GASB Update 2008: Where do we go from here?

Presented by Eric S. Berman, CPADeputy ComptrollerCommonwealth of MassachusettsMarch 2008

First… a word from our sponsors

The views expressed in this presentation are those of the speaker. Official positions of the

Commonwealth of Massachusetts are determined only after extensive due process

and deliberation.

Recently Issued GASB Pronouncements

GASB Statements Implementation

GASB Statements Implementation 2008 2009 2010 2011

nStatement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future RevenuesnStatement No. 50, Pension Disclosures

GASB Statements Implementation

2008 2009 2010 2011nStatement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations

RETROACTIVE APPLICATION

nStatement No. 52, Land and Other Real Estate Held as Investments by Endowments

RETROACTIVE APPLICATION

nStatement No. 51, Accounting and Financial Reporting for Intangible AssetsnEXPOSURE DRAFT, Accounting and Financial Reporting for Derivative InstrumentsnEXPOSURE DRAFT, Fund Balance Reporting and Governmental Fund Type Definitions

RETROACTIVE APPLICATION

RETROACTIVE APPLICATION

RETROACTIVE APPLICATION

HOT OFF THE PRESSES

GASB OPEB Standards

Statements 45 and 43

(Just the Basics)

Statement 45 (for Employers) n Subject: accounting and

reporting by employers for their OPEB expenses and obligations

n Applies to all employers that provide OPEB (that is, the employer pays all or part of the cost of the benefits, including implicit rate subsidies)

n Requires accrual-basis accounting for expense and measurement and disclosure of funded status (UAAL)

Statement 43 (for Plans)n Subject: reporting on

stewardship of plan assets by

n A trustee or plan administrator (stand-alone plan reporting) or

n An employer or plan sponsor with a fiduciary responsibility for the plan assets that includes the plan as a trust or agency fund in its own financial report

“Postemployment Benefits”As Defined in GASB Statementsn “Postemployment benefits”—benefits provided after

separation from employment as part of the total compensation for services, including: Pension benefits—

n Retirement incomen Other benefits (except postemployment healthcare) if

provided through a defined benefit pension plan Other postemployment benefits (OPEB)—

n Postemployment healthcare benefitsn Other forms (for example, life insurance) if provided

separately from a defined benefit pension plan

Postemployment Benefits:Substance of the Transactionn Postemployment benefits (pensions and

OPEB) are compensation Exchange transaction between employer and

employeesn Benefits are “earned,” during employment,

Benefits are not taken until after employment n The (accrual-basis) cost of benefits for a

period is part of the total cost of government services No issue on whether or not funding occurs

GASB 25/27Measurement Approachn GASB 43/45 almost the same as 25/27n Funding Friendly approach – higher interest

rates allowed if fundedn Some aspects of on behalf payments and

special funding situations within both GASB 43 and 45

Disclosure of Funded Status and Funding Progress

n Disclose the funded status as part of RSI and funding progress

n Disclose: Actuarial accrued liability (AAL) Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) (AAL

minus plan assets) Funded ratio (actuarial value of plan assets/AAL) Ratio of UAAL to covered payroll Notes to RSI regarding changes affecting the

interpretation of trends in the amounts reported

Effective Datesn Staggered implementation based on a government’s

phase for implementing GASB 34n Statement 45 will be effective for the employer’s

fiscal year beginning after December 15, 2006 (FY08) (Phase 1), 2007 (FY09) (Phase 2), or 2008 (Phase 3) (FY10)

n Statement 43 will be effective for the plan’s fiscal year beginning after December 15, 2005 (if largest employer is Phase 1) (FY07), 2006 (if largest is Phase 2) (FY08), or 2007 (if largest is Phase 3) (FY09)

n Earlier implementation is encouraged

Pension Disclosures

GASB 50

Pension Disclosures

n To conform the pension disclosures with the OPEB disclosures

n Notes to financial statements would disclose the funded status of the plan as of the most recent actuarial valuation date. Defined benefit pension plans also would disclose actuarial

methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI.

n Implementation FY08

Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues

Statement No. 48

Sales and Pledges-Scope

n Government receives proceeds in exchange for the rights to future cash flows from: Receivables:

n Delinquent property taxes

n Mortgages n Student loans

Future Revenues

n Guidance is provided for all transactions involving the transfer of assets (sold or donated) between components of a common reporting entity, including individual funds. No new basis, carrying value is retained Difference is a transfer/subsidy

Sales and Pledges-Scope

Sales and PledgesIs it a Sale or a Borrowing?n Borrowing by default, unless

you can prove otherwise, based on evaluation of

n Continuing involvement—control

n Does the transferor government retain control, or is control relinquished? Criteria provided for

receivables Criteria provided for future

revenues

What is the Intent of the parties? The terms of the agreement may not be determinative

Are receivables sold or pledged? n Is the transferee able to sell or pledge?n Are the receivables and cash collected

isolated from seller (and its creditors) Legally separate No access to cash Source and timing of payments Satisfaction of accounts Bankruptcy protection

n Is there an option or ability to replace or repurchase accounts?

Receivables

Receivables

If sale criteria are not met (collateralized borrowing):

n Pledging government: Does not de-recognize receivables Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure)

n RESULT - Transferee government recognizes a receivable

If the conditions for sale treatment are met:n Selling government:

De-recognizes receivables Recognizes revenue/gain (loss) in the government-wide

statements or enterprise funds for the difference between proceeds and carrying value.

Proceeds are recognized as revenue in governmental funds (net carrying value assumed to be zero)

n Purchasing government: Intra-entity--Purchased receivables are reported at carrying

value Outside of the reporting entity--receivables at cost

Receivables

Key - Are future revenues sold or pledged? n Is the transferee able to sell or pledge?n Does the transferor continue to have active involvement

in the generation of the revenues? By nature, own-source revenues involve continuing

active involvement.n Taxesn User charges

Some grants, entitlements, shared revenues, rents, royalties may meet the criteria for sale treatment, depending on active involvement

n Isolation—similar to receivables

Future Revenues

Future Revenues

If sale criteria are not met (collateralized borrowing):

n Pledging government: Continues recognition of revenues pledged Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure)

n Transferee government recognizes a receivable

If the conditions for sale treatment are met:

n Selling government: Has no asset to de-recognize for future

revenues Proceeds will usually be recognized as

deferred revenue and amortized over the life of the agreement

Deferral depends on why revenue had not been previously recognized by the seller

Future Revenues

If the conditions for sale treatment are met:n Purchasing government:

Intra-entity--Payment to selling government for rights to future revenues is reported as a deferred charge (and amortized)

Outside of the reporting entity--asset (rights) reported at cost

n Applied prospectively

Future Revenues

Other assets and liabilitiesn Assets:

Residual interests—subordinate note or residual certificate that represents the rights to:n Excess receivable collections (probability of

collection)n Excess future revenues (revenue recognition

event)n Liabilities:

Recourse and other obligations (FAS 5)

Sales and Pledgesn Disclosures—Future Revenues:

For direct or indirect pledges (while debt is outstanding)n What revenue?n Purpose of the debtn For how long?n Significance of pledged amountn Coverage

For future revenues sold (in the year of the sale)n What revenue?n For how long?n Significance of amount soldn Present value of receivables

Sales and Pledges Tax Increment Revenues Pledged EXAMPLE – NOT

FACTUALThe Commonwealth has pledged a portion of future sales tax revenues to repay $2.8 million in sales tax increment bonds issued in June 2007 to finance the refurbishing of the Worcester Convention Center. The bonds are payable solely from the incremental sales taxes generated by increased retail sales in a specified district contained in legislation. Incremental sales taxes are projected to produce 128 percent of the debt service requirements over the life of the bonds. Total principal and interest requirements for the bonds are $3,490,900, payable semiannually through June 2017. For the current year, principal and interest paid and total incremental sales tax revenues were $395,150 and $403,291, respectively.

Sales and PledgesSale of Future Rental Revenue - EXAMPLE

During the year, the city entered into an agreement with a private party under which the city relinquishes its rights to receive and retain future rental income from beachfront properties owned by the city. In July, the city received a lump-sum payment of $13.1 million in exchange for 100 percent of its rights to the rental payments through December 2030. Total rental income from the beachfront properties during that period under normal occupancy conditions is estimated to be $26.9 million. Based on this estimate, the city calculated the present value of the future rental payments to be $12.9 million at the time of the sale.

Effective Date

n For Periods Beginning After December 15, 2006 (EG FY08)

n Retroactive Application, Except: Provisions for Future Revenue

Sales to be Applied Prospectively

Statement 49 — Accounting and Financial Reporting for Pollution Remediation Obligations

Legal Liability Standards

n Varies by state and law Many are similar to

Superfundn Liable under Superfund

— Current and previous site

owners and operators Disposers Transporters

Where Pollution is in Massachusetts Per our DEP

n Massachusetts alone has: 37 superfund sites 102 brownfields, 26 corrective action sites and nearly 1,100

other sites

Source Mass GIS

Accounting for Pollution Remediation Obligations - Scopen Pollution REMEDIATION Obligations

Excludes prevention or control obligations Excludes asset retirement obligations—

including landfills (Statement 18) Excludes fines, penalties, toxic torts,

product or process safety outlays (NCGA Statement 4)

5 Obligating Events – any one can trigger GASB 49a. Compelled to take remediation action

because of pollution-caused imminent endangerment

b. Violate pollution-prevention permit—for example, RCRA permit

c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

5 Obligating Events (continued)d. Named, or evidence indicates govt. will

be named, in lawsuit to participate in remediation

Excludes lawsuits having no merit

e. Govt. commences, or legally obligates self to commence

Limited to portion legally required to complete

Decision Tree on PollutionPart 1 Obligating Events

Decision Tree on Pollution Part 2 – Measurement Guidance

From Part 1

Go to Part 5 Go to Part 3

Decision Tree on Pollution Part 3 – Capitalization Guidance

From Part 2 Yes

Go to Part 4

Prepping property to sell OR to reuse

Decision Tree on Pollution Part 4 – Liability Guidance

From Part 3

Go to Part 5

Decision Tree on Pollution Part 5 – Disclosure

From Part 2 – (if not estimable)

From Part 4

Three Contingencies – GASB 49 Recognition – Leaky Storage Tank in Road Project

Case Expected Outlays

% Probability

Outlays x %

Best $150,000 25% $ 37,500

Most Likely

$320,000 60% 192,000

Worst $450,000 15% 67,500

100% $297,000

Compare previous to FASB 5

n FASB 5 (old standard and current standard for non-pollution remediation) Liability only when

PROBABLE AND reasonably estimable

Use most likely amount in a range, or if no likely amount – least amount in range of probabilities

n GASB 49 (Pollution remediation only) Recognize immediately if

any one of 5 triggers met Recognize each phase of

remediation as it become estimablen Phases include

remediation work, indirect costs, legal, site investigation, monitoring

Measure based on expected cash flows

Which Outlays?

n All direct outlays attributable to remediation All outlays—not just incremental costs Consistent with Statement 18 Includes payroll, pension, and OPEB

n May include indirect outlays General overhead A matter of professional judgment

Expected Recoveries from PRPs and Insurancen Reduce expense (and expenditure, if

available) and . . .n If not realized or realizable—

Net against remediation liabilitiesn When realized or realizable

Accrete liability and report separate recovery assets (cash or receivable)

Recoveries exampleExpected outlays $10,000

Expected recoveries -3,000

Net remediation expense $7,000

If recovery not realized or realizable:• Pollution remediation liability = $7,000

If recovery realized or realizable:• Recovery asset (receivable) = $3,000• Pollution remediation liability = $10,000

Financial Reporting Display

n Government-wide Program cost, or Special item, or Extraordinary item No separate display of liability required

n Governmental funds Expenditures recognized when liquidated with

expendable available resources No pollution liability, only payables for goods

and services used

Effective Date & Transition

n Period beginning after December 15, 2007 (EG FY08)

n Measure liabilities at beginning of that period so beginning net assets can be restated

n Apply retroactively if you have sufficient objective verifiable information to apply to prior periods

n Early application encouraged

Land and Other Real Estate Held as Investments by Endowments

GASB 52

Land and Other Real Estate Held as Investments by Endowmentsn Resolves conflict between governmental and

fiduciary funds that hold land investments – also includes investment pools

n Land held for investment will be held at fair market value, instead of historical cost Changes in value = investment income

n Effective for periods beginning after June 15, 2008 – (FY09)

Accounting and Financial Reporting For Intangible Assets

GASB 51

Introductionn Intangible assets included in description of capital

assets in GASB 34n Inconsistency in practice on how intangible assets

are treated for accounting and financial reporting: As capital assets As intangible assets as considered in APB 17 Expensed in period that costs are incurred

n Objective of Statement is to reduce the inconsistency in reporting

Scopen For purposes of the standard, intangible assets are

assets that possess the following characteristics: Lack of physical substance Non-financial nature Initial useful life extending beyond a single reporting period

n Examples may include: Easements (right-of-way, permissive, restrictive) Land use rights (water, timber, mineral, air rights) Internally developed computer software Patents, trademarks, copyrights Licenses, permits and other rights

Scopen Intangible assets acquired or created through

a combination (municipal merger) transaction: Goodwill—provisions of standard are not

applicable Other intangible assets—only recognition and

measurement provisions are not applicablen Provisions of standard are not applicable to

assets resulting from capital lease transactions reported by lessees

Classification

n All intangible assets subject to provisions should be classified as capital assets

n Existing guidance related to capital assets should be applied to intangible assets as appropriate: Recognition Measurement Depreciation (amortization for intangibles) Impairment Presentation Disclosure

n Rest of standard provides guidance specific to intangibles that should be applied in addition to, or in lieu of if appropriate, capital asset guidance

Recognition

n An intangible asset should only be recognized if it is identifiable: The asset is separable from the

government; or The asset arises from contractual or

other legal rights, regardless of whether rights are separable

Internally Generated Intangibles – e.g. Softwaren 2 characteristics:

Can be created or produced by the government or an entity contracted by the government OR

Acquired from a 3rd party and more than an incremental effort to customize to put in service

Internally Generated Intangibles – e.g. Software – supersedes AICPA SOP 98-1n Capitalization ONLY when preliminary stage

completed – preliminary stage includes: Determination of objective of project and is feasible Demonstration that intent is there to complete the

projectn Application development phase is when

management authorizes and commits to funding – capitalization starts

n Capitalization ENDS in post-implementation – operation phase

n If functionality increases in the future – betterment could occur

Effective Date and Transition

n Effective date is periods beginning after June 15, 2009 (FY2010)

n RETROACTIVE IMPLEMENTATION Go look for intangibles starting NOW Include legal counsel help as well as IT

staff

Hot off the Presses – Fund Balance Exposure Draftn Clarifies categories of fund balance for

governmental funds only (of course)n Effective date would be for FY2011 – retro

application for all periods presentedn Statement codifies the types of funds

Amends GASB 34 for definitions of General, Special Revenue, Capital Projects, Debt Service and Permanent Funds

n Comments due June 30, Public Hearing July 14th – Kansas City, Missouri

Hot off the Presses – Fund Balance Exposure Draftn Fund balance is initially separated between

Nonspendable fund balancen Not in a spendable form or n Legally or contractually required to be maintained

Spendable fund balancesn Usually cash, investments, receivables

Further classification into restricted, limited, assigned and unassigned fund balances

Hot off the Presses – Fund Balance Exposure Draftn Spendable fund balances

n Restricted fund balances Look to GASB 46 definitions

n Limited fund balances Committed balances by the “highest level of decision making

authority” Cannot be used for any other purpose BUT NOT legally

restricted Agreed to by executive and legislative branches

n Assigned fund balances Amounts intended to be used by the government but not restricted

or limited Expressed by government or high ranking official Could be special revenue, capital projects or debt service

fundsn Unassigned fund balances – all left in the general fund

Hot off the Presses – Fund Balance Exposure Draftn Spendable fund balance rules

General fund – restricted or unassigned unless prior appropriations continued – assigned or limited

Accounting policy becomes hugely important Stabilization / Rainy Day funds are specific

purpose – restricted or limited

Hot off the Presses – Fund Balance Exposure Draftn Disclosure

Financial Statementsn Aggregate in financials, details in notes unless government

decides to present details in financials Policies and procedures

n Limited fund balances – highest level of authority and action needed to modify or rescind a restriction

n Assigned fund balances – official authorized to assign amounts to a purpose and the policy of assignment

n Order of spending of restrictions – restricted or unrestricted first?

ENCUMBRANCES ONLY IN NOTES NOT IN FINANCIAL STATEMENTSn Each major fund and non-major funds in the aggregate

Disclose minimum fund balance requirements, if any

How does it look?

Next time – Derivatives!

Questions?SECTION 23, ROW 2, SEAT 17: Would you pay $50 to sit behind a pole?