1. GASB Update 2015 Brian J. Hemmerle, CPA, CFE Jeffery W. Patterson, CPA, MBA February, 2015

2. About the Presenters Brian Hemmerle, CPA, CFE –Henry & Horne, Supervisor, Governmental Services –Graduated from the University of Arizona –Experience in Municipalities, School Districts, State Agencies, Non-Profits & Industry –Serves on the Board of Directors for the Girl Scouts Arizona Cactus Pine Council –AICPA, ASCPA, GFOA, GFOAz, AASBO –GFOA Special Review Committee Member Jeffery Patterson, CPA, MBA –Henry & Horne, Supervisor, Governmental Services –Graduated from the Utah State University –Experience in School Districts, Charter Schools, Cities, Towns, State Agencies & Non-Profits –Member of the AICPA, ASCPA, AASBO, GFOAZ –GFOA Special Review Committee Member

3. About Henry & Horne, LLP A valued partner to Arizona’s government and industry clients for over 50 years. Members of AASBO, GFOA, and GFOAZ and serve on the GFOA Special Review Committee. Serve on boards and committees Speaking/training engagements

4. Seminars Quarterly starting in January Breakfast is always provided for live presentations and webinars are offered in the same month for the same topics. A new topic related to governments each quarter. Earn 1 - 2 hour of Complimentary CPE Your topic suggestions are welcome!

5. Upcoming Topics April 2015 – Implementing GASB 68 & 71 in Arizona July & October 2015 – Coming Soon!!! – Audit implications of GASB 68 – Bond Accounting

6. Today’s Topic GASB 68 –Accounting and Financial Reporting for Pensions GASB 71 –Pension Transition for Contributions Made Subsequent to the Measurement Date GASB 69 –Government Combinations and Disposals of Government Operations Current GASB Projects

7. GASB Statement 68

8. Accounting and Financial Reporting for Pensions –Issued in June 2012 –Effective for FYE 2015 –Amends GASB Statement 27

9. GASB Statement 68 Established standards of financial reporting for defined benefit pension plans and defined contribution pension plans administered through a trust or equivalent arrangement Pension includes retirement income and other benefits but does not include postemployment healthcare and termination benefits

10. Types of Plans Single employer plans – involve only one government Multiple employer plans – include more than one government Agent multiple employer plans – separate accounts maintained for each employer. –PSPRS Cost sharing multiple employer plans – governments pool costs. –ASRS

11. Background Pension benefits originate from exchanges between the employer and employees and are part of the total compensation for employee services Pension obligations meet the definition of a liability in Concept Statement 4 –Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid

12. Changes Statement 68 changes accounting and financial reporting for employers with regard to: –The amount reported as a liability –The amount reported as pension expense –The discount rate used to calculate the present value of the obligation –The method used by the actuary to allocate costs –The technique used by the actuary to compensate for changes in assumptions and actual results

13. What about Modified Accrual? Liabilities to defined benefit pension plans, as well as liabilities for defined contribution pensions, are normally expected to be liquidated with expendable available resources when amounts due are pursuant to contractual arrangements or legal requirements. –Employers continue to recognize a pension expenditure based on their contractually required contribution to the plan by function. –Employers only report a liability if they fail to make the full amount of their contractually required contribution to the plan.

14. Employer Obligations Defined pension benefits originate from exchanges between employer and employee as part of compensation –The cost and obligations associated with pensions should be recorded as they are earned, not when contributions are made –The obligation exists now to provide a pension benefit at a future date

15. Discount Rate Statement 68 requires the discount rate to be a single rate that reflects: –The long-term expected rate of return on plan investments that are expected to used to finance the payment of benefits to the extent that: Plan net position is projected to be sufficient to make projected benefit payments, and Assets are expected to be invested using a strategy to achieve that return –A high quality 20-year muni bond index rate or yield on tax exempt GO bonds (AA rated or higher or an equivalent rating) beyond the point at which plan net assets available for pension benefits are projected to no longer be available for long-term investment. The plan will determine which method they will use.

16. Illustrated Measurement Approach

17. Timing

18. Timing 3 DIFFERENT DATES –Employers FYE –Measurement date (Net Pension Liability [NPL]) This date cannot be earlier than the end of the employers prior fiscal year end date. All components as of the same date –(Total Pension Liability – Plan Net Position = NPL) –Actuarial valuation date (of TPL) This date can be the same as the measurement date or earlier, but no earlier than 30 months +1 day prior to the employers FYE date. The pension plan will tell you what the actuarial valuation date and measurement date are for your applicable fiscal year end.

19. Illustrated Timing Example Example

20. Illustrated Timing Example For FYE June 30:

21. Illustrated Timing Example For FYE Dec. 31

22. Employer Contributions made directly by the employer subsequent to the measurement date of the net pension liability and before the end of the employer’s fiscal year should be recognized as a deferred outflow of resources. GASB Statement 71

23. Question: –For those deferred contributions which will need to be tracked between 7/1/2014 – 6/30/2015, what is the determining factor with which we will use to identify those contributions? The pay period end date or actual date the contribution is made to the plan? Answer: –Deferred contributions will be based on the accrual basis of accounting for the pay period end date, and not on the day the contribution was remitted to the plan. GASB Statement 71

24. Pension Expense Measuring Pension Expense –Before GASBS 68 Annual contributions expensed to pension expense. Essentially equal to the ARC.

25. Pension Expense Measuring Pension Expense –After GASBS 68 Annual contributions posted to deferred outflows. The difference between the actual and projected earnings on plan investments would be deferred and recognized as pension expense over a five-year closed period.

26. Pension Expense Measuring Pension Expense –After GASBS 68 Differences between expected and actual changes in economic and demographic factors (experience) would be deferred and recognized as pension expense over a period equal to the average remaining service periods of active and inactive employees (including retirees).

27. Pension Expense Measuring Pension Expense –After GASBS 68 Changes in (assumptions) or other inputs that affected measurement of the total pension liability since the prior measurement date would be deferred and recognized as pension expense over a period equal to the average remaining service periods of active and inactive employees (including retirees).

28. Pension Expense Measuring Pension Expense –After GASBS 68 Changes in (proportion) in the collective net pension liability since the prior measurement date would be deferred and recognized as pension expense over a period equal to the average remaining service periods of active and inactive employees (including retirees).

29. Pension Expense Items to be immediately expensed –Pension benefits earned during the reporting period (service cost or normal cost) –Interest cost on the total pension liability –Changes in benefit terms that affect the total pension liability –Long-term expected rate of return on pension plan investments

30. Pension Expense Summary of Changes in Expense

31. Example Accrual Based Entry

32. Contributions from Employer subsequent to the measurement period are not reflected in the NPL but rather as a debit to deferred outflows. It is then recognized as a reduction of NPL in the subsequent measurement period as a credit to deferred outflows and a debit to the NPL. Example Accrual Based Entry

33. Schedule of Employer Allocations (AICPA)

34. Schedule of Pension Amounts by Employer (AICPA)

37. Note Disclosures Assumptions Used in Measurement –Assumption in respect of: Salary Inflation Postemployment benefit increases Discount rate –Different rates, if contemplated for different periods –Date(s) of experience studies and tables on which significant assumptions are based

38. Note Disclosures Discount Rate – Expected Rate of Return –Expected rate of return on plan investments –Description of how the expected rate of return on plan investments was determined, including: Assumed asset allocation of the portfolio Best estimate of the long-term expected rate of return for each major asset class

39. Note Disclosures Discount Rate – Sensitivity Analysis –The effects on the current period net pension liability of a 1% increase and a 1% decrease in the discount rate.

40. Note Disclosures Significant Plan Disclosures –Annual money-weighted rate of return (1 year in the notes and 10 years in RSI) –Changes in the net pension liability –Net pension liability as of plan year end

41. RSI 10-Year Schedules Changes in the net pension liability Net pension liability –Total pension liability, plan net position, net pension liability and Plan net position as a percentage of the total pension liability Net pension liability as a percentage of covered- employee payroll

42. RSI 10-Year Schedules

44. Available Resources GASB Implementation Guides GASB Website ASRS Website Auditor General Website

45. GASB

46. GASBS 71 Pension Transition for Contributions Made Subsequent to the Measurement Date –Issued November 2013 –Effective for FYE 2015

47. GASBS 71

48. Contributions from Employer subsequent to the measurement period are not reflected in the NPL but rather as a debit to deferred outflows. It is then recognized as a reduction of NPL in the subsequent measurement period as a credit to deferred outflows and a debit to the NPL. Example Accrual Based Entry

49. GASB Statement 69

50. Government Combinations and Disposals of Government Operations –Issued December 2013 –Effective for FYE 2015

51. GASB Statement 69 Establishes accounting and financial reporting standards related to government combination and disposals of government operations. Previously no GAAP for the government environment. Governments had been using APB Opinion No. 16, Business Combinations

52. GASB Statement 69 There are three types of government combinations –Government merger –Government acquisition –Transfer of operations

53. GASB Statement 69 Government merger – combination of legally separate entities in which no significant consideration is exchanged. Government acquisition – combination of legally separate entities in which there is significant consideration exchanged. Transfer of operation – combination of operations without significant consideration.

54. GASB Statement 69 Consideration can include: –Financial and/or nonfinancial assets such as cash, investments, or capital assets –The assumption of liabilities, but does not include the assumption of negative net position –Potential transfer of cash or other assets that are contingent upon specified future events

55. GASB Statement 69 Government merger – combination of legally separate entities in which no significant consideration exchanged Two or more are now one –Items should be recorded at carrying value as of the merger date –No revaluations –Test for impairment –Transactions between the parties are eliminated

56. GASB Statement 69 Government acquisition - combination of legally separate entities in which there is significant consideration exchanged –Items should be recorded at market- based entry price (acquisition value) –If consideration value is greater than acquisition value, difference is recorded as deferred outflow (goodwill)

57. GASB Statement 69 Transfer of operations – combination of operations without significant consideration –Items should be recorded at carrying value as of the transfer date –Net position transferred is a special item

58. GASB Statement 69 Disposal –Gain or loss should be recorded as a special line item –Gain or loss should only include costs directly related to the disposal of operations

59. Exposure

60. Exposure Drafts ED-The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments ED-Fair Value Measurement and Application ED-Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered through Trusts That Meet Specified Criteria and Amendments to Certain Provisions of GASB Statements 67 and 68

61. GAAP Hierarchy GAAP Levels Reduced to: Two Authoritative Categories –GASB Statements Periodically incorporated in the Codification Subject to AICPA Rule 203 –Category (b) includes: GASB Technical Bulletins GASB Implementation Guides (Q&As) AICPA literature if specifically cleared by the GASB Nonauthoritative

62. GAAP Hierarchy Supersedes Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Amends Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30 1989 FASB and AICPA Pronouncements Effective for periods beginning after June 15, 2015, and would be applied retroactively with earlier application permitted

63. Fair Value Measurement and Application Highlights Scope is not limited to investments –Certain assets and liabilities measured at fair value –Includes derivatives Two-part Statement –Measurement –Application Note Disclosure requirements

64. Part I: Fair Value Measurement Definition of fair value –The 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-apply to assets and liabilities Other characteristics of fair value measurement –Market-based –Based on a government’s principal or most advantageous market No fair value option

65. Part I: Fair Value Measurement Valuation Techniques –Apply valuation techniques that best represents fair value in the circumstances Market approach Cost approach Income approach –Revisions due to a change in valuation technique is considered a change in accounting estimate Fair value hierarchy- –Level 1-quoted prices in active markets for identical assets or liabilities, most reliable –Level 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 observable –Level 3-unobservable inputs, least reliable

66. Part II: Fair Value Application Definition of an investment –A security of 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 cash Investment asset –Service capacity –Held primarily for income or profit Examples, if the definition of investment is met –Intangible assets –Land and land rights –Real estate –Lending assets –Natural resources assets

67. Part II: Fair Value Application Additional investment-types –Investments that are already measured at fair value –Alternative investments –Equity securities –Co-mingled investment pools that are not government sponsored Investments excluded from scope-not fair valued –Money market investments and participating interest- earning investment contracts –Investments in 2a7-like pools –Investments in life insurance –Investment in common stock that meet the criteria for applying the equity method –Non-participating interest earning investment contracts –Unallocated insurance contracts

68. Postemployment Benefits Other Than Pensions Highlights Would revise recognition, measurement, disclosure requirements for all employers –Liability Measured net of OPEB plan’s fiduciary net position Fully recognized in accrual-basis financial statements –Changes in the liability Some recognized as expense in the period of the change Others recognized as deferred outflows/inflows of resources with expense recognized over defined future periods Would be effective for FYs beginning after December 15, 2016

69. Postemployment Benefits Other Than Pensions Scope & Applicability Provides guidance for defined benefit and defined contribution OPEB provided through OPEB plans administered through trusts that meet certain criteria and OPEB provided outside of such plans Criteria for a trust –Employer/nonemployer contributions irrevocable –Plan assets dedicated to providing OPEB –Plan assets legally protected from creditors Applies to nonemployer contributing entities that have a legal obligation to make contributions directly to an OPEB plan

70. Postemployment Benefits Other Than Pensions Defined Benefit OPEB Liabilities to the OPEB plan (payables) Liabilities to employees for OPEB when administered though an OPEB plan administered as a trust that meets the criteria: –Net OPEB liability –Single/agent employers recognize 100% of net OPEB liability –Cost-sharing employers recognize proportionate shares of collective net OPEB liability

71. Postemployment Benefits Other Than Pensions Liability: Measurement-Timing Employer fiscal year-end Measurement date of net OPEB liability –As of date no earlier than end of prior fiscal year –Both components (total Liability/plan net position) as of the same date Actuarial valuation date of total OPEB liability –If not measurement date, as of date no more than 30 months prior to FYE –Actuarial valuations as least every 2 years Coordination with OPEB plan

72. Other Projects Leases Objective-reexamine issues associated with lease accounting (Statement 62) Preliminary Views Comment Period-Estimated Completion March 2015 Fiduciary Responsibilities Objective-develop guidance regarding the application of fiduciary responsibility criteria in deciding whether and how governments should report fiduciary activities in GPEFRs Preliminary Views Comment Period-Estimated Completion March 2015

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