Presentation on theme: "GASB Update Lisa R. Parker, CPA Project Manager"— Presentation transcript:
1 GASB Update Lisa R. Parker, CPA Project Manager Governmental Accounting Standards BoardThe views expressed in this presentation are those of Ms. Parker. Official positions of the GASB on accounting matters are determined only after extensive due process and deliberation.
2 Overview Pronouncements currently being implemented Projects currently being deliberated by the Board
3 Effective Dates—June 302015Statement 68—Pension Accounting for Employer and Nonemployer Contributing EntitiesStatement 69—Government Combinations and Disposals of Government OperationsStatement 71—Pension Transition for Contributions Made Subsequent to the Measurement Date2016Statement 72—Fair Value Measurement and ApplicationDepending on the state, one or both of the effective date slides will be used.
5 OverviewWhat: Existing standards for pension accounting and financial reporting by employers (Statement 27) have been updated and improvedWhy: Review of the effectiveness of Statement 27 found opportunities to significantly improve the usefulness of pension information reported by employersWhen: Periods beginning after June 15, 2014 (FYE and later)
6 Scope & ApplicabilityDefined benefit and defined contribution pensions provided through trusts that meet the following criteria:Employer/nonemployer contributions irrevocablePlan assets dedicated to providing pensionsPlan assets legally protected from creditorsExcludes all OPEBApplies to employers and nonemployer contributing entities that have a legal obligation to make contributions directly to a pension planSpecial funding situationsOther circumstances
7 Defined Benefit Pensions Liabilities to the pension plan (payables)Liabilities to employees for pensions“Net pension liability” (NPL)Total pension liability (TPL), net of pension plan’s fiduciary net positionTPL = actuarial present value of projected benefit payments attributed to past periodsFiduciary net position as measured by pension planSingle/agent employers recognize 100 percent of NPLCost-sharing employers recognize proportionate shares of collective NPL
9 NPL: Measurement—Timing Employer fiscal year-endMeasurement date (of NPL)As of date no earlier than end of prior fiscal yearBoth components (TPL/plan net position) as of the same dateActuarial valuation date (of TPL)If not measurement date, as of date no more than 30 months (+1 day) prior to FYEActuarial valuations at least every 2 years (more frequent valuations encouraged)Coordination with pension planThe employers need to work with their plans regarding the selection of these dates.
10 Timing—Examples If employer FYE 6/30/2015 If employer FYE 12/31/2015 Measurement date (NPL) no earlier than 6/30/2014 (prior fiscal year-end)Actuarial valuation date (TPL) no earlier than 12/31/2012 (30 months + 1 day prior to fiscal year-end)If employer FYE 12/31/2015Measurement date (NPL) no earlier than 12/31/2014 (prior fiscal year-end)Actuarial valuation date (TPL) no earlier than 6/30/2013 (30 months + 1 day prior to fiscal year-end)
11 NPL: Measurement—General Approach Three broad stepsProject benefit paymentsDiscount projected benefit payments to actuarial present valueAttribute actuarial present value to periodsMethods and assumptionsGenerally, assumptions in conformity with Actuarial Standards of PracticeFewer alternatives than in Statement 27 for methods and assumptions for GAAP reporting purposesNo changes required to actuarial methods and assumptions used to determine funding amounts
12 NPL: Measurement—Projection Benefit terms/agreements at measurement dateCurrent active and inactive employeesIncorporate expectations of:Salary changesService creditsAutomatic postemployment benefit changes (including COLAs)Ad hoc postemployment benefit changes if substantively automatic
13 NPL: Measurement—Discounting Projected benefit payments are discounted using the long- term expected rate or return (LTERoR) on pension plan investments, to extent that :Plan net position is projected to be sufficient to pay benefitsPlan assets are expected to be invested using a strategy to achieve that returnIf the conditions for using the LTeRoR are not met, projected benefit payments are discounted using a yield or index rate for 20-year, tax-exempt general obligation municipal bondsIt may be worth noting that the standards refer to a single discount rate that would produce the same present value of projected benefit payments as obtained by applying the two different rates.
14 Projecting Plan Net Position for Use of LTERoR Includes:Employer contributions for current and former employeesContributions from current employeesProjected investment earnings on projected plan net positionProjected benefit payments and administrative expensesDoes not include:Employer contributions for service costs of future employeesContributions of future employees, unless expected to exceed their own service costProjections of employer contributionsApply professional judgment if contribution amounts are established by statute, contract, or formal written policyConsider most recent 5-year contribution historyReflect all known events and conditionsIn other circumstances, projected contributions are limited to the average over the most recent 5 yearsMay be modified by consideration of subsequent eventsBasis for average determined through professional judgment
15 NPL: Measurement—Attribution Single methodEntry age actuarial cost methodLevel percentage of payIndividually appliedBeginning = 1st period of benefit accrualEnding = Expected retirementDeferred retirement option programs (DROPs)—entry date into DROP = retirement dateSame benefit terms to determine service cost as to determine actuarial present value of projected benefit paymentsUnder DROPs, the employee is “retired” for pension purposes but continues to work. The point here is that the ending date would be entry into the DROP, rather than the date on which the employee actually ceases to work.
17 Changes in NPLNPL recognized in current reporting period(NPL recognized in prior reporting period)Change in NPL for current reporting periodRecognize most changes in the NPL as expense in full in the reporting period in which they occurExamples: service cost, interest on TPL, benefit changes, projected earnings on pension plan investmentsExceptions:Differences between expected and actual experience (TPL)Changes of assumptions (TPL)Difference between projected and actual earnings on pension plan investmentsEmployer contributions
18 Changes in NPL—TPL Exceptions (A & B) Recognize the change in NPL as expense in current and future periodsSystematic and rational methodClosed periodAverage of expected remaining service lives of all employees (active and inactive, including retirees)Portion not recognized in expense initially is recognized as a deferred outflow of resources or deferred inflow of resources related to pensionsThe deferral is subsequently reduced by the same amount as the expense recognized in the succeeding years.
19 Changes in NPL—Earnings Exception (C) Recognize the change in NPL as expense in current and future periodsSystematic and rational methodClosed, 5-year periodPortion not recognized in expense initially is recognized as a deferred outflow of resources or deferred inflow of resources related to pensionsReport net deferred outflow of resources/deferred inflow of resources from this source
20 Changes in NPL: Employer Contributions (D) Contributions since the previous measurement dateDirectly reduce NPL (no expense impact)Contributions subsequent to the current measurement dateDeferred outflow of resources related to pensionsDirectly reduce NPL in next reporting period (no expense impact)
22 NPL: Cost-Sharing Employers Recognize proportionate shares of collective NPL, pension expense, deferred outflows of resources/ deferred inflows of resourcesProportion (%)Basis required to be consistent with contributionsConsider separate rates related to separate portions of collective NPLUse of relative long-term projected contribution effort encouragedCollective measure x proportion = proportionate share of collective measure
23 Changes in NPL: Cost-sharing Employers—Additional Considerations Potentially three itemsChange in proportionDifference between:The employer’s proportionate share of all employer contributions included in collective plan net positionContributions recognized by the employer in the measurement periodEmployer’s contributions subsequent to measurement dateItems 1 & 2—expense in current and future periods (systematic/rational method, closed period equal to average of expected remaining service lives)Item 3—deferred outflow of resources, reduces collective NPL in next period
25 NPL: Involvement of Nonemployer Contributing Entities Statement addresses those with legal requirement to contribute directly to the pension planSpecial funding situationsContribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contributeEmployer(s) and nonemployer contributing entity apply cost- sharing measurement to collective NPL, expense, and deferred outflows/deferred inflows of resourcesNonemployer expense classified in same manner as similar grants to other entitiesEmployer recognizes additional expense and revenue equal to nonemployer contributing entity’s proportionate share of collective expense (portion related to the employer)
27 NPL: Note Disclosures—All Employers Descriptive informationType of plan, identification of administratorBenefit terms—types of benefits, key elements of benefit formula, classes of employees covered, legal authorityContributions—basis, authority, rates ($ or % of pay), contributions in reporting periodAvailability of plan reportSignificant assumptions/other inputs in TPLInflation, salary changes, postemployment benefit changes, mortality assumptions, dates of experience studiesDiscount rate—rate, assumptions re: cash flows, how LTeRoR determined, municipal bond rate (if applicable), periods to which each rate applied, assumed asset allocation/expected real rates of return, NPL at discount rate +/- 1%
28 NPL: Note Disclosures—All Employers Information about pension plan’s fiduciary net position or reference to plan reportMeasurement date, actuarial valuation dateChanges of assumptions/other inputs and changes of benefit termsChanges subsequent to measurement date
29 NPL: Note Disclosures—All Employers Pension expense in current reporting periodDeferred outflows/deferred inflows of resourcesBalances by sourceDifferences between expected and actual experience (TPL)Changes of assumptions/other inputs (TPL)Net difference between projected and actual earnings on pension plan investmentsIndividual items for cost-sharing and special funding situationsEmployer’s contributions subsequent to measurement dateNet impact on pension expense in each of the next 5 years and thereafter in the aggregateAmount that will be reduction of NPL
30 NPL: Note Disclosures—Single & Agent Employers Schedule of changes in NPL by source for current periodService cost, interest, benefit changes, contributions by source, plan investment income, etc.If special funding situation:Amounts in schedule for collective NPLNonemployer contributing entity’s proportionate share (amount) of collective NPLEmployer’s proportionate share of collective NPLNumber of employees covered—inactive receiving benefits, inactive not receiving benefits, activeAllocated insurance contracts
31 NPL: Note Disclosures—Cost-Sharing Employers Employer’s proportion, basis for proportion, change in proportionEmployer’s proportionate share (amount) of collective NPLIf special funding situation:Nonemployer contributing entity’s proportionate shareTotal of employer’s and nonemployer entity’s proportionate shares
32 NPL: RSI—Single & Agent Employers 10-year schedulesChanges in NPL by sourceTPL, pension plan fiduciary net position, NPL, plan net position as % of TPL, covered-employee payroll, NPL as % of covered- employee payrollMay be presented with changes in NPL by sourceIf actuarially determined employer contribution (ADEC)ADEC, contributions in relation to the ADEC, difference, covered- employee payroll, contributions as % of covered-employee payrollIf no ADEC, but statutory or contractual contribution requirements, schedule similar to ADEC scheduleNotes to RSI with methods and assumptions for ADEC and significant changes
33 NPL: RSI—Cost-Sharing Employers 10-year schedulesEmployer’s proportion (%), proportionate share (amount) of collective NPL, covered-employee payroll, proportionate share as % of covered-employee payroll, pension plan’s net position as % of TPLIf special funding situation, also (1) nonemployer contributing entity’s proportionate share and (2) total of employer’s and nonemployer entity’s proportionate sharesIf statutory or contractual contribution requirementsRequired contribution, contributions in relation to required, difference, covered-employee payroll, contributions as % of covered-employee payrollNotes to RSI with significant changes
34 NPL: Note Disclosures/RSI—Nonemployer Contributing Entities in SFS Required information depends on how much of the NPL is recognized by the nonemployer entityIf substantial proportion, disclosures similar to cost-sharing employerIf less-than-substantial proportion, reduced informationNotesType of pension plan, identification of administratorContribution basis, authority, amount in reporting periodProportionate share (amount) of collective NPL, proportion (%), basis for proportion, change in proportion, expense, and deferred outflows/deferred inflows of resourcesRSI (10 years)—entity’s proportionate share (amount) of collective NPL, amount of contributions
35 Effective Date & Transition (including Statement 71)
36 Effective Date and Transition Fiscal years beginning after June 15, 2014Beginning deferred outflows/deferred inflows of resources balances all or nothing at initial implementation (except for employer contributions subsequent to the measurement date—Statement 71)RSI schedules are prospective if information is not initially availableIn all circumstances in which a contribution has been made between the measurement date of the beginning net pension liability and the beginning of the initial period of implementation of Statement 68, recognize the amount of the contribution as a beginning deferred outflow of resourcesOther deferred outflows of resources/inflows of resources reported only if it is practical to determine all such amounts
38 Implementation Guide to Statement 68 Reporting by pension plansApproved in December 2012Available to download free from the GASB website; printed copies can still be purchased272 questions and answers on topics including:Special funding situationsMeasurement of the liabilityDetermining a cost-sharing employer’s proportionate shareNotes and RSITransitionIllustrations, topical index, full text of the Standards section
40 OverviewWhat: New standards for mergers, acquisitions, and transfers and disposals of operationsWhy: These transactions are becoming more common, but no government-specific guidance was availableWhen: Periods beginning after December 15, 2013 (FYE and later)
41 ScopeScope includes:Combinations in which little or no consideration is providedGovernment mergersTransfers of operationsCombinations in which consideration is providedGovernment acquisitionsDisposals of government operationsBecause Statement 62 did not pick up APB 16, 17, and the part of 30 on disposals, we had to compose a government oriented requirement. It was impossible to “governmentalize” those pre-1989 requirements that governments had been applying.
42 Government Combinations To be considered a government combination, the arrangement should result in the continuation of a substantial portion of the services provided by the previously separate entities or their operations after the transaction has occurred.Terms of arrangement usually establish whether service continuation was intendedIf not, professional judgment should be usedService continuation: obligation or responsibility to continue to provide the services that were provided by the previously separate governments, organizations, or operationsThis distinguishes a combination from a contribution or purchase of assets and related liabilitiesService to be continued does not have to be the same scope as pre-combination—could be reduced scope or some other modification of the old service.
43 Definition of “Operations” An integrated set of activities with associated assets and liabilities that is conducted and managed for the purpose of providing identifiable services with associated assets and liabilitiesOur counterpart to the FASB’s definitions of a “Business” and a “non-profit activity.”
44 Overall ApproachGovernment Combination— continuation of the provision of service or operationsNo consideration providedMergerA single continuing government remains (A+B=B+)An entirely new government is formed(A+B=C)Transfer of OperationsTransfer of operations to an existing governmentTransfer of operations to form a new governmentConsideration providedAcquisition
46 When No Consideration Is Provided Assets and liabilities brought in at carrying valuesPresumption of GAAPInitial reporting—mergers:New entity: fresh startContinuing entity: restate as if a change in the reporting entityInitial reporting—transfers of operations:Continuing entity: transaction during the periodAdjustmentsAccounting principles, policies, and estimates (required)Capital asset impairment (required)Transaction eliminations (may be needed for continuing governments)Carrying value requirement is similar to pooling of interests in APB 16“Fresh start” means that there is no prior period . Nothing to restate.If the entity to be merged in is not governmental or has not applied governmental GAAP, conversion is required.If the assets, deferred outflows of resources, liabilities, or deferred inflows of resources of one or more of the merging entities are not recognized in conformity with authoritative guidance, those elements should be adjusted to bring them into conformity with that guidance before the merged government recognizes the combined assets, deferred outflows of resources, liabilities, and deferred inflows of resources.When it is a continuing entity combination and the combination date is not the start of the reporting period, it may be necessary to eliminate or reclassify transactions between the merging entities that took place during the year but before the combination date. (consistent with the internal eliminations requirements in 34)8
48 Government Acquisitions Measure consideration as the value of assets conveyed or liabilities incurred to the former owner at the acquisition dateAssets, liabilities and deferrals should be measured at acquisition value—a market-based entry priceEntry price is assumed to be based on an orderly transaction entered into on the acquisition dateAcquisition value represents the price that would be paid for similar assets, having similar service capacity, or discharging liabilities assumed as of acquisition date13
49 Government Acquisitions Exceptions to acquisition valueEmployee benefit arrangements (Statement 47)Landfill closure and postclosure care costs (Statement 18)Pollution remediation obligations (Statement 49)Investments required to be reported at fair value (Statement 31)Deferrals related to derivatives (Statement 53)13
50 Government Acquisitions—Consideration Given If exceeds the net position acquired, the difference would be treated as a deferred outflow of resourcesAttributed to future periods in a systematic and rational manner, based on professional judgmentIf net position exceeds the consideration givenConsidered a contribution – if the seller accepted the lower amount for the purpose of providing an economic benefit to the acquiring governmentIf not – the difference would be eliminated by reducing the acquisition values assigned to noncurrent assets (other than investments reported at fair value).If the difference exceeded the acquisition value of all noncurrent assets (other than investments reported at fair value), the remainder would be treated as a special item in the flows statement.Paragraph 110 in the BFC provides for an alternative to writing down the nonfinancial assets acquired when it appears that there is a bargain purchase.“The Board also considered the potential for an acquisition in which excess net position received represents neither a bargain purchase nor a contribution from the acquiree. An acquiree may accept a lower purchase price in recognition of obligations or commitments that are not currently required by generally accepted accounting principles to be recognized as liabilities. For example, a negotiated acquisition price may be affected by a significant contingency or certain postemployment benefit obligations that, if required to be recognized, would result in additional liabilities being assumed by the acquirer. The Board concluded that in those situations, governments should use professional judgment in determining the most faithfully representative disposition of the excess net position received. “
51 OverviewType of GovernmentCombinationConsideration ProvidedMerger/Acquisition/Transfer DateInitial Reporting PeriodRecognition and MeasurementMerger—new government is formedNoDate the combination becomes effectiveBegins on the merger dateAll elements at carrying value as of the merger date.Merger—single continuing governmentBeginning of the reporting period in which the combination occursTransaction reported in the period in which it occursAcquisitionYesDate the acquiring government obtains control of the acquired entity’s assets or becomes obligated for its liabilities or operations (typically when consideration is paid)Assets and liabilities at acquisition value as of the acquisition date.Deferred inflows and outflows of resources at carrying value.Transfer of operations—to form a new governmentDate the transferee government obtains control of the acquired operation’s assets or becomes obligated for its liabilitiesBegins on the effective transfer dateAll elements at carrying value as of the effective transfer dateTransfer of operations—to an existing governmentTransaction reported in the reporting period in which it occursFor mergers and transfers of operations, carrying values for capital assets may need to be adjusted for impairment
53 Disposals of Government Operations Includes all disposals of operations (transfers or sales)Gains and losses reported as special itemsSpecial item should include costs directly associated with the disposal, for example:Fees for professional servicesInvoluntary termination costsContract termination costs
54 DisclosuresThe following disclosures are required for all government combinations—brief description of the combination that:Identifies the entities involved and the primary reasons for the combinationMentions whether the entities combined were part of the same financial reporting entityDiscloses the date of the combinationAdditional disclosures for:Mergers and transfers of operationsAcquisitionsDisposals of Operations
55 Fair Value Measurement and Application: Statement 72
56 OverviewWhat: The Board is developing a new Statement updating the existing standards on fair value (primarily Statement 31)Why: Review of existing standards found opportunities to improve the measurement of resources available to governments, and to increase comparability and accountabilityWhen: Periods beginning after June 15, 2015 (FYE 6/30/16 and later)Statement will have three parts: measurement, application, and disclosure
58 Fair Value DefinitionThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.An exit priceOther characteristics of fair valueMarket-basedBased on a government’s principal or most advantageous marketNo fair value optionGovernments do not have the option to selectively apply fair value to any asset or liability
59 Key Terms Unit of Account Market participants Price Stand-alone asset or liability or a group of assets or liabilitiesDetermined by the particular standards that require fair value measurementMarket participantsFair value measurement determined using the assumptions market participants would use in pricing the asset or liabilityPriceNot adjusted for transaction costsWhen market information is not availableEstimate the price at which an orderly transaction would take place between market participants at that date (for example, a valuation technique)
60 Concepts Nonfinancial assets at fair value Liabilities at fair value Value at the asset’s highest and best useA government’s current use is presumed to be the highest and best use, unless otherwise suggestedMay be in combination with other assets and liabilities or on a stand- alone basisLiabilities at fair valueFor example: derivative liabilitiesTake government’s credit standing into accountIf there is no active market:Consider liabilities held by other parties as assetsIf the above is unavailable, use a relevant valuation technique
61 Valuation TechniquesApply valuation technique(s) that best represents fair value in the circumstancesMarket approach – Using prices and other relevant information generated by market transactions involving identical or similar assets or liabilitiesCost approach – Amount that would be required currently to replace the service capacity of an assetIncome approach – Converts expected future amounts (for example, cash flows) to a single current amount (that is, discounted)Revisions due to a change in valuation technique(s) are considered a change in accounting estimate
62 InputsMaximize use of relevant observable inputs and minimize use of unobservable inputsInputs should be consistent with the characteristics of the asset or liabilitySometimes includes an adjustment, a premium or discountDo not include premium or discount that is inconsistent with the unit of account established for the asset / liabilityDo not include premiums and discounts that reflect size as a characteristic of a government’s holdingsBased on bid and ask pricesChoose price within the bid-ask spread that is most representative of fair value, if relevantRegarding premiums and discounts: For instance, blockage factors that adjust the quoted price of an asset or liability based on the market’s trading volume
63 Hierarchy of InputsLevel 1: quoted prices (unadjusted) in active markets for identical assets or liabilities, most reliableLevel 2: quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other than quoted prices that are observableLevel 3: unobservable inputs, least reliableInputs categorized within multiple levels of the hierarchyFair value measurement is categorized in its entirety in the same level as the lowest (in terms of reliability) level input that is significant to the entire measurement
64 Adjustments Observable inputs If the adjustment of observable inputs uses unobservable inputs and results in a significantly higher or lower fair value, the resulting measurement is level 3Other examples that result in categorization to a lower level of the fair value hierarchyAlternative pricing methods (matrix pricing)Adjustments for new information after close of market but before measurement dateAdjustments for factors specific to the asset or liability
65 Volume AdjustmentsMeasuring fair value when volume or level of activity for an asset or a liability has significantly decreasedIf it is determined that a transaction or a quoted price does not represent fair value, an adjustment would be necessaryRisk adjustmentsIncludes a risk premium reflecting amount that market participants would demand as compensation for uncertaintyReflects an orderly transaction between market participants at the measurement date under current market conditionsChange in valuation technique(s) may be appropriate
66 Transactions Not Considered Orderly More difficult to tell when there is significant decrease in the volume or level of activity for the asset or liabilityAssessment should be performed taking into account:Market exposure and marketing periodWhether the sale was distressed or forcedThe transaction price compared to other recent similar transactionsIf the transaction is considered to be not orderly, little value should be placed on the transaction priceQuoted prices provided by third parties may be used if developed in accordance with this standard
67 Measurement—Net Asset Value Per Share (NAV) Measuring fair value of investments in certain entities that calculate net asset value (NAV) per share or its equivalentNAV per share may be used as a practical expedient to estimate fair valueAdjustment to NAV per share amount may be necessary to be consistent with measurement principlesMay be applied on an investment-by-investment basis but must be applied consistently to fair value measurement of the government’s entire position in a particular investmentIf sale of a portion of an investment at an amount different from net asset value per share is probable, the practical expedient may not be applied
69 Investment Definition A security or other asset that a government holds primarily for the purpose of income or profit and with a present service capacity that is based solely on its ability to generate cash or to be sold to generate cashService capacity refers to a government’s mission to provide servicesHeld primarily for income or profit—acquired first and foremost for future income and profit
70 Fair Value Application Assets that meet the definition of an investment generally should be measured at fair valueIntangible assetsLand and land rightsReal estateLending assetsNatural resource assetsAlternative investmentsEquity securities, stock warrants, and stock rights that do not have readily determinable fair valuesProvided such investment-types are not reported according to the equity methodCommingled investment pools that are not government sponsoredInvested securities lending collateralIf they meet the definition of an investmentAlso would apply to a derivative with credit balance that is classified as a liability
71 Investments Not Reported at Fair Value Money market investments and participating interest-earning investment contracts that have a remaining maturity at time of purchase of one year or less, reported by governments other than external investment poolsInvestments in 2a7-like poolsInvestments in life insurance. Investments in life settlement contracts, however, should be at fair valueInvestments in common stock that meet the criteria for applying the equity methodInvestments in common stock held by endowments as well as investments in certain entities that calculate net asset value per share are ineligible for the equity method.Non-participating interest earning investment contractsUnallocated insurance contractsSynthetic guaranteed investment contracts that are fully benefit responsive
72 Application of Acquisition Value Acquisition value (an entry price) replaces fair value for the following:Donated capital assetsDonated works of art, historical treasures, and similar assetsCapital assets acquired through a nonexchange transactionCapital assets received through a service concession arrangement
74 DisclosuresRecurring—Required or permitted in the statement of net position at the end of each reporting periodNon-recurring—Required or permitted in the statement of net position in particular circumstancesThe following information for each class or type of assets and/or liabilities measured at fair value should be disclosed:The fair value measurement at the end of the reporting period and for nonrecurring fair value measurements, the reasons for the measurementThe level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (Level 1, 2, or 3)A description of the valuation technique(s)All disclosures apply to both recurring and non-recurring measurements unless otherwise noted.
75 Level 3 and NAVFor fair value measurements categorized within Level 3 of the fair value hierarchyThe effect of those investments on investment income for the reporting periodDisclosures for investments in certain entities that calculate NAV per share (or its equivalent)Information that helps users of its financial statements to understand the nature and risks of the investmentsInformation on whether the investments are probable of being sold at amounts different from net asset value per share (or its equivalent)Examples of NAV disclosures:Fair value measurement of the investments in the class and a description of the significant investment strategies of the investee(s) in the classIf distributions are received through liquidation of the underlying assets of investees, an estimate of the period of time over which underlying assets are expected to be liquidatedAmount of unfunded commitments related to investments in the classGeneral description of the terms and conditions upon which the government may redeem investments in the class
76 Project Timeline Pre-Agenda Research Started April 2008 Added to Current Technical AgendaAugust 2011Preliminary Views ApprovedJune 2013Exposure Draft ApprovedJune 2014Final Statement ExpectedFebruary 2015
78 Other Postemployment Benefits These slides presume a presentation that previously addressed pensions. If not, flesh out with adapted slides from pension presentation.
79 The OPEB Exposure Drafts What: The GASB has proposed revisions to Statements 43 and 45 that would make OPEB accounting and financial reporting consistent with the pension standards in Statements 67 and 68Why: Pension and OPEB standards are being updated subsequent to a review of the effectiveness of the standards – objective is to establish a consistent set of standards for all postemployment benefits, providing more transparent reporting of the liability and more useful information about the liability and costs of benefitsWhen: Proposed implementation dates would be periods beginning after December 15, 2015 (plans) and December 15, 2016 (employers)
80 Fundamental ApproachFundamental approach for OPEB is the same as required for pensions in Statements 67 & 68Viewed in the context of an ongoing, career-long employment relationshipFocus on the cost to taxpayers over time of providing government servicesAccounting-based versus funding-based approach to measurement
81 Scope & ApplicabilityApplies same definition of OPEB as used in Statement 45All postemployment healthcare benefitsPostemployment benefits not provided through a pension planAddresses both defined benefit OPEB and defined contribution OPEBApplies to employers and nonemployer contributing entities that have a legal obligation to make contributions directly to an OPEB plan or to make benefit payments as those payments come dueSpecial funding situationsOther circumstances
82 Scope & ApplicabilityDifferentiates requirements based on whether OPEB is provided through plans administered through trusts in which the following criteria are met:Employer/nonemployer contributions irrevocablePlan assets dedicated to providing OPEBPlan assets legally protected from creditorsIf any part of the OPEB plan is administered through a trust that meets the specified criteria, apply the requirements for OPEB provided through an OPEB plan administered through a trust that meets the criteria
83 Liability to Employees for OPEB Based on total OPEB liability—the portion of the actuarial present value of projected benefit payments that is attributed to past periods of employee serviceIs OPEB administered through a trust that meets the specified criteria?Yes—recognize net OPEB liability (total OPEB liability, net of OPEB plan fiduciary net position)No—recognize total OPEB liability
84 Measurement of the Total OPEB Liability: Projections of OPEB Payments Based on claims costs or age-adjusted premiums approximating claims costs, in accordance with Actuarial Standards of PracticeNot reduced by subsidies expected to be received for making benefit payments unless payments are providing Medicare benefitsConsider legal or contractual caps if determined to be effectiveAlternative measurement method may be applied if fewer than 100 employees (active and inactive) are provided benefits through plan as of the beginning of the measurement periodGenerally, same simplifications to assumptions in Statement 45 can be usedReference to U.S. Office of Personnel Management regarding age-based turnover experience rather than default tables
85 Changes in LiabilityRecognize most changes in liability for the current reporting period in OPEB expense in full in the current period, except:Changes in total OPEB liability:Differences between expected and actual experience with regard to economic and demographic factors in the measurement of the total OPEB liabilityChanges of assumptions in the measurement of the total OPEB liabilityFor OPEB administered through trust in which specified criteria are met:Difference between projected and actual earnings on OPEB plan investmentsEmployer contributions
86 Cost-Sharing Employers Relevant only for OPEB administered through trust in which specified criteria are metRecognize proportionate shares of collective net OPEB liability, OPEB expense, and deferred outflows of resources/deferred inflows of resources related to OPEBProportion (%)Basis required to be consistent with contributionsUse of relative long-term projected contribution effort encouragedConsider separate rates related to separate portions of collective net OPEB liabilityCollective measure × proportion = proportionate share of collective measureDrop this slide if not in a state with cost-sharing OPEB plans
87 Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical AgendaApril 2012Exposure Drafts ApprovedMay 2014Final Statement ExpectedJune 2015
89 The GAAP HierarchyWhat: The GASB has proposed a revised hierarchy of generally accepted accounting principles and has exposed the entire Comprehensive Implementation Guide for public commentWhy: The GAAP hierarchy was incorporated (by Statement 55) from the auditing literature essentially “as is”—this project simplifies the hierarchy and explains how to identify the relevant literature within the hierarchyWhen: Final Statements are expected in June 2015The hierarchy of generally accepted accounting principles (GAAP hierarchy) comprises the types of guidance that state and local governments follow when preparing GAAP-based financial statementsThe GAAP hierarchy lists the order of priority for pronouncements to which a government should look for guidance
91 GAAP Levels Tentatively decided to reduce the GAAP hierarchy to: Two Authoritative CategoriesGASB StatementsPeriodically incorporated in the CodificationSubject to AICPA Rule 203Category (b) includes:GASB Technical BulletinsGASB Implementation Guides (Q&As)AICPA literature if specifically cleared by the GASBNonauthoritativeNote that Interpretations would be discontinued and existing Interpretations would be incororated by reference through a Statement.
92 Authoritative GAAP Category (a) guidance would be: Formally approved by the Board,For the purpose of creating, amending, superseding, or interpreting standards, ANDExposed for a period of public commentCategory (b) guidance would be:Cleared by the Board,Specifically made applicable to state and local governmental entities, AND
94 Comprehensive Implementation Guide (CIG) Tentatively classified as category (b) authoritativeRevised due processPublic exposure of guidance in the existing CIG and updates to the CIG going forwardBoard clearance of the final documentEvaluation of individual Q&As prior to exposureRemove or improve Q&As that only restate guidance directly from related statementsMove illustrations to the nonauthoritative appendixes
96 Nonauthoritative GAAP Nonauthoritative guidance should not conflict with or contradict authoritative GAAPIn evaluating the appropriateness of nonauthoritative literature, consider all of the following:Consistency with the GASB Concepts StatementsRelevance to particular circumstancesSpecificity of the guidanceGeneral recognition of the issuer or author as an authority
97 Nonauthoritative GAAP (continued) Sources of nonauthoritative accounting guidance and literature include:GASB Concepts StatementsPronouncements of the FASB, FASAB, IPSASB, and IASBAICPA issue PapersTechnical Information Services Inquiries and Replies included in AICPA Technical Practice AidsPractices that are widely recognized and prevalent in state and local governmentPronouncements of other professional associations or regulatory agenciesAccounting textbooks, handbooks, and articlesThese proposed changes would improve financial reporting for governments by:Clearly identifying the appropriate accounting guidance to applyImproving implementation guidance by elevating its authoritative status and, therefore, requiring that all implementation guidance be exposed for public commentCodification will include all authoritative literature
98 Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical AgendaApril 2012Exposure Drafts ApprovedDecember 2013Final Statement ExpectedJune 2015
100 Exposure Draft on Tax Abatement Disclosures What: The GASB has proposed standards requiring disclosures about a government’s tax abatement agreementsWhy: Information about revenues that governments forgo is essential to understanding financial position and economic condition, interperiod equity, sources and uses of financial resources, and compliance with finance related legal or contractual requirementsWhen: Exposure Draft issued for public comment in October 2014; comment deadline is January 30, 2015; would be effective for periods beginning after December 15, 2015
101 Definition and ScopeThe proposed Statement would apply only to transactions meeting this definition:For financial reporting purposes, a tax abatement results from an agreement between one or more governmental entities and a taxpayer in which (a) one or more governmental entities promise to forgo revenues from taxes for which the taxpayer otherwise would have been obligated and (b) the taxpayer promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments.
102 General Disclosure Principles Disclosure information for similar tax abatements may be provided either individually or in the aggregateFor all tax abatements, a reporting government would disclose separately (a) its own tax abatements and (b) tax abatements of other governments that reduce the reporting government’s taxesThe reporting government would disclose its own tax abatements by major program and those of other governments aggregated in totalDisclosure would commence in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires, unless otherwise specified
103 Proposed Disclosures General descriptive information: Name and purpose of the program and the taxes being abatedThe authority under which taxes are abatedThe criteria, if any, that make a recipient eligibleThe mechanism for abating taxes (form and calculation)Provisions for recapturing abated taxesThe types of commitments made by recipients of tax abatementsThe number of abatements granted during the reporting period and the number in effect as of the date of the financial statementsAmount of tax abated in the current yearThe types of commitments made by governments in tax abatement agreements (other than to reduce taxes) and the most significant individual commitments
104 Project Timeline Pre-Agenda Research Starts August 2013 Added to Current Technical AgendaDecember 2013Exposure Draft ApprovedOctober 2014Final Statement ExpectedAugust 2015March 6 – Comment Period End Date; April 8-10 Public Hearings;
106 Preliminary Views on Leases What: The GASB has proposed revisions to existing standards on lease accounting and financial reporting (primarily NCGA Statement 5 & GASB Statement 13)Why: The existing standards have been in effect for decades without review to determine if they remain appropriate and continue to result in useful information; FASB and IASB have been conducting a joint project to update their lease standards; opportunity to increase comparability and usefulness of information and reduce complexity for preparersWhen: Preliminary Views issued for public comment in November 2014; comment deadline is March 6, 2015
107 Foundational Principle All leases are financings of the right to use an underlying assetTherefore, single approach applied to accounting for all leasesApproach less complex than the current model:Lessees classify leases as capital or operatingLessors classify leases as sales-type, direct financing, or operatingException to single approachShort-term leasesPV chptr. 1 ¶10,
108 Scope Any contract that meets the definition of a lease Follow definition, not label“A lease is a contract that conveys the right to use a nonfinancial asset (the underlying asset) for a period of time in an exchange or exchange-like transaction.”“Contract” indicates it is legally enforceable“Nonfinancial asset,” rather than capital asset, allows for the possibility that another type of asset could be subject to a leaseBut excludes securities lending and other transactions involving financial assets“Exchange” excludes agreements with nominal payments
109 Lease Term Definition“The period during which a lessee has a noncancellable right to use an underlying asset (referred to as the noncancellable period), plus the following, if applicable:a. Periods covered by a lessee’s option to extend the lease if it is probable, based on all relevant factors, that the lessee will exercise that optionb. Periods covered by a lessee’s option to terminate the lease if it is probable, based on all relevant factors, that the lessee will not exercise that option.”“Noncancellable period” is time during which lessee is legally obligated to make payments to lessor“Probable” defined as in Statement 62: “likely to occur”PV chptr. 3 ¶2, 3
110 Lease Term Excludes cancellable periods Lessee has no enforceable right to use for cancellable periodsPeriods for which lessor has option to terminate leasePeriods for which lessee and lessor both have the option to terminate leaseIf only lessee has an option to terminate lease, evaluate probability that lessee will not exercise option (paragraph 2b)Fiscal funding/cancellation clauses should continue to be ignored if possibility of cancellation is remoteReassess lease term only when a lessee exercises lease extension option or does not exercise termination option contrary to the previous expectationPV chptr. 3 ¶3, 5, 6“If only the lessor has an option to terminate or cancel the lease after a certain point in time, or if the lessee and lessor both have that option, any periods following that date would be considered cancellable periods and would be excluded from the lease term. Neither the lessee nor the lessor would have an enforceable obligation against the other party for those cancellable periods. However, if only the lessee has an option to terminate the lease, the option would be evaluated under paragraph 2b of this chapter because the lessee can enforce the contract against the lessor, at the lessee’s discretion.” [PV chptr. 3 ¶3]“The proposed requirement in paragraph 6 [reassessment of lease term] would impose less of a burden on preparers because there would be little or no judgment involved or ongoing reassessments to make. Both lessees and lessors would know whether an option has been exercised and therefore would be in a position to reassess the lease term.” [PV chptr. 3 ¶7]
111 Initial Reporting Assets Liability Deferred Inflow Lessee Intangible asset (right to use leased asset)—value of lease liability plus prepayments and initial direct costs that are ancillary to place asset in usePresent value of future lease payments (incl. fixed payments, variable payments based on index or rate, probably residual guarantees, etc.)NALessorLease receivable (incl. same items as lessee liability)Continue to report leased assetEqual to lease receivable plus any cash received up front
112 Subsequent Reporting Assets Liability Deferred Inflow Lessee Amortize over shorter of useful life or lease termReduce by lease payments (less amount of interest expense)NALessorDepreciate leased asset (unless indefinite life or required to be returned in its original or enhanced condition)Reduce receivable by lease payments (less payment needed to cover accrued interest)Amortize discount over term of the receivableRecognize revenue over the lease term on a systematic and rational basisAmortization of discount reported as interest revenue
114 Lessee Disclosures A general description of leasing arrangements Total amount of assets recorded under leases, and related accumulated amortization (separately from owned assets)Lease assets disaggregated by major classes of underlying assetsThe total variable lease payments actually incurred during the reporting periodFuture minimum lease paymentsLease commitments, other than short-term leases, for which the lease term has not begunPayments made in excess of contractual requirements, such as residual value guarantees or penaltiesExpense and expenditure recognized for short-term leasesPV chptr. 4 ¶22
115 Lessor DisclosuresA general description of leasing arrangements, includingCost (and carrying amount, if different) of property on lease or held for leasing by major classes of property and the amount of accumulated depreciationTotal lease revenue for reporting periodLease revenue related to variable lease payments and other payments not previously included in the lease receivableSchedule of future payments included in lease receivableIf lessor government has issued debt for which the principal and interest payments are secured by lease paymentsDisclose existence, and terms and conditions, of options by the lessee to terminate a lease
117 Definition of Short-Term Leases At beginning of lease, maximum possible term under the contract is 12 months or lessInclude any options to extend, regardless of the probability of extensionFor leases cancellable by either party, the maximum possible term is the noncancellable period, including any notice periodsLeases that transfer ownership are not in scope of PV and, therefore, do not qualify for the short-term lease exception, even if they meet the other criteriaPV chptr. 6 ¶3, 5“The Board chose not to base the definition of a short-term lease on the lease term (as defined in paragraph 2 of Chapter 3) because the lease term includes consideration of the probability of exercising renewal options. For example, if it was not considered probable at inception that a renewal option would be exercised, but it actually is exercised and extends the lease term beyond one year, the lease would no longer qualify for the short-term exception. The Board believes that the monitoring effort and the resultant reclassification would negate the cost relief offered by the short-term exception.” [PV chptr. 6 ¶5]
118 Reporting Short-Term Leases LesseesLease payments recognized as expenses/expenditures based on the terms of the contractDo not recognize assets or liabilities associated with the right to use the underlying asset for short-term leasesDisclose short-term leases expense/expenditure recognized during the reporting periodLessorsLease payments recognized as revenue based on the terms of the contractDo not recognize receivables or deferred inflows associated with the leaseNo disclosure requirementsPV chptr. 6 ¶7, 10“In the Board’s view, the shorter the timeframe that is covered by a lease, the less significant the financing component of the arrangement becomes and, therefore, the interest revenue or expense/expenditure becomes less significant. As a result, the Board’s preliminary views on the accounting for short-term leases do not include the recognition of interest revenue or expense/expenditure.” [PV chptr. 6 ¶4]
119 Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical AgendaApril 2013Preliminary Views ApprovedNovember 2014Exposure Draft ExpectedJanuary 2016Final Statement ExpectedNovember 2016
121 Preliminary Views on Fiduciary Responsibilities What: The GASB has proposed standards that clarify when a government has a fiduciary responsibility and is required to present fiduciary fund financial statementsWhy: Existing standards require reporting of fiduciary responsibilities but do not define what they are; use of private-purpose trust funds and agency funds is inconsistent; business-type activities are uncertain about how to report fiduciary activitiesWhen: Preliminary Views issued for public comment in November 2014; comment deadline is March 6, 2015
123 Focus on ControlIdentifying when a government has a fiduciary responsibility:A government must have control to have a fiduciary responsibility for assetsHowever, a government’s control over assets is insufficient alone to making a determination about whether or not a government has a fiduciary responsibility for assetsA government controls assets in a fiduciary capacity if those assets:Are used by the government (or its assignee) to provide benefits to specified or intended beneficiaries ANDHave present service capacity that can be:UsedExchanged for another asset, such as cash OREmployed in any other way that provides benefits.Control is the starting point.
124 When Is a Government a Fiduciary? A government is a fiduciary if it controls assets in any of the following ways:From a pass-through grant for which the government does not have administrative or direct financial involvementIn accordance with a trust agreement or equivalent arrangement in which the government itself is not a beneficiaryFor the benefit of individuals that are not required to be part of the citizenry as a condition of being a beneficiary, or organizations or other governments that are not part of the financial reporting entity
126 What Resources Should Be Reported in Fiduciary Funds? 1. Resources (a) held for pension/OPEB arrangements in a trust or equivalent arrangement, (b) not available to government for another purpose, and (c) not covered by other GASB guidance2. Resources from a pass-through grant if the government acts solely as a cash-conduit for the resources3. Government is not a beneficiary and resources are held in a trust or equivalent arrangement4. Government is not a beneficiary and the resources are not for the benefit of individuals that are required to be part of the government’s citizenry as a condition of being a beneficiary, or for organizations or other governments that are part of the financial reporting entityResources from the government’s own source revenues generally should not be reported in fiduciary funds
127 Other Proposals Fiduciary fund types: New definitions for pension trust funds, investment trust funds, and private-purpose trust funds that focus on the resources that should be reported within each.Trust agreement or equivalent arrangement should be present for an activity to be reported in a trust fund.Custodial funds would report fiduciary activities for which there is no trust agreement or equivalent arrangement.A stand alone BTA’s fiduciary activities should be reported in separate fiduciary fund financial statements.Governments engaged in fiduciary activities should be required to present additions disaggregated by source and deductions disaggregated by type in a statement of changes in fiduciary net position for all fiduciary funds.
128 Project Timeline Pre-Agenda Research Starts April 2010 Added to Current Technical AgendaAugust 2013Preliminary Views ApprovedNovember 2014Exposure Draft ExpectedOctober 2015Final Statement ExpectedJuly 2016March 6 – Comment Period End Date; April 8-10 Public Hearings;
130 Asset Retirement Obligations What: The GASB is considering standards for reporting liabilities related to obligations to perform procedures to close certain capital assets, such as nuclear power plantsWhy: Existing standards (Statement 18) address only municipal landfills but governments have retirement obligations for other types of capital assetsWhen: An Exposure Draft is expected for December 2015
131 DefinitionsAsset retirement obligation—A legal obligation associated with the retirement of a capital assetRetirement of a capital asset—The other-than-temporary removal of a capital asset from serviceEncompasses sale, abandonment, recycling, or disposal in some other mannerDoes not include the temporary idling of a capital asset
132 Scope of Project—Included Legal obligations associated with the retirement of a tangible capital asset that result from the acquisition, construction, or development of a capital assetLegal obligations associated with the retirement of a tangible capital asset that result from the normal operation of a capital assetLegal obligations that require disposal of a replaced part that is a component of a tangible capital assetEnvironmental remediation liabilities that result from the normal operations of capital assets and that are associated with the retirement of those assetsObligations of a lessor in connection of a leased property that meet the criteria of an ARO
133 Scope of Project—Excluded Obligations that arise solely from a plan to sell or otherwise dispose of a capital assetItems covered by Statement 49Activities necessary to prepare an asset for an alternative useObligations of a lessee in connection with the leased property to make lease paymentsObligation for asbestos removal that results from the other- than-normal operation of an assetLandfills, including those not covered by Statement 18Conditional obligations to perform asset retirement activities
134 Project Approach and Measurement Attribute Approach—General guidance with specific guidance added as needed to operationalize the principles.Measurement attribute—Settlement amount
135 Project Timeline Pre-Agenda Research Starts December 2013 Added to Current Technical AgendaAugust 2014Exposure Draft ExpectedDecember 2015Final Statement ExpectedOctober 2016March 6 – Comment Period End Date; April 8-10 Public Hearings;
136 Blending Requirements for Certain Business-Type Activities
137 Blending Requirements What: The GASB is considering revising the standards regarding how certain component units of business-type activities should be presented in the financial statements of the primary governmentWhy: There is diversity in practice, with some component units blended for reasons not included in Statement 14When: An Exposure Draft is expected for June 2015Healthcare—many reporting entities were blending legally separate entities (mostly not-for-profit corporations and limited liability companies)The Component Units found in these BTAs generally do not meet blending criteria in Statement 14, paragraph 53 as amended:1. Most NFP corporations have boards comprised of people of the community (not substantive same board ¶53a.)2. These CUs provide services directly to the community, not as internal service fund (¶53b)3. These CU are generally expected to pay for their own debt (¶c)User interviewees favored more detailed information about the component units than the condensed information currently required to be disclosed by GASB standards
138 Existing Guidance—Statement 14, as amended Most component units should be included in the financial reporting entity by discrete presentation.Blending required if any of the following is true:Primary government and component unit have substantively the same governing body ANDA financial benefit/burden relationship exists, ORManagement (below the elected official level) of the primary government has “operational responsibility” for the activities of the component unitServices of the component unit exclusively benefit the primary governmentDebt of the component unit is expected to be repaid entirely or almost entirely with resources of the primary government
139 Project ScopeConsider which methods of reporting component units— blended or discrete presentation—is most appropriate for the reporting entity of certain BTAsIf types of component units in question should be blended:Consider whether blending can be achieved under the existing criteria (substantively the same governing body) or whether additional criteria should be developedIf additional blending criteria are considered, should application be limited to “certain BTAs” or available to all governments?Is disclosure of disaggregated information needed?
140 Tentative Board Decisions Clarify the “substantively the same governing body” criterion:Being the sole corporate member of an LLC, in which there is not a separate governing board, is equivalent to having substantively the same board.This approach would be consistent with statutes, as those do not require, but permit, the creation of a governing board for LLC’s.This approach would allow for blending a relatively small number of additional component units in BTA’s and would not resolve all the issue present in the healthcare sector.This clarifying guidance could be used in the future to influence the corporate structure of component units.Based on the variability of governance models that exist in hospitals in the governmental healthcare sector, Board tentatively decided that clarifying guidance not be pursued for not-for-profit corporations. The Board will, however, consider the implications of how being the sole corporate member of these corporations could impact their governance model at a future Board meeting.
141 Project Timeline Pre-Agenda Research Starts December 2013 Added to Current Technical AgendaAugust 2014Exposure Draft ExpectedJune 2015Final Statement ExpectedMarch 2016
143 External Investment Pools What: The GASB is considering revisions to the accounting and financial reporting standards for 2a7-like investment poolsWhy: Securities and Exchange Commission changes to Rule 2a7 would make it difficult for external investment pools to meet the criteria to report as 2a7-likeWhen: An Exposure Draft is expected for June 2015
144 BackgroundCurrent standards allow pools that are considered to be 2a7-like to report investments at amortized cost rather than fair valueThe SEC recently made significant changes to Rule 2a7Concerns were raised regarding the cost-benefit of government pools applying the revised Rule 2a7 provisions
145 Project ApproachThe project will consider whether criteria should be developed independent of Rule 2a7 that could be applied by external investment pools to determine when a cost- based can be applied to investments.If the Board agrees that independent criteria should be developed, the current 2a7 provisions and other regulatory provisions will be used as starting point.
146 Project Timeline Pre-Agenda Research Starts August 2014 Added to Current Technical AgendaDecember 2014Exposure Draft ExpectedJune 2015Final Statement ExpectedDecember 2015March 6 – Comment Period End Date; April 8-10 Public Hearings;
147 Irrevocable Charitable Trusts This project needs a Re-Branding Badly… the name is not proper or fitting of the transaction, but I cant make that change until the Board approves just that.
148 Irrevocable Charitable Trusts What: The GASB is considering establishing standards for reporting split-interest agreements, which are particularly prevalent among public colleges and universitiesWhy: Limited guidance exists for split-interest agreements where the government acts as trustee and as a beneficiary; no guidance exists for the recognition of beneficial interests in assets held and administered outside the government; users need information about these arrangementsWhen: An Exposure Draft is expected for June 2015
149 ScopeSplit-interest agreements for which the government or its component unit “holds and administers” the assetsBeneficial interests in resources held and administered by 3rd parties that are outside the reporting entity, includingSplit interest agreementsPerpetual trustsNot included:Donations within the scope of Statement 33Tribal resources held in trust for the tribe by the federal governmentAs of 12/11/14, Board had not approved official definitions of split interest agreements and beneficial interests.As of 12/11/14, the project does not define “holds” or “administers.”The tentative scope covers split interest agreements (“held and administered” by 3rd parties or “entered into” by the government) and beneficial interests in assets “held and administered” by a 3rd party. An “irrevocable charitable trust” describes only one of several types of arrangements whereby assets are held by the government for the benefit of the government and the donor.Other arrangements (when the government holds and administers the assets) include:pooled income funds (where multiple donors fund a pool managed by the government where the principle may not be depleted),charitable gift annuities (donor transfers resources to government and the government provides an annuity for the life of the donor, and any remaining resources go to the government at donor’s death).
150 Beneficial InterestThe term beneficial interest refers to the right to receive resources in a future reporting period, as opposed legal title to the donated resourcesBeneficial interest is a form of legal ownershipDoes not address pledgesLegal ownership of pledges is less certainStatement 33 does not allow recognition of assets from pledges with time requirements until the assets are receivedBeneficial Interest examplesSame as above except donor transmits resources to a bank to act as the trusteeState university recognizes beneficial interest in trust assets
151 Key Elements of Split-Interest Agreements Donor gives resources to government or 3rd partyGovernment or 3rd party “holds and administers” as trusteeIncome BenefitPayments during the life of the trustGenerally goes to non-governmental beneficiaryGenerally the donor or donor’s relativeRemainder BenefitRemainder assets at termination of trustGenerally goes to governmentTrust termination occurs uponDonor’s deathSet periodCombination (such as, 5 years or donor’s death, whichever is longer)Split-Interest Agreement examplesA state university receives a donation of investment assets from a former alumni via a split interest agreementAgreement requires that the income of the donated assets be provided for the benefit of the donor until deathUpon the death of the donor, the remainder assets are to be used for the state university to further its programsDonated assets can potentially include cash, stock, bonds, real estate, other trusts, REITS, works of art, life insurance policies, etc.IRS data shows:Roughly 93% of split interest agreements provide the remainder to a “charitable purpose.” If the government “holds” the resources, then the government normally would received the remainder at the termination of the trust.There are unusual cases where the government received payments during the life of the trust and the remainder assets go to the nongovernmental beneficiary.Income benefit payments can be fixed (as an annuity) or can be variable. For example, it can be specified as a fixed percent of the fair value of the assets measured annually.Remainder Benefits are usually misinterpreted as the corpus of the donated assets, while in reality, the donate assets can increase or decrease based on the income benefit payment structure specified by the donor.
153 Split-Interest Agreements with Resources Held by Government MeasurementAssetLiabilityDeferred InflowInitialResources measured at fair valueFor benefit of nongovernmental beneficiary:Income benefit—measure directly at settlement amountFor government’s benefit in resources:Remainder benefit—residual amount (trust assets less income benefit)SubsequentInvestments remeasured at fair value; changes are investment incomeDistributions to income beneficiaries reduce income benefitIncome Benefit is mostly measured using a Present Value technique – discounted cash flows.
154 Reporting Beneficial Interests in Resources Held by Others Donation agreement needs to meet all criteria for recognitionLegal document specifies government by name as beneficiaryGovernment has a vested beneficial interestDonation agreement is irrevocableDonor has not granted variance powerIntermediary is not under the control of the donorAssigning beneficial interests is not subject to approval of the trustee or prohibited by lawAttempt to assign beneficial interests does not terminate the agreementThe long list of criteria for asset recognition is designed to first determine that the government has an irrevocable right, outside the control of the donor, therefore the government can claim. And second, to ensure the government can convert the asset to ‘cash’ (monetize the right) to demonstrate present service capacity.
155 Split-Interest Agreements with Resources Held by Others MeasurementAssetDeferred InflowInitialResources initially measured at fair valueFor government’s benefit in resources:Initially measured at fair valueSubsequentChanges in fair value of resources are investment incomeIncome Benefit is mostly measured using a Present Value technique – discounted cash flows.
156 Project Timeline Pre-Agenda Research Starts December 2013 Added to the Current Technical AgendaApril 2014Exposure Draft ExpectedJune 2015Final Statement ExpectedJanuary 2016