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4/26/2016

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GASB UPDATE & AUDIT RISK ALERT

Presented by: Brian Barksdale May 4, 2016

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Speaker Info

• Brian Barksdale, CPA

• Carr, Riggs & Ingram

• Partner‐in‐charge of Birmingham office

• Governmental/Nonprofit Industry Line Leader

• [email protected]

• (205) 933‐7822

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Year Statement # Description

2015 68 Pension accounting for employers and nonemployer contributing entities

69 Government combinations

71 Pension transition

2016 72 Fair value measurement and application

76 GAAP hierarchy

Effective Dates – June 30 Year‐Ends & Later

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2017 73 Pensions not within the scope of #67 & 68

74 Financial reporting by OPEB plans

77 Tax abatement disclosures

78 Pensions provided through certain multiple‐employer defined benefit pension plans

79 Certain external investment pools and pool participants

80 Blending requirements for certain component units – amendment of GASB 14


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2017 82 Pension issues – an amendment of GASB 67, 68 and 73

2018 75 OPEB accounting for employers and nonemployer contributing entities

81 Irrevocable split‐interest agreements


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• Could easily spend all day on the most recent GASB pronouncements and exposure drafts

• Due to time limitations, will cover the ones that are effective soonest and those that will have more impact on our audience

Today’s Agenda

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• Attorneys?

• Actuaries?

• IRS Agents?

• Members of GASB?

Audience Questions

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GASB 68 ‐ Pensions

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Very brief info following – solely to add context to some of the other newer GASB standards

GASB 68 ‐ Pensions

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Effective Dates—Pensions

June 30, 2015Statement 68—Accounting and Financial Reporting for Pensions

Statement 71—Pension Transition for Contributions Made Subsequent to the Measurement Date

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Fundamental Approach

Old

Funding‐based Approach

(Ex: Mortgage)

New

Accounting‐based Approach

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Net Pension Liability

Recognize NPL in Accrual Based Financial Statements. (Cost Sharing Plans recognize proportionate share)

Total Pension Liability

PV of Projected Benefits for Past Service (Similar to

AAL)

Plan Net Position

Restricted Resources Held in Trust

Net Pension Liability

“Difference”

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Measurement Approach Illustrated

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Pension Expense Recognition

Immediate recognition as expense for all persons covered by the plan

More accelerated basis than what was required in the past

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Deferred Expense Recognition

The effects of the following would be reported as a deferred inflow or outflow of resources and then be amortized

Changes in actuarial assumptions

Differences between expected and actual changes in economic and demographic factors

Differences between expected and actual investment returns

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Disclosures

Numerous disclosure items

Many disclosures about the plan, actuarial assumptions used, etc.

10‐year schedules:

‐ Changes in Net Pension Liability

‐ Employer Contributions

‐ Investment Returns

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GASB 72 – Fair Value Measurement

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“Fair Value” is defined as an exit price: Price received to sell an asset (or paid to transfer a liability) in an orderly transaction.

Valuation techniques:

1) Market approach – based on market transactions

2) Cost approach – amount required to replace an asset

3) Income approach – converts future amounts to current (discounted) amount

GASB 72 Fair Value Measurement & Application

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Level 1 – quoted prices in active markets for identical assets or liabilities

Level 2 – observable inputs other than quoted prices

Level 3 – unobservable inputs

GASB 72 Hierarchy of Inputs

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Investments generally required to be measured at fair value.

Exceptions continue to include:• Money market investments• 2a7‐like external investment pools• Life insurance contracts• Common stock meeting criteria for equity method• Guaranteed investment contracts

Assets previously reported at fair value, now reported at “acquisition value” (an entry price):

– Donated capital assets– Donated works of art, historical treasures– Capital assets received in a service concession arrangement

GASB 72 Fair Value Application

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Acquisition value

The price that would be paid to acquire an asset with equivalent service potential or the amount for which a liability could be liquidated at the acquisition date.

GASB 72

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Entry‐price measurement


Type of Asset Current GASB GASB 72

Donated capital assets Estimated fair value at acquisition date plus ancillary charges

Acquisition value

Donated works of art or historical treasures

Historical cost or fair value at the date of donation

Acquisition value

Capital assets received in a service concession arrangement

Fair value Acquisition value

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Definition of Fair Value

FASB 157 GASB – Current Standards

GASB – New Standard 72

Fair value is the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date

The amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.


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Fair value measurements at end of reporting period

Level of the fair value hierarchy (except those at NAV)

Description of valuation technique Changes in valuation technique, if applicable For nonrecurring fair value measurements, the reason for the measurement

GASB 72 Fair Value Disclosures

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• When implemented, changes made to comply should be treated as an adjustment of prior periods. Statements presented for periods affected should be restated.

• If restatement for all prior periods presented is not practical – report the cumulative effect for the earliest period restated. And explain the reason for not restating earlier periods.

GASB 72 – Implementation Matters

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GASB 73 – More Pensions

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Accounting and Financial Reporting For Pensions and Related Assets That Are Not

Within The Scope of GASB 68, and Amendments to Certain Provisions of GASB 67

and 68

Effective – Years beginning after 6/15/2016 AND Years beginning after 6/15/2015


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• Impacts pensions WITHOUT a trust

• If the employer does not have a “special funding situation” – should record an obligation for the Total Pension Liability

• Discount rate to use – yield or index rate for 20‐year, tax‐exempt GO municipal bonds with average rating of AA/Aa or better


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• Assets accumulated for the payment of pension obligations that are NOT administered through a trust should NOT be accounted for as “pension plan assets”

• Required disclosures – similar to requirements of GASB 67 and 68 in the notes and RSI


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GASB 74 and 75 ‐ OPEB

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• 74 – Financial Reporting For Post‐Employment Benefit Plans Other Than Pension Plans

Effective – years beginning after June 15, 2016

• 75 – Accounting and Financial Reporting For Post‐Employment Benefits Other Than Pensions

Effective – years beginning after June 15, 2017


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• GASB issued #74 (plans) and #75 (employers) to make OPEB accounting & financial reporting consistent with the pension standards of #67 and #68

• Purpose – provide more transparent reporting of the OPEB liability and more useful information about both the obligation and the costs of benefits


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Plan and Asset Reporting

Scope – defined benefit and defined contribution OPEB plans administered through trusts that meet specified criteria

GASB 74 ‐ OPEB

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Also addresses assets that are accumulated for providing OPEB benefits that are NOT

administered through trusts that meet the criteria

• Assets are reported as assets in the employer’s governmental/proprietary funds

• Assets that are held for other governments –reported in an agency fund

GASB 74 ‐ OPEB

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• Not many changes from GASB 43 as far as financial statement recognition is concerned

• RSI and disclosure changes are primarily to reflect changes in the measurement of defined benefit liabilities of employers

GASB 74 ‐ OPEB

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Scope and Applicability to Employers:

Same definition of OPEB as used in GASB 45

(all post‐employment healthcare benefits and other benefits that are not provided through a pension plan)

GASB 75 ‐ OPEB

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Liability – based on the total OPEB liability –the portion of actuarial present value of projected benefit payments that is attributable to past periods of employee service

GASB 75 ‐ OPEB

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• Is OPEB administered through a trust that meets specified criteria?

• If yes, recognize the net OPEB liability (total OPEB liability minus OPEB plan fiduciary net position)

• If no, recognize the total OPEB liability

GASB 75 ‐ OPEB

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• Measurement date –

• The employer’s liability to employees is measured as of a date no earlier than the end of the employer’s prior fiscal year and no later than the employer’s current fiscal year

• Based on an actuarial valuation obtained at least biennially no more than 30 months and 1 day earlier than the employer’s most recent fiscal year‐end

GASB 75 ‐ OPEB

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Steps in measurement of the total OPEB liability

1. Project the benefit payments to be paid

2. Discount the projected benefit payments to their actuarial present value

3. Attribute the actuarial present value to periods

GASB 75 ‐ OPEB

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• Alternative measurement method may be applied if there are fewer than 100 employees (active and inactive) who are provided benefits through the plan as of the beginning of the measurement period

• Generally the same simplifications to the assumptions per GASB 45 can be utilized

GASB 75 ‐ OPEB

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Changes in the OPEB liability

Will record most changes in the liability for the current financial reporting period as immediate OPEB expense – except:

1. Changes in the total OPEB liability:

a. Differences between expected and actual experience related to economic and demographic factors in the measurement of the total OPEB liability

GASB 75 ‐ OPEB

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b. Changes of assumptions in the measurement of the total OPEB liability

2. For OPEB administered through a trust in which specified criteria are met:

a. Difference between projected and actual earnings on plan investments

b. Employer contributions

GASB 75 ‐ OPEB

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Cost‐sharing employers:

• Recognize proportionate share of collective net OPEB liability, OPEB expense, and deferred outflows/inflows related to OPEB

GASB 75 ‐ OPEB

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RSI and Note Disclosures

Similar to those required for pensions:

• Effect on net OPEB liability of a discount rate +/‐ 1 percent

• Effect on net OPEB liability of a healthcare cost trend rate +/‐ 1 percent

• 10 year schedules – liability, ratios, contributions, etc.

GASB 75 ‐ OPEB

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GASB 76 – GAAP Hierarchy

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Level Sources Due Process

A GASB Statements Formally approved by the GASB for the purpose of creating, amending, superseding or interpreting standards AND exposed for a period of public comment

B GASB Technical Bulletins and Implementation Guides; AICPA literature specifically cleared by GASB

Cleared by the GASB, specifically made applicable to state/local government entities AND exposed for a period of public comment


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The Hierarchy of GAAP For State and Local Governments

Effective for periods beginning after June 15, 2015 (applied retroactively)

Supersedes GASB 55


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GASB 55 was issued in 2009 and brought the requirements of SAS 69 into the GASB

pronouncements


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GASB 55 –

1. GASB Statements and Interpretations

2. GASB Technical Bulletins

3. AICPA Practice Bulletins

4. Implementation Guides Published by GASB

5. Other Sources


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• Reduces the GAAP hierarchy to two categories of authoritative GAAP

• Addresses the use of authoritative and nonauthoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP


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Comprehensive Implementation Guide

• Considered category B

• Revised due process, including –

1. Public exposure of new Q&A guidance

2. Will continue to issue guides to individual pronouncements

3. Board clearance of the final implementation guides


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New GASB codification delayed until March, 2016 – to get the new hierarchy included


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GASB 77 – Tax Abatements

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Tax Abatement Disclosures

Effective – years beginning after December 15, 2015


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Requires disclosures about a government’s tax abatement agreements

WHY?

“Information about revenues that governments agree to forgo is essential to understanding the financial position, economic condition, interperiod equity, sources and uses of financial resources and compliance with finance‐related legal or contractual requirements”


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Emphasis is on the substance of the arrangement meeting the definition in GASB 77, not on its name or form

Does not include all transactions that reduce tax revenues – some actions can cause a reduction in taxes but are not abatements


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Applies only to arrangements that meet this definition:

A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which:

(a) One or more governments promise to forgo tax revenues to which they are otherwise entitled ‐‐‐AND


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(b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments


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Disclosure Principles

• Disclosure info for similar tax abatements may be provided either individually or in the aggregate

• Disclose separately (a) its own tax abatements and (b) tax abatements that are entered into by other governments that reduce the reporting government’s tax revenues


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• Must disclose own tax abatements by major program

• Disclose those of other governments by the government and the specific tax that was abated

• May disclose individual abatements above the quantitative threshold established by the government


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• Disclosure commences in the period in which a tax abatement agreement is entered into and continues until the tax abatement expires, unless otherwise specified


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Brief Descriptive Info Government’s Own

Abatements

Other Government’s Abatements

Name of program X

Purpose of program X

Name of government X

Tax being abated X X

Authority to abate taxes X

Eligibility criteria X

Abatement mechanism X

Recapture provisions X

Types of recipient commitments X


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Other Disclosures Government’s Own Abatements

Other Government’s Abatements

Dollar amount of taxes abated X X

Amounts received or receivable from other governments associated with the abated taxes

X X

Other commitments by the government

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Quantitative threshold for individual disclosure

X X

Information omitted (if any) due to legal prohibitions

X X


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GASB #78 Pensions provided through certain multiple‐employer defined benefit pension plans

• Excludes certain plans from the scope of #68• Cost‐sharing multiple employer defined benefit plans that are:a. not a state or local governmental planb. used to provide benefits to both governmental and non‐governmental employers, andc. plans with no predominant gov’t employer

Other GASB Standards

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GASB #79 Certain external investment pools and pool participants

• Establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes.


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GASB #80 Blending requirements for certain component units – amendment of GASB #14

• Requires blending of a component unit incorporated as a not‐for‐profit corporation in which the primary government is the sole corporate member, as identified in the component unit’s articles of incorporation or bylaws.

• Does not alter GASB #39


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GASB #81 Irrevocable split‐interest agreements

• Giving agreements used by donors to provide resources to two or more beneficiaries

• Requires that a gov’t records assets, liabilities & deferred inflows at the agreement inception


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GASB #82 Pension issues – amendment of GASB #67, #68 and #73

• Addresses issues regarding:a. presentation of payroll‐related measures in RSIb. selection of assumptions and treatment of deviations from Actuarial Standard of Practicec. classification of payments made by employers to satisfy employee contribution requirements


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GASB Technical Agenda

www.gasb.org

What Lies Ahead??

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GASB Technical Agenda Overview

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Brief note – Financial Reporting Model Reexamination

Major criticism of governmental financial reports –that they are not available on a timely basis.

GASB will be looking for appropriate changes to the model that could positively impact the timeliness of reports.

Timeframe – FOREVER!!! (Actually thru May, 2021)


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2015/2016 Audit Risk Alert

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Economics are important to the audit:

• Need to understand the entity and its environment, including external factors

• Should understand both general and specific economic conditions facing governmental entities

Economic Environment

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• Changes in property tax values

• Changes in retail activity

• Changes in employment rates

• Population growth or reduction


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• International City/County Management Association released “State and Local Fiscal Facts 2015” in early 2015

• States expected to increase general fund revenue & spending for the 5th straight year

• Local property tax revenues expected to show positive growth

• Municipal employment increasing for the first time since 2008


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SEC initiative –Municipalities Continuing Disclosure Cooperation Initiative

• Goal – to address potentially widespread violations of Federal securities laws by municipal issuers and underwriters of municipal securities in connection with certain representations about continuing disclosures in bond offering documents

Securities and Exchange Commission

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Official Statement is prepared that offers municipal securities for sale

• These securities are exempt from most Federal securities laws

• SEC Rule 15c2‐12 imposes certain requirements on underwriters of municipal securities


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Because of SEC Rule 15c2‐12 issuers of most muni securities offerings provide certain disclosures (primary market disclosures) as well as at certain times thereafter (continuing disclosures)

• Annual financial condition of the issuer

• Material events that could impact the ability of the issuer to pay amounts owed on the debt


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Examples of “material events”

• Principal & interest payment delinquency

• Non‐payment related default, if material

• Unscheduled draw on debt service reserve

• Adverse tax opinion or event affecting tax‐exempt status

• Bond call, if material

• Rating change


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• Continuing disclosures are filed through the Electronic Municipal Market Access (EMMA) System

• Upload annual reports, financial data, etc.


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Consequences of failure to make required disclosures

• Failure to comply‐must be disclosed in future official statements

• If some proves a loss arising from the failure to disclose, action for damages can be filed

• Obligated Person must file a Notice of Failure to Comply


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MCDC Initiative

• Division of Enforcement of the SEC will recommend favorable settlement terms to issuers and underwriters if they self‐report possible violations


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• Auditors should educate clients that are municipal issuers about the SEC initiative

• Encourage to review their policies for ensuring compliance with continuing disclosure obligations


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• New OMB Uniform Guidance will have an impact on Single Audits

• Effective date for audit requirements – audits of fiscal years beginning on or after 12/26/2014. (Years ending 12/31/2015 and later)

• NOT permitted to early implement ANY of the audit provisions

Uniform Guidance

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Will bring changes to a variety of areas of Single Audit, including:

• Audit threshold

• Low risk auditee determination

• Major program determination

• Testing internal control and compliance

• Reporting

Uniform Guidance

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Questions?

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