presented by eric s. berman, cpa deputy comptroller commonwealth of massachusetts april 2009 if its...
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Presented by Eric S. Berman, CPADeputy ComptrollerCommonwealth of MassachusettsApril 2009
If It’s Monday, We Must be in Norwalk and Other Updates from GASB 2009
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First… a word from our sponsors
The views expressed in this presentation are those of the speaker. Official positions of the Commonwealth of Massachusetts are
determined only after extensive due process and deliberation.
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GASB Statements Implementation
2009 2010Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
Phase 3 Plans < $10 million
Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pension Plans
Phase 2 Employers > $10 million <
$100 million
Phase 3 Employers < $10 milion
Technical Bulletin 2004-2, Recognition of Pension and OPEB Expenditures / Expense and Liabilities by Cost-Sharing Employers
With OPEB Implementation
Technical Bulletin 2006-1, Accounting and Financial Reporting for Employers and OPEB Plans… Medicare Part D
With OPEB Implementation
Technical Bulletin 2008-1, Determining the Annual Required Contribution Adjustment for Post-Employment Benefits
With OPEB Implementation
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GASB Statements-Future Dates
2009
·Statement No. 49,
Accounting and Financial Reporting for Pollution Remediation Obligations
RETROACTIVE APPLICATION
·Statement No. 52,
Land and Other Real Estate Held as Investments by Endowments
RETROACTIVE APPLICATION
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GASB Statements-Future Dates2009 2010 2011
Statement No. 51, Accounting and Financial Reporting for Intangible Assets
RETROACTIVE APPLICATION IN 2010
STATEMENT No. 53, Accounting and Financial Reporting for Derivative Instruments
RETROACTIVE APPLICATION IN 2010
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GASB Statements-Future Dates2009 2010 2011
NEW AND HOT!! Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions
RETROACTIVE APPLICATION IN 2011
EVEN HOTTER!! STATEMENT No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
IMMEDIATE IMPLEMENTATION
EVEN HOTTER!! STATEMENT No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards
IMMEDIATE IMPLEMENTATION
HOT OFF THE PRESSES
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Just the facts on OPEB for those stragglers!
What is the substantive plan from the employers/employees perspective?
Does an implicit rate subsidy exist? Has a qualifying trust been established? Are the actuarial assumptions reasonable? What constitutes a contribution to the plan? What is required to be presented in the financial
statements?
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Statement 49 — Accounting and Financial Reporting for Pollution Remediation Obligations –
- aka the sleeping giant
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Where Superfund, Priority List and RCRA Sites are in Tennessee per EPA
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There’s one right nearby!Our Hotel
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What Do You Need To Know About Statement 49? Thresholds are required to be met before the clock starts
on recognition Measurement is based on expected cash flows Amounts should be reasonably estimable Some obligations will result in the recognition of an asset Recoveries—depend on the source
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Recognition Threshold Determine whether one of more
components of a pollution remediation obligation are recognizable as a liability when . . . Government knows or reasonably believes
that a site is polluted, and Obligating event occurs (the criteria
effectively serve as a safe harbor)
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Decision Tree on PollutionPart 1 Obligating Events
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Decision Tree on Pollution Part 2 – Measurement Guidance
From Part 1
Go to Part 5 Go to Part 3
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Decision Tree on Pollution Part 3 – Capitalization Guidance
From Part 2 Yes
Go to Part 4
Prepping property to sell OR to reuse
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Decision Tree on Pollution Part 4 – Liability Guidance
From Part 3
Go to Part 5
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Decision Tree on Pollution Part 5 – Disclosure
From Part 2 – (if not estimable)
From Part 4
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Three Contingencies – GASB 49 Recognition – Leaky Storage Tank in Road Project
Case Expected Outlays
(a)
% Probability
(b)
Outlays x %
(a x b)
Best $150,000 25% $ 37,500
Most Likely
$320,000 60% 192,000
Worst $450,000 15% 67,500
100% $297,000
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Implementation Ideas
Internal controls to ensure obligating events identified
For example—Year-end inquiry to departmentsSimilar to contingent liability
inquiries, but for obligating events
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Recognition Overview
Component recognition approachCost accumulation, not fair valueCurrent value, not present valueExpected cash flow technique
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Expected Recoveries from Potential Responsible Parties and Insurance Reduce expense (and expenditure, if
available) and . . . If not realized or realizable—
Net against remediation liabilities When realized or realizable
Increase liability and report separate recovery assets (cash or receivable)
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Effective Date
Fiscal periods beginning after
June 15, 2008 (FY09)
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Land and Other Real Estate Held as Investments by Endowments
GASB 52
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Land and Other Real Estate Held as Investments by Endowments
Resolves conflict between governmental and fiduciary funds that hold land investments – also includes investment pools
Land held for investment will be held at fair market value, instead of historical cost Changes in value = investment income
Effective for periods beginning after June 15, 2008 – (FY09)
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Accounting and Financial Reporting For Intangible Assets
GASB 51
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Introduction Intangible assets included in description of capital
assets in GASB 34 Inconsistency in practice on how intangible assets
are treated for accounting and financial reporting: As capital assets As intangible assets as considered in APB 17 Expensed in period that costs are incurred
Objective of Statement is to reduce the inconsistency in reporting
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Description
An intangible asset is an asset that possesses all of the following characteristics:Lack of physical substance Nonfinancial natureInitial useful life extending beyond a
single reporting period
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Scope
Examples may include: Easements (right-of-way, permissive,
restrictive) Land use rights (water, timber, mineral,
air rights) Internally developed computer software Patents, trademarks, copyrights Licenses, permits and other rights
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Recognition
An intangible asset should only be recognized if it is identifiable:The asset is separable from the
government; orThe asset arises from contractual or
other legal rights, regardless of whether rights are separable
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Classification All intangible assets subject to provisions should be classified as
capital assets Existing guidance related to capital assets should be applied to
intangible assets as appropriate: Recognition Measurement Depreciation (amortization for intangibles) Impairment Presentation Disclosure
Rest of standard provides guidance specific to intangibles that should be applied in addition to, or in lieu of if appropriate, capital asset guidance
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Basic Guidance All intangible assets subject to Statement 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
modified accrual 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 Intangibles – e.g. Software2 characteristics:
Can be created or produced by the government or an entity contracted by the government OR
Acquired from a 3rd party and more than an incremental effort to customize to put in service
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Internally Generated Intangibles – e.g. Software – supersedes AICPA SOP 98-1
Preliminary Development OperationsDetermination of objective of project and is feasibleDemonstration that intent is there to complete the project
Management authorizes and commits to fundingSoftware is coded, tested and implemented
Software is accepted and operating
EXPENSE CAPITALIZE EXPENSE
Future betterments that add to useful life - Capitalize
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Helpful Best Practices
RETROACTIVE IMPLEMENTATIONGo look for intangibles starting
NOWInclude legal counsel help as well
as IT staff
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Effective Date and Transition Effective date is fiscal periods beginning after
June 15, 2009 Provisions generally should be retroactively
applied 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
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Statement 53
Accounting and Financial Reporting for Derivative Instruments
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Derivatives Notional amounts outstanding, 1987-present
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
Bil
lio
ns
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: International Swaps and Derivatives Association, Inc., 2008
$683.7 trillion in June 2008
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Types of Derivatives that Accountants Encounter
12% 9%
68%2%
1%
8%
Foreign Exchange Contracts Interest Rate Contracts
Equity - Linked Contracts Commodity Contracts
Credit Default Swaps Other
% of notional amounts outstanding – as of June 2008 – Source Bank for International Settlements
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Ponder this about pooled securities such as mortgage backed derivatives:
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Executive Summary of GASB Statement No. 53 Complex statement that:
Defines derivatives and exclusions Presents requirements for recognition and
measurement of derivatives Describes and calculates hedge accounting, efficient
and inefficient hedge accounting Contains a full set of examples and note disclosures,
as well as transition guidance
Supersedes Technical Bulletin 2003-1 Amends pieces of Statement Nos. 7, 23, 25, 31,
40 and 43
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Executive Summary of GASB Statement No. 53 What is a derivative?
It is a contract that has settlement factors which could beone or more reference rates, notional amounts, payment provisions or any combination
It has leverage It can be settled net
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Executive Summary of GASB Statement No. 53 What are settlement factors?
Reference Rate – an interest rate, security price, commodity price, exchange rate, other variables
Notional Amount(s) – the face amount of the contract, which includes the number of units, shares, bushels, pounds etc.
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Executive Summary of GASB Statement No. 53 Requirements of the statement:
Derivatives should be reported on the statement of net assets at fair value except for synthetic guaranteed investment contracts
Unless hedging derivative, changes in fair values are part of investment revenue in statement of activities, changes etc.
If hedging, then changes are deferred inflows or outflows
If hedged derivative is terminated, P&L event
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Executive Summary of GASB Statement No. 53 How to measure fair value
Market price if there is a market Discounted expected cash flows One of a number of different pricing
models and methodsIF using a pricing service and the method to
calculate is NOT disclosed by the service, then management must make an assessment of propriety based on the information received
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Executive Summary of GASB Statement No. 53 Termination occurs when
Hedging derivative not effective Government becomes exposed to adverse changes in
fair values or cash flows Hedged asset or liability is sold or retired, refunded or
defeased Derivative is terminated Forward transaction occurs (e.g. sale of bonds or
purchase of commodity) Reporting – investment revenue, balance sheet
activity caption “increase (decrease) upon hedge termination”
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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
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Principle
Fair value with hedge accountingChanges in fair value of derivative are
deferred for qualifying transactionsChanges in fair value of derivative would not
be deferred ifThe related asset (for example, investment) is
reported at fair valueThe hedge does not meet the effective criteria
How is that operationalized?
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What is a hedge?
A hedge is a contract entered into to reduce some form of risk in cash flows or fair values
Hedges that accomplish the goal of reducing risk as expected are commonly referred to as effective.
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What is a hedge?
It must be associated with a hedgeable item Asset, Liability, Expected Transaction (swaption,
forward etc.) Notional amount = principal amount Derivative is in the same fund as hedgeable
item Term or time period is consistent between
derivative and hedgeable item It is effective in reducing the risk
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How to evaluate effectiveness?
Initial Year If terms of derivative (years, amounts, rates) are
consistent with debt, asset etc., then automatically effective – known as consistent critical terms
If inconsistent, then at least one of many quantitative methods must be used
Subsequent Years Use the same method as first year, but can use other
method Evaluation of effectiveness is done by measuring
cash flows or overall changes in fair values
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How to evaluate effectiveness?
Quantitative methods include Synthetic instrument method (combine debt
cash flows and derivative to create a third item)
Dollar offset method (measure changes in cash flows)
Regression analysis method (statistical relationship between debt and derivative changes)
Can use other quantitative methods
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Effectiveness Corridors
Synthetic instrument method
Dollar Offset
Regression analysis
Synthetic rate should be within 90% - 111% of fixed rate
Derivative cash flows 80% - 125% of debt
R2 (measure of the proportion of the variance in a dependent variable about its mean that can be explained by changes in the independent variable.) must be ≥ 0.80
F-statistic (confidence level) must have 95% confidence
Corridor must be 80% - 125% of debt
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Note Disclosure
Summary table of informationOrganized by governmental, BTA,
fiduciary fundsSubdivisions for hedging derivatives and
investment derivativesWithin each categories – aggregate
information by type (received fixed swaps, pay fixed swaps, swaptions, caps, basis swaps, futures etc.)
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Example of Calculating Effectiveness Assumptions
Auction rate bonds issued for $100MM on 7/1/xx. Bonds mature 6/30/x4
Semiannual coupons reset weekly On 7/1/xx, the government enters into a $100MM,
notional, pay fixed, receive variable swap that terminates 6/30/x4. FMV at 7/1xx=$0
Semiannual variable payment reset weekly Variable payment is 49.96% of LIBOR + 78 basis
points Fixed payment is 3.58782%.
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Step 1 – Diagram the transaction
Government Counterparty
Fixed pay 3.57872%
Variable receive – LIBOR + 78bps
Bondholders
Auction rate paid
Note that the actual synthetic rate paid will vary depending on the difference between the auction rate paid and the variable rate received.
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Step 2, Spreadsheet the cash flows and values
Fair Value Change in Fair Value
1 (2,487,390)$ (2,487,390)$ 2 (4,000,154) (1,512,764) 3 (1,536,286) 2,463,868 4 - 1,536,286
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Step 3, Divide and Measure
From Assumptions
Since these are between 90 and 111%, then derivative is effective – changes only reflected in statement of net assets
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Journal Entries – HIGHLY SIMPLIFIEDYear 1 Swap Payment to Counterparty
Dr. Interest Expense $3,578,720 Cr. Cash $3,578,720
Swap Receipt from Counterparty Dr. Cash $2,031,713 Cr. Interest Expense $2,031,713
Payment to Bond Holders Dr. Interest Expense $1,789,314 Cr. Cash $1,789,314
Change in Fair Value Dr. Pay-fixed rate swaps $2,487,390 Cr. Deferred Outflow of Resources $2,487,390
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Journal Entries – HIGHLY SIMPLIFIEDYear 2 Swap Payment to Counterparty
Dr. Interest Expense $3,578,720 Cr. Cash $3,578,720
Swap Receipt from Counterparty Dr. Cash $1,575,995 Cr. Interest Expense $1,575,995
Payment to Bond Holders Dr. Interest Expense $1,359,205 Cr. Cash $1,359,205
Change in Fair Value Dr. Pay-fixed rate swaps $1,512,764 Cr. Deferred Outflow of Resources $1,512,764
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Journal Entries – HIGHLY SIMPLIFIEDYear 4 – FINAL YEAR Swap Payment to Counterparty
Dr. Interest Expense $3,578,720 Cr. Cash $3,578,720
Swap Receipt from Counterparty Dr. Cash $1,940,223 Cr. Interest Expense $1,940,223
Payment to Bond Holders Dr. Interest Expense $1,930,405 Cr. Cash $1,930,405
Change in Fair Value Dr. Deferred Outflow of Resources $1,536,286 Cr. Pay – Fixed Rate Swaps $1,536,286
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Note Disclosure
Summary table of information Information includes:
Notional amounts Changes in fair value and where it is reported in
the financial statements Fair values at the end of the year Reclassifications from hedging to investment
derivatives during the period Deferral amounts in investment revenue
Can be narrative if small number of contacts
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Note Disclosure
Narratives include Objectives of derivatives Terms of derivatives include
Notional amounts Reference rates, indexes etc. Any embedded options (caps, floors collars) Date of contract and termination or maturity Any cash paid or received
2003-1 risks (credit, interest rate, basis, termination, rollover, market access, foreign currency)
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Note Disclosure
OtherHedged debt –follow GASB 38 – disclose
net cash flows If using other quantitative method –
identify and notable features of the method
Investment derivatives2003-1 disclosures along with GASB 40
disclosures
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Note Disclosure – June 30, Year 1Item Type Objective Notional
Amount
(000’s)
Effective Date
Matures Terms FMV
(000’s)
A Variable Receive Interest Rate Swap
Hedge of changes in cash flows of series XX bonds
$100,000
7/1/xx 6/30/x4 Receive LIBOR + 78bps, pay 3.57872%
($2,487)
B Fuel contract
Hedge oil market price changes
1 MBTUs
4/30/x0 12/31/x0 Pay $7.50 MBTU, based on pricing point at expiration
111
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Disclosure
After table, note the following:Terms not in tableHow fair values calculatedRisks and ratings of counterpartiesContingencies on derivativesTable of all payments and hedged
debt
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Disclosure – 2nd tableChanges in Fair Value Fair Value at June 30,xx
Governmental Activities
Classification Amount
(000’s)
Classification Amount
(000’s)
Notional
(000’s)
Variable Receive Interest Rate Swap
Deferred Outflow
($2,487) Debt ($2,487) $100,000
Commodity Forward
Deferred Inflow
111 Derivative Instruments
111 1,000 MMBTU’s
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Transition Transition periods BEGINNING AFTER
June 15, 2009 Retroactive application for all periods
presented Perform hedge effectiveness evaluation as
of the END of the CURRENT period ONLY. If effective now, assume effective as of the beginning of the contract
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Other items included in the Statement Huge (11 page) glossary 12 robust illustrations
Consistent critical terms Interest rate swaps – synthetic method Interest rate swaps – terminations due to
market conditions Regression analysis Dollar offset method
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Other items included in the Statement 12 robust illustrations (continued)
Swaptions Full set of note disclosures
Flowchart of hedge effectiveness decisions Codification instructions Still to Come – Implementation Guide –
Watch for it in 2009!
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70
Fund Balance Reporting and Governmental Fund Type Definitions
Statement 54
HOT OFF THE PRESSES!!
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What Do You Need to Know About Statement 54?Could be a large change2 initial distinctions
Non-spendableCan’t be spent with cashIn a non-spendable formLegally or contractually required to
remain intact
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What Do You Need to Know About Statement 54?2 initial distinctions
SpendableCan be spent, but may have
restrictions – those being:RestrictedCommittedAssigned
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What Do You Need to Know About Statement 54?Restricted
Same definition as in Statement No. 46Externally imposed by creditors (e.g.
debt covenants)Imposed by law through constitutional
provisions or enabling legislation and has legal enforceability
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What Do You Need to Know About Statement 54?
CommittedCan only be used for specific purposes
imposed by formal action of the government’s highest level of decision making authorityCan only be changed by the same type of
action Law, ordinance, resolution
Should occur prior to year end, but can occur after
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What Do You Need to Know About Statement 54?
AssignedCan constrained by intent
Should be expressed by governing body or a committee or an official that can assign assets
Includes all remaining amounts NOT in the General Fund
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What Do You Need to Know About Statement 54? Unassigned
Includes only unrestricted, uncommitted, unassigned amounts in the General Fund ONLY
General Fund should be the only fund that reports a positive unassigned amount
If a NON-General Fund balance is negative after restricted, committed, assigned, then Reduce assigned and if that goes to zero Negative unassigned
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What 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.
Debt Service, Permanent and General Fund unchanged
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What Do You Need to Know About Statement 54?
Rainy Day / Stabilization FundsSatisfies the criteria for a Special Revenue Fund, only if the resources derive from a specific restricted or committed revenue source
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What else about Statement 54?
Policies and procedures of committed and assigned should be in the Summary of Significant Accounting Policies Committed:
Who is the highest level of decision making authority? What action is required to establish commitment?
Assigned Who can assign What is the policy of assignment
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What else about Statement 54? Encumbrances
Disappear from the face of the financial statements, other than what is already restricted
Disclosed in the notes Stabilization Disclosure
Notes should describe authority, requirements for additions, spending and balance
Minimum fund balance policies disclosed Implementation – periods beginning
after June 15, 2010
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Display in the Financial Statements
Either disaggregated or aggregatedComplex governments will probably
aggregate If aggregate on the face of the statements, no
requirement to present disaggregated numbers, unless important to financial statement usersDetail can be put in the notes
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How does it look? - Aggregated
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How does it look? - Disaggregated
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GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Codifies the 4 levels of GAAP, formerly in SAS
69 A. GASB Statements and Interpretations B. GASB Technical Bulletins and if applicable,
AICPA Industry Accounting and Auditing Guides and Statements of Position
C. AICPA technical practice bulletins D. GASB Implementation Guides
If it’s not in A, look at B-D. If not in A-D, look at other literature Immediate implementation
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Questions?Eric S. Berman, MSA, CPA
Deputy Comptroller Commonwealth of Massachusetts
617-973-2602
Email: [email protected]