Presentation on theme: "Presented by Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts April 2009 If Its Monday, We Must be in Norwalk and Other Updates from."— Presentation transcript:
Presented by Eric S. Berman, CPA Deputy Comptroller Commonwealth of Massachusetts April 2009 If Its Monday, We Must be in Norwalk and Other Updates from GASB 2009
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.
GASB Statements Implementation 20092010 Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Phase 3 Plans < $10 million Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pension Plans Phase 2 Employers > $10 million < $100 million Phase 3 Employers < $10 milion Technical Bulletin 2004-2, Recognition of Pension and OPEB Expenditures / Expense and Liabilities by Cost-Sharing Employers With OPEB Implementation Technical Bulletin 2006-1, Accounting and Financial Reporting for Employers and OPEB Plans… Medicare Part D With OPEB Implementation Technical Bulletin 2008-1, Determining the Annual Required Contribution Adjustment for Post-Employment Benefits With OPEB Implementation
GASB Statements-Future Dates 2009 · Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations RETROACTIVE APPLICATION · Statement No. 52, Land and Other Real Estate Held as Investments by Endowments RETROACTIVE APPLICATION
GASB Statements-Future Dates 200920102011 Statement No. 51, Accounting and Financial Reporting for Intangible Assets RETROACTIVE APPLICATION IN 2010 STATEMENT No. 53, Accounting and Financial Reporting for Derivative Instruments RETROACTIVE APPLICATION IN 2010
GASB Statements-Future Dates 200920102011 NEW AND HOT!! Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions RETROACTIVE APPLICATION IN 2011 EVEN HOTTER!! STATEMENT No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments IMMEDIATE IMPLEMENTATION EVEN HOTTER!! STATEMENT No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards IMMEDIATE IMPLEMENTATION HOT OFF THE PRESSES
7 Just the facts on OPEB for those stragglers! What is the substantive plan from the employers/employees perspective? Does an implicit rate subsidy exist? Has a qualifying trust been established? Are the actuarial assumptions reasonable? What constitutes a contribution to the plan? What is required to be presented in the financial statements?
Statement 49 Accounting and Financial Reporting for Pollution Remediation Obligations – - aka the sleeping giant
Where Superfund, Priority List and RCRA Sites are in Tennessee per EPA
11 What Do You Need To Know About Statement 49? Thresholds are required to be met before the clock starts on recognition Measurement is based on expected cash flows Amounts should be reasonably estimable Some obligations will result in the recognition of an asset Recoveriesdepend on the source
12 Recognition Threshold Determine whether one of more components of a pollution remediation obligation are recognizable as a liability when... Government knows or reasonably believes that a site is polluted, and Obligating event occurs (the criteria effectively serve as a safe harbor)
Decision Tree on Pollution Part 1 Obligating Events
Decision Tree on Pollution Part 2 – Measurement Guidance From Part 1 Go to Part 5 Go to Part 3
Decision Tree on Pollution Part 3 – Capitalization Guidance From Part 2 Yes Go to Part 4 Prepping property to sell OR to reuse
Decision Tree on Pollution Part 4 – Liability Guidance From Part 3 Go to Part 5
Decision Tree on Pollution Part 5 – Disclosure From Part 2 – (if not estimable) From Part 4
Three Contingencies – GASB 49 Recognition – Leaky Storage Tank in Road Project CaseExpected Outlays (a) % Probability (b) Outlays x % (a x b) Best$150,00025%$ 37,500 Most Likely $320,00060% 192,000 Worst$450,00015% 67,500 100%$297,000
Implementation Ideas Internal controls to ensure obligating events identified For exampleYear-end inquiry to departments Similar to contingent liability inquiries, but for obligating events
20 Recognition Overview Component recognition approach Cost accumulation, not fair value Current value, not present value Expected cash flow technique
Expected Recoveries from Potential Responsible Parties and Insurance Reduce expense (and expenditure, if available) and... If not realized or realizable Net against remediation liabilities When realized or realizable Increase liability and report separate recovery assets (cash or receivable)
22 Effective Date Fiscal periods beginning after June 15, 2008 (FY09)
Land and Other Real Estate Held as Investments by Endowments GASB 52
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)
Accounting and Financial Reporting For Intangible Assets GASB 51
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
27 Description An intangible asset is an asset that possesses all of the following characteristics: Lack of physical substance Nonfinancial nature Initial useful life extending beyond a single reporting period
Scope 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
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
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
31 Basic Guidance All intangible assets subject to Statement should be classified as capital assets: All existing authoritative guidance related to capital assets should be applied to these intangible assets Since considered capital assets, not reported as assets in modified accrual financial statements Scope exceptions: Intangible assets acquired or created primarily for directly obtaining income or profit Capital leases Goodwill from a combination transaction
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
Internally Generated Intangibles – e.g. Software – supersedes AICPA SOP 98-1 PreliminaryDevelopmentOperations Determination of objective of project and is feasible Demonstration that intent is there to complete the project Management authorizes and commits to funding Software is coded, tested and implemented Software is accepted and operating EXPENSECAPITALIZEEXPENSE Future betterments that add to useful life - Capitalize
Helpful Best Practices RETROACTIVE IMPLEMENTATION Go look for intangibles starting NOW Include legal counsel help as well as IT staff
35 Effective Date and Transition Effective date is fiscal periods beginning after June 15, 2009 Provisions generally should be retroactively applied Exceptions for retroactively reporting intangible assets: Permitted but not required for intangible assets with indefinite useful lives at transition Required for all other intangible assets acquired in fiscal years ending after June 30, 1980 by phase 1 or 2 governments Encouraged but not required for all other intangible assets of phase 3 governments
36 Statement 53 Accounting and Financial Reporting for Derivative Instruments
Derivatives Notional amounts outstanding, 1987-present Source: International Swaps and Derivatives Association, Inc., 2008 $683.7 trillion in June 2008
Types of Derivatives that Accountants Encounter % of notional amounts outstanding – as of June 2008 – Source Bank for International Settlements
Ponder this about pooled securities such as mortgage backed derivatives:
Executive Summary of GASB Statement No. 53 Complex statement that: Defines derivatives and exclusions Presents requirements for recognition and measurement of derivatives Describes and calculates hedge accounting, efficient and inefficient hedge accounting Contains a full set of examples and note disclosures, as well as transition guidance Supersedes Technical Bulletin 2003-1 Amends pieces of Statement Nos. 7, 23, 25, 31, 40 and 43
Executive Summary of GASB Statement No. 53 What is a derivative? It is a contract that has settlement factors which could be one or more reference rates, notional amounts, payment provisions or any combination It has leverage It can be settled net
Executive Summary of GASB Statement No. 53 What are settlement factors? Reference Rate – an interest rate, security price, commodity price, exchange rate, other variables Notional Amount(s) – the face amount of the contract, which includes the number of units, shares, bushels, pounds etc.
Executive Summary of GASB Statement No. 53 Requirements of the statement: Derivatives should be reported on the statement of net assets at fair value except for synthetic guaranteed investment contracts Unless hedging derivative, changes in fair values are part of investment revenue in statement of activities, changes etc. If hedging, then changes are deferred inflows or outflows If hedged derivative is terminated, P&L event
Executive Summary of GASB Statement No. 53 How to measure fair value Market price if there is a market Discounted expected cash flows One of a number of different pricing models and methods IF using a pricing service and the method to calculate is NOT disclosed by the service, then management must make an assessment of propriety based on the information received
Executive Summary of GASB Statement No. 53 Termination occurs when Hedging derivative not effective Government becomes exposed to adverse changes in fair values or cash flows Hedged asset or liability is sold or retired, refunded or defeased Derivative is terminated Forward transaction occurs (e.g. sale of bonds or purchase of commodity) Reporting – investment revenue, balance sheet activity caption increase (decrease) upon hedge termination
46 Examples of Derivatives Interest rate swap Variable-rate to fixed-rate Fixed-rate to variable-rate Basis swap Exchange payments based on the changes of two variable rates Swaption Gives the purchaser of the option the right, but not the obligation, to enter into an interest rate swap Commodity swap Reduce exposure to a commoditys price risk
47 Principle Fair value with hedge accounting Changes in fair value of derivative are deferred for qualifying transactions Changes in fair value of derivative would not be deferred if The related asset (for example, investment) is reported at fair value The hedge does not meet the effective criteria How is that operationalized?
What is a hedge? A hedge is a contract entered into to reduce some form of risk in cash flows or fair values Hedges that accomplish the goal of reducing risk as expected are commonly referred to as effective.
What is a hedge? It must be associated with a hedgeable item Asset, Liability, Expected Transaction (swaption, forward etc.) Notional amount = principal amount Derivative is in the same fund as hedgeable item Term or time period is consistent between derivative and hedgeable item It is effective in reducing the risk
How to evaluate effectiveness? Initial Year If terms of derivative (years, amounts, rates) are consistent with debt, asset etc., then automatically effective – known as consistent critical terms If inconsistent, then at least one of many quantitative methods must be used Subsequent Years Use the same method as first year, but can use other method Evaluation of effectiveness is done by measuring cash flows or overall changes in fair values
How to evaluate effectiveness? Quantitative methods include Synthetic instrument method (combine debt cash flows and derivative to create a third item) Dollar offset method (measure changes in cash flows) Regression analysis method (statistical relationship between debt and derivative changes) Can use other quantitative methods
Effectiveness Corridors Synthetic instrument method Dollar Offset Regression analysis Synthetic rate should be within 90% - 111% of fixed rate Derivative cash flows 80% - 125% of debt R 2 (measure of the proportion of the variance in a dependent variable about its mean that can be explained by changes in the independent variable.) must be 0.80 F-statistic (confidence level) must have 95% confidence Corridor must be 80% - 125% of debt
Note Disclosure Summary table of information Organized by governmental, BTA, fiduciary funds Subdivisions for hedging derivatives and investment derivatives Within each categories – aggregate information by type (received fixed swaps, pay fixed swaps, swaptions, caps, basis swaps, futures etc.)
Example of Calculating Effectiveness Assumptions Auction rate bonds issued for $100MM on 7/1/xx. Bonds mature 6/30/x4 Semiannual coupons reset weekly On 7/1/xx, the government enters into a $100MM, notional, pay fixed, receive variable swap that terminates 6/30/x4. FMV at 7/1xx=$0 Semiannual variable payment reset weekly Variable payment is 49.96% of LIBOR + 78 basis points Fixed payment is 3.58782%.
Step 1 – Diagram the transaction GovernmentCounterparty Fixed pay 3.57872% Variable receive – LIBOR + 78bps Bondholders Auction rate paid Note that the actual synthetic rate paid will vary depending on the difference between the auction rate paid and the variable rate received.
Step 3, Divide and Measure From Assumptions Since these are between 90 and 111%, then derivative is effective – changes only reflected in statement of net assets
Journal Entries – HIGHLY SIMPLIFIED Year 1 Swap Payment to Counterparty Dr.Interest Expense$3,578,720 Cr.Cash$3,578,720 Swap Receipt from Counterparty Dr.Cash$2,031,713 Cr.Interest Expense$2,031,713 Payment to Bond Holders Dr.Interest Expense$1,789,314 Cr.Cash$1,789,314 Change in Fair Value Dr.Pay-fixed rate swaps $2,487,390 Cr.Deferred Outflow of Resources$2,487,390
Journal Entries – HIGHLY SIMPLIFIED Year 2 Swap Payment to Counterparty Dr.Interest Expense$3,578,720 Cr.Cash$3,578,720 Swap Receipt from Counterparty Dr.Cash$1,575,995 Cr.Interest Expense$1,575,995 Payment to Bond Holders Dr.Interest Expense$1,359,205 Cr.Cash$1,359,205 Change in Fair Value Dr.Pay-fixed rate swaps $1,512,764 Cr.Deferred Outflow of Resources$1,512,764
Journal Entries – HIGHLY SIMPLIFIED Year 4 – FINAL YEAR Swap Payment to Counterparty Dr.Interest Expense$3,578,720 Cr.Cash$3,578,720 Swap Receipt from Counterparty Dr.Cash$1,940,223 Cr.Interest Expense$1,940,223 Payment to Bond Holders Dr.Interest Expense$1,930,405 Cr.Cash$1,930,405 Change in Fair Value Dr.Deferred Outflow of Resources $1,536,286 Cr.Pay – Fixed Rate Swaps$1,536,286
Note Disclosure Summary table of information Information includes: Notional amounts Changes in fair value and where it is reported in the financial statements Fair values at the end of the year Reclassifications from hedging to investment derivatives during the period Deferral amounts in investment revenue Can be narrative if small number of contacts
Note Disclosure Narratives include Objectives of derivatives Terms of derivatives include Notional amounts Reference rates, indexes etc. Any embedded options (caps, floors collars) Date of contract and termination or maturity Any cash paid or received 2003-1 risks (credit, interest rate, basis, termination, rollover, market access, foreign currency)
Note Disclosure Other Hedged debt –follow GASB 38 – disclose net cash flows If using other quantitative method – identify and notable features of the method Investment derivatives 2003-1 disclosures along with GASB 40 disclosures
Note Disclosure – June 30, Year 1 ItemTypeObjectiveNotional Amount (000s) Effective Date MaturesTermsFMV (000s) AVariable Receive Interest Rate Swap Hedge of changes in cash flows of series XX bonds $100,00 0 7/1/xx6/30/x4Receive LIBOR + 78bps, pay 3.57872 % ($2,487) BFuel contract Hedge oil market price changes 1 MBTUs 4/30/x012/31/x0Pay $7.50 MBTU, based on pricing point at expirati on 111
Disclosure After table, note the following: Terms not in table How fair values calculated Risks and ratings of counterparties Contingencies on derivatives Table of all payments and hedged debt
Disclosure – 2 nd table Changes in Fair ValueFair Value at June 30,xx Governmental Activities ClassificationAmount (000s) ClassificationAmount (000s) Notional (000s) Variable Receive Interest Rate Swap Deferred Outflow ($2,487)Debt($2,487)$100,000 Commodity Forward Deferred Inflow 111Derivative Instruments 1111,000 MMBTUs
Transition Transition periods BEGINNING AFTER June 15, 2009 Retroactive application for all periods presented Perform hedge effectiveness evaluation as of the END of the CURRENT period ONLY. If effective now, assume effective as of the beginning of the contract
Other items included in the Statement Huge (11 page) glossary 12 robust illustrations Consistent critical terms Interest rate swaps – synthetic method Interest rate swaps – terminations due to market conditions Regression analysis Dollar offset method
Other items included in the Statement 12 robust illustrations (continued) Swaptions Full set of note disclosures Flowchart of hedge effectiveness decisions Codification instructions Still to Come – Implementation Guide – Watch for it in 2009!
70 Fund Balance Reporting and Governmental Fund Type Definitions Statement 54 HOT OFF THE PRESSES!!
What Do You Need to Know About Statement 54? Could be a large change 2 initial distinctions Non-spendable Cant be spent with cash In a non-spendable form Legally or contractually required to remain intact
What Do You Need to Know About Statement 54? 2 initial distinctions Spendable Can be spent, but may have restrictions – those being: Restricted Committed Assigned
What Do You Need to Know About Statement 54? Restricted Same definition as in Statement No. 46 Externally imposed by creditors (e.g. debt covenants) Imposed by law through constitutional provisions or enabling legislation and has legal enforceability
What Do You Need to Know About Statement 54? Committed Can only be used for specific purposes imposed by formal action of the governments highest level of decision making authority Can only be changed by the same type of action Law, ordinance, resolution Should occur prior to year end, but can occur after
What Do You Need to Know About Statement 54? Assigned Can constrained by intent Should be expressed by governing body or a committee or an official that can assign assets Includes all remaining amounts NOT in the General Fund
What Do You Need to Know About Statement 54? Unassigned Includes only unrestricted, uncommitted, unassigned amounts in the General Fund ONLY General Fund should be the only fund that reports a positive unassigned amount If a NON-General Fund balance is negative after restricted, committed, assigned, then Reduce assigned and if that goes to zero Negative unassigned
What Do You Need to Know About Statement 54? Governmental Fund Type Definitions Special revenue fundused to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Capital projects fundused to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets. Debt Service, Permanent and General Fund unchanged
What Do You Need to Know About Statement 54? Rainy Day / Stabilization Funds Satisfies the criteria for a Special Revenue Fund, only if the resources derive from a specific restricted or committed revenue source
What else about Statement 54? Policies and procedures of committed and assigned should be in the Summary of Significant Accounting Policies Committed: Who is the highest level of decision making authority? What action is required to establish commitment? Assigned Who can assign What is the policy of assignment
What else about Statement 54? Encumbrances Disappear from the face of the financial statements, other than what is already restricted Disclosed in the notes Stabilization Disclosure Notes should describe authority, requirements for additions, spending and balance Minimum fund balance policies disclosed Implementation – periods beginning after June 15, 2010
Display in the Financial Statements Either disaggregated or aggregated Complex governments will probably aggregate If aggregate on the face of the statements, no requirement to present disaggregated numbers, unless important to financial statement users Detail can be put in the notes
GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Codifies the 4 levels of GAAP, formerly in SAS 69 A.GASB Statements and Interpretations B.GASB Technical Bulletins and if applicable, AICPA Industry Accounting and Auditing Guides and Statements of Position C.AICPA technical practice bulletins D.GASB Implementation Guides If its not in A, look at B-D. If not in A-D, look at other literature Immediate implementation
Questions? Eric S. Berman, MSA, CPA Deputy Comptroller Commonwealth of Massachusetts 617-973-2602 Email: Eric.email@example.com
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