1. www.eidebailly.com What the GASB’s Preliminary Views May Mean to Your State Marcie Handy, CPA, Assistant State Comptroller – State of Utah Eric S. Berman, MSA, CPA, Partner – Eide Bailly LLP Give Me Leases or Give Me Fiduciary Responsibilities! Patrick Henry 1775

2. www.eidebailly.com 1 Leases—Biggest Deals Single approach—right of use No classification of leases into operating/capital or other categories Potentially develop some exceptions Underlying assumption that leases are financings Practicality exception—short-term lease Lease that, at the beginning of the lease, has maximum possible term under the contract, including any options to extend, of 12 months or less 1

3. www.eidebailly.com 2 Leases Lessees – Recognition and Measurement Intangible asset for the right to use the underlying asset and Liability for future payments Day 0 liability = Fixed payments over lease term Variable payments based on an index / rate in effect at that date Variable payments that are in-substance fixed Residual value guarantees that are probable of being required Termination penalties if based on the determination of the lease term, the termination option is probable of being exercised Liability does not include lease payments that are dependent on a lessee’s performance or usage of an underlying asset 2

4. www.eidebailly.com 3 So What is the Right of Use Model? LessorLessee Right to Use Asset Lease Payments Lease Agreement A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 3

5. www.eidebailly.com 4 Leases May have multiple components Lease principle and interest Maintenance Utilities Security Other Should separate lease and non-lease components or multiple lease components if practical 4

6. www.eidebailly.com 5 Leases Governmental lessor Board is proposing symmetry Lessor would recognize receivable for the right to receive payments Payments discounted by the rate charged lessee No de-recognition of underlying asset No recognition of performance liability (e.g. security) Deferred inflow of resources is credit = [receivable + cash received] Lease revenue recognized systematically & rationally over lease term (e.g. effective interest method) 5

7. www.eidebailly.com 6 Leases Governmental lessor Receivable includes Residual value guarantees Purchase options Termination penalties (if measured, exercised and unpaid) Direct costs expensed (just like GASB-65) Sub-lease situations 2 separate transactions Do not net Apply all applicable guidance 6

8. www.eidebailly.com 7 Leases State of Utah – Field Test Evaluated Lessee Perspective Only Primary Governmental Activities Only 325 Leases Mainly office space/buildings 10 Capital Leases, $24.9M Net Assets, $21.8M Liability 225 Operating Leases, $67.7M Future Minimum Lease Payments, $27.7M Expenditures Use Excel Spreadsheet to Maintain/Track Each Lease 7

9. www.eidebailly.com 8 Leases State of Utah – Field Test Field Test - Issues Time Consuming – Have to Reexamine Each Lease Renewal, Termination Clauses Non-lease or Multiple Lease components Subleases Measure Underlying Asset at Historical Cost Determine Current Lease Liability Recalculate the Net Present Value Determined Will Take 1 Hour Per Lease, so…. 8

10. www.eidebailly.com 9 Leases State of Utah – Field Test We Ignored Lease Payments < $100K Eliminated the Evaluation of 90 Leases $3.1M or 2% of $157M in Future Minimum Lease Payments We Grouped Leases by Dollars Leases Between $100K - $200K Evaluated as a Group and Applied Patterns Most Leases have a term of 5 years or less Going Forward Will Evaluate All New Leases 9

11. www.eidebailly.com 10 Fiduciary Responsibilities—Where The Board Has Been Fiduciary definition A government is a fiduciary and has a fiduciary responsibility when it controls assets 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. Custodial funds—A new fund type that includes any fiduciary arrangement that is not governed by a formal trust agreement or equivalent arrangement Fiduciary activities continue to be reported as basic financial statements 10

12. www.eidebailly.com 11 When Does a Government Control Assets – putting it all together Government Might Have Control IF It is directly holding the assets, regardless of its responsibility for administering the exchange of those assets It is directly responsible for administering the exchange of assets, regardless of the legal structures that might separate the government and the entity that is holding the assets It has assigned its responsibility for administering the exchange of assets (for example, to an asset manager) but maintains the ability to reassign that responsibility, regardless of the legal structures that might separate the government and the entity that is holding the assets. 11

13. www.eidebailly.com 12 When Does a Government Control Assets – putting it all together Government Might NOT Have Control IF It is acting as a trustee for assets and has no responsibility for administering the exchange of assets even though it may have the ability to establish parameters (for example, providing a selection of investment options) for those that have the responsibility It is neither directly holding nor acting as a trustee for assets and has no responsibility for administering the exchange of assets even though it may have the ability to establish parameters for those that have the responsibility It is not directly holding assets and has no responsibility for administering the exchange of assets. 12

14. www.eidebailly.com 13 In other words… 13

15. www.eidebailly.com 14 So What are the Board’s Views? Fiduciary funds would continue to be reported in the basic financial statements No change in full accrual Classification within fiduciary funds based on the presence or absence of a trust agreement or equivalent No change in investment trust / private purpose trusts with trust agreements or equivalent if Trust assets are dedicated to providing benefits to recipients in accordance with the benefit terms Trust assets are legally protected from the creditors of the government that is acting as the trustee 14

16. www.eidebailly.com 15 But There’s Something New… Custodial Funds Would report fiduciary activities for which there is no trust agreement or equivalent arrangement. Including: Certain funds previously classified as agency funds The portion of certain funds previously classified as pension (and other employee benefit) trust funds that is held for the benefit of employees of another government, but for which there is no trust agreement or equivalent arrangement Could include things like rate stabilization reserves for future pension contributions held at employers Certain funds previously classified as investment trust funds or private-purpose trust funds, but for which there is no trust agreement or equivalent arrangement. 15

17. www.eidebailly.com 16 Other Aspects of the PV Reporting of fiduciary funds would continue Additions disaggregated by source Net investment income Deductions disaggregated by type Administrative costs (if applicable) Fiduciary component unit reporting Inconsistent at best, especially with IRC 457, 403(b) and 401 plans Proposal is to present combined fiduciary component units of fiduciary component units Example - Combine plans before presentation in a general government’s pension trust funds Business-type activities with fiduciary activities would now present fiduciary funds Examples – Hospitals, Higher Education 16

18. www.eidebailly.com 17 State of Utah – Field Test State Has Approximately 400 Funds Evaluated 24 Private Purpose Trust Funds Evaluated 69 Agency Funds Evaluated 2 Investment Trust and OPEB Funds Did Not Evaluate Pension Trust funds Results No Change to Investment Trust Funds or OPEB Trust Funds Reclassified 7 Funds PPT, 5 to Custodial, 2 to Governmental 5 PPT Are Custodial = No Trust Agreement/Equivalent Arrangement 2 PPT Are Governmental = Assets Are Not Fiduciary 17

19. www.eidebailly.com 18 State of Utah – Field Test Field Test - Issues Trust Agreement or Equivalent Arrangement Where Trust Assets: Are dedicated to providing benefits to recipients Are legally protected from the creditors of the government No Examples of Equivalent Arrangement Implied/inferred from previous actions? Statute? Court cases? 18

20. www.eidebailly.com 19 State of Utah – Field Test Field Test - Issues Recognition of a Liability in Fiduciary Funds “Present obligations to sacrifice resources that the government has little or no discretion to avoid” When an event has occurred that compels the government to disburse the fiduciary resources. When no further action or condition is required by beneficiary Need Further Clarification – When to Recognize a Liability Utah has a PPT that has an annual actuary valuation Liability is recorded based on results of the actuary report No longer be reported in PPT? 19

21. www.eidebailly.com What Does This All Mean? 20

22. www.eidebailly.com Questions! 877 W. Main St., Ste. 800 Boise, ID 83702-5858 12 Stedman Street #2 Brookline, MA 02446 Eric S. Berman, MSA, CPA, CGMA Partner Eide Bailly LLP T 208.424.3524 M 626.375.3600 E eberman@eidebailly.com www.eidebailly.com Experience the Eide Bailly Difference www.eidebailly.com Marcie L. Handy, CPA Assistant State Comptroller State of Utah 350 North State Street, Salt Lake City, UT 84114 T 801.538.1678 E mhandy@utah.gov www.utah.gov