2005 Midwest Regional Professional Development Conference

1. AGA Topeka Chapter 2005 Midwest RegionalProfessionalDevelopment Conference Roberta Reese May 12, 2005

2. Overview • New Implementation Guide • Statement 40: Investment disclosures • TB 2003-1: Derivatives disclosures • Statement 46: Restricted net assets • Pollution remediation obligations • Sales and pledges • Statement 44: Statistical section

3. Comprehensive Implementation Guide • Released in September 2004 • Updates the 2003 edition which consolidated the existing guides • Statement 40 Guide incorporated • 800 pages, includes 1,245 questions • Exhibits and exercises • Annual updates 2004

4. Statement No. 40—Deposit and Investment Risk Disclosures Issued March 2003 Effective for Periods Beginning After June 15, 2004

5. Deposits and Investments Risks • Risks are the focus • Fair value considers variabilities of cash flows discounted for time value and risk

6. Disclosures by Investment Type • Investments should be organized by investment type, such as: • U.S. Treasuries • Corporate bonds • Commercial paper • Dissimilar investments should not be aggregated

7. Level of Detail • Generally, the disclosures should be made for the primary government for which disclosures are essential for fair presentation

8. Level of Detail • Risk disclosures should also be made for: • governmental and business-type activities, • individual major funds, • nonmajor funds in the aggregate, or • fiduciary fund types when the risk exposures are significantly greater than the deposit and investment risks of the primary government

9. Level of Detail—An Example • A capital projects fund, because of its investment in one issuer of corporate bonds, is exposed to a concentration of credit risk. However, the primary government’s total investments might not indicate a concentration risk. In this case, additional disclosure should be made for the capital projects fund’s exposure to a concentration of credit risk.

10. Interest Rate Risk • The risk that changes in interest rates may adversely affect an investment’s fair value • Five methods identified, must choose one: • Specific identification • Weighted average maturity • Duration • Simulation model • Segmented time distributions

11. Specific Identification

12. Segmented Time Distribution

13. Highly Sensitive Investments • A debt investment with contract terms that make the investment’s fair value highly sensitive to interest rate changes

14. Highly Sensitive Investments: Examples • Inverse floaters • Variable coupons with multiplier [for example, coupon varies by 125% of London Interbank Offered Rate (LIBOR)] • Collateralized mortgage obligations, such as interest-only or residual tranches

15. Credit Risk • Disclose credit quality as of year-end • Includes corporate debt, state and local governments, external investment pools • Exempt: Debt investments with explicit guarantee of US government—GNMA • If not rated, indicate as much

16. Custodial Credit Risk • Disclose only “Category 3” • Deposits that are uninsured and uncollateralized • Uninsured investments that are either held by the: • Counterparty, or • Counterparty’s trust department, but not in the name of the government

17. Concentration of Credit Risk • Defined as investments of more than 5 percent in any one issuer • Excluded: • US government debt • Debt explicitly guaranteed by the US government • Pooled investments such as mutual funds or external investment pools

18. Foreign Currency Risk • Applies to deposits and investments • Disclose currency • If debt security, disclose interest rate risk

19. Deposit and Investment Policies • Disclose only those policies that are relevant to the risks that are disclosed • In other words, if there is no risk disclosure, no policy disclosure is required

20. Effective Date • Fiscal years beginning after June 15, 2004 • Earlier application is encouraged

21. Technical Bulletin 2003-01 Disclosures for Derivatives Not Reported at Fair Value

22. Derivatives—Disclosures • Previous guidance provided in Technical Bulletin 94-1 • Final TB issued in June 2003 • Effective date—Periods ending after June 15, 2003 (FYE June 30, 2003)

23. Derivatives—Disclosures • Objective of the derivative • Significant terms • Notional amount • Interest rates • Embedded options • Effective date and ending date • Fair value

24. Derivatives—Disclosures • Risks • Credit • Interest rate • Basis • Termination • Rollover • Market access • Associated debt—effect of the derivative on net cash flow

25. Statement 46: Net Assets Restricted by Enabling Legislation

26. Net Assets • Two Issues: • Clarifies “legally enforceable” • Requires separate reporting of net assets restricted by enabling legislation

27. Net Assets • Enabling legislation authorizes the government to assess, levy, charge, or otherwise mandate payment of resources (from external resource providers) and includes a legally enforceable requirement that those resources be used only for the specific purposes stipulated in the legislation

28. Net Assets • Legally Enforceable: • The government can be compelled by an external party to use resources only for a specific purpose • Based on presumption (and legal opinion?) • May never be proven • “Tainting” the pool?

29. Net Assets • “New” enabling legislation to replace existing law • New resources • Remaining balances • Noncompliant use of restricted assets • Re-evaluate classification • Reclassify as unrestricted • Maintain restriction

30. Net Assets • Net assets restricted by enabling legislation should be displayed separately from other restricted assets • To emphasize different level of influence

31. Pollution Remediation Obligations

32. Pollution Remediation Obligations • What types of obligations are out there? • Range from superfund sites to brownfields • Issues addressed in the project • What is the obligating event? • How should the obligation be measured? • Preliminary Views document

33. Pollution Remediation Obligations • Scope • Pollution remediation obligations • Except Statement 18 (landfills) • No asset retirement obligations • No pollution prevention obligations • Cost accumulation, not fair value • Current cost, not present value • Expected cash flow, rather than best estimate

34. Two ContingenciesNeither is Probable

35. Probable Together

36. Pollution Remediation Obligations • Recognition triggers—liability when: • Imminent endangerment compels action • Named as responsible party • Named in lawsuit to enforce action • Cleanup or containment commenced • Recognize component when measurable (benchmarks approach)

37. Pollution Remediation Obligations • Current cost based on reasonable and supportable assumptions about future events • laws expected to be in effect • technology expected to be used

38. Pollution Remediation Obligations • What costs are to be included in liability? • Pre-cleanup site assessment, feasibility study, design, etc. • Cleanup, containment, disposal activities • Oversight and enforcement costs • Operation and maintenance of the remedy and monitoring • Entity must decide whether to include indirect and non-incremental costs

39. Pollution Remediation Obligations • What is the debit entry? • Generally expense • Can defer expense under FASB Stmt 71 • Capitalize in certain situations • Do NOT record liabilities for capitalizable costs!

40. Pollution Remediation Obligations • Capitalize if • Cleanup to prepare property for sale (limited to FV)* • Polluted property bought and cleaned for service (cap)* • Asset impaired and cleanup restores lost service utility (cap) * Capitalize if incurred within a reasonable period

41. Pollution Remediation Obligations • Recoveries—net against expense • Recoveries from other parties • Recognize consistent with liability (expected cash flow technique) • Insurance recoveries • Recognize as separate recovery assets when realized or realizable • If not realized or realizable—offset against liabilities

42. Pollution Remediation Obligations • Accretion • Adjust liability annually for changes • Inflation or deflation • Price increases/decreases for specific cost elements • Changes in technology • Changes in laws or regulations • Same as Statement 18

43. Pollution Remediation Obligations Timetable: • Preliminary Views—March 2005 • Exposure Draft—December 2005 • Statement—Fall/Winter 2006

44. Sales and Pledges of Receivables and Future Revenues

45. Sales and Pledges • Scope of the project—government receives proceeds from a third party in exchange for the rights to future cash flows from: • Receivables: • Delinquent property taxes • Uncollected fines • Mortgages • Student loans • Future revenues

46. Sales and Pledges Scope of the project: • Also includes situations in which the government does not receive proceeds, but pledges future cash flows • Primary government pledges revenues to debt-issuing component unit

47. Sales and Pledges Added to the agenda in 2004: • TB 2004-1 (tobacco settlement) concerns • Budgetary pressures to accelerate cash flows • Current lack of disclosures about pledged revenues • Need for government-specific standards

48. Sales and Pledges Sale or borrowing? • Intent of the parties, terms of the agreement • Continuing involvement—control • Does the transferor government retain control, or is control relinquished? • Criteria for receivables • Criteria for sales

49. Sales and Pledges Are receivables sold or pledged? • Transferee’s ability to sell or pledge • Isolation • Legally separate • No access to cash • Source and timing of payments • Satisfaction of accounts • Bankruptcy protection • Obligation to replace or repurchase accounts

50. Sales and Pledges Are future revenues sold or pledged? • Transferee’s ability to sell or pledge • Transferor’s continuing active involvement in the generation of the revenues • Excludes own-source revenues • Taxes • User charges • Grants, entitlements