Recent GASB Pronouncements

North Dakota University System April 2011

Prepared for the North Dakota SBHE BAFC by Robin Putnam

Recent GASB Pronouncements

Applicable to NDUS:

GASB Statement No. 51 – Accounting & Financial Reporting for Intangible Assets. Effective Date: July 1, 2010.

Other recent GASB Pronouncements not-applicable to NDUS in FY10:

GASB Statement No. 52 – Land & Other Real Estate Held as Investments by Endowments. Effective Date: July 1, 2009

GASB Statement No. 53 - Accounting and Financial Reporting for Derivative Instruments. Effective Date: July 1, 2010

Note: GASB 52 will be applicable in the future if land or other real estate is held as an investment by endowments by either a campus or System Office.

GASB 53 will be applicable in the future if a campus or System Office enters into a derivative arrangement that meets the criteria of GASB 53.

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GASB STATEMENT NO. 51

ACCOUNTING AND

FINANCIAL REPORTING FOR

INTANGIBLE ASSETS

EFFECTIVE FOR FISCAL YEAR 2010

Purpose and Effective Date

Requires intangible assets such as, software, easements, trademarks and patents, that meet certain criteria to be capitalized in the Statement of Net Assets (SNA) in the year of acquisition and amortized over the useful life of the asset.

Prior to GASB 51, intangibles were typically expensed in the year acquired and reported in the Statement of Revenue, Expenses and Changes in Net Assets (SRECNA).

GASB 51 required retroactive application back to June 30, 1980 for most intangibles.

The cumulative effect of prior activity (including amortization) was reported as a restatement of $2.2 million to beginning net assets in the NDUS FY10 Financial Statements.

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Definition

An intangible asset is an asset that has all of the following three characteristics:

•Lacks physical substance

•Nonfinancial nature

•Initial useful life extending beyond a single reporting period.

Additionally: Asset is separable. Capable of being separated and sold, transferred, licensed, rented or exchanged. Includes purchased, acquired or internally generated assets.

OR

Asset arises from contractual or other legal rights, regardless of whether rights are transferable or separable.

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Recording of Intangibles

Recorded as capital assets in the SNA.

Amortization expense is recorded over the useful life of the asset in the SRECNA.

Scope Exceptions:

Assets that meet the definition but are acquired or created primarily for income or profit

Capital leases

Goodwill created through the combination of a government and another entity

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Costs incurred related to an IGIA are capitalized when they meet all of these conditions:

Specific objective of the project & the nature of the service capacity expected to be provided upon completion of the project has been determined.

Technical feasibility has been determined.

Demonstration of the current intention and ability to complete or, in the case of a multi-year project, continue development of the intangible asset.

Costs incurred prior to meeting these criteria should be expensed as incurred.

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Internally Generated Intangible Assets

Activities involved with Internally Generated Computer Software fall into one of three development stages Preliminary Project Stage (Costs are expensed as incurred):

Concept formulation and evaluation of alternatives

Determination of the existence of needed technology

Final selection of alternatives

Application Development Stage (Costs are capitalized once criteria is met; cease capitalizing when software is operational): Design of the chosen path

Coding

Installation to hardware

Testing & parallel processing phase

Post-Implementation/Operation Stage (Costs are expensed as incurred): Application training

Software maintenance

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Internally Generated Computer Software

•Same premise as depreciation of capital assets

•Useful life should not exceed the legal term of the rights associated with the asset.

•Intangible assets with indefinite useful lives are not amortized. • Indefinite useful life: no legal, contractual, regulatory, technological

or other factors that limit the useful life of the intangible asset.

• Example: Permanent right-of-way easement

• If changes in conditions result in the useful life no longer being indefinite, intangible asset should be tested for impairment because a change in the expected duration of use of the asset has occurred.

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Amortization

•No note disclosures required specific to intangible

assets

•Intangible assets should be included with the

capital asset note disclosures.

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Disclosures

GASB STATEMENT NO. 52

LAND AND OTHER REAL

ESTATE HELD AS

INVESTMENTS BY

ENDOWMENTS

Improves comparability and usefulness of financial reporting by endowments.

•Prior to GASB Statement No. 52, endowments were required to record land and other real estate held as investments at historical cost. Other entities, such as pension plans, were required to record them at fair value.

Provisions of GASB Statement No. 52:

•Requires land and other real estate held as investments by endowments to be recorded at fair value.

•Changes in fair value during the year are reported as investment income.

•Effective date: July 1, 2009

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Purpose and Effective Date

GASB STATEMENT NO. 53

ACCOUNTING and

FINANCIAL REPORTING for

DERIVATIVE INSTRUMENTS EFFECTIVE FOR FISCAL YEAR 2010

Purpose and Effective Date

Purpose: to set accounting and financial reporting

requirements for derivative instrument arrangements.

Effective date: July 1, 2010.

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What Are Derivative Instruments?

Complex financial arrangements where two parties agree to make payments to each other based on what happens in separate transactions, agreements or rates.

Entered into with little or no initial investment to lower the costs of borrowing, lock-in prices, reduce price volatility, earn income, manage cash flows.

Governments enter into derivative instruments with other parties, usually private-sector financial firms.

Governments receive and make payments based on rates or prices without actually entering into the related financial or commodity transactions.

Upside: Can reduce or eliminate impact of changes in cash flows and fair values caused by changes in interest rates and commodity prices.

Downside: Can expose governments to significant risks, such as termination risk, credit risk, interest rate risk.

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Interest rate swaps

Commodity swaps

Interest rate locks

Options, such as calls, puts, collars, floors or swaptions

Forward contracts

Futures contracts for commodities such as fuel, agriculture products

Synthetic guaranteed investment contracts

Note: This list is not meant to be all-inclusive. Individual instruments should be evaluated using the criteria in GASB 53 to determine if they meet the definition of a derivative.

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Examples of Derivatives

GASB 53 Excludes:

Normal purchases & sales contracts in the normal course of operations, such as natural gas or electricity, provided it is probable that the university will make or take delivery.

Excluded if the university has a choice to take or make delivery of the commodity or exchange the cash value to terminate the contract.

Certain insurance contracts.

Loan commitments.

Certain financial guarantee contracts such as guarantees to pay a creditor if a debtor fails to make payments .

Nonexchange-traded contract with a rate based on either:

A climate, geological or other physical variable

A price or value of a nonfinancial asset

Example: University enters into contract to purchase vehicles. If either party fails to perform its obligations, the contract provides for damages as a % of the value of the vehicles. The damage provision is related to the purchase of nonfinancial assets (the vehicles) and is therefore not within scope of GASB 53.

Note: Commodity forward contracts are not excluded because the university is not taking delivery of the commodity through the forward contract but rather through the contract to purchase.

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Types of Derivative

Investment or Hedging:

– Investment derivatives – Instrument primarily to

obtain income or profit or does not meet the

criteria of a hedging derivative. Account for as

investments.

– Hedging derivatives – Instrument associated with

a hedgeable item and significantly reduces

financial risk by substantially offsetting changes

in cash flows or fair values of the hedgeable

items. Apply hedge accounting.

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Accounting for Derivatives

Hedge Accounting

Derivatives are reported at fair value on the SNA as either assets

or liabilities.

Fair value changes are reported as deferred assets or liabilities

on the SNA until hedge is terminated.

Hedge accounting is applied beginning of the year that a hedging derivative

instrument is established and until the hedge is terminated.

Exception to hedge accounting: Transactions within the primary government unit do not

qualify for hedge accounting. For example: a commitment to sell electricity by a government

utility (enterprise fund) to the government’s general fund is not a hedgeable item.

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Meets

definition

of a

derivative?

Yes

Hedgeable

item?

Yes

Apply

Investment

Accounting

No

Effective?

No

Terminated?

Yes

No

Apply Hedge

Accounting

Record

derivative at FV

on SNA

Record FV

changes as

deferred inflow

or outflow on

SNA

Yes Debt

Refunding?

Record deferral

amount to income

in period

termination

occurs

Yes

No

Include deferral

amount in net

carrying value of

old debt

Report

derivative at

FV on SNA

Record FV

changes to

investment

income in

current period

Overview Stop No

Questions ?

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