

  36. Demographic and Economic Information

  37. Specific presentations • Demographic and economic indicators (10 years) • Information on principal employers (current year and 9 years previous)

  38. Operating Information

  39. Specific presentations • Number of government employees (10 years) • Demand for or level of service (10 years) • Indicators of volume, nature, or use of capital assets (10 years)

  40. Effective date • Periods beginning after 6/15/05

  41. Restrictions Associated with Enabling Legislation GASB Statement 46

  42. Definition of enabling legislation • Two elements • Authorization to raise resources • Legally enforceable requirement that those resources be used for the purpose for which raised

  43. Are such resources “restricted”? • Local level • Typically there is legal enforceability by the state • State level • Sovereignty means there is nothing to stop a state from subsequently unilaterally changing the law • Compare to other types of legal restrictions

  44. Treatment – general rule • “Tantamount to a legally binding agreement between the government and the resource providers (the taxpayers)” • Normally properly classified as “restricted,” but should be reported separately within the restricted net assets category (compare expendable and nonexpendable)

  45. Potential reclassification • May be needed if… • Resources subsequently spent for some other purpose • Subsequent legislation specifically changed the purpose for which existing balances may be spent • Compare changes for resources raised subsequently • Never automatic • Always judged separately by source

  46. Effective date • Fiscal years beginning after 6/15/05 • Early implementation encouraged

  47. Termination Benefits GASB Statement No. 47

  48. Definition • Incentive for voluntary early termination • Settlement for involuntary early termination

  49. Termination benefits v. post-employment benefits • Post-employment benefits (pensions/OPEB) • Related to the past • Compensation for prior service • Termination benefits • Related to the present • Cost of discontinuing future service

  50. Change from scope of prior guidance • Previous guidance limited to special termination benefits • Voluntary • Short duration • Now extended to all types of termination benefits • Voluntary and involuntary • Regardless of duration

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