slide 1 gasb update appa september 14, 2009 the views expressed in this presentation are those of...
TRANSCRIPT
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 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 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 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 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 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 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