Jamie Matthews, CPA May 2013

1. GASB 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Jamie Matthews, CPA May 2013

2. Introduction • Objective: provide guidance for reporting deferred outflows, deferred inflows and the net position in the Statement of Financial Position • Effective Date: for periods beginning after 12/15/11 (FYE 12/31/12 & FYE 6/30/13) • Deferred Outflows: reported in a separate section following assets • Deferred Inflows: reported in a separate section following liabilities

3. Statement of Net Position • Statement of Net Position should report Net Position, rather than net assets, proprietary or fiduciary fund balance, or equity • Governments are encouraged to present the government-wide Statement of Net Position in a format that displays: • Although a Balance Sheet format may be used:

4. Net Investment in Capital Assets Component of Net Position • Changed title • From: “Investment in capital assets, net of related debt” • To: “Net investment in Capital Assets” • Calculated the same as the old except related deferrals are now included

5. Financial Reporting for Governmental Funds • Deferred outflows/inflows that are required to be reported in a governmental fund balance sheet should be presented in a format that displays:

6. Disclosures • Details of the different types of deferred amounts in the notes to the financial statements if significant components of the total deferred amounts are obscured by aggregation • Disclosure in the notes to the financial statements is required only if the information is not displayed on the face of financial statements

7. Transition • Applied retroactively by reclassifying the statement of net position and balance sheet information, if practical, for all prior periods presented • In the period this Statement is first applied, the financial statements should disclose the nature of any reclassification and its effect • Also, the reason for not reclassifying statement of net position and balance sheet information for prior periods presented should be explained

8. GASB 65Items Previously Reported as Assets and Liabilities Jamie Matthews, CPA March 2013

9. Introduction • Objectives: • Properly classify certain items that were previously reported as assets and liabilities as deferred outflows of resources or deferred inflows of resources, or • Recognize certain items that were previously reported as assets and liabilities as outflows of resources (expenses or expenditures) or inflows of resources (revenues)

10. Introduction • Prior to this statement, GASB only identified 3 items as deferred outflows/inflows: • Deferred outflow/inflows for the changes in fair value of hedging derivative instruments (GASB 53) • Deferred inflow of resources to be reported by a transferor government in a qualifying service concession arrangement (GASB 60) • Deferred inflows for proceeds from the sale of future revenue (GASB 48)

11. Introduction • Effective Date • For periods beginning after 12/15/12 (FYE 12/31/13 & 6/30/14) • Gilbert Associates Recommendation: • We encourage most clients to • implement GASB 63/65 at the same time

12. Definitions • Assets • Resources with present service capacity that the government presently controls • Present service capacity - is an asset in its existing capability to enable the government to provide services, which in turn enables the government to fulfill its mission

13. Definitions • Liabilities • Present obligations to sacrifice resources that the government has little or no discretion to avoid

14. Definitions • Deferred Outflow of Resources • Consumption of net assets by the government that is applicable to a future reporting period • Deferred Inflow of Resources • Acquisition of net assets by the government that is applicable to a future reporting period

15. Definitions • A deferred outflow of resources has a positive effect on net position, similar to assets, and a deferred inflow of resources has a negative effect on net position, similar to liabilities. • Notwithstanding those similarities, deferred inflows/outflows of resources should not be included in those sections of a statement of financial position.

16. How GASB Determined the Proper Bucket

17. Still an Asset! • Prepayments • Some respondents to Exposure Draft expressed concerns with classifying prepayments as assets. • Concern: prepayments relate to future periods and should be classified as deferred outflows of resources. • Board doesn’t disagree prepayments may relate to future periods; however, Board established a hierarchy approach for applying definitions. • Regarding prepayments, Board believes they meet definition of an asset as entity controls use of prepayments to provide services to citizens regardless of period in which services will be provided.

18. Still an Asset! • Purchase future revenues from a Gov outside the financial reporting entity • Cable TV initial subscriber install costs • Capitalized incurred costs related to regulated activities • Net pension plan position in excess of employer’s liability

19. Still a Liability! • Advance of derived tax revenue nonexchange • Advance from grantor (if eligibility requirements, other than time requirements, have not been met) • Ex: Revenue on expenditure-driven grant received before the incurrence of eligible costs. Time requirement is met, but no eligible costs. • Debit Deferred Revenue, Credit Cash • Receipt of prepayment • Cable TV hookup revenue in excess of selling costs • Premium revenues for insurance entities and public entity risk

20. Still a Liability! • Commitment (with the obligation to make or acquire a loan) • Fees to guarantee the funding of mortgage loans • Fees received for arranging a commitment directly between a permanent investor and a borrower • Refunds imposed by a regulator

21. Deferred Outflows • Deferred amount on refunding debt (debit balance) • Why not an asset? • When value of resources required to refund old bonds exceeds the net carrying amount of old bonds, Board doesn’t believe resulting debit amount represents an increase in service capacity that government presently controls. • Resources cannot be exchanged for another asset or used to directly provide present service capacity and, therefore, do not meet definition of an asset.

22. Deferred Outflows • Deferred amount on refunding debt (debit balance) (continued) • Why not a current inflow/outflow? • Board concluded that reporting accounting ‘gain’ or ‘loss’ in the period old debt is refunded not only fails to report purpose of the transaction, but also distorts operating results in period the debt is refunded and in subsequent periods • The difference that results from refunding is not a separate ‘loss’ transaction, but rather reduction of interest savings to be obtained in future by substituting new interest rate for old • Loss on sale-leaseback

23. Deferred Inflows • Deferred amount on refunding debt (credit balance) • Advance of revenue from imposed nonexchange transaction (ex. property taxes and fines) • Why not a liability? • Resources received prior to the period when the resources are required to be used or when use is first permitted do not meet the definition of a liability

24. Deferred Inflows • Advance from a grantor (if all eligibility requirements, except for time, are met) • Ex: Government hasn’t recognized revenue solely because not yet considered available. They are eligible, but can’t spend it yet. • Advance payments by provider and resources received in advance by recipient in government-mandated nonexchange transactions and voluntary nonexchange transactions, including “reimbursement-type” or “expenditure driven” grant programs, DO NOTmeet definition of asset and liability, respectively, when only eligibility requirement not met is time requirement.

25. Deferred Inflows • Advance from a grantor (continued) • Once all eligibility requirements have been met, other than time requirements, Board believes provider no longer maintains control of present service capacity of advance payments, and recipient no longer has present obligation to sacrifice resources. • If eligibility requirements, other than time, have been met, it’s not likely provider can reacquire its resources from recipients and, conversely, recipient likely no longer has obligation to provider. Therefore, Board concluded balance does not meet definition of asset for provider or liability for recipient.

26. Deferred Inflows • Sales of futures revenues when revenue recognition is appropriate • “Unavailable” revenue related to application of modified accrual accounting • Gain from sales-leaseback • Loan origination fees (excluding points) for mortgage loans held for resale prior to sale • Loan origination fees for points for lending activities and mortgage loans held for investment • Resources generated by current rates intended to recover costs that are expected to be incurred in the future (regulated industries)

27. Expense (Current Outflows) • Debt issuance costs • Why not an asset? • Because the costs incurred do not result in service capacity that the government presently controls • Why not a deferred outflow? • Because the costs are not applicable to a future period

28. Expense (Current Outflows) • Acquisition costs • Initial direct cost incurred by lessor for operating leases • Fees related to purchased loans • Gains or other reductions of net allowable costs intended to reduce rates over future periods (regulated industries)

29. Revenue(Current Inflow) • Loan origination fees (excluding points) related to lending activities • Commitment fees realized upon exercise of expiration of commitment • Commitment fees charges (with obligation to make or acquire a loan or to satisfy an obligation when exercise is considered remote) • Fees received from purchased loans

30. Revenue (Current Inflows) • Loan origination fees (excluding points) for mortgage loans held as investments • Loan origination fees (excluding points) for mortgage loans held for resale after sale • Fees realized after the funding of mortgage loans has occurred or after the commitment to guarantee the funding of mortgage loan expires • Fees realized when a commitment is arranged directly between a permanent investor and a borrower

31. Other Items • Major Funds - Criteria for determining major funds will included deferred outflows and deferred inflows • Term Deferred – Limited to items reported as deferred outflows of resources or deferred inflows of resources

32. For More Information: Jamie Matthews, CPA Gilbert Associates, Inc. jamie@gilbertcpa.com