2005 midwest regional professional development conference

2005 Midwest Regional2005 Midwest RegionalProfessionalProfessionalDevelopment Development ConferenceConference

Roberta ReeseRoberta Reese

May 12, 2005May 12, 2005

AGA Topeka AGA Topeka ChapterChapter

OverviewOverview

New Implementation GuideNew Implementation Guide Statement 40: Investment Statement 40: Investment

disclosuresdisclosures TB 2003-1: Derivatives disclosuresTB 2003-1: Derivatives disclosures Statement 46: Restricted net assetsStatement 46: Restricted net assets Pollution remediation obligationsPollution remediation obligations Sales and pledgesSales and pledges Statement 44: Statistical sectionStatement 44: Statistical section

Comprehensive Comprehensive Implementation Guide Implementation Guide

– Released in September 2004Released in September 2004– Updates the 2003 edition Updates the 2003 edition

which consolidated the which consolidated the existing guidesexisting guides

– Statement 40 Guide Statement 40 Guide incorporatedincorporated

– 800 pages, includes 1,245 800 pages, includes 1,245 questionsquestions

– Exhibits and exercisesExhibits and exercises– Annual updatesAnnual updates

2004

Issued Issued

March 2003March 2003Effective for Periods Effective for Periods

Beginning After June 15, Beginning After June 15, 20042004

Statement No. 40—Statement No. 40—Deposit and Investment Deposit and Investment Risk DisclosuresRisk Disclosures

Deposits and Deposits and Investments RisksInvestments Risks Risks are the focusRisks are the focus

– Fair value considers variabilities of Fair value considers variabilities of cash flows discounted for time value cash flows discounted for time value and riskand risk

Disclosures by Disclosures by Investment TypeInvestment Type Investments should be organized Investments should be organized

by investment type, such as:by investment type, such as:– U.S. TreasuriesU.S. Treasuries– Corporate bondsCorporate bonds– Commercial paperCommercial paper

Dissimilar investments should not Dissimilar investments should not be aggregatedbe aggregated

Level of DetailLevel of Detail

Generally, the disclosures should Generally, the disclosures should be made for the primary be made for the primary government for which disclosures government for which disclosures are essential for fair presentationare essential for fair presentation

Level of DetailLevel of Detail

Risk disclosures should also be made for:Risk disclosures should also be made for:– governmental and business-type activities, governmental and business-type activities, – individual major funds, individual major funds, – nonmajor funds in the aggregate, or nonmajor funds in the aggregate, or – fiduciary fund types fiduciary fund types

when the risk exposures are significantly when the risk exposures are significantly greater than the deposit and investment greater than the deposit and investment risks of the primary governmentrisks of the primary government

Level of Detail—Level of Detail—An ExampleAn Example A capital projects fund, because of its A capital projects fund, because of its

investment in one issuer of corporate investment in one issuer of corporate bonds, is exposed to a concentration of bonds, is exposed to a concentration of credit risk. However, the primary credit risk. However, the primary government’s total investments might government’s total investments might not indicate a concentration risk. In this not indicate a concentration risk. In this case, additional disclosure should be case, additional disclosure should be made for the capital projects fund’s made for the capital projects fund’s exposure to a concentration of credit exposure to a concentration of credit risk.risk.

Interest Rate RiskInterest Rate Risk

The risk that changes in interest rates The risk that changes in interest rates may adversely affect an investment’s fair may adversely affect an investment’s fair valuevalue

Five methods identified, must choose Five methods identified, must choose one:one:– Specific identificationSpecific identification– Weighted average maturityWeighted average maturity– DurationDuration– Simulation modelSimulation model– Segmented time distributionsSegmented time distributions

Specific IdentificationSpecific Identification

MaturitiesMaturities Fair ValueFair Value

State investment poolState investment pool Not applicableNot applicable $1,506,980$1,506,980

U.S. Treasury billU.S. Treasury bill Jan 2003Jan 2003 452,980452,980

Government National Government National Mortgage AssociationMortgage Association Mar 2003Mar 2003

282,230282,230

ABC Corp. commercial paperABC Corp. commercial paper Jan 2003Jan 2003 350,000350,000

DEF Corporation bondsDEF Corporation bonds Mar 2004Mar 2004 50,00050,000

TotalTotal $2,642,190$2,642,190

Fair Fair ValueValue < 1< 1 1-51-5 6-106-10 > 10> 10

ReposRepos $150$150 $150$150

U.S. TreasuryU.S. Treasury 6262 4545 1717

Corporate bondsCorporate bonds 4646 55 3535 44 22

Certificate of Certificate of depositdeposit

8585

6060 2525 __ __

TotalTotal 343343 260260 7777 44 22

Segmented Time Segmented Time DistributionDistribution

Highly Sensitive Highly Sensitive InvestmentsInvestments A debt investment with contract A debt investment with contract

terms that make the investment’s terms that make the investment’s fair value highly sensitive to fair value highly sensitive to interest rate changesinterest rate changes

Highly Sensitive Highly Sensitive Investments: Examples Investments: Examples Inverse floatersInverse floaters Variable coupons with multiplier Variable coupons with multiplier

[for example, coupon varies by [for example, coupon varies by 125% of London Interbank 125% of London Interbank Offered Rate (LIBOR)]Offered Rate (LIBOR)]

Collateralized mortgage Collateralized mortgage obligations, such as interest-only obligations, such as interest-only or residual tranchesor residual tranches

Credit RiskCredit Risk

Disclose credit quality as of year-endDisclose credit quality as of year-end Includes corporate debt, state and Includes corporate debt, state and

local governments, external local governments, external investment poolsinvestment pools

Exempt: Debt investments with Exempt: Debt investments with explicit guarantee of US governmentexplicit guarantee of US government—GNMA—GNMA

If not rated, indicate as muchIf not rated, indicate as much

Custodial Credit RiskCustodial Credit Risk

Disclose only “Category 3”Disclose only “Category 3”– Deposits that are uninsured and Deposits that are uninsured and

uncollateralizeduncollateralized– Uninsured investments that are Uninsured investments that are

either held by the: either held by the: Counterparty, or Counterparty, or Counterparty’s trust department, but Counterparty’s trust department, but

not in the name of the governmentnot in the name of the government

Concentration of Concentration of Credit RiskCredit Risk Defined as investments of more Defined as investments of more

than 5 percent in any one issuerthan 5 percent in any one issuer Excluded: Excluded:

– US government debtUS government debt– Debt explicitly guaranteed by the US Debt explicitly guaranteed by the US

governmentgovernment– Pooled investments such as mutual Pooled investments such as mutual

funds or external investment poolsfunds or external investment pools

Foreign Currency RiskForeign Currency Risk

Applies to deposits and Applies to deposits and investmentsinvestments

Disclose currencyDisclose currency If debt security, disclose interest If debt security, disclose interest

rate riskrate risk

Deposit and Deposit and Investment PoliciesInvestment Policies Disclose only those policies that Disclose only those policies that

are relevant to the risks that are are relevant to the risks that are disclosed disclosed

In other words, if there is no risk In other words, if there is no risk disclosure, no policy disclosure is disclosure, no policy disclosure is requiredrequired

Effective DateEffective Date

Fiscal years beginning after June Fiscal years beginning after June 15, 200415, 2004

Earlier application is encouragedEarlier application is encouraged

Technical Bulletin Technical Bulletin 2003-012003-01

Disclosures for Derivatives Disclosures for Derivatives Not Reported at Fair ValueNot Reported at Fair Value

Derivatives—Derivatives—DisclosuresDisclosures Previous guidance provided in Previous guidance provided in

Technical Bulletin 94-1Technical Bulletin 94-1 Final TB issued in June 2003Final TB issued in June 2003 Effective date—Periods ending Effective date—Periods ending

after June 15, 2003 (FYE June 30, after June 15, 2003 (FYE June 30, 2003)2003)

Derivatives—Derivatives—DisclosuresDisclosures Objective of the derivativeObjective of the derivative Significant termsSignificant terms

– Notional amountNotional amount– Interest ratesInterest rates– Embedded optionsEmbedded options– Effective date and ending dateEffective date and ending date

Fair valueFair value

Derivatives—Derivatives—DisclosuresDisclosures RisksRisks

– CreditCredit– Interest rateInterest rate– BasisBasis– TerminationTermination– RolloverRollover– Market accessMarket access

Associated debt—effect of the Associated debt—effect of the derivative on net cash flowderivative on net cash flow

Statement 46: Net Statement 46: Net Assets Restricted by Assets Restricted by Enabling LegislationEnabling Legislation

Net AssetsNet Assets

Two Issues:Two Issues:– Clarifies “legally enforceable”Clarifies “legally enforceable”– Requires separate reporting of net Requires separate reporting of net

assets restricted by enabling assets restricted by enabling legislationlegislation


Enabling legislationEnabling legislation authorizes the authorizes the government to assess, levy, charge, government to assess, levy, charge, or otherwise mandate payment of or otherwise mandate payment of resources (from external resource resources (from external resource providers) providers) andand includes a includes a legally legally enforceableenforceable requirement that those requirement that those resources be used only for the resources be used only for the specific purposes stipulated in the specific purposes stipulated in the legislation legislation


Legally Enforceable:Legally Enforceable:– The government can be compelled The government can be compelled

by an external party to use by an external party to use resources only for a specific purposeresources only for a specific purpose

– Based on presumption (and legal Based on presumption (and legal opinion?)opinion?) May never be provenMay never be proven

– ““Tainting” the pool?Tainting” the pool?


““New” enabling legislation to New” enabling legislation to replace existing lawreplace existing law– New resourcesNew resources– Remaining balancesRemaining balances

Noncompliant use of restricted Noncompliant use of restricted assetsassets– Re-evaluate classificationRe-evaluate classification

Reclassify as unrestrictedReclassify as unrestricted Maintain restrictionMaintain restriction


Net assets restricted by enabling Net assets restricted by enabling legislation should be displayed legislation should be displayed separately from other restricted separately from other restricted assetsassets– To emphasize different level of To emphasize different level of

influenceinfluence

Pollution Pollution Remediation Remediation ObligationsObligations

Pollution Remediation Pollution Remediation ObligationsObligations What types of obligations are out What types of obligations are out

there?there?– Range from superfund sites to Range from superfund sites to

brownfieldsbrownfields Issues addressed in the projectIssues addressed in the project

– What is the obligating event?What is the obligating event?– How should the obligation be measured?How should the obligation be measured?

Preliminary Views documentPreliminary Views document

Pollution Remediation Pollution Remediation ObligationsObligations ScopeScope

– Pollution remediation obligationsPollution remediation obligations Except Statement 18 (landfills)Except Statement 18 (landfills)

– No asset retirement obligationsNo asset retirement obligations– No pollution prevention obligationsNo pollution prevention obligations

Cost accumulation, not fair value Cost accumulation, not fair value Current cost, not present valueCurrent cost, not present value Expected cash flow, rather than best Expected cash flow, rather than best

estimateestimate

Two ContingenciesTwo ContingenciesNeither is ProbableNeither is Probable

Potential payment Probability (a) x (b)$0 60% $0

$200 40% $80$80.00

Potential payment Probability (a) x (b)$0 60% $0

$200 40% $80$80.00

Probable TogetherProbable Together

Permutations of Potential Payments JointContingency 1 Contingency 2 Total Probabilities

$0 $0 $0 36.0%$0 $200 $200 24.0%

$200 $0 $200 24.0%$200 $200 $400 16.0%

100.0%

Pollution Remediation Pollution Remediation ObligationsObligations Recognition triggers—liability when:Recognition triggers—liability when:

– Imminent endangerment compels actionImminent endangerment compels action– Named as responsible partyNamed as responsible party– Named in lawsuit to enforce actionNamed in lawsuit to enforce action– Cleanup or containment commencedCleanup or containment commenced

Recognize component when Recognize component when measurable (benchmarks approach)measurable (benchmarks approach)

Pollution Remediation Pollution Remediation ObligationsObligations Current cost based on Current cost based on reasonable reasonable

and supportable assumptionsand supportable assumptions about future events about future events – laws expected to be in effectlaws expected to be in effect– technology expected to be used technology expected to be used

Pollution Remediation Pollution Remediation ObligationsObligations What costs are to be included in What costs are to be included in

liability?liability?– Pre-cleanup site assessment, feasibility Pre-cleanup site assessment, feasibility

study, design, etc.study, design, etc.– Cleanup, containment, disposal activitiesCleanup, containment, disposal activities– Oversight and enforcement costsOversight and enforcement costs– Operation and maintenance of the remedy Operation and maintenance of the remedy

and monitoringand monitoring Entity must decide whether to include Entity must decide whether to include

indirect and non-incremental costsindirect and non-incremental costs

Pollution Remediation Pollution Remediation ObligationsObligations What is the debit entry?What is the debit entry?

– Generally expenseGenerally expense– Can defer expense under FASB Stmt Can defer expense under FASB Stmt

7171– Capitalize in certain situationsCapitalize in certain situations

Do NOT record liabilities for Do NOT record liabilities for capitalizable costs!capitalizable costs!

Pollution Remediation Pollution Remediation ObligationsObligations Capitalize ifCapitalize if

– Cleanup to prepare property for sale Cleanup to prepare property for sale (limited to FV)*(limited to FV)*

– Polluted property bought and cleaned Polluted property bought and cleaned for service (cap)*for service (cap)*

– Asset impaired and cleanup restores Asset impaired and cleanup restores lost service utility (cap)lost service utility (cap)

* Capitalize if incurred within a reasonable period* Capitalize if incurred within a reasonable period

Pollution Remediation Pollution Remediation ObligationsObligations Recoveries—net against expenseRecoveries—net against expense

– Recoveries from other partiesRecoveries from other parties Recognize consistent with liability Recognize consistent with liability

(expected cash flow technique)(expected cash flow technique)

– Insurance recoveriesInsurance recoveries Recognize as separate recovery assets Recognize as separate recovery assets

when realized or realizablewhen realized or realizable If not realized or realizable—offset If not realized or realizable—offset

against liabilitiesagainst liabilities

Pollution Remediation Pollution Remediation ObligationsObligations AccretionAccretion

– Adjust liability annually for changesAdjust liability annually for changes Inflation or deflationInflation or deflation Price increases/decreases for specific Price increases/decreases for specific

cost elementscost elements Changes in technologyChanges in technology Changes in laws or regulationsChanges in laws or regulations

– Same as Statement 18Same as Statement 18

Pollution Remediation Pollution Remediation ObligationsObligations

Timetable:Timetable: Preliminary Views—March 2005Preliminary Views—March 2005 Exposure Draft—December 2005Exposure Draft—December 2005 Statement—Fall/Winter 2006Statement—Fall/Winter 2006

Sales and Pledges of Sales and Pledges of Receivables and Future Receivables and Future RevenuesRevenues

Sales and PledgesSales and Pledges

Scope of the project—government Scope of the project—government receives proceeds from a third party in receives proceeds from a third party in exchange for the rights to future cash exchange for the rights to future cash flows from:flows from:– Receivables:Receivables:

Delinquent property taxesDelinquent property taxes Uncollected finesUncollected fines Mortgages Mortgages Student loansStudent loans

– Future revenuesFuture revenues


Scope of the project:Scope of the project: Also includes situations in which Also includes situations in which

the government does not receive the government does not receive proceeds, but pledges future cash proceeds, but pledges future cash flowsflows– Primary government pledges Primary government pledges

revenues to debt-issuing component revenues to debt-issuing component unitunit


Added to the agenda in 2004:Added to the agenda in 2004: TB 2004-1 (tobacco settlement) TB 2004-1 (tobacco settlement)

concernsconcerns Budgetary pressures to accelerate cash Budgetary pressures to accelerate cash

flowsflows Current lack of disclosures about Current lack of disclosures about

pledged revenues pledged revenues Need for government-specific Need for government-specific

standardsstandards


Sale or borrowing?Sale or borrowing? Intent of the parties, terms of the Intent of the parties, terms of the

agreementagreement Continuing involvement—controlContinuing involvement—control

– Does the transferor government retain Does the transferor government retain control, or is control relinquished?control, or is control relinquished?

– Criteria for receivablesCriteria for receivables– Criteria for salesCriteria for sales


Are receivables sold or pledged?Are receivables sold or pledged? Transferee’s ability to sell or pledgeTransferee’s ability to sell or pledge Isolation Isolation

– Legally separate Legally separate – No access to cash No access to cash – Source and timing of paymentsSource and timing of payments– Satisfaction of accountsSatisfaction of accounts– Bankruptcy protectionBankruptcy protection

Obligation to replace or repurchase Obligation to replace or repurchase accountsaccounts


Are future revenues sold or pledged?Are future revenues sold or pledged? Transferee’s ability to sell or pledgeTransferee’s ability to sell or pledge Transferor’s continuing active Transferor’s continuing active

involvement in the generation of the involvement in the generation of the revenuesrevenues– Excludes own-source revenuesExcludes own-source revenues

TaxesTaxes User chargesUser charges

– Grants, entitlementsGrants, entitlements


If not a sale (collateralized borrowing):If not a sale (collateralized borrowing): Pledging government:Pledging government:

– Recognizes liability for the proceedsRecognizes liability for the proceeds– Does not de-recognize receivablesDoes not de-recognize receivables– Continues recognition of revenues pledgedContinues recognition of revenues pledged– Payments reduce liability (G/F Payments reduce liability (G/F

expenditure)expenditure) Transferee government recognizes a Transferee government recognizes a

receivable receivable


Meets the conditions for sale treatment:Meets the conditions for sale treatment: Selling government:Selling government:

– De-recognizes receivablesDe-recognizes receivables– No asset to de-recognize for future revenuesNo asset to de-recognize for future revenues– Difference between proceeds and carrying Difference between proceeds and carrying

value is gain (loss)value is gain (loss) Purchasing government:Purchasing government:

– Intra-entity—asset at carrying valueIntra-entity—asset at carrying value– Outside of the reporting entity—asset at costOutside of the reporting entity—asset at cost


Other assets and liabilities:Other assets and liabilities: Residual interests—subordinate Residual interests—subordinate

note/certificatenote/certificate– Excess receivable collectionsExcess receivable collections– Excess future revenuesExcess future revenues

Recourse and other obligationsRecourse and other obligations Servicing fees—deferred revenues Servicing fees—deferred revenues

and chargesand charges


Pledging government does not Pledging government does not receive proceeds:receive proceeds:– Government may be prohibited or Government may be prohibited or

have limited ability to issue debthave limited ability to issue debt– Creates/uses component unit to issue Creates/uses component unit to issue

debtdebt– Pledge does not constitute a liabilityPledge does not constitute a liability– Liability arises when pledged revenue Liability arises when pledged revenue

is recognizedis recognized


Disclosures:Disclosures:– Required for direct or indirect pledgesRequired for direct or indirect pledges

What revenue?What revenue? Purpose of the debtPurpose of the debt For how long?For how long? Significance of pledged amountSignificance of pledged amount

– Required for future revenues sold:Required for future revenues sold: What revenue?What revenue? For how long?For how long? Significance of amount soldSignificance of amount sold

Statement No. 44Statement No. 44

Economic Condition Economic Condition Reporting:Reporting:

The Statistical The Statistical SectionSection

The Statistical SectionThe Statistical Section—Objectives—Objectives

For assessing economic condition:For assessing economic condition: Provide perspective, context, and Provide perspective, context, and

detail relative to the financial detail relative to the financial statementsstatements

Provide information (outside the Provide information (outside the financial statements) about the financial statements) about the demographic and economic demographic and economic environmentenvironment

The Statistical SectionThe Statistical Section

Applicability:Applicability: Any government that provides a Any government that provides a

statistical sectionstatistical section

Focus:Focus: On the primary governmentOn the primary government

Status:Status: Supplementary informationSupplementary information

Types of Statistical Types of Statistical Section InformationSection Information

Financial trends informationFinancial trends information Revenue capacity information—factors affecting Revenue capacity information—factors affecting

ability to generate own-source revenuesability to generate own-source revenues Debt capacity informationDebt capacity information Demographic and economic informationDemographic and economic information

– Understand socio-economic environmentUnderstand socio-economic environment– Facilitate comparisons over time and among Facilitate comparisons over time and among

governmentsgovernments Operating information—contextual information Operating information—contextual information

about operations and resourcesabout operations and resources

Transition ProvisionsTransition Provisions

Effective Date: Periods Beginning Effective Date: Periods Beginning after June 15, 2005after June 15, 2005

Retroactive reporting encouraged, Retroactive reporting encouraged, but not requiredbut not required

Encouraged, but not required, to Encouraged, but not required, to report government-wide information report government-wide information retroactively to the year Statement retroactively to the year Statement 34 was implemented34 was implemented

Other ProjectsOther Projects

TB 2004-2, TB 2004-2, Recognition of Pension and Recognition of Pension and Other Postemployment Benefit Other Postemployment Benefit Expenditures/Expenses and Liabilities Expenditures/Expenses and Liabilities by Cost-Sharing Employersby Cost-Sharing Employers

Accounting for Termination BenefitsAccounting for Termination Benefits, , ED released December 10, 2004, ED released December 10, 2004, comment period ended March 11, comment period ended March 11, 20052005

Derivatives and hedgingDerivatives and hedging Electronic reportingElectronic reporting

Questions:Questions:

Roberta Reese:Roberta Reese:– Telephone—(203) 847-0700 X324Telephone—(203) 847-0700 X324– E-mail: E-mail: [email protected]@gasb.org

Web site—www.gasb.orgWeb site—www.gasb.org

2005 midwest regional professional development conference

Documents

debt investments

investment disclosurestb

investment risks

investment typeinvestments

investments risksrisks

concentration risk

concentration of credit

time value