California Society of Municipal Finance Officers

GASB Update

Current Board Members

MemberBob Attmore, ChairMike BelskyBill HolderDavid SundstromJan SylvisMarcia TaylorJim Williams

Term Expires20142013—first term20102014—first term2012—first term20152012

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Where Are We Now?

Effective Dates—June 30• June 30, 2010

– Statement 45—Phase III– Statement 51– Statement 53– Statement 57, paragraph 6 and 7– Statement 58

• June 30, 2011– Statement 54

• June 30, 2012– Statement 57, paragraph 8

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Other Postemployment Benefits

Implementation Is Here

OPEB—Phase III The Time Has Come

• Are retiree healthcare benefits being offered (including implicit rate subsidies)

• Is the entity eligible to apply the alternative measurement method (AMM)?– Plans with fewer than 100 members– Statement 57 provisions

What Is AMM?

• Includes the same three broad measurement steps as an actuarial valuation

• Is governed by most of the same parameters• But allows simplification of certain

assumptions and techniques to permit potential application by non-specialists

The AMM Specifics• General considerations—

– The projection of benefits should include assumptions regarding all significant factors affecting the amount and timing of projected future benefit payments.

– Assumptions generally should be based on the actual experience of the covered group, to the extent that credible experience data are available, but should emphasize expected long-term future trends rather than give undue weight to recent past experience.

– The reasonableness of each assumption should be considered independently based on its own merits and its consistency with each other assumption.

– In addition, consideration should be given to the reasonableness of the combined impact of all assumptions.

• Expected point in time at which benefits will begin to be provided—The assumption should reflect past experience and future expectations for the covered group. – The assumption may incorporate a single assumed retirement age for all active

employees or an assumption that all active employees will retire upon attaining a certain number of years of service.

The AMM Specifics• Marital and dependency status—The employer may base these

assumptions on the current status of active and retired plan members or on historical demographic data for retirees in the covered group.

• Mortality—The employer should base this assumption on current published mortality tables.

• Turnover—The employer generally should base both the assumed probability that an active plan member will remain employed until the assumed retirement age and the expected future working lifetime of plan members, for purposes of allocating the present value of expected benefits to periods, on the historical age-based turnover experience of the covered group using the calculation method in paragraph 35a. – If experience data are not available, the employer should assign the probability of remaining

employed until the assumed retirement age using Table 1 in paragraph 35b, and should determine the expected future working lifetime of plan members using Table 2 in paragraph 35c.

The AMM Specifics• Healthcare cost trend rate—The employer should derive select and

ultimate assumptions about healthcare cost trends in future years for which benefits are projected from an objective source.– www.cms.hhs.gov Statistics, Trends, and Reports, National Health Care Expenditures

Projections: 2009–2019

• Use of health insurance premiums—An employer participating in an experience-rated healthcare plan that provides benefits through premium payments to an insurer or other service provider may use the plan's current premium structure as the initial per capita healthcare rates for the purpose of projecting future healthcare benefit payments. – If the same premium rates are given for both active employees and retirees, and the plan

is not a community-rated plan, the employer should obtain from the insurer age-adjusted premium rates for retirees or,

– If that information cannot be obtained from the insurer, estimate age-adjusted premiums for retirees using the method provided in Tables 3 through 5 of Statement 45, paragraph 35d.

The AMM Specifics• Plans with coverage options—When a postemployment

benefit plan provides plan members more than one coverage option, the employer should base assumptions regarding members' coverage choices on the experience of the covered group, considering differences, if any, in the choices of pre- and post-Medicare-eligible members.

• Use of grouping—The employer may use grouping techniques. – One such technique is to group participants based on common

demographic characteristics (for example, participants within a range of ages or years of service), where the obligation for each participant in the group is expected to be similar for commonly grouped individuals.

– Another technique is to group plans with similar expected costs and benefits.

Intangible Assets

Statement 51

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

• Statement generally does not provide guidance on whether a transaction results in an asset– Look to definition of “asset” in Concepts Statement No. 4,

Elements of Financial Statements for guidance– Basis for conclusions does state that powers created through

statute or inherent nature of government are not intangible assets

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Classification—Basic Guidance

• All 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

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Internally Generated Computer Software

• Specific guidance on applying the IGIA specified-conditions approach for internally generated computer software (IGCS) is provided

• IGCS is either:– Developed in-house by government personnel or a

contractor on their behalf; or– Commercially available software modified using more than

minimal incremental effort before being put in operation• Guidance based on development stages similar to

AICPA SOP 98-1

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Internally Generated Computer Software

• Specific guidance on applying the IGIA specified-conditions approach for internally generated computer software (IGCS) is provided

• IGCS is either:– Developed in-house by government personnel or a

contractor on their behalf; or– Commercially available software modified using more than

minimal incremental effort before being put in operation• Guidance based on development stages similar to

AICPA SOP 98-1

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Internally Generated Computer Software

• Activities associated with developing IGCS should be categorized in one of three development stages:– Preliminary project stage

• Conceptual formulation and evaluation of alternatives• Determination of existence of needed technology• Final selection of alternatives

– Application development stage• Design of the chosen path• Coding• Installation to hardware• Testing and parallel processing

– Post-implementation/operation stage• Application user training• Software maintenance

Amortization

• Existing guidance for depreciation of capital assets generally applies to amortizing intangible assets– No mandated maximum amortization period

• Exception 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

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Effective Date and Transition

• Effective date is fiscal periods beginning after June 15, 2009• Provisions generally should be retroactively applied• Exception for retroactively reporting IGIA:

– Permitted but not required for IGIA – Retroactively report only if specified-conditions approach can be applied– May report some, but not all, IGIA developed prior to the effective date– Modifications of software not retroactively reported should follow Statement 51

guidance when performed subsequent to the effective date• Other exceptions for retroactively reporting intangible assets:

– Permitted but not required for intangible assets with indefinite useful lives at transition

– Required for all other intangible assets acquired in fiscal years ending after June 30, 1980 by phase 1 or 2 governments

– Encouraged but not required for all other intangible assets of phase 3 governments

Statement 53

Derivative Instruments

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What is a Derivative Instrument for Financial Reporting Purposes?

• A derivative instrument has:– One or more reference rates (underlyings) and

one or more notional amounts– Leverage– Net settlement

Common Derivative Instruments

• Futures contracts• Some forward contracts, including swaps• Options—exchange-traded and others

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Derivative Related Risks

• Credit risk• Interest rate risk• Basis risk• Termination risk• Rollover risk• Market-access risk• Foreign currency risk• Also headline risk

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Accounting GuidanceFair value with hedge accounting• Derivative instruments would be measured on the

statement of net assets at fair value• Fair value changes would be reported on the

“change statement” as investment income• Exception: HEDGES!

– Changes in fair value of derivative instruments would be reported on the balance sheet as deferrals—either deferred charges or deferred credits

– Swap asset, deferred inflows– Swap liability, deferred outflows

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Effective Date

• Reporting periods beginning after June 15, 2009

• Implementation Guide is available in stand-alone form and as part of the Comprehensive Implementation Guide

Statement 54

Fund Balance and Governmental Fund Type Definitions

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What Do You Need to Know About Statement 54?

• New fund balance presentation hierarchy is based primarily on the degree of spending constraints placed upon use of resources for specific purposes versus availability for appropriation

• The 5 new presentation classifications go from non-spendable down through three levels of less binding spending constraints to an unassigned level, which is available for any spending of the government.

New Fund Balance Presentation Classifications

• Non-spendable—Inventory, long-term receivables

• Restricted—Statement 34/46 definition• Committed—Formal action of governing body• Assigned—Similar to designations expressing

intent• Unassigned—Available for any purpose

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New Fund Balance Classifications

• Nonspendable• Restricted• Committed• Assigned• Unassigned

Essentially what is

now reserved

Essentially what is

now unreserved

Essentially what is

now designated

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Committed Fund Balance

• Constraint on use is imposed by the government itself, using its highest level of decision making authority

• Amounts classified as “committed” are not subject to legal enforceability like restricted resources; however, spending constraint can be removed or changed only by taking the same highest level action

• Action to constrain resources should occur prior to end of fiscal year, though the exact amount may be determined subsequently

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Assigned Fund Balance

• Amounts intended to be used for specific purposes

• Intent is expressed by – The governing body itself, or– A body (budget or finance committee) or an

official authorized by the governing body to assign resources for specific purposes

• Residual amounts in governmental funds other than the general fund are assigned

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Unassigned Fund Balance

• Available for any purpose• Reported only in the general fund, except in

cases of negative fund balance– Negative balances in other governmental funds

are reported as unassigned

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What More Do You Need to Know About Statement 54?

Governmental Fund Type Definitions– Special revenue fund—used to account for and report the

proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.

– Capital projects fund—used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets.

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Additional Statement 54 Changes

• New note disclosures required• Addresses classification of “stabilization” or

“rainy day” amounts• Effective for periods beginning after June 15,

2010

Current Projects• Concepts Statements

– Recognition and Measurement Attributes• Service Efforts and Accomplishments Reporting

– Voluntary Guidelines • Pension Accounting and Reporting• Pre-November 30, 1989 FASB Pronouncements• Service Concession Arrangements• Financial Instruments Omnibus• Statement 14 Reexamination• Economic Condition Reporting

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Why The Conceptual Framework Is Important

• The “Map Quest” or “Google Earth” of standards• Most recent concepts statement, Elements of Financial

Statements, already has had an affect on standards– Intangible assets– Derivative instruments

• Recognition and Measurement Attributes will do the same– Governmental funds—what belongs in a fund for financial

reporting purposes– Fair value (remeasured value) versus historical cost (initial

value)

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Scope of the Postemployment Benefits Project

• Basic approach– Funding based with parameters– Liability based (FASB Statement 158)– Something in between

• How the actuarial liability should be measured– Salary projections– Discount rate

• Plan reporting• Cost sharing allocations for employers

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Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements

• Why November 30, 1989?– FAF reaffirmed jurisdictional arrangement and determined that

subsequent FASB pronouncements should be considered other accounting literature unless specifically adopted by the GASB

– Eliminated “negative” standard setting• Why do this project now?

– Older literature harder to find, may be exacerbated by FASB codification project

– Inconsistencies in practice—what applies, what does not apply• What has been addressed?

– AICPA—Accounting Research Bulletins and Opinions– FASB—Statements and Interpretations

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Service Concession Arrangement Proposals

• Who should report the capital in a service concession arrangement—transferor versus the operator?– The transferor determines or regulates what services the

operator is required to provide, to whom the operator is required to provide them, and the price ranges or rates that can be charged for services;

– The transferor is entitled to—through ownership, beneficial entitlement, or otherwise—significant residual interest in the property at the end of the arrangement.

• When should upfront payments be recognized?– Generally, over the life of the agreement.

Financial Instruments Omnibus

• Covers issues in four Statements—Proposals:– Statement 25—Removes fair value exemption for

unallocated insurance contracts– Statement 31—Clarifies what is a “2a7-like”

investment pool– Statement 40—Clarifies that the interest rate risk

disclosure requirement only applies to bonds and certain bond mutual funds

– Statement 53—Clarifies four practice issues

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Statement 14 Reexamination• Retains current reporting entity framework. This framework includes (1) the criteria

for inclusion of component units and (2) the methods of presenting component units.

• In addition to meeting the fiscal dependency criterion, a financial benefit/burden relationship should be present for a potential component unit to be included in the primary government’s financial statements based on the fiscal dependency criterion.

• The “misleading to exclude” notion will be retained in Statement 14, but amendments to the guidance will clarify the professional judgment aspect of the guidance.

• Component units will be blended if the component unit’s governing body is substantively the same as the governing body of the primary government and either (1) a financial benefit/burden relationship exists with the primary government or (2) management of the primary government has operational responsibility for the component unit. – Debt issuing component units would qualify for blending if primary government resources

are used to retire their debt.

Research Agenda

• Electronic Financial Reporting• Fair Value Measurement• Government Combinations• Interpretation 1—Demand Bonds

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Questions?