APPA September 18, 2006 –Update Views expressed are those of Wesley Galloway. Official positions of the GASB are established via due process.

APPAAPPA

September 18, 2006September 18, 2006

–Update

Views expressed are those of Wesley Galloway. Official positions of the GASB are established via due process.

Statement 20 & Applicability of FASB Pronouncements

FIN 47

Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143

No—provisions of NCGAS 4, paragraphs 9 and 14, as amended by GASBS 10 and GASBS 34, paragraph 69, apply

SFAS 154

Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3

No.

Periods Beginning After Dec. 15, 2004

Statements 42—Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries

Definition

• Asset impairment is a: – SIGNIFICANT– UNEXPECTED– Decline in the service utility of a capital asset

The usable capacity that, at acquisition, was expected to be used.

NOT the same as utilization.

Impairment test

Identifying Impairments

• Events or changes in circumstance that indicate impairment should be prominent

• Generally expected to have prompted discussion by governing board, management, or media

• Physical damage

• Enact or approval of laws or regulations or other environmental factors

• Technological development or evidence of obsolescence

• A change in the manner or expected duration of use of an asset

• Construction stoppage

Measurement of Impairment

• Assets not being used and construction stoppage– Lower of carrying value or fair value

• Assets continuing to be used pending sale– NOT considered to exhibit a change in manner or expected

duration of use– Reevaluate remaining estimated useful life and salvage

value

Periods Beginning After June 15, 2005

Statements 44, 46, and 47

Statement 34 Retroactive Infrastructure for Phase I Governments

Statement 44

Economic Condition Reporting: The Statistical Section

Changes to Statistical Section

• Some new schedules added, other schedules are expanded, some schedules eliminated

• Total number of schedules presented will generally grow by 2 or 3

• Status of statistical section has not changed– Still a required part of a CAFR, but CAFR remains optional

• New standards apply to any statistical section presented with the basic financial statements, even if not in a CAFR

Five Categories of Statistical Info

• Financial trends• Revenue capacity• Debt capacity• Demographic and economic• Operating

• Illustrated in Implementation Guide

Statement 46

Net Assets Restricted by Enabling Legislation

Background

• Statement 34 identifies three sources of restrictions on net assets—external parties, constitutional provisions, and enabling legislation

• Enabling legislation is a type of legislation that authorizes the raising of a new revenue (i.e., it does not earmark existing revenues) and that contains a legally enforceable restriction on the purpose for which those revenues can be used

Legal Enforceability

• Means that an external party—such as citizens, a public interest group, or the judiciary—can compel a government to abide by the restriction

• Remains a matter of professional judgment, which may include: – Reviewing determinations for similar legislation– Obtaining the advice of legal counsel– Other actions

Legal Enforceability

• Restrictions should be reviewed on a case-by-case basis:– If a restriction is found to no longer be legally enforceable, a

government may reevaluate the legal enforceability of similar restrictions, but should not necessarily conclude that all such restrictions are unenforceable

– Prohibitions against one legislature binding a subsequent legislature generally are not, on their own, sufficient basis for determining a restriction is not enforceable

Changes in Circumstances

• If new enabling legislation replaces prior enabling legislation and creates new legally enforceable restrictions:– New resources restricted for new purpose– Determine (professional judgment) whether balance of old

resources restricted for old purpose, new purpose, or unrestricted

• If resources are used for purposes not specified by enabling legislation, or other cause for reconsideration:– Government should review legal enforceability of restriction

• If legally enforceable, don’t reduce restricted net assets

Reporting Requirement

• The portion of net assets restricted by enabling legislation should be disclosed in the notes to the financial statements– The Exposure Draft proposed to require separate display of

enabling legislation restrictions on the face of the statement of net assets, but the Board changed the requirement to disclosure in response to the public comments it received

Statement 47

Accounting for Termination Benefits

Scope

• Establishes accounting and reporting requirements for all forms of termination benefits– Supersedes guidance in NCGAI 8 for special termination benefits

• Voluntary termination benefits– Inducements to hasten the termination of services– Ex.: early-retirement incentives

• Involuntary termination benefits– Benefits provided as a consequence of the early termination of

services– Ex.: severance pay

• Includes COBRA• Excludes unemployment compensation

Termination Benefits vs. OPEB

• Determine whether the nature of arrangement is to provide benefits:– In exchange for the early termination of services (a

termination benefit), or– As compensation for services (OPEB)

• Consider all relevant factors, including:– Employer’s intent– Employees’ view of the benefits– Whether conditioned on termination of employment prior to

normal retirement age– Length of time benefits have been made available

Measurement

• Healthcare-related:– Projection of benefits– Healthcare cost trend rate– Discount rate

• Non-healthcare-related:– If specific amounts are payable at fixed times—Use

discounted PV of expected future benefits– If not, option to use undiscounted total at current cost

Recognition Requirements—Accrual Basis

• Voluntary termination benefits:– Liability and expense recognized when:

• Employees accept the offer• Amounts can be estimated

– Measurement updated at end of each subsequent reporting period

• Involuntary termination benefits:– Generally, liability and expense recognized when:

• Plan of termination approved and communicated• Amounts can be estimated

– Measurement updated at end of each subsequent reporting period

Recognition Requirements—Accrual Basis (cont.)

• Involuntary termination benefits (cont.)– Plan of involuntary termination

• Identifies, at a minimum:– Number of employees to be terminated

– Job classification or functions and locations affected

– When terminations are likely to occur

• Provides sufficient detail for employees to determine the type and amount of benefits they will receive if they are terminated

Recognition Requirements—Accrual Basis (cont.)

• Involuntary termination benefits (cont.)– If plan of termination requires future service

• Liability and expense for the portion of involuntary termination benefits that will be provided only after completion of future service should be recognized ratably over the future service period

– Future service period begins when plan of termination has been approved and communicated and the amounts can be estimated

– Measurement of liability updated at end of future service period and incremental liability/expense recognized ratably over remaining future service period

Recognition Requirements—Modified Accrual

• Liabilities and expenditures recognized to extent the liabilities are normally expected to be liquidated with expendable available financial resources

• See paragraph 14 of Interpretation 6

Note Disclosures

• Significant methods and assumptions• Benefits not recognized because not estimable• In period employer becomes obligated:

– Description of termination benefit arrangement• Ex.: type(s) of benefits, # of employees affected, period of

time benefit are expected to be provided– Cost of termination benefits, if not otherwise identifiable

• If benefits affect a defined benefit pension or OPEB plan, employer should disclosure the change in the actuarial accrued liability attributable to the termination benefits

Effective Date and Transition

• Generally, effective for periods beginning after June 15, 2005

• However, those that affect defined benefit OPEB simultaneous implementation with Statement 45

• In initial year, requirements should be applied to any previous commitments of termination benefits that remain unpaid at effective date

Financial Statements Issued After June 30, 2006

Technical Bulletin 2006-1—Accounting and Financial Reporting by Employers and OPEB Plans for Payments from the Federal Government Pursuant to the Retiree Drug Benefit Provisions of Medicare Part D

Basis

• View that Medicare D reimbursements are transactions separate from the exchange of salaries and benefits for services received by the state or local government.

Accounting

• Payments to employers– Voluntary nonexchange transactions (Statement 33)

• Payments made directly to an OPEB plan– On-behalf payments (Statement 24)

• Calculations of actuarial accrued liabilities, the ARC, and annual OPEB cost– Apply Statement 43 and 45 without reduction for Medicare

Part D payments

What’s On The Horizon?

Future GASB Implementation

• Periods beginning after Dec. 15, 2005– OPEB Plan reporting (GASB 43), Phase I

• Periods beginning after June 15, 2006– Retroactive Infrastructure reporting, Phase II

• Periods beginning after Dec. 15, 2006– OPEB Plan reporting, Phase II– OPEB Employer reporting (GASB 45), Phase I (& any

termination benefits)