New GASB Statements: A Preparer’s Perspective

Tim Becker, CPAManager, Financial

Reporting SectionState of Michigan Office of Financial

ManagementNASACT Annual

ConferenceOmaha 2006

GASB Pronouncements Implemented This Fiscal Year

Statement 42: Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Statement 44: Economic Condition Reporting: The Statistical Section

Statement 46: Net Assets Restricted by Enabling Legislation

Statement 47: Accounting for Termination Benefits

Technical Bulletin 2006-1: Medicare Part D

Objectives of GASB 42

Establish requirements for accounting and reporting of impaired capital assetsPrior standards lacked a mechanism to

reduce carrying valuePrior to GASB 42 the only option to reduce

the value was through depreciation

Establish authoritative guidance for insurance recoveries for all funds

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Significant and unexpected decline in service utility indicated by: Physical damage Legal or environmental

changes Technological

development or obsolescence

Change in manner or duration of use

Construction stoppages

Impairment is not only for infrastructure

Key Factors in Decision Tree: Is event significant? Is decline in utilization unexpected?

IF YES to BOTH above 2, impairment is present. IF NO – disclose if asset is idle

Is evidence of temporary nature of impairment unavailable?

If NO – disclose if asset is idle Will asset continue to be used?

IF NO – write down to lower of carrying or FMV

Recoveries – separate transaction Other financing source or extraordinary item Can also be recoveries of non-capital items

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

How to identify impairments Clear policy and

procedures Target the

keepers of capital assets records

Provide specific examples in the policy and procedures

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Develop / Confirm policy – new policy should addressWho makes impairment decision

Must be able to gauge five factors explained before

Must judge if temporary or permanentMust be involved in deciding fair

market values or service unitsWho is in charge of disclosureinsurance recoveries

Statement 42 - Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Objectives of GASB 44

Improved the understandability and usefulness of information presented as supplementary information in CAFR Statistical SectionNCGA Statement 1 was prior

standard for statistical sectionLack of specificity in NCGA 1 led to

divergence of practiceNCGA 1 did not require government-

wide, accrual based information established by GASB 34

Statement 44 – Economic Condition Reporting

States if part of GFOA CAFR program are doing much of GASB 44 work already Financial trends Revenue Debt Demographic / Economic Operations

Key for states to focus onOPERATING INFORMATION – why?

Focus on information that isVerifiableReplicableTells the story that ‘should be told’

Statement 44 – Economic Condition Reporting

Statement 44 – Economic Condition Reporting

OPERATING INFORMATION – basic requirements:By GASB 34 Activity

category:Number of government

employees“Indicators” (e.g. performance

measures) of the demand of level of service

“Indicators” of capital asset usage

Pitfalls to watch out for as a middle manager recommending courses of action to a decision maker Not getting consensus on what an

“employee” is or what is the employee’s home agency

Not agreeing with policymakers up front as to what the key indicators should be for operations

What do you think key indicators should be for your state?

Statement 44 – Economic Condition Reporting

Objectives of GASB 46

Clarifies meaning of phrase “legally enforceable” as it relates to restrictions imposed on net asset use by enabling legislation Can’t be removed by

Government easily External – legal

constraints Can be imposed by

public interest groups or citizens in judicial finding

Statement 46 – Net Assets Restricted by Enabling Legislation

Succeeding in implementing 46Review all current restrictions

Special revenue funds are not necessarily restricted revenue

Beware of “earmarking”Work with legal or legislative staff

if uncertain on legislative intentCreate a database / spreadsheet of

restrictions

Statement 46 – Net Assets Restricted by Enabling Legislation

Statement 46 database or spreadsheetAgency/ Type of activityFundAccountLegal cite or source of restrictionInternal or external restrictionAnalysis (explanation for audit

trail)

Statement 46 – Net Assets Restricted by Enabling Legislation

Statement 46 database or spreadsheet Amount of net assets (%) that could be

restricted Category of restriction

Constitution Enabling Legislation External Restriction

Have any net assets been used for other than this purpose? What and why

Treatment for statutory restrictions if different than GAAP

Objectives of GASB 47

Provide guidance to governmental employers for accounting of all termination benefits Prior guidance only

covered special termination benefits (those offered for a short period of time)

Termination benefits are Early retirement incentives Severance benefits

Excluding pensions and OPEB (covered by other standards)

Statement 47 – Accounting for Termination Benefits

Keys for managerial successEstablish a line of communication

with HR decision makers toQuantify populationCalculate benefits dueUnderstand timing

Health care costs related to early retirement will increase pensions and OPEB

Work with actuary to make sure changes are done

Objectives of GASB Technical Bulletin 2006-1

Clarifies the application of existing standards of accounting and financial reporting to payments that an employer or DB OPEB plan receives from Federal Government pursuant to retiree drug subsidy provisions of Medicare Part DBulletin clarifies guidance by

providing responses to four common questions

T.B. 2006-1 Medicare Part D

Question 1: How should an employer account for and report payment from the Federal Government pursuant to retiree drug subsidy (RDS)?

Answer: The payment is a voluntary nonexchange transaction between the Federal Government and employer Record asset and revenue

Per GASB 33 Paragraph 7 Payment is a separate transaction from the

exchange of salaries and benefits for services between the employer and employee

T.B. 2006-1 Medicare Part D

Question 2: How does RDS payment affect the accounting and financial reporting by a DB OPEB plan?

Answer: The transaction does not affect accounting for employer contributions or the financial reporting presentation by a DB OPEB in which the employer participates An OPEB plan should apply measurement

requirements of GASB 43 to determine actuarial accrued liability, ARC, and annual OPEB without reduction for RDS payment

T.B. 2006-1 Medicare Part D

Question 3: How should an employer account for and report RDS payment to the DB OPEB plan?

Answer: plan administration dictatesOPEB administered as qualifying trust

RDS is an on-behalf payment for fringe benefits

Employer recognizes revenue and expense per GASB 24 and disclose amounts recognized

Multiple-employer OPEB not administered as a qualifying trust

Plan is to be reported as an agency fundEmployer recognizes asset and revenue

T.B. 2006-1 Medicare Part D

Question 4: How should a DB OPEB plan account for and report RDS payment to the plan?

Answer: GASB 43 Paragraph 34 requires the plan and its participating employer should apply the same actuarial methods and assumptions DB OPEB administered as a qualifying

trust should measure the actuarial accrued liability, ARC, and annual OPEB cost without reduction for RDS payments

Questions?Take advantage

of resources GASB Staff Early

implementing governments

NASACT members and groups

Don’t be afraid of mistakes, just keep them small enough!