Slide 1 GASB Update APPA September 14, 2009 The views expressed in this presentation are those of Mr. Galloway. Official positions of the GASB are determined.

Slide 1

GASB UpdateAPPA September 14, 2009

The views expressed in this presentation are those of Mr. Galloway. Official positions of the GASB are determined only after extensive due process and deliberation.

Slide 2

Effective Dates

Now– Statement 55—GAAP Hierarchy– Statement 56—AICPA Codification

Beginning after Dec. 15, 2007 (Dec. 31 ‘08, June 30 ‘09)– Statement 49, Pollution Remediation

Obligations

Beginning after June 15, 2008 (June 30 ‘09, Dec. 31 ‘09)– Statement 52, Real Estate Investments in

Endowments

Slide 3

Effective Dates

Beginning after Dec. 15, 2008 (Dec. 31 ‘09, June 30 ‘10)– Statement 45, OPEB Employer reporting,

Phase III

Beginning after June 15, 2009 (June 30 ‘10, Dec. 31 ‘10)– Statement 51, Intangible Assets– Statement 53, Derivative Instruments

Beginning after June 15, 2010 (June 30 ‘11, Dec. 31 ‘11)– Statement 54, Fund Balance Reporting and

Governmental Fund Type Definitions

Slide 4

Current Exposure Documents

Pension Accounting and Financial Reporting (Invitation to Comment)Service Concession ArrangementsChapter 9 BankruptciesOPEB Measures by Agent Employers and Agent Multiple-Employer PlansFinancial Instruments OmnibusSuggested Guidelines for Voluntary Reporting of SEA Information

Slide 5

Emission Credits

How should a governmental power utility record emissions credits?

Staff view—If the emission credits will be used in operations, no asset would be recognized. If the emission credits will be sold, they are intangible assets held for income or profit and would be reported at cost, which is zero, with gains recognized when sold.

Slide 6

Build America Bonds

Government issues taxable bonds and feds. Reimburse 35% of interest paid.

How to treat the debit and credit in a utility setting?

Staff view—Interest expense and nonexchange revenue.

Slide 7

Applicability of New FASBs

FASB 157, Fair Value Measurements—Generally, no. Typically conflicts with GASB 31.

No new contingency disclosures

Others concerns?

Slide 8

Other Current Projects

Codification of Pre-1989 FASB standards– Tentative decision to rescind option to apply all

post-1989 FASB Statements and Interpretations– They would be other accounting literature in

GAAP heirarchy

Statement 14 Reexamination– Tentative amendments to blending criteria– Blending it single-column BTA presentations

Slide 9

Statement 55 The Hierarchy of Generally Accepted Accounting Principles for State and

Local Governments

Slide 10

Project Objective

AICPA requested that standards setters incorporate accounting and financial reporting standards into their own literatureGeneral approach to the project was to bring in the AICPA literature “as is,” with minimal modifications only where necessary for the governmental environmentFinal statements are not expected to change current practice

Slide 11

GAAP Hierarchy

The Hierarchy was generally maintained from the AICPA literatureStill 4 categories (a–d)– (a) officially established accounting principles– (b) GASB TBs, AICPA Industry Audit Guides and

Statements of Position– (c) AICPA Practice Bulletins– (d) Implementation Guides and widely recognized

and prevalent practices

Slide 12

Statement 56 Codification of Accounting and Financial Reporting Guidance

Contained in the AICPA Statements on Auditing Standards

Slide 13

Project Objective

Project brought in guidance on the following topics:– Related Party Transactions– Subsequent Events– Going Concern Considerations

Final statements are not expected to change current practice

Slide 14

Significant Changes

Rename “type I/type II” subsequent events as “recognized/non-recognized” subsequent events

Changed the time horizon to assess going concern– AICPA language: “…not to exceed one year beyond the date of

the financial statements…”– Statement 56 language: “…for 12 months beyond the financial

statement date. Moreover, if there is information that is currently known to the government that may raise substantial doubt shortly thereafter (for example, within an additional three months), it also should be considered.”

Slide 15

OPEB Implementation Issues

Slide 16

OPEB Implementation Issues

Defining the “plan”

Qualifying trusts

Implicit rate subsidies

Defined contribution plans require individual accounts– Contractual per-employee contributions

may still be defined benefit

Effect of using Internal Service Fund

Slide 17

OPEB Implementation Issues

OPEB & Insurance accounting differ

Contributions– Direct payment of insurance counts

Reporting by participants in agent multiple-employer plans– Agents’ actuarial dates and frequency

must match with plan’s

Fiduciary reporting by BTAs

Slide 18

Technical Bulletin 2008-1Determining the Annual Required

Contribution Adjustment for

Postemployment Benefits

Issued December 2008

Slide 19

TB 2008-1

Applies to situations in which the actuarial valuation separately identifies the actual amount that is included in the ARC related to the amortization of past employer contribution deficiencies or excess contributions to a pension or OPEB plan

In response to constituent feedback that questioned the availability of actual amounts, Statements 27 and 45 required a procedure for estimating the amount

Slide 20

TB 2008-1

TB encourages use of the actual amount, if known, in place of the estimation procedure for purposes of the ARC adjustment

Effective dates:– For pensions, periods ending after December 15,

2008 (12-31-08 and 6-30-09)– For OPEB, periods ending after December 15, 2008,

or simultaneously with the initial implementation of Statement 45, whichever is later

– Earlier application is encouraged

Slide 21

Statement 49

Accounting and Financial Reporting for

Pollution Remediation Obligations

Slide 22

Obligating Events

a. Compelled to take remediation action because of pollution-caused imminent endangerment

b. Violate pollution-prevention permit—for example, RCRA permit

c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing)

Slide 23

Obligating Events (continued)

d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation Excludes lawsuits having no merit

e. Govt. commences, or legally obligates self to commence Limited to portion legally required to complete

Slide 24

Recognition Overview

Component recognition approach

Cost accumulation, not fair value

Current value, not present value

Expected cash flow technique

Slide 25

Capitalization Criteria:

a. Cleanup to prepare property for sale (limited to fair value)

b. Polluted property bought and cleaned for use (limited)

c. Asset impaired and cleanup restores lost service utility (limited)

d. Acquire PP&E that have future alternative use, e.g., land (limited to future service utility)

For a. & b.—capitalize only if incurred within reasonable period

Slide 26

Expected Recoveries

Only if from PRPs or Insurance

Reduce expense (and expenditure, if available) and . . .– If not realized or realizable

• Net against remediation liabilities

– When realized or realizable• Accrete liability and report separate

recovery assets (cash or receivable)

Slide 27

Effective Date

Statement 49 requires governments to measure PROs as of the beginning of the period in which it is implemented. What happens if the government did not measure at that time?

Slide 28

Statement 52

Land and Other Real Estate Held as Investments by Endowments

Slide 29

What Does it Do?

Land and other real estate held as investments by pension and OPEB plans, investment pools, and deferred compensation plans are reported at fair value

Permanent and term endowments, which essentially serve the same function, reported land at historical cost

Under 52, endowments will now report fair value as well

Slide 30

Statement 51

Accounting and Financial Reporting for Intangible Assets

Slide 31

Description

An intangible asset is an asset that possesses all of the following characteristics:– Lack of physical substance – Nonfinancial nature– Initial useful life extending beyond a

single reporting period

Slide 32

Common Types of Intangible Assets

Right-of-way easements

Other types of easements

Patents, copyrights, trademarks

Land use rights

Licenses and permits

Computer software– Purchased or licensed– Internally generated

Slide 33

Basic GuidanceAll intangible assets subject to Statement 51 should be classified as capital assets:– All existing authoritative guidance related to capital assets

should be applied to these intangible assets– Since considered capital assets, not reported as assets in

governmental fund financial statements

Scope exceptions: – Intangible assets acquired or created primarily for directly

obtaining income or profit– Capital leases– Goodwill from a combination transaction

Slide 34

Recognition

An intangible asset should be recognized only if it is identifiable:– Asset is separable, i.e. capable of being

separated and sold, transferred, licensed, etc.

-OR-– Asset arises from contractual or other legal

rights, regardless of whether rights are separable

Slide 35

Internally Generated Intangibles

Internally generated intangible assets (IGIA) are:– Created or produced by the government or an entity

contracted by the government; or– Acquired from a third party but require more than

minimal incremental effort to achieve expected service capacity

Statement provides a specified-conditions approach to recognizing outlays associated with IGIA

Slide 36

AmortizationExisting guidance for depreciation of capital assets generally applies to amortizing intangible assetsException for intangible assets with indefinite useful lives:– No factors currently exist that limit the useful life of the

asset– A useful life that must be estimated does not mean

indefinite useful life• Permanent right-of-way easement vs. computer software

Intangible assets with indefinite useful lives should not be amortized

Slide 37

Statement 53

Accounting and Financial Reporting for Derivative Instruments

Slide 38

What is a Derivative for Financial Reporting Purposes?

A derivative has:1. One or more reference rates (underlyings) and

one or more notional amounts

2. Leverage

3. Net settlement

Slide 39

Examples of Derivatives

Interest rate swap– Variable-rate to fixed-rate– Fixed-rate to variable-rate

Basis swap– Exchange payments based on the changes of two

variable rates

Swaption– Gives the purchaser of the option the right, but not

the obligation, to enter into an interest rate swap

Commodity swap– Reduce exposure to a commodity’s price risk

Slide 40

Excluded Instruments

Normal purchases & normal sales contracts– Commodity e.g., gas or electricity– Government intends to and has practice of taking

delivery or selling the commodity– Quantity is consistent with volume used

Traditional insurance contractsTraditional financial guarantee contractsNon exchange-traded climate contracts, liquidated damages, etc.

Slide 41

Basic Approach Fair Value with Hedge Acntg.

Derivative instruments are measured on the statement of net assets at fair valueFair value changes are reported on the statement of resource flows as investment incomeException: Effective Hedges– Changes in fair value of derivative instruments would be

reported on the statement of net assets as deferrals—either deferred inflows or outflows

Scope Exclusion: Measurement of derivatives in government funds

Slide 42

Hedges and Hedge Accounting

Two Requirements:– 1. Association. The derivative instrument is

associated with a hedgeable item– 2. Substantial offsets. The derivative instrument

is effective in providing changes in cash flows or fair values that substantially offset the cash flow or fair value changes of the hedgeable item

If the above requirements are met, hedge accounting is required

Slide 43

Hedgeable Items

Single asset or liability

Groups of similar assets or liabilities that have same risk exposure

Expected transaction—occurrence should be probable

Specific risks of financial instruments, such as interest rate risk

Transactions within the primary government do not qualify for hedge accounting

No hedge accounting for investments

Slide 44

Methods of Evaluating Effectiveness

Effectiveness is determined by using a specified method of evaluating hedgesQualitative method

– Consistent critical terms

Quantitative methods– Synthetic instrument– Linear regression– Dollar offset– Other method – see characteristics

Slide 45

4 Key Things to Know aboutHedge Accounting

Potential hedging derivative instruments failing the consistent critical terms test should be evaluated with one or more quantitative methods

If a potential hedging derivative instrument fails one of the quantitative methods, a government may use another, but is not required to

Slide 46

4 Key Things to Know aboutHedge Accounting

Effectiveness is evaluated at end of every reporting period

If, in later reporting periods, one method finds a derivative instrument to be ineffective, then another method may be used

Slide 47

Hedge Terminations

Recognize deferral amount in income if:– The hedging derivative instrument is no

longer effective– The government is reexposed to the hedged

risk– The likelihood of the expected transaction is

no longer probable– The hedging derivative instrument is

terminated

Slide 48

Hybrid Instruments

Composed of an embedded derivative instrument and a companion instrument

Example: In an interest rate swap, a government agrees to pay an above-market fixed rate, generating an up-front payment to the government

Slide 49

Accounting for Hybrid Instruments

Bifurcate the embedded derivative from the companion instrument– The embedded derivative instrument

should be measured at fair value– The companion instrument should be

measured and reported consistent with its substance, such as debt

Slide 50

Note Disclosures

Summary of derivative instrument activity by:

1) Governmental activities, business-type activities, and fiduciary activities

2) Then by fair value hedges, cash flow hedges, and investment derivatives

3) Then by type:• Notional amount• Fair values & changes and where reported• Fair values & amounts reclassified from

hedge to investment

Slide 51

Note Disclosures

Disclosures for HEDGING derivatives – Application of TB-2003 disclosures– Significant terms– Risks: Credit, Interest Rate, Basis, Termination,

Rollover, Market-access, Foreign Currency– If an “other evaluation method” is used, the identity

of that method and its critical values

Disclosures for INVESTMENT derivatives – Risks: Credit, Interest Rate, Foreign

Currency (Statement 40 disclosures)

Slide 52

Note Disclosures

Contingencies (e.g., collateral postings)

Synthetic guaranteed investment contracts– Description and nature

– Fair values• Wrap contract

• Underlying investments

Slide 53

Statement 54

Fund Balance Reportingand

Governmental Fund Type Definitions

Slide 54

New Fund Balance Classifications

Nonspendable

Restricted

Committed*

Assigned

Unassigned

Essentially what is

now reserved

Essentially what is

now unreserved

Essentially what is

now designated

Slide 55

Questions?(203) 956-5272 ◦ [email protected]

www.gasb.org