WV GASB Conference GAAP Update [Read-Only]wvde.state.wv.us/finance/documents/GASBUpdatePresentation.pdf · The Great GASB Conference ... implementation of GASB 47 • All other termination

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The Great GASB Conference

WV Department of EducationOffice of School Finance

July 13, 2011

Presented by

Gregory S. Allison, CPAUNC School of Government

Our Aggressive Agenda

• GASB Standards

– 47 (Termination Benefits)

– 54 (Fund balance/governmental fund types)

51 (Intangible assets)– 51 (Intangible assets)

– 55 (GAAP hierarchy)

– 56 (Codification of AICPA guidance)

– 61 (Financial Reporting Entity Omnibus)

– 62 (Codification of FASB Guidance)

The Aggression Continues....

• Common accounting and financial reporting problems

• Ongoing challenges with SAS 112/115

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GASB Statement No. 47

Accounting for Termination BenefitsAccounting for Termination Benefits

GASB 47 – Termination Benefits

• Scope expanded to include all termination benefits (voluntary & involuntary)

• Common benefits: – Enhancements to defined pension benefits

C h f ll i i i– Cash payments at or following termination

– Additional OPEB coverage

– Life insurance coverage

– Certain COBRA benefits

– Career counseling

GASB 47 ‐ Exclusions / Exceptions

• Unemployment compensation claims ‐ NCGA Statement 4

• Defined benefit pension benefits – GASB Statement 27 for measurement – still follow GASB 47 disclosure requirementsrequirements

• OPEB – GASB Statement 45 for measurement – still follow GASB 47 disclosure requirements

• Immaterial items

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GASB 47 ‐ Termination Benefits vs. Postemployment Benefits

• May be difficult to distinguish between benefits provided in exchange for early termination of service and benefits in exchange for services rendered

• Professional judgment requiredE l ’ i t t– Employer’s intent

– How employees view the benefits

– Length of time for which benefits have been available

– Benefit applies to termination before normal retirement age

GASB 47 ‐Measurement of Termination Benefits

• Includes the direct benefits themselves

• Should include any fringe benefits related to the termination benefits

Sh ld i l d h i i d• Should include any changes in estimated costs of other employee benefits (compensated absences) – if measurable

GASB 47 ‐ Recognition Requirements –Accrual Basis

• Voluntary termination benefits (including COBRA benefits when age‐related & significant)– Expense & liability recognized when:

• Employees accept offer

• Amounts can be estimated

– Liability measurement should be updated at end of each subsequent reporting period

• Incremental liability & expense should be measured

• May be positive or negative

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GASB 47 ‐ Recognition Requirements –Accrual Basis

• Involuntary termination benefits– Expense & liability recognized when:

• Plan of termination approved by those with authority to commit employer

• Plan communicated to employees

• Amounts can be estimated

– Liability measurement should be updated at end of each subsequent– Liability measurement should be updated at end of each subsequent reporting period

• Incremental liability & expense should be measured

• May be positive or negative

– Involuntary termination – future service requirements ‐ liability & expense recognized ratably over future service period

GASB 47 ‐ Recognition Requirements –Modified Accrual

• Liabilities and expenditures recognized to the extent liabilities are normally expected to be liquidated with expendable available resources– GASB Interpretation 6– Due and payable

GASB 47 ‐ Disclosure Requirements

• In period when employer becomes obligated for termination benefits or future periods in which employees are required to render services to receive involuntary termination benefits, then disclose:– Description of termination benefit arrangements

t f b fit id d• types of benefits provided

• number of employees affected

• period of time over which benefits are expected to be provided

– Cost of termination benefits (if not apparent from the face of the statements)

– For defined benefit pensions and OPEB benefits – change in the related actuarial accrued liability

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GASB 47 ‐ Disclosure Requirements (Cont.)

• In all periods when termination benefit liabilities are reported:

– Significant methods (e.g., discounted present value) used to determine liabilitiesvalue) used to determine liabilities

– Significant assumptions (e.g., discount rate, healthcare cost trend rate, etc.) used to determine liabilities

GASB 47 ‐ Effective Date (s)

• Termination benefits affecting an employer’s obligations for defined benefit OPEB ‐ phased implementation for employers based on GASB 34– Phase 1 – FY beginning after 12/15/06

Phase 2 FY beginning after 12/15/07– Phase 2 – FY beginning after 12/15/07

– Phase 3 – FY beginning after 12/15/08

– Early implementation of GASB 45 requires early implementation of GASB 47

• All other termination benefits, including those affecting obligations for defined benefit pensions– FY beginning after 6/15/05


Fund Balance Reporting and p gGovernmental Fund Type

Definitions

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The New Fund Balance

• GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions

• Required implementation FY beginning after• Required implementation FY beginning after 6/15/10

• Traditional three component model (reserved, unreserved‐designated, unreserved) replaced with five new components

New Components of Fund Balance

• Nonspendable

• Restricted

• Committed

• Assigned

• Unassigned

Why Change?

• Traditional focus of fund balance components on resources available for appropriation

f bj i• New focus on two objectives

– Indication of constraints of how resources can be spent

– Identification of the sources of those constraints

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Nonspendable Fund Balance

• Portion of fund balance/net resources not in spendable form or nonspendable for foreseeable future– Inventories

– Prepayments

– Long‐term receivables

• Portion of fund balance/net resources required to remain intact– Permanent fund principle

Restricted Fund Balance

• Resources in a governmental fund subject to externally enforceable constraints on spendingp g

– Debt covenants

– Grantors

– Contributors

– Enabling legislation (e.g., taxes raised for a particular purpose)

Committed Fund Balance

• Formal legal constraints placed by the governing board

– Formal action necessary to create OR rescind

• Constraints have to be in place no later than• Constraints have to be in place no later than the end of the fiscal period

• Similar to a high level designation

• Ability to rescind differentiates committed from restricted net assets

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Assigned Fund Balance

• Reflects a government’s intended use of resources (i.e., earmarking – neither restricted or committed)– Assignments may occur anytime before the issuance

f fi i l t t tof financial statements

• Assignment ability may be delegated by the board (commitments may not be)– Less formal

• Default category for governmental funds except general fund (unless those amounts are negative)

Unassigned Fund Balance

• Residual category for general fund

• Reflects deficit fund balance for other governmental funds

ibl i i i d f d• Impossible to report positive assigned fund balance and negative unassigned fund balance

– Assigned amount has to be eliminated before negative unassigned may be reported

What about....???

• Encumbrances

– No longer separately identifiable on the face of the financial statements

– Still considered a component of either restricted, committed, or assigned

• Restricted and committed amounts indirectly included in the calculations of the respective resources

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What about...???(cont.)

• Appropriation for subsequent year’s projected budget shortfall

C tl fl t d d i t d f d b l– Currently reflected as designated fund balance

– Now will be reflected as an assignment

• Formal action to create but no formal action to not use

• Limited to the projected deficit

What about...???(cont.)

• Stabilization amounts

– Formal establishment of “rainy day” or “contingency” funds to only be used in specified circumstances

– Categorized as restricted or committed

• Circumstances are specific and non‐routine (e.g., “emergencies” would not qualify)

• Most commonly committed in NC

• Unassigned if not restricted or committed

Display Guidelines

• Nonspendable can be displayed in the aggregate or by the two categories

– Nonspendable in formp

– Required to remain intact

• Restricted can be broken down by “major” restrictions or in the aggregate

• Committed and assigned may be reported by “major” limitations or in the aggregate

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Sample Balance Sheet Classifications

Nonspendable (any governmental funds)

Restricted for (any governmental funds)

Committed to (any governmental funds)

Assigned to (any governmental funds)

Unassigned (General Fund only, used for negative residuals of other governmental funds)

Fund Balance Note Disclosures

• Committed Fund Balance

– Government’s highest level of decision‐making authority

– Formal actions necessary to enact/modify/rescindFormal actions necessary to enact/modify/rescind

• Assigned Fund Balance

– Body responsible for assigning amounts

– Policy that authorizes such assignments

Disclosures (cont.)

• Order in which government considers restricted versus unrestricted amounts to be spent when both are available

• Order in which committed assigned or• Order in which committed, assigned, or unassigned amounts are considered to be spent

• Any aggregate displays on B/S should be disaggregated in sufficient detail in notes

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Disclosures (continued)

• Stabilization arrangements/requirements– Authority

– Additions process

– Use processp

– Balance if not apparent on face of financials

• Minimum Fund Balance policies– Describe the policy

– Brief description of action necessary to have enacted

Governmental Fund Type Definitions

• General Fund

– The General Fund should be used to account for and report all financial resources not accounted for and reported in another fundp

• Language for the General Fund being used when another fund is not required dropped

• “All transactions” replaced with “all financial resources”

Governmental Fund Type Definitions (cont.)

• Special Revenue Fund– Used to account for and report proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects

• Must have 1 or more restricted or committed revenueMust have 1 or more restricted or committed revenue sources ‐ should be majority of resources – if specific resources no longer a majority – use General Fund

• Resources should be recorded as revenues in special revenue funds

• Should not include funds held in trust• Disclose purposes of major special revenue funds and revenues and resources used in those funds

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• Capital Projects Fund– Used to account for and report financial resources that are restricted, committed, or

i d t dit f it l tlassigned to expenditure for capital outlays• Does not need to be major facilities (major equipment replacement is acceptable)

• Excludes proprietary fund capital outlays and capital assets held in trust for others


• Debt Service Fund– Used to account for and report financial resources that are restricted, committed, or assigned to , , gexpenditure for principal and interest

• Used when legally required

• Used to accumulate resources for debt service payments in future years


• Permanent Fund

– Used to account for and report resources that are restricted to the extent that only earnings, not principal, may be used for purposes that support p p , y p p ppthe reporting government’s programs

• Do not include private purpose trust funds

• Endowments and cemetery perpetual care funds

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Implementation Issues

• Implementation should be done retroactively

• Reclassifications made by restating fund balance for all prior periods presented

• Fund balance information in the statistical section may reflect changes prospectively, though retroactive implementation is encouraged


A ti d Fi i l R tiAccounting and Financial Reporting for Intangible Assets

Accounting and Financial Reporting for Intangible Assets

• Guidance to identify, account for, and report intangible assets

Offi i l d fi i i f i ibl• Official definition of intangible asset

– Lacks physical substance

– Nonfinancial in nature

– Initial useful life extending beyond a single reporting period

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Examples of Intangible Assets

• Easements

• Computer software

• Water rights

• Timber rights

• Patents

• Trademarks

General Overall Guidance

• Intangible assets should be classified as capital assets

A t th t li itl l d d f th– Assets that are explicitly excluded from the scope of the standard, such as capital leases, should follow existing relevant authoritative guidance

General Overall Guidance (cont.)

• Intangible assets only reported in Statement of Net Assets if identifiable

• Specific approach for intangible assets that are internally generated (e g patents orinternally generated (e.g., patents or copyrights)

• Accounting and reporting for internally generated software

• Guidance for amortization of intangibles

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General Reporting Guidance

• Intangibles acquired or created primarily for obtaining profit should be reported as investments

• Intangibles must be “identifiable” or “separable” – it can be sold, rented, transferred, etc.

Internally Generated Intangibles

• Examples include patents, copyrights, and, most commonly, software

• Three criteria for such assets to be capitalized– Objective and service capacity of asset has beenObjective and service capacity of asset has been determined

– Feasibility of project has been demonstrated

– Intention to continue and complete project has been demonstrated

Special Guidelines for Software

• Management must also authorize and commit funding for software project before outlays may be considered eligible for capitalization– Thus, capitalization period begins with authorization

d it t t j tand commitment to project

– Capitalization period ends with substantial completion (i.e., software is ready for use)

• Activities in pre‐ and post‐capitalization phases should be expensed (i.e., training costs not capitalized)

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Overall Amortization Guidelines

• Useful life for amortization should equal service capacity expectation not to exceed length of contractual provisions

• Intangibles with indefinite useful lives should• Intangibles with indefinite useful lives should not be amortized

– This may change, assuming an impairment has not occurred, if conditions convert a useful life to a definite period

Implementation Guide Clarifications for Intangibles

• Websites

• Interest capitalization requirements, if applicable, do apply to intangible projects just like they do for tangible projects (for business‐type activities only)

• Purchased/licensed software that is not internally generated is an intangible

Implementation Guide Clarifications for Intangibles

– Example...5 year licensing agreement

– Intangible asset offset by commitment of obligation to pay

• No amortization of an intangible with an indefinite useful life

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Implementation Provisions

• Provisions were effective for FYs that began after 6/15/09

G l i i l i i d• General retroactive implementation required

– Phase 1 and 2 governments required except for intangibles with indefinite useful lives and those that were internally generated

– Phase 3 governments optional


The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments

GASB Statement No. 55 (cont.)

• Basically “copies” existing GAAP hierarchy standards from the AICPA’s Auditing Standards to the GASB standards as to allow for ease ofto the GASB standards as to allow for ease of access

• New statement would not establish new hierarchy or change existing hierarchy

• Effective upon issuance

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GAAP Hierarchy (a review)....

• GASB Statements and Interpretations

• GASB Technical Bulletins and AICPA audit guides and SOPs if cleared by GASB

i ll i if l d b G S• AICPA Practice Bulletins if cleared by GASB

• Implementation Guides published by GASB staff, as well as other generally accepted practices (e.g., The Blue Book)


Codification of Accounting and Financial Reporting Guidance Contained in the AICPA

Statements on Auditing StandardsStatements on Auditing Standards

GASB Statement No. 56 (cont.)• Guidance is not new; basically “copies” guidance that currently exists in AICPA Auditing Standards, with some slight modifications, to GASB standards related to– Related party transactions

– Subsequent events

– Going concern considerations

• Allows for standards related to preparation of financial statements to be in GASB literature

• Effective upon issuance

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The Financial Reporting Entity: Omnibus

Overview of GASB Statement No. 61,

Component Units

• Primary government versus component units

• Component units, by definition, must be legally separate

l di di i• Blending versus discrete presentation

• GASB Statement Nos. 14 and 61 provide accounting and financial reporting guidance

Imposition of Will ‐ PG has ability to….

• Remove appointed board members at will

• Approve/modify budget

• Approve/require changes affecting revenues

• Veto/override/modify governing board decisions

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Imposition of Will ‐ PG has ability to….(cont.)

• Appoint/hire/reassign/dismiss management

• Take other actions to impose will

Financial BenefitFinancial Burden

• Accessing resources without dissolution

• Obligated to finance deficits or provide support

• Obligated in some manner for the debt of the potential component unit

Financial Reporting

• Blending

• Discrete presentation

• Note disclosure

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Blending

• Required if….

– Boards are substantially the same and there is financial benefit/burden relationship or PG has operational responsibility of CUp p y

– CU provides services almost exclusively to PG or provides benefits almost exclusively to PG

– CU’s debt is expected to be entirely or almost entirely by resources of the PG

Discrete Presentation

• Required for CU’s that cannot be blended

• Shown in columns to the right of the PG

• BFS reporting requirements

– Must show major CU’s in BFS

– CU’s as individual columns in BFS

– Columns with combining statements


Codification of Accounting and Financial Reporting Guidance

Contained in Pre‐November 30, 1989 ,FASB and AICPA Pronouncements

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• Incorporates into GASB literature certain accounting/financial reporting guidance issued on or before November 30 1989issued on or before November 30, 1989

– FASB Statements and Interpretations

– Accounting Principles Board Opinions

– Accounting Research Bulletins of the AICPA


• Supersedes GASB Statement No. 20 – Eliminates election provided in paragraph 7 for enterprise funds and business‐type activities to apply post‐11/30/89 FASB St t t /I t t ti th t d fli tStatements/Interpretations that do no conflict or contradict GASB guidance

• These entities may continue to apply, as other accounting literature, post‐11/30/89 FASB pronouncements that do not conflict with GASB


• Codification includes all accounting standards within levels A through D of current GAAP hierarchyhierarchy

• Codification simply reorganizes US GAAP pronouncements topically

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Purposes of New Codification and Implementation

• Reduce amount of time and effort required to research an accounting issue

bili f h li ( h• Improve usability of the literature (thus mitigating the risk of noncompliance)

• Enhances opportunity for real‐time updates

• Effective for FYs that begin after December 15, 2011

Common Accounting and Financial Reporting ProblemsFinancial Reporting Problems

Letter of Transmittal and Independent Auditor’s Report

• Date of the letter of transmittal should be no earlier that the date of the independent auditor’s reportauditor s report

• Auditor’s opinion should opine on budgetary comparison information when presented as part of basic financial statements

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MD&A

• Scope of analysis should be comprehensive (and an actual analysis)– Governmental and business‐type activities

– General fund and other major fundsj

– Budgetary variances (original, final, and actual)

• 3 years of condensed financial data if comparatives are presented

• Include appropriate discussions of capital asset and long‐term debt activity

Component Units

• Avoid blending component units that should be discretely presented

• Component unit data should be complete and consistent

Statement of Net Assets

• Calculate the net pension /OPEB obligation correctly (e.g., include all contributions)

i O li bili i l• Pension or OPEB liabilities are long‐term, not current

• Debt should be reported net of related premiums or discounts

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Statement of Net Assets (cont.)

• Invested in capital assets, net of related debt should be calculated correctly

– Unexpended bond proceeds (restricted)

Bond issuance costs (not part of calculation)– Bond issuance costs (not part of calculation)

– Internal borrowings (not part of calculation)

– Intangible capital assets (part of calculation)

– Refunding bonds (part of calculation, assuming they are replacing capital related debt)

Statement of Activities

• Levied taxes versus “shared” taxes

• Significant revenues should be reported lseparately

• Refrain from using the term “capital outlay” in accrual‐based statements

Statement of Activities (cont.)

• Intergovernmental expenses should be reported within the appropriate functional category

• Only significant amounts should be reported as special items– It is possible for special items to be reported at one level of reporting and not another (i.e., government‐wide versus fund level)

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Fund Financials

• All major funds should be reported properly

• Reconciliations to the government‐wide statement of activities should focus only on changes during the reporting period

Governmental Funds

• Certain accrued liabilities should only be reported in governmental funds “to the extent that the liabilities mature each period”– Claims and judgments

– Compensated absences

– Termination benefits

– Landfill closure and postclosure care costs

– Pollution remediation obligations

– Operating leases with scheduled rent increases

Governmental Funds (cont.)

• New debt issuances (including refundings)

– Face value of debt as other financing source

i d h fi i– Premium reported as other financing source

– Discount reported as other financing use

– Bond issuance costs reported as expenditures

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Governmental Funds (cont.)

• Other financing sources/uses– Face value of long‐term debt at issuance– Original issue premiums and discounts– Payments to escrow from proceeds of refunding bondsbonds

– Sales of capital asset and insurance recoveries (if not a special item)

– Transfers– Debt service on demand bonds classified as fund liabilities

– Reclassification of demand bonds as fund liabilities

Proprietary Funds

• Balance sheet/statement of net assets must be reported in a classified format (contrast with option at government‐wide level)

• Provide detail on major categories of• Provide detail on major categories of restricted net assets

• Capital contributions should be reported consistently (between government‐wide and fund financials)

Proprietary Funds (cont.)

• “Cash flows from operating activities” is the residual category of the statement of cash flows

• Noncash events should be separately reported– Capital asset contributions

– Changes in FMV of investments

– Inception of a capital lease agreement

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Fiduciary Funds

• Pension plans and OPEB plans need to be reported as separate funds

id ffi i d il i f• Provide sufficient detail on investments for pension and OPEB plans

• Employers must report on‐behalf payments made directly to a pension or OPEB plan

Note Disclosures

• Adequately describe criteria used for identifying component units

i l i li i• Disclose investment policies

• Report changes in long‐term liabilities at gross rather than net amounts

Note Disclosures (cont.)

• Provide new pension disclosures as per GASB Statement No. 50, Pension Disclosures

C t ’ d t f th h d l f f di– Current year’s data from the schedule of funding progress

– Reference to the full schedule of funding progress

– Actuarial assumptions used

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Note Disclosures (cont.)

• Distinguish pension/OPEB cost from the annual required contribution (will occur when there is a net pension obligation)

• Required note disclosures for pollution remediation

• Required note disclosures for endowments

Required Supplementary Information

• Schedules of funding progress for pensions d O h ld i ll i d dand OPEB should contain all required data

elements

– Both actuarial value of plan assets and the actuarial accrued liability (not just the net unfunded actuarial accrued liability)

SAS 112

• Issued by the AICPA

• Statement on Auditing Standards No. 112, Communicating Internal Control Related Matters Identified in an AuditMatters Identified in an Audit

• Had an immediate impact on governments nationally

• Smaller governments with limited staff profoundly affected

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Overview of SAS 112

• Establishes standards for auditors to evaluate internal control

ff i f i h fi l• Effective for governments with fiscal years ending on or after 12/15/06

• Auditors must identify any deficiencies they note

Types of Deficiencies

• Control deficiency

– Weakness in internal control that could be debilitating

• Significant deficiency• Significant deficiency

– More than a remote chance that a control deficiency will result in misstatement

• Material weakness

– More than a remote likelihood of misstatement

Statement on Auditing Standards No. 115

• Communicating Internal Control Related Matters Identified in an Audit

• Effective for periods ending on or after December 15 2009December 15, 2009

• Supersedes SAS No. 112 of the same name and is designed to bring consistency to terminology used in audit sector

• Main changes relate to definitions of material weaknesses and significant deficiencies

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Types of Deficiencies

• Control deficiency– Weakness in internal control

• Significant deficiency– Less severe than a material weakness yetLess severe than a material weakness, yet important enough to merit attention

• Material weakness– More than a reasonable possibility that a material misstatement will not be prevented, detected, or corrected on a timely basis

Deficiencies that are Indicators of Material Weaknesses

• Identification of fraud (period)

• Restatement of previously issued financial statements to correct material misstatement

• Identification of material misstatement thatIdentification of material misstatement that auditors perceive would not have been detected by entity’s internal control

• Ineffective oversight of financial reporting and internal controls by those charged with governance

Common Concerns of SAS 112/115

• Auditor prepared financial statements

– Single biggest concern for smaller governments

– Further emphasizes the responsibility of management for the preparation of the externalmanagement for the preparation of the external financial statements

– Very much a “grey” area related to auditor judgment on “assisting” versus “preparing”

– “Convenience” versus “necessity”

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Common Concerns (cont.)

• Auditor prepared statements (cont.)

– Outsourcing bookkeeping

– Outsourcing financial statement preparation

Willingness of Governing Boards to accept noted– Willingness of Governing Boards to accept noted deficiencies

• Understanding the auditor’s perspective

• Perception of “competence”

• “Cost” versus “benefit”

Common Concerns (cont.)

• The “Fine Line”

– Conversion of records

– Preparation of journal entries

• Other issues with SAS 112/115

– Role of the management letter

– Oversight agency perceptions and expectations

Purpose of SAS 112/115

• Establishes standards for auditors to evaluate i l l d id if d iinternal control and identify and communicate deficiencies they note

WV GASB Conference GAAP Update [Read-Only]wvde.state.wv.us/finance/documents/GASBUpdatePresentation.pdf · The Great GASB Conference ... implementation of GASB 47 • All other termination

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