Governmental Accounting Update
AGA Winter Seminar
January 19, 2010
Gerry Boaz,
Technical Manager,
Tennessee Division
of State Audit
1
Objective

Provide an update on recently (and soon
to be) issued and effective
pronouncements





Statements
Interpretations
Technical bulletins
Concepts statements
Implementation Guides
2
Agenda

Effective for 6/30/2009
Standards that should
already be
implemented




GASB 49
GASB 52
GASB 55
GASB 56
Effective for 6/30/2010
 FY2010 Standards



Effective for 6/30/2011
FY2011 Standards


GASB 54
Proposed Standards






Pensions Invitation to
Comment
OPEB
Chapter 9 Bankruptcy
Financial Instruments
Service Concessions
Voluntary Reporting of Service
Efforts and Accomplishments
GASB 51
GASB 53
3
What was he thinking?
The views and opinions
expressed in this
presentation are those of
the speaker. Official
positions of the TN
Comptroller of Treasury
and the TN Division of
State Audit are
determined only after
extensive due process
and deliberation.
4
5
Standards to be implemented
in 2010
GASB 51 and 53
6

GASB 51,
Accounting and
Financial Reporting
For Intangible
Assets
7
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
8
Description

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
9
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
10
Recognition

An intangible asset should only be
recognized if it is identifiable:
 The asset is separable from the
government; or
 The asset arises from contractual or
other legal rights, regardless of whether
rights are separable
11
Classification


All intangible assets subject to provisions should be
classified as capital assets
Apply existing authoritative guidance related to the
accounting and financial reporting for capital assets as
appropriate:







Recognition
Measurement
Depreciation (amortization for intangible assets)
Impairment (GASB 42 e.g., generic drugs)
Presentation
Disclosures
Rest of standard provides guidance specific to
intangibles that should be applied in addition to, or in
lieu of if appropriate, capital asset guidance
12
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
13
Internally Generated Intangible Assets
Two characteristics:
 Are created or produced by the government or
an entity contracted by the government, or
 Are acquired from a third party but require
more than minimal incremental effort on the
part of the government to begin to achieve
their expected level of service capacity.
14
Internally generated computer software
Supersedes AICPA SOP 98-1
Preliminary
Development
Operations
Determination of
project and service
capacity and is
feasible
Management authorizes Software is
and commits to funding accepted and
operating
Demonstration that
intent is there to
complete project
Software is coded,
tested, and
implemented
EXPENSE
CAPITALIZE
EXPENSE
Future betterments that add to useful life--Capitalize
15
Impairment Indicator

Common indicators of impairment for
internally generated intangible assets


development stoppage, such as stoppage of
development of computer software due to a
change in the priorities of management (similar to
GASB 42 ¶9)
Reported at the lower of carrying value or fair
value.
16
Best Practices

RETROACTIVE IMPLEMENTATION
Go look for intangibles starting NOW
 Include legal counsel help as well as IT
staff

17
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
18
GASB 53,
Accounting and
Financial
Reporting for
Derivative
Instruments
19
20
Derivatives Notional amounts
outstanding, 1987-present
$700,000
$600,000
Millions
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
21
Types of Derivatives Encountered
12%
9%
8%
68%
2%
1%
Foreign Exchange Contracts
Equity - Linked Contracts
Credit Default Swaps
Interest Rate Contracts
Commodity Contracts
Other
% of notional amounts outstanding – as of June
2008 – Source Bank for International Settlements
22
Scope Outs





Investments
Normal purchases and
normal sales contracts
Traditional insurance
contracts
Traditional financial
guarantee contracts
Nonexchange-traded
climate contracts,
liquidated damages, etc.
23
What is a Derivative Instrument for
Financial Reporting Purposes?
A derivative instrument has:
1.
2.
3.
One or more reference rates (underlyings) and
one or more notional amounts
Leverage
Net settlement
24
Examples of Derivatives

Interest rate swap



Basis swap


Exchange payments based on the changes of two variable rates
Swaption


Variable-rate to fixed-rate
Fixed-rate to variable-rate
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
25
Government Sector Derivatives

Commodity derivatives
 Any governmental entity that
purchases commodities for use in
operations or for production of
electricity (public utilities,
transportation authorities, school
districts)
 Futures contracts
 Forward contracts
 Commodity swaps
26
Basic Approach
Fair value with hedge accounting

Derivative instruments are measured on the
statement of net assets at fair value

Fair value changes are reported on the
statement of resource flows as investment
income

Exception: Effective Hedges


Changes in fair value of derivative instruments
would be reported on the statement of net assets
as deferrals—either deferred charges or deferred
credits
Scope Exclusion: Measurement of derivatives
in government funds
27
What Does That Mean?



Derivative instruments meet the definition of an asset
or liability in Concepts Statement 4
Derivative instruments should be measured at fair
value
Two classifications of derivatives:
1. Hedging derivatives—changes in fair value
apply to future accounting periods → Hedge
accounting
2. Investment derivatives—changes in fair value
apply to the current accounting period →
Investment accounting
28
Cash Flow Hedge: Variable-to-Fixed
Interest Rate Swap
Fixed payment 5.75%
State or local
government
Variable-rate
coupon
payments
Swap counterparty
Variable-rate coupon
payments
Variable-rate
bond holders
29
Hedge Accounting


Hedge accounting MUST be applied if there
is: *
Association: Derivative instrument is
associated with a hedgeable item
Substantial Offset: Derivative instrument is
effective in substantially offsetting cash flow
or fair value changes in the hedgeable item
*Hedge accounting is NOT an option, and documentation
is encouraged, but NOT required
30
Hedgeable Items

Single asset or liability

Groups of similar assets or liabilities must
have same risk exposure

Expected transaction—occurrence should
be probable

Specific risks of financial instruments, such
as interest rate risk
31
What Doesn’t Qualify for Hedge
Accounting


Do not need hedge accounting
for investments
Transactions within the primary
government do not qualify for
hedge accounting
32
What is “Effective” for Financial
Reporting Purposes?

Effectiveness is
established when the
derivative instrument
substantially-offsets
either the cash flows or
fair values of the
hedgeable item
33
Methods of Evaluating Effectiveness
Effectiveness is determined by using a
specified method of evaluating hedges
Qualitative method


Consistent critical terms
Quantitative methods





Synthetic instrument
Linear regression
Dollar offset
Other method – see characteristics
34
Other Quantitative Methods

Must:




Demonstrate changes offset
each other
Generate replicable, consistent
evaluations of effectiveness
Incorporate consideration of
substantive characteristics of
derivative and hedgeable item
that could affect cash flows or
fair values
Be disclosed with detail
35
If Effectiveness is Established:

Hedge accounting:


Derivative is reported at fair value in the
statement of net assets
Fair value changes are deferred until a future
period (when there is a termination of the
hedging relationship)
36
Deferred Inflows and Outflows
Journal Entries for Effective Hedges

Derivative A ↑ FV:
Derivative A
10
Deferred Inflow 10

Derivative B ↓ FV:
Deferred Outflow 20
Derivative B
20
Statement of Net Assets
Assets
Cash
5
Derivative Instruments
10
Deferred Outflow
20
Liabilities and Fund Balance
Debt
5
Derivative Instruments
20
Deferred Inflow
10
*Only Govt-Wide Stmts Shown
37
If Effectiveness Is NOT
Established:

Investment Accounting:*


Derivative is reported at fair value in the
statement of net assets
Fair value changes are recognized in the
current period
*Other GASB Statements related to investment accounting
include GASB Statements 3, 31, and 40
38
Derivative Disclosures


Similar derivatives instruments may be
aggregated
Summary of derivative instrument activity by:
1.
Government activities, business-type activities, and
fiduciary activities
2. Then by fair value hedges, cash flow hedges, and
investment derivative instruments
3. Then by type:

Notional amount

Fair values and changes and where reported

Fair values and amounts reclassified from hedge
to investment
39
Derivative Disclosures

Disclosures for HEDGING derivative instruments




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

No disclosure of hedge ineffectiveness

Disclosures for INVESTMENT derivative
instruments

Risks: credit, interest rate, foreign currency
40
Derivative Disclosures

Contingencies (e.g., collateral postings)





Fair value of derivative instruments with feature
Amount of all potential settlements
Amounts posted
Hedged debt
Synthetic guaranteed investment contracts


Description and nature
Fair values


Wrap contract
Underlying investments
41
GASB Statement 53 Summary

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
42
GASB 53 Summary Reminder



Derivatives instruments are reported on the
statement of net assets and measured according
to their fair values
Fair value changes are reported on the change
statement, provided a derivative instrument is
not a hedging derivative instrument
If a derivative instrument is a hedging derivative
instrument, its fair value changes are deferred
on the statement of net assets until the hedged
transaction occurs
43
GASB 53 Effective Date
Standard is effective for reporting periods
beginning after June 15, 2009
With help from the GASB Derivatives
Implementation Guide!
44
GASB 54, Fund
Balance
Reporting and
Governmental
Fund Type
Definitions
45
What Do You Need to Know About
Statement 54?


New presentation hierarchy based primarily on
spending constraints placed upon use of resources
versus availability for appropriation
New presentation classifications:





Non-spendable—Inventory, LT receivables, permanent
fund
Restricted—GASB 34/46 definition
Committed—Formal action of governing body
Assigned—Similar to designations expressing intent
Unassigned
46
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.
47
Additional Changes

New note disclosures required

Committed fund balance



Government’s highest level of decision-making
authority
The formal action that is required to be taken to
establish (and modify or rescind) a FB commitment
Assigned fund balance


The body of official authorized to assign amounts to a
specific purpose
The policy established by the governing body pursuant
to which that authorization is given
48
Additional Changes (cont.)

Classification in accordance with ¶18


Whether the government considers restricted or
unrestricted amounts to have been spent when an
expenditure is incurred for purposes for which both are
available
Whether committed, assigned, or unassigned amounts
are considered to have been spent when an expenditure
is incurred for purposes for which amounts in any of
those unrestricted balance classifications could be used
49
Additional Changes (cont.)

Addresses classification of “stabilization” or
“rainy day” amounts




The authority for establishing stabilization
arrangements (statute or ordinance)
The requirements for additions to the stabilization
amount
The conditions under which stabilization amounts
may be spent
The stabilization balance, if not apparent on the
face of the financial statements
50
What else about Statement 54?

Encumbrances

Disappear from the face of the financial
statements, other than what is already restricted


Stabilization Disclosure



Disclosed in the notes
Notes should describe authority, requirements for
additions, spending and balance
Minimum fund balance policies disclosed
Implementation – periods beginning after
June 15, 2010
51
Display in the Financial Statements

Either disaggregated or aggregated


Complex governments will probably
aggregate
If aggregate on the face of the statements,
no requirement to present disaggregated
numbers, unless important to financial
statement users

Detail can be put in the notes
52
How does it look? - Aggregated
53
How does it look? - Disaggregated
54
55
A Look into the Crystal Ball
Current Projects








Pension Accounting and Financial Reporting
Service Concession Arrangements
Service Efforts and Accomplishments Reporting
Statement 14 (Reporting Entity) Reexamination
Recognition and Measurement Attributes –
Concepts Statement
Chapter 9 Bankruptcies
Financial Instruments Omnibus
Codification of FASB Pronouncements (preNovember 1989)
56
Scope of the
Postemployment Benefits Project

Basic approach





Recognition of employer pension liabilities and expenses
How the actuarial liability should be measured




Funding base with parameters
Liability driven
Something in between
Handling projected future changes
Basis for determining a discount rate
Cost sharing allocations for employers
Plan reporting
57
Service Concession Arrangements

Who should report the capital asset in a service
concession arrangement—transferor versus the
operator?



The transferor determines or regulates what services the
operator is required to provide and how the operator is
required to provide them with the property, 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.
58
SEA Reporting—Scope

What the project is:




Focus on voluntary reporting
Focus on suggested guidelines
Focus on clarifying GASB’s role
What the project is not:



Establishing performance measures
Establishing performance benchmarks
Requiring SEA Reporting
59
Performance Management System
Strategic Planning
Program or
Activity Planning
EXTERNAL
REPORTING
Internal Reporting
Government
Performance
Management
System
Selecting
Performance
Measures
Performance- Based
Budgeting
Evaluating
Performance
Managing Work
Processes
1
60
Proposed Essential Components of
Effective SEA Reports




Purpose and Scope
Major Goals and Objectives
Key Measures of SEA Performance
Discussion and Analysis of Results and
Changes
61
Proposed Qualitative Characteristics of SEA
Performance Information






Relevance
Understandability
Comparability
Timeliness
Consistency
Reliability
62
Statement 14 Reexamination






Fiscal dependency—is it enough?
Misleading to exclude criteria for inclusion
Blending versus discrete presentation
Criteria for major component units
Fiduciary activities
Disclosures
63
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)
64
Chapter 9 Bankruptcies



Not a signal that GASB knows that more
bankruptcies are coming
Will provide guidance on liability restructuring
Comment deadline has passed
65
Financial Instruments Omnibus

Will address significant issues that have
arisen since the release of:




Statement 31
Statement 40
Statement 53
Comment deadline has passed
66
Research Agenda





Economic Condition Reporting
Electronic Financial Reporting
Fair Value Measurement
Certain OPEB Implementation Issues
Fiscal sustainability
67
GASB Website—www.gasb.org






Downloads and ordering information
(Exposure documents, Statements, Q&As)
Summaries of standards
Project pages
Technical inquiry form
Staff contacts
http://www.gasb.org/tech/index.html (GASB
20 paragraph 7 guidance)
68
Questions?
Gerry Boaz, CPA, CGFM
TN State Audit Technical
Manager
phone: (615) 747-5262
email: [email protected]
or
GASB Phone: (203) 847-0700
WWW.GASB.ORG
69
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