precision experience assurance gasb update purvis gray & company llp june, 2011 mark a. white...

Precision Experience Assurance

GASB UpdatePurvis Gray & Company LLP

June, 2011

Mark A. White CPA, PartnerPurvis Gray & Company, LLP

Ocala, Florida


Accounting Profession Reacts to New GASB Statements

Accounting Profession Reacts to New GASB Statements


Historical Perspective GASB was established by the Financial Accounting Foundation (FAF)

in 1984 They were delegated the authority to establish GAAP for state and local

governments—authoritative GASB Statement No. 34 issued in 1999(effective 2002-2004)

This equal 34 Statements in the first 16 years GASB Statement No. 62 issued in 2011

This equals 28 Statements in the last 12 years GASB No. 34 established the financial reporting framework that was

previously lacking and now the dam has been broken open and the new pronouncements are flowing!


Recent GASB Statements

No. 53-Accounting and Financial Reporting for Derivative Instruments

No. 54-Fund Balance Reporting and Governmental Fund Type Definitions

No. 55-The Hierarchy of GAAP for SLG’sNo. 56-Codification of Accounting and Financial

Reporting Guidance Contained in the AICPA Statements on Auditing Standards



No. 57-OPEB Measurement by Agent Employers and Agent Multiple-Employer Plans

No. 58-Accounting and Financial Reporting for Chapter 9 Bankruptcies

No. 59-Financial Instrument OmnibusNo. 60-Accounting and Financial Reporting for

Service Concession ArrangementsNo. 61- The Financial Reporting Entity: Omnibus



No. 62-Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements

ED-Financial Reporting of Deferred Outflows and Inflows of Resources and net Position

PV-Pension Accounting and Financial Reporting by Employers


GASB No. 55 – GAAP Hierarchy GASB is responsible for establishing GAAP for SLG’s, however the current

GAAP hierarchy is set forth in the AICPA SAS No. 69—The Meaning of Present Fairly IAW GAAP. This statement incorporates the hierarchy of GAAP for SLG’s into the GASB’s authoritative literature. Hierarchy is;

GASB Statements and InterpretationsGASB Technical Bulletins and if made applicable to SLG’s, AICPA Industry Audit &

Accounting Guides & SOP’sAICPA Practice Bulletins if specifically made applicable to SLG’s and cleared by

GASB Implementation Guides published by GASB staff and widely recognized practices

in SLG’s


GASB No. 56 - Financial Reporting Guidance Found in AICPA SAS’s

The objective of this statement in to incorporate into the GASB’s authoritative literature certain accounting and financial reporting guidance that currently is presented only in the AICPA’s SAS’s.

The presentation of principles used in preparation of FS is more appropriately included in accounting and financial reporting rather than auditing literature. The standard addresses three issues not found in the accounting literature; related party transactions, going concern considerations and subsequent events.

Does not change what you already know about these three areas already, rather it puts them in authoritative accounting literature rather than SAS’s.


GASB No. 57 – OPEB Agent Plans Current standards for sole and agent employers provide that an employer may use the

alternative measurement method if the employer is a sole employer with fewer than 100 total plan members, or the employer is an agent employer with fewer than 100 plan members and, for some reason, the

agent multiple-employer plan either is not required to or does not choose to issue annual financial reports that include actuarial information at the plan administrative level.

The latter stipulations effectively disqualify agent employers from using the alternative method if the agent multiple-employer plan as a whole has 100 or more total plan members, is administered as a qualifying trust, and issues an annual financial report prepared in conformity with Statement 43.

The effects would be to permit aggregation of information derived in part from actuarial valuations and in part from use of the alternative measurement method, and to permit some employers to measure on a triennial schedule different from the plan’s two-year schedule. Considerations related to this issue are generally similar to those related to the request to permit some employers to obtain actuarial valuations on a triennial schedule.


GASB No. 58 – Bankruptcies

The objective of this Statement is to provide accounting and financial reporting guidance for governments that have petitioned for protection from creditors by filing for bankruptcy under Chapter 9 of the United States Bankruptcy Code.

It requires governments to re-measure liabilities that are adjusted in bankruptcy when the bankruptcy court confirms (that is, approves) a new payment plan


GASB No. 59 – Financial Instruments

Statement 31 provides guidance on the reporting of external investment pools. When the investments of an external investment pool meet certain credit quality and maturity requirements (2a7-like pools), Statement 31 provides that investments may be measured at amortized cost and that participants in the pool also may report their positions at amortized cost.

However, important authoritative guidance that clarifies what is a 2a7-like pool is only contained in the Comprehensive Implementation Guide (level “d” in the hierarchy of generally accepted accounting principles [GAAP hierarchy]).

In order to be able to use amortized cost, the investments held by a mutual fund must be of very high credit quality and short maturity. The high credit quality requirement is intended to limit the investment portfolio’s credit risk; the short maturity requirement is intended to limit interest rate risk.

In Securities and Exchange Commission (SEC) practice, mutual funds that meet the requirements of rule 2a7 are permitted to be labeled as money market funds.

The GASB’s intent was that a 2a7-like external investment pool is a governmental external investment pool that, if it was under the supervision (had filed with) the SEC, would meet all requirements for money market funds. This intent was clearly spelled out in the Comprehensive Implementation Guide.


GASB No. 60-Concession Arrangements

There is no single, widely-accepted definition of the term public/private partnership (PPP). However, many descriptions characterize a PPP as an arrangement between a government and a private sector entity to deliver a governmental asset (normally infrastructure or a public facility) and, often, the related public service (in some cases, the arrangement may be solely for the delivery of the public service related to an existing governmental asset).

The allocation of risks to the parties involved in a PPP can be quite complex. Because of this, determining the accounting and financial reporting for the property associated with these arrangements involves the consideration of conceptual topics including control over the use of the property, the bearing of risks and rewards related to the property, and governmental accountability for infrastructure assets and the services they provide. Examples of PPPs include: A hospital authority transferring its assets, liabilities and hospital operations to a not-for-profit hospital system

through a lease and management agreement, with the hospital authority’s ongoing operations being limited to issuing conduit debt for the not-for-profit hospital system and serving as a “pass-through” for governmental grants.

A university leasing land to a third-party developer for construction of a dormitory building, with the building being leased back to the university or the units being leased directly to university students and faculty by the developer.

A state leasing a portion of its turnpike system to a private consortium in exchange for an up-front payment.

A state entering into an agreement with a private consortium to build and then operate a tollway in exchange for an up-front payment.


GASB No. 61 – Financial Reporting Entity

The requirements of Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, to address reporting entity issues that have arisen since the issuance of those Statements.

This Statement modifies certain requirements for inclusion of component units in the financial reporting entity. For organizations that previously were required to be included as component units by meeting the fiscal dependency criterion, a financial benefit or burden relationship also would need to be present between the primary government and that organization for it to be included in the reporting entity as a component unit.

Further, for organizations that do not meet the financial accountability criteria for inclusion as component units but that, nevertheless, should be included because the primary government’s management determines that it would be misleading to exclude them, this Statement clarifies the manner in which that determination should be made and the types of relationships that generally should be considered in making the determination.


GASB No. 62 – Pre 11/30/89 FASB Codification

GASB Statement 34, paragraph 17 provides that FASB and AICPA pronouncements issued on or before November 30, 1989, should be applied to the reporting of governmental and business-type activities "unless those pronouncements conflict with or contradict GASB pronouncements."

This means that financial statement preparers are currently required to identify which provisions within the FASB and AICPA pronouncements are applicable to them and generally is open to interpretation by financial statement preparers regarding what provisions in the FASB and AICPA pronouncements are considered conflicting and contradictory.

The project would benefit preparers and auditors by clearly identifying which FASB and AICPA pronouncement provisions to apply to state and local governments

The need for this project is made more urgent by the July 1, 2009, launch of the FASB Accounting Standards Codification, which supersedes all previous FASB and AICPA pronouncements as the official authoritative literature.

The objective of this project is to specifically identify provisions in Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions, Accounting Research Bulletins of the AICPA Committee on Accounting Procedure, and AICPA Accounting Interpretations, issued on or before November 30, 1989 (collectively, the "FASB pronouncements"), as referenced in paragraph 17 of GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, that do not conflict with or contradict GASB pronouncements and to incorporate those provisions into the GASB’s literature.

The statement literally contains the pre 11/30/89 codification


FYE Effective Dates September 30, 2010

Statement No. 53 – Derivatives September 30, 2011

Statement No. 54 – Fund Balance Statement No. 59 – Financial Instrument Omnibus

September 30, 2012 Statement No. 57, paragraph 8 – OPEB Amendment

September 30, 2013 Statement No. 60 – Concession Arrangements Statement No. 61 – Reporting Entity Omnibus Statement No. 62 – Codification Pre 89’ FASB


16

Statement No. 53

Accounting and Financial Reporting

for Derivative Instruments


Summary of No. 53 -Derivatives

Derivatives generally fit into two general categories; Hedging derivative if effectiveness test is met

Record at FMV and defer the gain or loss Investment derivative if effectiveness test is not met

Record at FMV with the other side of the entry going to investment gain or loss - OUCH!!

Thus most of the statement deals with meeting hedge effectiveness—the prize! There are multiple quantitative methods to test effectiveness-

pricing point measurements primarily Effectiveness does not mean you are “in the money”


Common Derivative Instruments

Interest Rate Swaps

Futures contracts--NYMEX

Options—exchange-traded and others

Swaptions


Interest Rate Swap Example

19

Swap counterpartyState or local government

Variable-rate bond holders

Variable-rate coupon payments; SIFMA

Variable payment received: 67% of 1-month LIBOR

Fixed payment 5.0%


20

Synthetic Instrument Method (Cash Flow Hedges)

Swap Notional Amount $ 10,000,000 Pay Fixed - Receive Variable From Counterparty

Swap Fixed Rate 4%

SWAP Index 70% 1 Mo. LIBOR

Fixed Swap Variable Swap Net Variable

Pmnt. To Receipt From Derivative Bond Total Synthetic

FYE Counterparty Counterparty (Pmnt) Receipt Interest Payments Rate

9/30/2010 $ (400,000) $ 100,000 $ (300,000) $ (95,000) $ (395,000) 3.95%

Analysis of Synthetic Instrument Test

Synthetic Rate 3.95%

Swap Fixed Rate 4.00%

Percentage Ratio 98.75%

Is Ratio Between 90% and 111%? Pass


Statement No. 54

Fund Balance Reporting and Governmental

Fund Type Definitions

21


22

Summary of Statement No. 54

Fund Balance ClassificationsNew fund balance presentation hierarchy is based

primarily on the degree of spending constraints placed upon use of resources for specific purposes versus availability for appropriation

The five new presentation classifications go from non-spendable down through three levels of less binding spending constraints to an unassigned level, which is available for any spending of the government.


New Fund Balance Presentation Classifications

Non-spendable—Inventory, long-term receivables, minority interest

Restricted—must be legally enforceable, Committed—Formal action of governing bodyAssigned—Similar to designations expressing

intentUnassigned—Available for any purpose

23


Restricted Fund Balance

Constraint on use must be legally enforceable, and typically externally imposed by creditors, grantors, contributors, or laws or regulations of other governments


Committed Fund Balance

Constraint on use is imposed by the government itself, using its highest level of decision making authority

Amounts classified as “committed” are not subject to legal enforceability like restricted resources; however, spending constraint can be removed or changed only by taking the same highest level action

Action to constrain resources should occur prior to end of fiscal year, though the exact amount may be determined subsequently

25


Assigned Fund Balance

Amounts intended to be used for specific purposes

Intent is expressed by The governing body itself, orA body (budget or finance committee) or an

official authorized by the governing body to assign resources for specific purposes

Residual amounts in governmental funds other than the general fund are assigned

26


Difference BetweenCommitted and Assigned

Committed requires:– The commitment be made by the governing body– The action be formal and reversible only by the same action– A specified purpose

Assigned really only for specified purposes in the general fund – allows for management’s intentions

In other funds, assigned is simply a residual for amounts that don’t meet the committed criteria


Unassigned Fund Balance

Available for any purposeReported only in the general fund, except in

cases of negative fund balanceNegative balances in other governmental funds

are reported as unassigned

28


29

Other Key Provisions of Statement 54

Fund Type Definitions ClarifiedSpecial revenueCapital projectsDebt service

Paragraph 30 requirements highlighted


30

Special Revenue Funds

Special revenue funds are 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.


Accounting Profession Reluctantly Accepts New GASB Statements

Accounting Profession Reluctantly Accepts New GASB Statements


Preliminary Views-Pension Accounting and Financial Reporting

Currently a pension liability is reported only when a government contributes less than the annual required contribution calculated by actuaries

Pension benefits are compensation promised by governments to their employees in exchange for work performed.

The government is primarily responsible for the any unfunded portion of the pension obligation.

The unfunded portion of the pension should be reported as a net pension liability in the financial statements of the government.


Timetable

Preliminary Views—was released on June 16, 2010

Public hearings—were held in October 2010Exposure Draft expected to be issued in June

2011

33


34

34

Other GASB Current Projects

Statement of Net PositionDeferred Inflows and Deferred Outflows: OmnibusEconomic Condition Reporting: Fiscal SustainabilityRecognition and Measurement Attributes—

Conceptual Framework ProjectGovernment CombinationsStatement 53—Derivative Termination Provisions


GASB Research Agenda

Electronic Financial ReportingFair Value MeasurementFiduciary ResponsibilitiesFinancial Guarantees

35


GASB UpdatePurvis Gray & Company LLP

June, 2011

Mark A. White CPA, PartnerPurvis Gray & Company, LLP

Ocala, Florida

precision experience assurance gasb update purvis gray & company llp june, 2011 mark a. white...

Documents

financial reporting

hierarchy of gaap

aicpa statements

codification of accounting

gasb staff

examples of gasb

fund balance reporting

gaap hierarchygasb