Auxiliary Organizations Technical Update Mark Thomas, Partner KPMG LLP May 19, 2015.

Auxiliary OrganizationsTechnical Update

Mark Thomas, Partner

KPMG LLP

May 19, 2015

Learning Objective:• Be familiar with the new accounting pronouncements and

understand its effect to the California State University System financial statements

May 2015 Year-End GAAP Training 2

GASB Pronouncements• GASB Statement No. 68, Accounting and Financial

Reporting for Pensions, Issued June 2012• GASB Statement No. 69, Government Combinations and

Disposals of Government Operations• GASB Statement No. 70, Accounting and Financial Reporting for

Nonexchange Financial Guarantees• GASB Statement No. 71, Pension Transition for Contributions

Made Subsequent to the Measurement Date—an amendment of GASB Statement No. 68

• GASB Statement No. 72, Fair Value Measurement and Application

May 2015 Year-End GAAP Training 3

GASB 68 Overview• Addresses accounting and financial reporting for

pensions that are provided to the employees of state and local governmental employers• Employers should report in their financial statements a

net unfunded pension liability• Moving from a funding approach to an earned approach• An employer should recognize its proportionate share of

the collective net pension liability, pension expense, and deferred inflows/outflows of a cost-sharing plan

May 2015 Year-End GAAP Training 4

Statement No. 72

• GASB Statement No. 72, Fair Value Measurement and Application• Issued February 2015• Effective for periods beginning after June 15,

2015 (effective June 30, 2016)• Addresses accounting and financial reporting

issues related to fair value measurements.

May 2015 Year-End GAAP Training 5

Investments• Investments – • Defined as a security or other asset that

(a) government holds primarily for the purpose of income or profit and

(b) has a present service capacity based solely on its ability to generate cash or to be sold to generate cash.

• GASB 72 generally requires investments to be measured at fair value

May 2015 Year-End GAAP Training 6

Investments• A government is permitted in certain

circumstances to establish the fair value of an investments that does not have a readily determinable fair value by using the net asset value per share (or its equivalent)

May 2015 Year-End GAAP Training 7

Fair Value definition• Fair Value – • 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.• Assumes highest and best use:

• Physically possible• Legally permissible• Financially feasible

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Valuation Techniques

Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

• Market Approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets and liabilities.

May 2015 Year-End GAAP Training 9

Valuation Techniques• Cost Approach – reflects the amount that would

be required to replace the present service capacity of an asset.

• Income Approach – converts future amounts to a single current amount.

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Fair Value Hierarchy• Level 1 inputs – quoted market prices (unadjusted)

in active markets for identical assets or liabilities.• Level 2 inputs – inputs other than quoted prices –

included within level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3 inputs – unobservable inputs, such as management’s assumption of the default rate among underlying mortgages of a mortgage-backed securities.

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Fair Value of Liabilities• Measurement of the fair value of a liability assumes

that the liability is transferred to a market participant at the measurement date.

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Fair Value Measurement ExceptionsType of Investments Measurement Applicable Guidance

Investments in nonparticipating interest-earning investment contracts

Cost-based measure Statement 31, par. 8

Investments in unallocated insurance contracts

Interest-earning investment contracts

Statement 31, par. 8Statement 59, par. 4

Money market investments and participating interest-earning investment contracts with maturity of < one year and are held by government other than external investment pools

Amortized cost Statement 31, par. 9

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Fair Value Measurement ExceptionsType of Investments Measurement Applicable

Guidance

Investments held by 2a7-like external investment pools

Amortized cost Statement 31, par. 16

Fully benefit-responsiveness synthetic guaranteed investment contracts

Contract value Statement 53, par. 67

Investments in life insurance contracts

Cash surrender value

May 2015 Year-End GAAP Training 14

Fair Value Disclosures• Fair value amounts• Level of fair value hierarchy• Valuation techniques• Organize disclosures by type of asset or liability

reported at fair value• Additional disclosures regarding investments in

certain entities that calculate net asset value per share (or its equivalent).

May 2015 Year-End GAAP Training 15

Coming Soon...

• GASB Statements 73-75: Accounting and Financial Reporting for Other Postemployment Benefits (Plan and Employer)• AICPA’s Audits of State and Local

Governments – 2015 Edition

May 2015 Year-End GAAP Training 16

Question #1

This valuation technique uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities.

a. Income approach

b. Cost approach

c. Market approach

d. Net asset value approachMay 2015 Year-End GAAP Training 17

Answer #1

Answer: c. Market approach

May 2015 Year-End GAAP Training 18

FASB Accounting Standards Update• ASU 2014-09 Revenue from Contracts with

Customers• ASU 2014-15 – Presentation of Financial Statements –

Going Concern• ASU 2015-01 – Income Statement – Extraordinary and

Unusual Items• ASU 2015-02 - Consolidation• ASU 2015-03 – Interest – Imputation of Interest• ASU 2015-04 – Compensation – Retirement Benefits• ASU 2015-05 – Intangibles – Goodwill and Other –

Internal-Use Software

May 2015 Year-End GAAP Training 19

ASU 2014-09: Revenue from Contracts with Customers• Effective date: FY2019 for CSU• The Core Principle and the Five-Step Model

May 2015 Year-End GAAP Training 20

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognize revenue when (or as) the entity satisfies a performance obligation

ASU 2014-15: Presentation of Financial Statements – Going Concern

• Effective date: FY2017 for CSU• Disclosure required when there is substantial

doubt or when substantial doubt has been alleviated primarily by management plans.• Substantial doubt exists when it is probable that

entity will not meet obligations (for a period of one year from the financial statements issuance date)

May 2015 Year-End GAAP Training 21

Question #2

Which of the following is NOT one of the five steps to the revenue standard?

a. Determine the transaction price

b. Determine if the good was shipped or service performed

c. Allocate the transaction price to the performance obligations in the contract

d. Identify the contract with a customer

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Answer #2

b. Determine if the good was shipped or service performed

May 2015 Year-End GAAP Training 23

Coming Soon...

• Proposed ASU: Changes to Not-for-Profit Financial Statements • Net Asset Classification• Intermediate Measures of Operations• Statements of Cash Flows• Other Key Changes

May 2015 Year-End GAAP Training 24

Changes to Not-for Profit Financial Statements

Net Asset Classes – reduce the number of net asset classes from three to two:

• Net Asset without Donor Restrictions (UR)• Net Assets with Donor Restrictions (TR and PR

• Disclosures: Donor Restrictions and Board Designations

• Underwater Endowment Deficiencies• Reclassified to NA with Donor Restrictions• Additional Disclosures

May 2015 Year-End GAAP Training 25

Changes to Not-for Profit Financial StatementsIntermediate Measures of Operations• Defined required intermediate operating

measures based on two dimensions:• Mission Dimension – business and charitable activity• Availability Dimension – whether resources are available for

current year activities

• Two Measures (Subtotals) – Presentation of Transfers:

• Operating Excess (Deficit) Before Transfers• Operating Excess (Deficit) After Transfers

May 2015 Year-End GAAP Training 26

Changes to Not-for Profit Financial Statements

Statement of Cash Flows• Direct method required• Indirect reconciliation requirement eliminated• Recategorization:

- Cash flows on long-lived assets (from investing to operating)- Interest and dividends (from operating to investing)- Interest on Debt (from operating to financing)- Cash gifts restricted for acquisition of long-lived assets (from

operating to financing)

May 2015 Year-End GAAP Training 27

Changes to Not-for Profit Financial Statements

Other Key Changes• Reporting of Operating Expenses by Nature and

Function• Matrix not required but will be most practical• Definition of management and general defined• Implementation guidance on which activities report direct

conduct and direct supervision of program activities

• Investment Return and Expenses• Expenses netted in income

May 2015 Year-End GAAP Training 28

Changes to Not-for Profit Financial Statements

• Investment Return and Expenses, continued….• Netted expenses include external expenses and direct

internal expenses• Disclosure of components of gross investment return no

longer required

• Liquidity Disclosures• Quantitative: Financial assets and financial liabilities• Qualitative: Information about how the entity manages

liquidity• Time horizon used to manage liquidity.

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Q&A

May 2015 Year-End GAAP Training 30

www.calstate.edu

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