GASB Update Lisa R. Parker, CPA Project Manager Governmental Accounting Standards Board The 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.

Overview Pronouncements currently being implemented Projects currently being deliberated by the Board

Effective Dates—June 30 2015 Statement 68—Pension Accounting for Employer and Nonemployer Contributing Entities Statement 69—Government Combinations and Disposals of Government Operations Statement 71—Pension Transition for Contributions Made Subsequent to the Measurement Date 2016 Statement 72—Fair Value Measurement and Application Depending on the state, one or both of the effective date slides will be used.

Pensions: Statements 68 & 71

Overview What: Existing standards for pension accounting and financial reporting by employers (Statement 27) have been updated and improved Why: Review of the effectiveness of Statement 27 found opportunities to significantly improve the usefulness of pension information reported by employers When: Periods beginning after June 15, 2014 (FYE 6-30-15 and later)

Scope & Applicability Defined benefit and defined contribution pensions provided through trusts that meet the following criteria: Employer/nonemployer contributions irrevocable Plan assets dedicated to providing pensions Plan assets legally protected from creditors Excludes all OPEB Applies to employers and nonemployer contributing entities that have a legal obligation to make contributions directly to a pension plan Special funding situations Other circumstances

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 position TPL = actuarial present value of projected benefit payments attributed to past periods Fiduciary net position as measured by pension plan Single/agent employers recognize 100 percent of NPL Cost-sharing employers recognize proportionate shares of collective NPL

Measuring the Net Pension Liability

NPL: Measurement—Timing Employer fiscal year-end Measurement date (of NPL) As of date no earlier than end of prior fiscal year Both components (TPL/plan net position) as of the same date Actuarial valuation date (of TPL) If not measurement date, as of date no more than 30 months (+1 day) prior to FYE Actuarial valuations at least every 2 years (more frequent valuations encouraged) Coordination with pension plan The employers need to work with their plans regarding the selection of these dates.

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 12/31/2015 Measurement 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)

NPL: Measurement—General Approach Three broad steps Project benefit payments Discount projected benefit payments to actuarial present value Attribute actuarial present value to periods Methods and assumptions Generally, assumptions in conformity with Actuarial Standards of Practice Fewer alternatives than in Statement 27 for methods and assumptions for GAAP reporting purposes No changes required to actuarial methods and assumptions used to determine funding amounts

NPL: Measurement—Projection Benefit terms/agreements at measurement date Current active and inactive employees Incorporate expectations of: Salary changes Service credits Automatic postemployment benefit changes (including COLAs) Ad hoc postemployment benefit changes if substantively automatic

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 benefits Plan assets are expected to be invested using a strategy to achieve that return If 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 bonds It 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.

Projecting Plan Net Position for Use of LTERoR Includes: Employer contributions for current and former employees Contributions from current employees Projected investment earnings on projected plan net position Projected benefit payments and administrative expenses Does not include: Employer contributions for service costs of future employees Contributions of future employees, unless expected to exceed their own service cost Projections of employer contributions Apply professional judgment if contribution amounts are established by statute, contract, or formal written policy Consider most recent 5-year contribution history Reflect all known events and conditions In other circumstances, projected contributions are limited to the average over the most recent 5 years May be modified by consideration of subsequent events Basis for average determined through professional judgment

NPL: Measurement—Attribution Single method Entry age actuarial cost method Level percentage of pay Individually applied Beginning = 1st period of benefit accrual Ending = Expected retirement Deferred retirement option programs (DROPs)—entry date into DROP = retirement date Same benefit terms to determine service cost as to determine actuarial present value of projected benefit payments Under 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.

Measuring Pension Expense

Changes in NPL NPL recognized in current reporting period (NPL recognized in prior reporting period) Change in NPL for current reporting period Recognize most changes in the NPL as expense in full in the reporting period in which they occur Examples: service cost, interest on TPL, benefit changes, projected earnings on pension plan investments Exceptions: Differences between expected and actual experience (TPL) Changes of assumptions (TPL) Difference between projected and actual earnings on pension plan investments Employer contributions

Changes in NPL—TPL Exceptions (A & B) Recognize the change in NPL as expense in current and future periods Systematic and rational method Closed period Average 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 pensions The deferral is subsequently reduced by the same amount as the expense recognized in the succeeding years.

Changes in NPL—Earnings Exception (C) Recognize the change in NPL as expense in current and future periods Systematic and rational method Closed, 5-year period Portion not recognized in expense initially is recognized as a deferred outflow of resources or deferred inflow of resources related to pensions Report net deferred outflow of resources/deferred inflow of resources from this source

Changes in NPL: Employer Contributions (D) Contributions since the previous measurement date Directly reduce NPL (no expense impact) Contributions subsequent to the current measurement date Deferred outflow of resources related to pensions Directly reduce NPL in next reporting period (no expense impact)

Cost-Sharing Employers

NPL: Cost-Sharing Employers Recognize proportionate shares of collective NPL, pension expense, deferred outflows of resources/ deferred inflows of resources Proportion (%) Basis required to be consistent with contributions Consider separate rates related to separate portions of collective NPL Use of relative long-term projected contribution effort encouraged Collective measure x proportion = proportionate share of collective measure

Changes in NPL: Cost-sharing Employers—Additional Considerations Potentially three items Change in proportion Difference between: The employer’s proportionate share of all employer contributions included in collective plan net position Contributions recognized by the employer in the measurement period Employer’s contributions subsequent to measurement date Items 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

Special Funding Situations

NPL: Involvement of Nonemployer Contributing Entities Statement addresses those with legal requirement to contribute directly to the pension plan Special funding situations Contribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contribute Employer(s) and nonemployer contributing entity apply cost- sharing measurement to collective NPL, expense, and deferred outflows/deferred inflows of resources Nonemployer expense classified in same manner as similar grants to other entities Employer recognizes additional expense and revenue equal to nonemployer contributing entity’s proportionate share of collective expense (portion related to the employer)

Notes and RSI

NPL: Note Disclosures—All Employers Descriptive information Type of plan, identification of administrator Benefit terms—types of benefits, key elements of benefit formula, classes of employees covered, legal authority Contributions—basis, authority, rates ($ or % of pay), contributions in reporting period Availability of plan report Significant assumptions/other inputs in TPL Inflation, salary changes, postemployment benefit changes, mortality assumptions, dates of experience studies Discount 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%

NPL: Note Disclosures—All Employers Information about pension plan’s fiduciary net position or reference to plan report Measurement date, actuarial valuation date Changes of assumptions/other inputs and changes of benefit terms Changes subsequent to measurement date

NPL: Note Disclosures—All Employers Pension expense in current reporting period Deferred outflows/deferred inflows of resources Balances by source Differences between expected and actual experience (TPL) Changes of assumptions/other inputs (TPL) Net difference between projected and actual earnings on pension plan investments Individual items for cost-sharing and special funding situations Employer’s contributions subsequent to measurement date Net impact on pension expense in each of the next 5 years and thereafter in the aggregate Amount that will be reduction of NPL

NPL: Note Disclosures—Single & Agent Employers Schedule of changes in NPL by source for current period Service cost, interest, benefit changes, contributions by source, plan investment income, etc. If special funding situation: Amounts in schedule for collective NPL Nonemployer contributing entity’s proportionate share (amount) of collective NPL Employer’s proportionate share of collective NPL Number of employees covered—inactive receiving benefits, inactive not receiving benefits, active Allocated insurance contracts

NPL: Note Disclosures—Cost-Sharing Employers Employer’s proportion, basis for proportion, change in proportion Employer’s proportionate share (amount) of collective NPL If special funding situation: Nonemployer contributing entity’s proportionate share Total of employer’s and nonemployer entity’s proportionate shares

NPL: RSI—Single & Agent Employers 10-year schedules Changes in NPL by source TPL, pension plan fiduciary net position, NPL, plan net position as % of TPL, covered-employee payroll, NPL as % of covered- employee payroll May be presented with changes in NPL by source If actuarially determined employer contribution (ADEC) ADEC, contributions in relation to the ADEC, difference, covered- employee payroll, contributions as % of covered-employee payroll If no ADEC, but statutory or contractual contribution requirements, schedule similar to ADEC schedule Notes to RSI with methods and assumptions for ADEC and significant changes

NPL: RSI—Cost-Sharing Employers 10-year schedules Employer’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 TPL If special funding situation, also (1) nonemployer contributing entity’s proportionate share and (2) total of employer’s and nonemployer entity’s proportionate shares If statutory or contractual contribution requirements Required contribution, contributions in relation to required, difference, covered-employee payroll, contributions as % of covered-employee payroll Notes to RSI with significant changes

NPL: Note Disclosures/RSI—Nonemployer Contributing Entities in SFS Required information depends on how much of the NPL is recognized by the nonemployer entity If substantial proportion, disclosures similar to cost-sharing employer If less-than-substantial proportion, reduced information Notes Type of pension plan, identification of administrator Contribution basis, authority, amount in reporting period Proportionate share (amount) of collective NPL, proportion (%), basis for proportion, change in proportion, expense, and deferred outflows/deferred inflows of resources RSI (10 years)—entity’s proportionate share (amount) of collective NPL, amount of contributions

Effective Date & Transition (including Statement 71)

Effective Date and Transition Fiscal years beginning after June 15, 2014 Beginning 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 available In 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 resources Other deferred outflows of resources/inflows of resources reported only if it is practical to determine all such amounts

Implementation Guide

Implementation Guide to Statement 68 Reporting by pension plans Approved in December 2012 Available to download free from the GASB website; printed copies can still be purchased 272 questions and answers on topics including: Special funding situations Measurement of the liability Determining a cost-sharing employer’s proportionate share Notes and RSI Transition Illustrations, topical index, full text of the Standards section

Government Combinations: Statement 69

Overview What: New standards for mergers, acquisitions, and transfers and disposals of operations Why: These transactions are becoming more common, but no government-specific guidance was available When: Periods beginning after December 15, 2013 (FYE 12-31-14 and later)

Scope Scope includes: Combinations in which little or no consideration is provided Government mergers Transfers of operations Combinations in which consideration is provided Government acquisitions Disposals of government operations Because 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.

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 intended If not, professional judgment should be used Service continuation: obligation or responsibility to continue to provide the services that were provided by the previously separate governments, organizations, or operations This distinguishes a combination from a contribution or purchase of assets and related liabilities Service 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.

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 liabilities Our counterpart to the FASB’s definitions of a “Business” and a “non-profit activity.”

Overall Approach Government Combination— continuation of the provision of service or operations No consideration provided Merger A single continuing government remains (A+B=B+) An entirely new government is formed (A+B=C) Transfer of Operations Transfer of operations to an existing government Transfer of operations to form a new government Consideration provided Acquisition

Mergers and Transfers of Operations

When No Consideration Is Provided Assets and liabilities brought in at carrying values Presumption of GAAP Initial reporting—mergers: New entity: fresh start Continuing entity: restate as if a change in the reporting entity Initial reporting—transfers of operations: Continuing entity: transaction during the period Adjustments Accounting 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

Acquisitions

Government Acquisitions Measure consideration as the value of assets conveyed or liabilities incurred to the former owner at the acquisition date Assets, liabilities and deferrals should be measured at acquisition value—a market-based entry price Entry price is assumed to be based on an orderly transaction entered into on the acquisition date Acquisition value represents the price that would be paid for similar assets, having similar service capacity, or discharging liabilities assumed as of acquisition date 13

Government Acquisitions Exceptions to acquisition value Employee 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

Government Acquisitions—Consideration Given If exceeds the net position acquired, the difference would be treated as a deferred outflow of resources Attributed to future periods in a systematic and rational manner, based on professional judgment If net position exceeds the consideration given Considered a contribution – if the seller accepted the lower amount for the purpose of providing an economic benefit to the acquiring government If 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. “

Overview Type of Government Combination Consideration Provided Merger/ Acquisition/ Transfer Date Initial Reporting Period Recognition and Measurement Merger—new government is formed No Date the combination becomes effective Begins on the merger date All elements at carrying value as of the merger date. Merger—single continuing government Beginning of the reporting period in which the combination occurs Transaction reported in the period in which it occurs Acquisition Yes Date 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 government Date the transferee government obtains control of the acquired operation’s assets or becomes obligated for its liabilities Begins on the effective transfer date All elements at carrying value as of the effective transfer date Transfer of operations—to an existing government Transaction reported in the reporting period in which it occurs For mergers and transfers of operations, carrying values for capital assets may need to be adjusted for impairment

Other Provisions

Disposals of Government Operations Includes all disposals of operations (transfers or sales) Gains and losses reported as special items Special item should include costs directly associated with the disposal, for example: Fees for professional services Involuntary termination costs Contract termination costs

Disclosures The following disclosures are required for all government combinations—brief description of the combination that: Identifies the entities involved and the primary reasons for the combination Mentions whether the entities combined were part of the same financial reporting entity Discloses the date of the combination Additional disclosures for: Mergers and transfers of operations Acquisitions Disposals of Operations

Fair Value Measurement and Application: Statement 72

Overview What: 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 accountability When: Periods beginning after June 15, 2015 (FYE 6/30/16 and later) Statement will have three parts: measurement, application, and disclosure

Fair Value Measurement

Fair Value Definition 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. An exit price Other characteristics of fair value Market-based Based on a government’s principal or most advantageous market No fair value option Governments do not have the option to selectively apply fair value to any asset or liability

Key Terms Unit of Account Market participants Price Stand-alone asset or liability or a group of assets or liabilities Determined by the particular standards that require fair value measurement Market participants Fair value measurement determined using the assumptions market participants would use in pricing the asset or liability Price Not adjusted for transaction costs When market information is not available Estimate the price at which an orderly transaction would take place between market participants at that date (for example, a valuation technique)

Concepts Nonfinancial assets at fair value Liabilities at fair value Value at the asset’s highest and best use A government’s current use is presumed to be the highest and best use, unless otherwise suggested May be in combination with other assets and liabilities or on a stand- alone basis Liabilities at fair value For example: derivative liabilities Take government’s credit standing into account If there is no active market: Consider liabilities held by other parties as assets If the above is unavailable, use a relevant valuation technique

Valuation Techniques Apply valuation technique(s) that best represents fair value in the circumstances Market approach – Using prices and other relevant information generated by market transactions involving identical or similar assets or liabilities Cost approach – Amount that would be required currently to replace the service capacity of an asset Income 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

Inputs Maximize use of relevant observable inputs and minimize use of unobservable inputs Inputs should be consistent with the characteristics of the asset or liability Sometimes includes an adjustment, a premium or discount Do not include premium or discount that is inconsistent with the unit of account established for the asset / liability Do not include premiums and discounts that reflect size as a characteristic of a government’s holdings Based on bid and ask prices Choose price within the bid-ask spread that is most representative of fair value, if relevant Regarding premiums and discounts: For instance, blockage factors that adjust the quoted price of an asset or liability based on the market’s trading volume

Hierarchy of Inputs Level 1: quoted prices (unadjusted) 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 Inputs categorized within multiple levels of the hierarchy Fair 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

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 3 Other examples that result in categorization to a lower level of the fair value hierarchy Alternative pricing methods (matrix pricing) Adjustments for new information after close of market but before measurement date Adjustments for factors specific to the asset or liability

Volume Adjustments Measuring fair value when volume or level of activity for an asset or a liability has significantly decreased If it is determined that a transaction or a quoted price does not represent fair value, an adjustment would be necessary Risk adjustments Includes a risk premium reflecting amount that market participants would demand as compensation for uncertainty Reflects an orderly transaction between market participants at the measurement date under current market conditions Change in valuation technique(s) may be appropriate

Transactions Not Considered Orderly More difficult to tell when there is significant decrease in the volume or level of activity for the asset or liability Assessment should be performed taking into account: Market exposure and marketing period Whether the sale was distressed or forced The transaction price compared to other recent similar transactions If the transaction is considered to be not orderly, little value should be placed on the transaction price Quoted prices provided by third parties may be used if developed in accordance with this standard

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 equivalent NAV per share may be used as a practical expedient to estimate fair value Adjustment to NAV per share amount may be necessary to be consistent with measurement principles May 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 investment If 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

Fair Value Application

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 cash Service capacity refers to a government’s mission to provide services Held primarily for income or profit—acquired first and foremost for future income and profit

Fair Value Application Assets that meet the definition of an investment generally should be measured at fair value Intangible assets Land and land rights Real estate Lending assets Natural resource assets Alternative investments Equity securities, stock warrants, and stock rights that do not have readily determinable fair values Provided such investment-types are not reported according to the equity method Commingled investment pools that are not government sponsored Invested securities lending collateral If they meet the definition of an investment Also would apply to a derivative with credit balance that is classified as a liability

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 pools Investments in 2a7-like pools Investments in life insurance. Investments in life settlement contracts, however, should be at fair value Investments in common stock that meet the criteria for applying the equity method Investments 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 contracts Unallocated insurance contracts Synthetic guaranteed investment contracts that are fully benefit responsive

Application of Acquisition Value Acquisition value (an entry price) replaces fair value for the following: Donated capital assets Donated works of art, historical treasures, and similar assets Capital assets acquired through a nonexchange transaction Capital assets received through a service concession arrangement

Note Disclosures

Disclosures Recurring—Required or permitted in the statement of net position at the end of each reporting period Non-recurring—Required or permitted in the statement of net position in particular circumstances The 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 measurement The 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.

Level 3 and NAV For fair value measurements categorized within Level 3 of the fair value hierarchy The effect of those investments on investment income for the reporting period Disclosures 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 investments Information 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 class If 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 liquidated Amount of unfunded commitments related to investments in the class General description of the terms and conditions upon which the government may redeem investments in the class

Project Timeline Pre-Agenda Research Started April 2008 Added to Current Technical Agenda August 2011 Preliminary Views Approved June 2013 Exposure Draft Approved June 2014 Final Statement Expected February 2015

Current Technical Agenda Projects

Other Postemployment Benefits These slides presume a presentation that previously addressed pensions. If not, flesh out with adapted slides from pension presentation.

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 68 Why: 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 benefits When: Proposed implementation dates would be periods beginning after December 15, 2015 (plans) and December 15, 2016 (employers)

Fundamental Approach Fundamental approach for OPEB is the same as required for pensions in Statements 67 & 68 Viewed in the context of an ongoing, career-long employment relationship Focus on the cost to taxpayers over time of providing government services Accounting-based versus funding-based approach to measurement

Scope & Applicability Applies same definition of OPEB as used in Statement 45 All postemployment healthcare benefits Postemployment benefits not provided through a pension plan Addresses both defined benefit OPEB and defined contribution OPEB Applies 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 due Special funding situations Other circumstances

Scope & Applicability Differentiates requirements based on whether OPEB is provided through plans administered through trusts in which the following criteria are met: Employer/nonemployer contributions irrevocable Plan assets dedicated to providing OPEB Plan assets legally protected from creditors If 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

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 service Is 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

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 Practice Not reduced by subsidies expected to be received for making benefit payments unless payments are providing Medicare benefits Consider legal or contractual caps if determined to be effective Alternative 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 period Generally, same simplifications to assumptions in Statement 45 can be used Reference to U.S. Office of Personnel Management regarding age-based turnover experience rather than default tables

Changes in Liability Recognize 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 liability Changes of assumptions in the measurement of the total OPEB liability For OPEB administered through trust in which specified criteria are met: Difference between projected and actual earnings on OPEB plan investments Employer contributions

Cost-Sharing Employers Relevant only for OPEB administered through trust in which specified criteria are met Recognize proportionate shares of collective net OPEB liability, OPEB expense, and deferred outflows of resources/deferred inflows of resources related to OPEB Proportion (%) Basis required to be consistent with contributions Use of relative long-term projected contribution effort encouraged Consider separate rates related to separate portions of collective net OPEB liability Collective measure × proportion = proportionate share of collective measure Drop this slide if not in a state with cost-sharing OPEB plans

Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical Agenda April 2012 Exposure Drafts Approved May 2014 Final Statement Expected June 2015

GAAP Hierarchy

The GAAP Hierarchy What: The GASB has proposed a revised hierarchy of generally accepted accounting principles and has exposed the entire Comprehensive Implementation Guide for public comment Why: 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 hierarchy When: Final Statements are expected in June 2015 The hierarchy of generally accepted accounting principles (GAAP hierarchy) comprises the types of guidance that state and local governments follow when preparing GAAP-based financial statements The GAAP hierarchy lists the order of priority for pronouncements to which a government should look for guidance

Levels of GAAP

GAAP Levels Tentatively decided to reduce the GAAP hierarchy 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 Note that Interpretations would be discontinued and existing Interpretations would be incororated by reference through a Statement.

Authoritative GAAP Category (a) guidance would be: Formally approved by the Board, For the purpose of creating, amending, superseding, or interpreting standards, AND Exposed for a period of public comment Category (b) guidance would be: Cleared by the Board, Specifically made applicable to state and local governmental entities, AND

Comprehensive Implementation Guide

Comprehensive Implementation Guide (CIG) Tentatively classified as category (b) authoritative Revised due process Public exposure of guidance in the existing CIG and updates to the CIG going forward Board clearance of the final document Evaluation of individual Q&As prior to exposure Remove or improve Q&As that only restate guidance directly from related statements Move illustrations to the nonauthoritative appendixes

Nonauthoritative GAAP

Nonauthoritative GAAP Nonauthoritative guidance should not conflict with or contradict authoritative GAAP In evaluating the appropriateness of nonauthoritative literature, consider all of the following: Consistency with the GASB Concepts Statements Relevance to particular circumstances Specificity of the guidance General recognition of the issuer or author as an authority

Nonauthoritative GAAP (continued) Sources of nonauthoritative accounting guidance and literature include: GASB Concepts Statements Pronouncements of the FASB, FASAB, IPSASB, and IASB AICPA issue Papers Technical Information Services Inquiries and Replies included in AICPA Technical Practice Aids Practices that are widely recognized and prevalent in state and local government Pronouncements of other professional associations or regulatory agencies Accounting textbooks, handbooks, and articles These proposed changes would improve financial reporting for governments by: Clearly identifying the appropriate accounting guidance to apply Improving implementation guidance by elevating its authoritative status and, therefore, requiring that all implementation guidance be exposed for public comment Codification will include all authoritative literature

Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical Agenda April 2012 Exposure Drafts Approved December 2013 Final Statement Expected June 2015

Tax Abatement Disclosures

Exposure Draft on Tax Abatement Disclosures What: The GASB has proposed standards requiring disclosures about a government’s tax abatement agreements Why: 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 requirements When: 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

Definition and Scope The 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.

General Disclosure Principles Disclosure information for similar tax abatements may be provided either individually or in the aggregate For 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 taxes The reporting government would disclose its own tax abatements by major program and those of other governments aggregated in total Disclosure 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

Proposed Disclosures General descriptive information: Name and purpose of the program and the taxes being abated The authority under which taxes are abated The criteria, if any, that make a recipient eligible The mechanism for abating taxes (form and calculation) Provisions for recapturing abated taxes The types of commitments made by recipients of tax abatements The number of abatements granted during the reporting period and the number in effect as of the date of the financial statements Amount of tax abated in the current year The types of commitments made by governments in tax abatement agreements (other than to reduce taxes) and the most significant individual commitments

Project Timeline Pre-Agenda Research Starts August 2013 Added to Current Technical Agenda December 2013 Exposure Draft Approved October 2014 Final Statement Expected August 2015 March 6 – Comment Period End Date; April 8-10 Public Hearings;

Leases

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 preparers When: Preliminary Views issued for public comment in November 2014; comment deadline is March 6, 2015

Foundational Principle All leases are financings of the right to use an underlying asset Therefore, single approach applied to accounting for all leases Approach less complex than the current model: Lessees classify leases as capital or operating Lessors classify leases as sales-type, direct financing, or operating Exception to single approach Short-term leases PV chptr. 1 ¶10,

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 lease But excludes securities lending and other transactions involving financial assets “Exchange” excludes agreements with nominal payments

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 option b. 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

Lease Term Excludes cancellable periods Lessee has no enforceable right to use for cancellable periods Periods for which lessor has option to terminate lease Periods for which lessee and lessor both have the option to terminate lease If 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 remote Reassess lease term only when a lessee exercises lease extension option or does not exercise termination option contrary to the previous expectation PV 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]

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 use Present value of future lease payments (incl. fixed payments, variable payments based on index or rate, probably residual guarantees, etc.) NA Lessor Lease receivable (incl. same items as lessee liability) Continue to report leased asset Equal to lease receivable plus any cash received up front

Subsequent Reporting Assets Liability Deferred Inflow Lessee Amortize over shorter of useful life or lease term Reduce by lease payments (less amount of interest expense) NA Lessor Depreciate 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 receivable Recognize revenue over the lease term on a systematic and rational basis Amortization of discount reported as interest revenue

Disclosures

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 assets The total variable lease payments actually incurred during the reporting period Future minimum lease payments Lease commitments, other than short-term leases, for which the lease term has not begun Payments made in excess of contractual requirements, such as residual value guarantees or penalties Expense and expenditure recognized for short-term leases PV chptr. 4 ¶22

Lessor Disclosures A general description of leasing arrangements, including Cost (and carrying amount, if different) of property on lease or held for leasing by major classes of property and the amount of accumulated depreciation Total lease revenue for reporting period Lease revenue related to variable lease payments and other payments not previously included in the lease receivable Schedule of future payments included in lease receivable If lessor government has issued debt for which the principal and interest payments are secured by lease payments Disclose existence, and terms and conditions, of options by the lessee to terminate a lease

Exception for Short-Term Leases

Definition of Short-Term Leases At beginning of lease, maximum possible term under the contract is 12 months or less Include any options to extend, regardless of the probability of extension For leases cancellable by either party, the maximum possible term is the noncancellable period, including any notice periods Leases 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 criteria PV 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]

Reporting Short-Term Leases Lessees Lease payments recognized as expenses/expenditures based on the terms of the contract Do not recognize assets or liabilities associated with the right to use the underlying asset for short-term leases Disclose short-term leases expense/expenditure recognized during the reporting period Lessors Lease payments recognized as revenue based on the terms of the contract Do not recognize receivables or deferred inflows associated with the lease No disclosure requirements PV 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]

Project Timeline Pre-Agenda Research Started April 2011 Added to Current Technical Agenda April 2013 Preliminary Views Approved November 2014 Exposure Draft Expected January 2016 Final Statement Expected November 2016

Fiduciary Responsibilities

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 statements Why: 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 activities When: Preliminary Views issued for public comment in November 2014; comment deadline is March 6, 2015

When Is a Government a Fiduciary?

Focus on Control Identifying when a government has a fiduciary responsibility: A government must have control to have a fiduciary responsibility for assets However, a government’s control over assets is insufficient alone to making a determination about whether or not a government has a fiduciary responsibility for assets A 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 AND Have present service capacity that can be: Used Exchanged for another asset, such as cash OR Employed in any other way that provides benefits. Control is the starting point.

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 involvement In accordance with a trust agreement or equivalent arrangement in which the government itself is not a beneficiary For 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

When Is a Government Controlling Resources?

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 guidance 2. Resources from a pass-through grant if the government acts solely as a cash-conduit for the resources 3. Government is not a beneficiary and resources are held in a trust or equivalent arrangement 4. 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 entity Resources from the government’s own source revenues generally should not be reported in fiduciary funds

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.

Project Timeline Pre-Agenda Research Starts April 2010 Added to Current Technical Agenda August 2013 Preliminary Views Approved November 2014 Exposure Draft Expected October 2015 Final Statement Expected July 2016 March 6 – Comment Period End Date; April 8-10 Public Hearings;

Asset Retirement Obligations

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 plants Why: Existing standards (Statement 18) address only municipal landfills but governments have retirement obligations for other types of capital assets When: An Exposure Draft is expected for December 2015

Definitions Asset retirement obligation—A legal obligation associated with the retirement of a capital asset Retirement of a capital asset—The other-than-temporary removal of a capital asset from service Encompasses sale, abandonment, recycling, or disposal in some other manner Does not include the temporary idling of a capital asset

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 asset Legal obligations associated with the retirement of a tangible capital asset that result from the normal operation of a capital asset Legal obligations that require disposal of a replaced part that is a component of a tangible capital asset Environmental remediation liabilities that result from the normal operations of capital assets and that are associated with the retirement of those assets Obligations of a lessor in connection of a leased property that meet the criteria of an ARO

Scope of Project—Excluded Obligations that arise solely from a plan to sell or otherwise dispose of a capital asset Items covered by Statement 49 Activities necessary to prepare an asset for an alternative use Obligations of a lessee in connection with the leased property to make lease payments Obligation for asbestos removal that results from the other- than-normal operation of an asset Landfills, including those not covered by Statement 18 Conditional obligations to perform asset retirement activities

Project Approach and Measurement Attribute Approach—General guidance with specific guidance added as needed to operationalize the principles. Measurement attribute—Settlement amount

Project Timeline Pre-Agenda Research Starts December 2013 Added to Current Technical Agenda August 2014 Exposure Draft Expected December 2015 Final Statement Expected October 2016 March 6 – Comment Period End Date; April 8-10 Public Hearings;

Blending Requirements for Certain Business-Type Activities

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 government Why: There is diversity in practice, with some component units blended for reasons not included in Statement 14 When: An Exposure Draft is expected for June 2015 Healthcare—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

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 AND A financial benefit/burden relationship exists, OR Management (below the elected official level) of the primary government has “operational responsibility” for the activities of the component unit Services of the component unit exclusively benefit the primary government Debt of the component unit is expected to be repaid entirely or almost entirely with resources of the primary government

Project Scope Consider which methods of reporting component units— blended or discrete presentation—is most appropriate for the reporting entity of certain BTAs If 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 developed If additional blending criteria are considered, should application be limited to “certain BTAs” or available to all governments? Is disclosure of disaggregated information needed?

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.

Project Timeline Pre-Agenda Research Starts December 2013 Added to Current Technical Agenda August 2014 Exposure Draft Expected June 2015 Final Statement Expected March 2016

External Investment Pools

External Investment Pools What: The GASB is considering revisions to the accounting and financial reporting standards for 2a7-like investment pools Why: Securities and Exchange Commission changes to Rule 2a7 would make it difficult for external investment pools to meet the criteria to report as 2a7-like When: An Exposure Draft is expected for June 2015

Background Current standards allow pools that are considered to be 2a7-like to report investments at amortized cost rather than fair value The SEC recently made significant changes to Rule 2a7 Concerns were raised regarding the cost-benefit of government pools applying the revised Rule 2a7 provisions

Project Approach The 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.

Project Timeline Pre-Agenda Research Starts August 2014 Added to Current Technical Agenda December 2014 Exposure Draft Expected June 2015 Final Statement Expected December 2015 March 6 – Comment Period End Date; April 8-10 Public Hearings;

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.

Irrevocable Charitable Trusts What: The GASB is considering establishing standards for reporting split-interest agreements, which are particularly prevalent among public colleges and universities Why: 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 arrangements When: An Exposure Draft is expected for June 2015

Scope Split-interest agreements for which the government or its component unit “holds and administers” the assets Beneficial interests in resources held and administered by 3rd parties that are outside the reporting entity, including Split interest agreements Perpetual trusts Not included: Donations within the scope of Statement 33 Tribal resources held in trust for the tribe by the federal government As 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).

Beneficial Interest The term beneficial interest refers to the right to receive resources in a future reporting period, as opposed legal title to the donated resources Beneficial interest is a form of legal ownership Does not address pledges Legal ownership of pledges is less certain Statement 33 does not allow recognition of assets from pledges with time requirements until the assets are received Beneficial Interest examples Same as above except donor transmits resources to a bank to act as the trustee State university recognizes beneficial interest in trust assets

Key Elements of Split-Interest Agreements Donor gives resources to government or 3rd party Government or 3rd party “holds and administers” as trustee Income Benefit Payments during the life of the trust Generally goes to non-governmental beneficiary Generally the donor or donor’s relative Remainder Benefit Remainder assets at termination of trust Generally goes to government Trust termination occurs upon Donor’s death Set period Combination (such as, 5 years or donor’s death, whichever is longer) Split-Interest Agreement examples A state university receives a donation of investment assets from a former alumni via a split interest agreement Agreement requires that the income of the donated assets be provided for the benefit of the donor until death Upon the death of the donor, the remainder assets are to be used for the state university to further its programs Donated 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.

Tentative Board Decisions

Split-Interest Agreements with Resources Held by Government Measurement Asset Liability Deferred Inflow Initial Resources measured at fair value For benefit of nongovernmental beneficiary: Income benefit—measure directly at settlement amount For government’s benefit in resources: Remainder benefit—residual amount (trust assets less income benefit) Subsequent Investments remeasured at fair value; changes are investment income Distributions to income beneficiaries reduce income benefit Income Benefit is mostly measured using a Present Value technique – discounted cash flows.

Reporting Beneficial Interests in Resources Held by Others Donation agreement needs to meet all criteria for recognition Legal document specifies government by name as beneficiary Government has a vested beneficial interest Donation agreement is irrevocable Donor has not granted variance power Intermediary is not under the control of the donor Assigning beneficial interests is not subject to approval of the trustee or prohibited by law Attempt to assign beneficial interests does not terminate the agreement The 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.

Split-Interest Agreements with Resources Held by Others Measurement Asset Deferred Inflow Initial Resources initially measured at fair value For government’s benefit in resources: Initially measured at fair value Subsequent Changes in fair value of resources are investment income Income Benefit is mostly measured using a Present Value technique – discounted cash flows.

Project Timeline Pre-Agenda Research Starts December 2013 Added to the Current Technical Agenda April 2014 Exposure Draft Expected June 2015 Final Statement Expected January 2016

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