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GASB Update 2008: Where do we go from here? Presented by Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts March 2008.

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Presentation on theme: "GASB Update 2008: Where do we go from here? Presented by Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts March 2008."— Presentation transcript:

1 GASB Update 2008: Where do we go from here? Presented by Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts March 2008

2 First… a word from our sponsors The views expressed in this presentation are those of the speaker. Official positions of the Commonwealth of Massachusetts are determined only after extensive due process and deliberation.

3 Foremost–Restructuring the Financial Accounting Foundation 11 adopted proposals – 7 directly or indirectly changing GASB Proposal 1 – Expand the breadth of organizations invited to name people to be FAF trustees Proposal 2 – Change FAF terms from two 3-year terms to 1 five year term Proposal 3 – Change FAF count from 16 members to 14 to 18 depending on board vote Proposal 4 – Give FAF more oversight on standard setting Proposals 5-8 FASB only

4 If at first you dont succeed - the end around – Proposal to Restructure the Financial Accounting Foundation 11 adopted proposals – 7 directly or indirectly changing GASB Proposal 9 – Secure a stable funding source for GASB Proposal 10 – Retain the current makeup of GASB Proposal 11 – Give GASB chair decision – making authority to set the GASBs agenda

5 Recently Issued GASB Pronouncements

6 GASB Statements Implementation



9 GASB OPEB Standards Statements 45 and 43 (Just the Basics)

10 Statement 45 (for Employers) Subject: accounting and reporting by employers for their OPEB expenses and obligations Applies to all employers that provide OPEB (that is, the employer pays all or part of the cost of the benefits, including implicit rate subsidies) Requires accrual-basis accounting for expense and measurement and disclosure of funded status (UAAL)

11 Statement 43 (for Plans) Subject: reporting on stewardship of plan assets by A trustee or plan administrator (stand-alone plan reporting) or An employer or plan sponsor with a fiduciary responsibility for the plan assets that includes the plan as a trust or agency fund in its own financial report

12 Postemployment Benefits As Defined in GASB Statements Postemployment benefitsbenefits provided after separation from employment as part of the total compensation for services, including: Pension benefits Retirement income Other benefits (except postemployment healthcare) if provided through a defined benefit pension plan Other postemployment benefits (OPEB) Postemployment healthcare benefits Other forms (for example, life insurance) if provided separately from a defined benefit pension plan

13 Postemployment Benefits: Substance of the Transaction Postemployment benefits (pensions and OPEB) are compensation Exchange transaction between employer and employees Benefits are earned, during employment, Benefits are not taken until after employment The (accrual-basis) cost of benefits for a period is part of the total cost of government services No issue on whether or not funding occurs

14 GASB 25/27 Measurement Approach GASB 43/45 almost the same as 25/27 Funding Friendly approach – higher interest rates allowed if funded Some aspects of on behalf payments and special funding situations within both GASB 43 and 45

15 Disclosure of Funded Status and Funding Progress Disclose the funded status as part of RSI and funding progress Disclose: Actuarial accrued liability (AAL) Actuarial value of plan assets Unfunded actuarial accrued liability (UAAL) (AAL minus plan assets) Funded ratio (actuarial value of plan assets/AAL) Ratio of UAAL to covered payroll Notes to RSI regarding changes affecting the interpretation of trends in the amounts reported

16 Effective Dates Staggered implementation based on a governments phase for implementing GASB 34 Statement 45 will be effective for the employers fiscal year beginning after December 15, 2006 (FY08) (Phase 1), 2007 (FY09) (Phase 2), or 2008 (Phase 3) (FY10) Statement 43 will be effective for the plans fiscal year beginning after December 15, 2005 (if largest employer is Phase 1) (FY07), 2006 (if largest is Phase 2) (FY08), or 2007 (if largest is Phase 3) (FY09) Earlier implementation is encouraged

17 Pension Disclosures GASB 50

18 Pension Disclosures To conform the pension disclosures with the OPEB disclosures Notes to financial statements would disclose the funded status of the plan as of the most recent actuarial valuation date. Defined benefit pension plans also would disclose actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI. Implementation FY08

19 Sales and Pledges of Receivables and Future Revenues and Intra- Entity Transfers of Assets and Future Revenues Statement No. 48

20 Sales and Pledges-Scope Government receives proceeds in exchange for the rights to future cash flows from: Receivables: Delinquent property taxes Mortgages Student loans Future Revenues

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

22 Sales and Pledges Is it a Sale or a Borrowing? Borrowing by default, unless you can prove otherwise, based on evaluation of Continuing involvement control Does the transferor government retain control, or is control relinquished? Criteria provided for receivables Criteria provided for future revenues What is the Intent of the parties? The terms of the agreement may not be determinative

23 Are receivables sold or pledged? Is the transferee able to sell or pledge? Are the receivables and cash collected isolated from seller (and its creditors) Legally separate No access to cash Source and timing of payments Satisfaction of accounts Bankruptcy protection Is there an option or ability to replace or repurchase accounts? Receivables

24 If sale criteria are not met (collateralized borrowing): Pledging government: Does not de-recognize receivables Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure) RESULT - Transferee government recognizes a receivable

25 If the conditions for sale treatment are met: Selling government: De-recognizes receivables Recognizes revenue/gain (loss) in the government- wide statements or enterprise funds for the difference between proceeds and carrying value. Proceeds are recognized as revenue in governmental funds (net carrying value assumed to be zero) Purchasing government: Intra-entity--Purchased receivables are reported at carrying value Outside of the reporting entity--receivables at cost Receivables

26 Key - Are future revenues sold or pledged? Is the transferee able to sell or pledge? Does the transferor continue to have active involvement in the generation of the revenues? By nature, own-source revenues involve continuing active involvement. Taxes User charges Some grants, entitlements, shared revenues, rents, royalties may meet the criteria for sale treatment, depending on active involvement Isolationsimilar to receivables Future Revenues

27 If sale criteria are not met (collateralized borrowing): Pledging government: Continues recognition of revenues pledged Recognizes liability for the proceeds received Payments reduce liability (G/F expenditure) Transferee government recognizes a receivable

28 If the conditions for sale treatment are met: Selling government: Has no asset to de-recognize for future revenues Proceeds will usually be recognized as deferred revenue and amortized over the life of the agreement Deferral depends on why revenue had not been previously recognized by the seller Future Revenues

29 If the conditions for sale treatment are met: Purchasing government: Intra-entity--Payment to selling government for rights to future revenues is reported as a deferred charge (and amortized) Outside of the reporting entity--asset (rights) reported at cost Applied prospectively Future Revenues

30 Other assets and liabilities Assets: Residual interestssubordinate note or residual certificate that represents the rights to: Excess receivable collections (probability of collection) Excess future revenues (revenue recognition event) Liabilities: Recourse and other obligations (FAS 5)

31 Sales and Pledges DisclosuresFuture Revenues: For direct or indirect pledges (while debt is outstanding) What revenue? Purpose of the debt For how long? Significance of pledged amount Coverage For future revenues sold (in the year of the sale) What revenue? For how long? Significance of amount sold Present value of receivables

32 Sales and Pledges Tax Increment Revenues Pledged EXAMPLE – NOT FACTUAL The Commonwealth has pledged a portion of future sales tax revenues to repay $2.8 million in sales tax increment bonds issued in June 2007 to finance the refurbishing of the Worcester Convention Center. The bonds are payable solely from the incremental sales taxes generated by increased retail sales in a specified district contained in legislation. Incremental sales taxes are projected to produce 128 percent of the debt service requirements over the life of the bonds. Total principal and interest requirements for the bonds are $3,490,900, payable semiannually through June For the current year, principal and interest paid and total incremental sales tax revenues were $395,150 and $403,291, respectively.

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

34 Effective Date For Periods Beginning After December 15, 2006 (EG FY08) Retroactive Application, Except: Provisions for Future Revenue Sales to be Applied Prospectively

35 Statement 49 Accounting and Financial Reporting for Pollution Remediation Obligations

36 Legal Liability Standards Varies by state and law Many are similar to Superfund Liable under Superfund Current and previous site owners and operators Disposers Transporters

37 Where Pollution is in Massachusetts Per our DEP Massachusetts alone has: 37 superfund sites 102 brownfields, 26 corrective action sites and nearly 1,100 other sites Source Mass GIS

38 Accounting for Pollution Remediation Obligations - Scope Pollution REMEDIATION Obligations Excludes prevention or control obligations Excludes asset retirement obligations including landfills (Statement 18) Excludes fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4)

39 5 Obligating Events – any one can trigger GASB 49 a. Compelled to take remediation action because of pollution-caused imminent endangerment b. Violate pollution-prevention permitfor example, RCRA permit c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

40 5 Obligating Events (continued) d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation Excludes lawsuits having no merit e. Govt. commences, or legally obligates self to commence Limited to portion legally required to complete

41 Decision Tree on Pollution Part 1 Obligating Events

42 Decision Tree on Pollution Part 2 – Measurement Guidance From Part 1 Go to Part 5 Go to Part 3

43 Decision Tree on Pollution Part 3 – Capitalization Guidance From Part 2 Yes Go to Part 4 Prepping property to sell OR to reuse

44 Decision Tree on Pollution Part 4 – Liability Guidance From Part 3 Go to Part 5

45 Decision Tree on Pollution Part 5 – Disclosure From Part 2 – (if not estimable) From Part 4

46 Three Contingencies – GASB 49 Recognition – Leaky Storage Tank in Road Project CaseExpected Outlays % Probability Outlays x % Best$150,00025%$ 37,500 Most Likely $320,00060% 192,000 Worst$450,00015% 67, %$297,000

47 Compare previous to FASB 5 FASB 5 (old standard and current standard for non-pollution remediation) Liability only when PROBABLE AND reasonably estimable Use most likely amount in a range, or if no likely amount – least amount in range of probabilities GASB 49 (Pollution remediation only) Recognize immediately if any one of 5 triggers met Recognize each phase of remediation as it become estimable Phases include remediation work, indirect costs, legal, site investigation, monitoring Measure based on expected cash flows

48 Which Outlays? All direct outlays attributable to remediation All outlaysnot just incremental costs Consistent with Statement 18 Includes payroll, pension, and OPEB May include indirect outlays General overhead A matter of professional judgment

49 Expected Recoveries from PRPs and Insurance Reduce expense (and expenditure, if available) and... If not realized or realizable Net against remediation liabilities When realized or realizable Accrete liability and report separate recovery assets (cash or receivable)

50 Recoveries example Expected outlays $10,000 Expected recoveries -3,000 Net remediation expense $7,000 If recovery not realized or realizable: Pollution remediation liability = $7,000 If recovery realized or realizable: Recovery asset (receivable) = $3,000 Pollution remediation liability = $10,000

51 Financial Reporting Display Government-wide Program cost, or Special item, or Extraordinary item No separate display of liability required Governmental funds Expenditures recognized when liquidated with expendable available resources No pollution liability, only payables for goods and services used

52 Effective Date & Transition Period beginning after December 15, 2007 (EG FY08) Measure liabilities at beginning of that period so beginning net assets can be restated Apply retroactively if you have sufficient objective verifiable information to apply to prior periods Early application encouraged

53 Land and Other Real Estate Held as Investments by Endowments GASB 52

54 Land and Other Real Estate Held as Investments by Endowments Resolves conflict between governmental and fiduciary funds that hold land investments – also includes investment pools Land held for investment will be held at fair market value, instead of historical cost Changes in value = investment income Effective for periods beginning after June 15, 2008 – (FY09)

55 Accounting and Financial Reporting For Intangible Assets GASB 51

56 Introduction Intangible assets included in description of capital assets in GASB 34 Inconsistency in practice on how intangible assets are treated for accounting and financial reporting: As capital assets As intangible assets as considered in APB 17 Expensed in period that costs are incurred Objective of Statement is to reduce the inconsistency in reporting

57 Scope For purposes of the standard, intangible assets are assets that possess the following characteristics: Lack of physical substance Non-financial nature Initial useful life extending beyond a single reporting period Examples may include: Easements (right-of-way, permissive, restrictive) Land use rights (water, timber, mineral, air rights) Internally developed computer software Patents, trademarks, copyrights Licenses, permits and other rights

58 Scope Intangible assets acquired or created through a combination (municipal merger) transaction: Goodwillprovisions of standard are not applicable Other intangible assetsonly recognition and measurement provisions are not applicable Provisions of standard are not applicable to assets resulting from capital lease transactions reported by lessees

59 Classification All intangible assets subject to provisions should be classified as capital assets Existing guidance related to capital assets should be applied to intangible assets as appropriate: Recognition Measurement Depreciation (amortization for intangibles) Impairment Presentation Disclosure Rest of standard provides guidance specific to intangibles that should be applied in addition to, or in lieu of if appropriate, capital asset guidance

60 Recognition An intangible asset should only be recognized if it is identifiable: The asset is separable from the government; or The asset arises from contractual or other legal rights, regardless of whether rights are separable

61 Internally Generated Intangibles – e.g. Software 2 characteristics: Can be created or produced by the government or an entity contracted by the government OR Acquired from a 3 rd party and more than an incremental effort to customize to put in service

62 Internally Generated Intangibles – e.g. Software – supersedes AICPA SOP 98-1 Capitalization ONLY when preliminary stage completed – preliminary stage includes: Determination of objective of project and is feasible Demonstration that intent is there to complete the project Application development phase is when management authorizes and commits to funding – capitalization starts Capitalization ENDS in post-implementation – operation phase If functionality increases in the future – betterment could occur

63 Effective Date and Transition Effective date is periods beginning after June 15, 2009 (FY2010) RETROACTIVE IMPLEMENTATION Go look for intangibles starting NOW Include legal counsel help as well as IT staff

64 Hot off the Presses – Fund Balance Exposure Draft Clarifies categories of fund balance for governmental funds only (of course) Effective date would be for FY2011 – retro application for all periods presented Statement codifies the types of funds Amends GASB 34 for definitions of General, Special Revenue, Capital Projects, Debt Service and Permanent Funds Comments due June 30, Public Hearing July 14 th – Kansas City, Missouri

65 Hot off the Presses – Fund Balance Exposure Draft Fund balance is initially separated between Nonspendable fund balance Not in a spendable form or Legally or contractually required to be maintained Spendable fund balances Usually cash, investments, receivables Further classification into restricted, limited, assigned and unassigned fund balances

66 Hot off the Presses – Fund Balance Exposure Draft Spendable fund balances Restricted fund balances Look to GASB 46 definitions Limited fund balances Committed balances by the highest level of decision making authority Cannot be used for any other purpose BUT NOT legally restricted Agreed to by executive and legislative branches Assigned fund balances Amounts intended to be used by the government but not restricted or limited Expressed by government or high ranking official Could be special revenue, capital projects or debt service funds Unassigned fund balances – all left in the general fund

67 Hot off the Presses – Fund Balance Exposure Draft Spendable fund balance rules General fund – restricted or unassigned unless prior appropriations continued – assigned or limited Accounting policy becomes hugely important Stabilization / Rainy Day funds are specific purpose – restricted or limited

68 Hot off the Presses – Fund Balance Exposure Draft Disclosure Financial Statements Aggregate in financials, details in notes unless government decides to present details in financials Policies and procedures Limited fund balances – highest level of authority and action needed to modify or rescind a restriction Assigned fund balances – official authorized to assign amounts to a purpose and the policy of assignment Order of spending of restrictions – restricted or unrestricted first? ENCUMBRANCES ONLY IN NOTES NOT IN FINANCIAL STATEMENTS Each major fund and non-major funds in the aggregate Disclose minimum fund balance requirements, if any

69 How does it look?

70 Next time – Derivatives!

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

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