Transcript Accounting and Auditing Issues Affecting Oklahoma Local

Frank Crawford, CPA
www.crawfordcpas.com
[email protected]
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Statement No. 43, Financial Reporting for
Postemployment Benefit Plans Other Than
Pension Plans—April
Statement No. 45, Accounting and Financial
Reporting by Employers for Postemployment
Benefits Other Than Pension Plans—June
3
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Statement No. 49, Accounting and Financial
Reporting for Pollution Remediation
Obligations—November
4
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Statement No.50, Pension Disclosures-—May
Statement No. 51, Accounting and Financial
Reporting for Intangible Assets—June
Statement No. 52, Land and Other Real Estate
Held as Investments by Endowments
5
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Statement No. 53, Accounting and Financial
Reporting for Derivative Instruments—June
Technical Bulletin No. 2008-1, Determining
the Annual Required Contribution Adjustment
for Postemployment Benefits
6
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Statement No. 54, Fund Balance and
Governmental Fund Type Definitions—
February
Statement No. 55, The Hierarchy of Generally
Accepted Accounting Principles for State and
Local Governments - April
Statement No. 56, Codification of Accounting
and Financial Reporting Guidance Contained in
the AICPA Statements on Auditing Standards –
April
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Immediate
◦ Statement 55
◦ Statement 56
June 30, 2009
◦ Statement 45—Phase 2
◦ Statement 43—Phase 3
◦ Statement 49
◦ Statement 52
◦ TB 2008-1 (Generally)
June 30, 2010
◦ Statement 45—Phase 3
◦ Statement 51
◦ Statement 53
June 30, 2011
◦ Statement 54
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Subject: accounting and reporting
by employers for their OPEB
expenses and obligations
Applies to all employers that
provide OPEB (that is, the
employer pays all or part of the
cost of the benefits, including
implicit rate subsidies)
Requires accrual-basis
accounting for expense and
measurement and disclosure of
funded status (UAAL)
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Subject: reporting on
stewardship of plan assets by
A trustee or plan administrator
(stand-alone plan reporting) or
An employer or plan sponsor
with a fiduciary responsibility for
the plan assets that includes the
plan as a trust or agency fund in
its own financial report

“Postemployment benefits”—benefits provided after
separation from employment as part of the total
compensation for services, including:
◦ Pension benefits—
 Retirement income
 Other benefits (except postemployment healthcare) if provided
through a defined benefit pension plan
◦ Other postemployment benefits (OPEB)—
 Postemployment healthcare benefits
 Other forms (for example, life insurance) if provided separately
from a defined benefit pension plan

In Statement 45 (employer reporting):
◦ “Plan” usually refers to an employer’s substantive commitment
or agreement to provide OPEB—including, for example, provisions
or understandings regarding plan membership, eligibility for benefits,
types of benefits, points at which benefits will begin and end, and
method of financing benefits

In Statement 43 (plan reporting):
◦ “Plan” usually refers to a trust or agency fund used to administer
the financing of OPEB and the payment of benefits (that is, to
assets under the stewardship of an administering entity)—regardless
of the financing policy adopted

Benefits should be projected based on the current substantive plan
(the plan as understood by the employer and plan members),
including changes made and communicated to plan members, at
the time of the actuarial valuation and (or including) the historical
pattern of sharing of costs between employer and plan members to
that point
◦ Anticipated future changes in plan design should not be included in the
projection of benefits

A legal or contractual benefit cap (as distinguished from a cap on
contributions), should be considered in the projection of benefits if
the cap is deemed effective
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Postemployment benefits (pensions and OPEB) are part of the
compensation for services rendered by employees; they are part of
an exchange transaction between employer and employees
Benefits are “earned,” and obligations accrue or accumulate, during
employment, but benefits are not taken until after employment
(potentially long time lag between incurring and paying the
obligation)
The (accrual-basis) cost of benefits for a period is part of the total
cost of government services for that period, whether or not the
employer chooses to fund it concurrently
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Harmonizes accounting requirements with funding concepts and methods
to the maximum extent appropriate for accrual accounting purposes
Although OPEB plans generally are not funded, this approach still is
“funding friendly” for OPEB, because an employer that chooses to fund
(now or later) need not use different measures for accounting and funding
purposes
Statement 45 does not include any requirement with respect to an
employer’s method of financing or budgeting of OPEB; for example, it does
not require that an employer fund the benefits using the actuarial methods
required for accounting purposes
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Project cash outflows for benefits
Discount projected benefits to present value (PV)
Allocate the PV of projected benefits to periods
using an acceptable actuarial cost method
Employee Age Timeline
Service Period
25
Age when hired
40
80
62
Assumed age at retirement
Present age
Life Expectancy
1) Project Benefits
$4,500
25
40
Actuarial Present Value
3) Actuarial cost method
$15,000
62
. . .
$14,000
2) Discount
80
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Employers also will be required to disclose the funded status of the benefits
as of the most recent valuation and to present as RSI multi-year trend
information about funding progress, including the following information:
◦
◦
◦
◦
◦
◦
Actuarial accrued liability (AAL)
Actuarial value of plan assets
Unfunded actuarial accrued liability (UAAL) (AAL minus plan assets)
Funded ratio (actuarial value of plan assets/AAL)
Ratio of UAAL to covered payroll
Notes to RSI regarding changes affecting the interpretation of trends in the
amounts reported

An employer’s commitment to permit retirees to
participate in the same group as active employees by
paying the blended premium involves a real cost to the
employer
◦ For example, if claims costs are $6,000 per retiree, and the
retiree pays a blended premium of $3,600, the employer
generally pays the difference, or $2,400 per retiree

The preceding is a function of the significant effect of age
on claims costs (that is, claims costs for retirees in a
combined group generally will be significantly higher than
claims costs for active employees in the group)

The “implicit” subsidy is no less “real” than an explicit
contribution; it is a hard cash outlay (only obscured by the
averaging)
◦ For example, if the preceding employer nominally pays the
$3,600 blended premium for each active employee, but the
cost of coverage (claims costs) for an active employee is only
$2,800, the excess of $800 per active employee has nothing to
do with providing coverage for active employees; it is a cash
contribution by the employer toward the higher cost of
coverage for retirees
Govt. A
Unfunded
(PAYG)
Actuarial accrued liabilities (AAL) (a)
Actuarial value of plan assets (b)
Unfunded actuarial accrued
liabilities (UAAL) (a-b)
Funded ratio (b/a)
Covered payroll (c)
UAAL as a % of covered payroll (a-b/c)
Govt. B
Partially
Funded
$13,500,000
-0--
$13,500,000
9,000,000
13,500,000
0.0%
$7,600,000
177.6%
4,500,000
66.7%
$7,600,000
59.2%
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Staggered implementation based on a government’s
phase for implementing GASB 34
Statement 45 will be effective for the employer’s fiscal
year beginning after December 15, 2006 (Phase 1),
2007 (Phase 2), or 2008 (Phase 3)
Statement 43 will be effective for the plan’s fiscal year
beginning after December 15, 2005 (if largest
employer is Phase 1), 2006 (if largest is Phase 2), or
2007 (if largest is Phase 3)
Earlier implementation is encouraged
25
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Pollution REMEDIATION Obligations
◦ Excludes prevention or control obligations
◦ Excludes asset retirement obligations—including
landfills (Statement 18)
◦ Excludes fines, penalties, toxic torts, product or
process safety outlays (NCGA Statement 4)
26
a.
b.
c.
Compelled to take remediation action
because of pollution-caused imminent
endangerment
Violate pollution-prevention permit—for
example, RCRA permit
Named, or evidence indicates govt. will be
named, as responsible party or PRP for
remediation (or cost sharing)
27
d.
Named, or evidence indicates govt. will be
named, in lawsuit to participate in
remediation

e.
Excludes lawsuits having no merit
Govt. commences, or legally obligates self to
commence

Limited to portion legally required to complete
28
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Component approach
◦ Recognize components of liability as they become
reasonably estimable
◦ Recognition benchmarks
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Cost accumulation, not fair value
Current value, not present value
Expected cash flow technique
29
Potential Payment Probability
$0
$200
60%
40%
(a) x (b)
$0
$80
$80
Potential Payment
Probability (a) x (b)
$0
60%
$0
$200
40%
$80
$80
30
Potential Payment
Probability (a) x (b)
$0
60%
$0
$200
40%
$80
$80
Potential Payment
$0 $1
$200
Probability (a) x (b)
60%
$0
40%
$80
Now it’s 100% probable. But how much
do you record?
$80
31
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All direct outlays attributable to remediation
◦ All outlays—not just incremental costs
◦ Consistent with Statement 18
◦ Includes payroll, pension, and OPEB

May include indirect outlays
◦ General overhead
◦ A matter of professional judgment
32
a.
b.
c.
d.

Cleanup to prepare property for sale (limited to
fair value)
Polluted property bought and cleaned for use
(limited)
Asset impaired and cleanup restores lost service
utility (limited)
Acquire PP&E that have future alternative use,
e.g., land (limited to future service utility)
For a. & b.—capitalize only if incurred within
reasonable period
33
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Reduce expense (and expenditure, if
available) and . . .
If not realized or realizable—
◦ Net against remediation liabilities

When realized or realizable
◦ Accrete liability and report separate recovery assets
(cash or receivable)
34
Expected outlays
Expected recoveries
Net remediation expense
$10,000
3,000
$7,000
If recovery not realized or realizable:
• Pollution remediation liability =
$7,000
If recovery realized or realizable:
• Recovery asset (receivable) = $3,000
• Pollution remediation liability = $10,000
35
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Government-wide
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Program cost, or
Special item, or
Extraordinary item
No separate display of liability required
Governmental funds
◦ Expenditures recognized when liquidated with
expendable available resources
◦ No pollution liability, only payables for goods
and services used
36
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Period beginning after December 15, 2007
Measure liabilities at beginning of that period
so beginning net assets can be restated
Apply retroactively if you have sufficient
objective verifiable information to apply to
prior periods
Early application encouraged
37
Pension Disclosures
An amendment of GASB Statements No. 25 and
No. 27
38
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Goal is to conform the pension disclosures
with the OPEB disclosures
Notes to financial statements would disclose
the funded status of the plan as of the most
recent actuarial valuation date.
◦ Defined benefit pension plans also would disclose
actuarial methods and significant assumptions used
in the most recent actuarial valuation in notes to
financial statements instead of in notes to RSI.
39
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Generally effective for periods beginning after
June 15, 2007
40
Accounting and Financial Reporting
for Intangible Assets
41
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Paragraph 19 of GASB Statement 34
◦ Capital assets include, “land, improvements to land,
easements, buildings, building improvements, vehicles,
machinery, equipment, works of art and historical
treasures, infrastructure, and all other tangible or
intangible assets that are used in operations and that
have initial useful lives that extend beyond a single
reporting period” (emphasis added).
42
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What are the “intangible assets that are used in
operations” that are mentioned in Statement 34,
paragraph 19?
◦ APB Opinion 17, Intangible Assets
 Issued in 1970 and had been authoritative guidance for
governments prior to Statement 34
 Did not define intangible assets, but listed them
 Patents
 Trademarks
 Copyrights
43
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An 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
44
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Intangible assets usually result from legal or
contractual rights and clearly have no
physical substance.
◦ Trademarks, copyrights, royalty interests

What about intangible assets closely related
to tangible assets?
◦ Right-of-way easement for a road
◦ Water rights
45
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A right-of-way easement for a road depends on a
tangible asset—land—to enable a government to
provide transportation services.
What is the asset?
◦ The asset is not the land or the road.
◦ The asset is the right-of-way easement (a right to use
the land for a specific purpose).
 It is a contractual right that does not have physical
substance.
46
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Accounts receivables and investment
securities do not have physical substance.
Are they intangible assets?
47
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Second characteristic of intangible assets is
that they are nonfinancial in nature.
◦ Must not be in monetary form
 Like cash and investment securities
◦ Must be neither a claim nor a right to assets in
monetary form
 Like receivables
48
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All capital assets, not just intangible assets,
must have an useful life that extends beyond
one reporting period.
IF NOT, expense when incurred.
49
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Right-of-way easements
Other types of easements
Patents, copyrights, trademarks
Land use rights
Water rights
Licenses and permits
Computer software
◦ Purchased or licensed
◦ Internally generated
50
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Intangible assets acquired or created
primarily for directly obtaining income or
profit
◦ Copyrights on books or recordings given to a
university so they can earn royalties

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Capital leases
Goodwill from a combination transaction
51
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All existing authoritative guidance related to
capital assets should be applied to these
intangible assets
◦ Purchased intangible assets recognized at historical
purchase price
◦ Donated intangible assets recognized at fair value
when acquired
52
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All intangible assets subject to Statement
should be classified as part of capital assets
in government-wide, proprietary fund, and
fiduciary fund statement of net assets.
◦ Because intangible assets are considered capital
assets, they are reported as expenditures (not
assets) in governmental fund financial statements.
53
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Capital assets (including intangibles) that are
being depreciated or amortized are reported
separately from capital assets that are not
being depreciated or amortized.
54
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Allocation of the cost of intangible assets over their
estimated useful lives.
Existing guidance for depreciation of capital assets
generally applies to amortizing intangible assets.
◦ Amortization expense reported for intangible assets with
finite useful lives.

Amortization period for contractual or legal rights
limited to period of expected service capacity.
55
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Town has a right to use water from a lake for
20 years. What is the amortization period?
Same scenario, but town for a nominal
amount has the right to renew the water
rights for an additional 10 years.
Amortization period?
56
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Town has a right to use water from a lake for
20 years. What is the amortization period?
◦ 20 years

Same scenario, but town for a nominal
amount has the right to renew the water
rights for an additional 10 years.
Amortization period?
◦ 30 years—assuming evidence exists town would
seek renewal
57

No amortization for intangible assets with
indefinite useful lives
◦ No factors (legal, contractual, technological, or
otherwise) currently exist that limit the useful life of
the asset

How will a right-of-way easement for land
under a road normally be reported?
◦ Part of capital assets not being
depreciated or amortized
58

Internally generated intangible assets (IGIA) are
assets that are:
◦ Created or produced by the government or an entity
contracted by the government; or
◦ Acquired from a third party but require more than
minimal incremental effort to achieve expected service
capacity

Examples
◦
◦
◦
◦
Computer software
Patents
Copyrights
Trademarks
59
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Statement provides a specified-conditions
approach to recognizing outlays associated
with IGIA
Outlays incurred related to an IGIA that is
considered identifiable should be capitalized
only upon the occurrence of all three criteria
on following slide.
60
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Three capitalization criteria

Outlays incurred prior to meeting criteria should be
expensed as incurred
◦ Determination of the specific objective of the project and
the nature of the service capacity that is expected to be
provided by the asset upon completion of the project;
◦ Demonstration of the technical or technological
feasibility for completing the project so that the asset
will provide its expected service capacity;
◦ Demonstration of the current intention, ability, and
presence of effort to complete or, in the case of a
multiyear project, continue development of the
intangible asset
61
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Specific guidance on applying the specifiedconditions approach for recognition of internally
generated computer software is provided
Internally generated computer software includes
software developed:
◦ By government’s own employees
◦ By third party on behalf of government
◦ Commercially but requiring more than minimal
incremental effort to put into operations
62
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Guidance generally based on development stages
similar to AICPA SOP 98-1
Three stages
◦ Preliminary project stage
 Needs and alternatives for software developed
◦ Application development stage
 Design, software configuration and interfacing, coding, and
testing
◦ Post-implementation/operation stage
 Training and software maintenance
63
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Outlays associated with preliminary project
and post-implementation/ operation stages
should be expensed as incurred.
Outlays associated with application
development stage should be capitalized if:
◦ Preliminary project stage complete, and
◦ Management implicitly or explicitly authorizes and
commits to funding.
64
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Stoppage during development
◦ Stopping development of computer software

Impaired intangible assets reported at lower
of carrying value or fair value in statement of
net assets.
65
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Effective date is fiscal periods beginning
after June 15, 2009
Provisions generally should be
retroactively applied
66
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Exceptions for retroactively reporting intangible
assets:
◦ Permitted but not required for IGIA and intangible assets
with indefinite useful lives at transition
 Right-of-way easements for land under roads not required
to be retroactively reported.
◦ 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
67
Land and Other Real Estate Held as Investments
by Endowments
68
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
Establish financial reporting standards for
land and other real estate held as
investments by endowments
Endowments include:
◦ Permanent and term endowments
 Principal generally maintained in perpetuity or for a
stated period of time or until the occurrence of an
event
◦ Permanent funds
69
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Reported at fair value in statement of net
assets
Changes in fair value reported as investment
income
Make applicable Statement 31, paragraph 15
disclosures
◦ Method to estimate fair value if not market prices
70
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For periods beginning after June 15, 2008
71
Issued
June 2008
72
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Interest rate swap
◦ Variable-rate to fixed-rate
◦ Fixed-rate to variable-rate
Basis swap
◦ Exchange payments based on the changes of two variable
rates
Swaption
◦ 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
73

Fair value with hedge accounting
◦ Changes in fair value of derivative are deferred for qualifying
transactions
◦ Changes in fair value of derivative would not be deferred if
 The related asset (for example, investment) is reported at fair value
 The hedge does not meet the effective criteria

How is that operationalized?
74
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Consistent critical terms
Quantitative techniques
◦
◦
◦
◦
Synthetic instrument
Dollar offset
Regression
Other qualifying quantitative methods
75
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Effective for financial periods beginning after June
15, 2009
Implementation guide approved by the Board at
the January 2009 meeting
76
GASB Technical Bulletin No. 2008-1
Determining the Annual Required
Contribution Adjustment for
Postemployment Benefits
77

TB clarifies that actual amount of interest
(and principal, if any) may be used to make
ARC adjustment.
◦ That is, actual amounts may replace the estimate of
ARC adjustment that comes from method described
in:
 Statement 27, paragraph 13
 Statement 45, paragraph 16
78

For periods ending after December 15, 2008
(or for OPEB at least simultaneously with
implementation of Statement 45)
79
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Issued February 2009
80
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Nonspendable fund balance
Restricted fund balance
Committed fund balance
Assigned fund balance
Unassigned fund balance
Spendable
81
Nonspendable Fund Balance includes
amounts that cannot be spent because they
are either:
(a) not in spendable form or
◦Inventories, prepaids, long-term loans
(b) legally or contractually required to be
maintained intact.
◦Principal of a permanent fund
82
Restricted Fund Balance:
Amounts that are restricted to specific
purposes, pursuant to the definition of
restricted in paragraph 34 of Statement 34, as
amended by Statement No. 46.
◦ External parties
◦ Constitution
◦ Enabling legislation
83
Committed Fund Balance:
Amounts that are committed for specific
purposes by formal action of the government’s
highest level of decision-making authority.
84
Assigned Fund Balance:
Amounts that are intended by the government
to be used for specific purposes, but are neither
restricted nor committed.
◦ All amounts in other governmental funds not
restricted or committed.
◦ Amounts in general fund intended for specific use
85
Unassigned Fund Balance:
Residual classification for the general fund
◦ Has not been assigned to other funds and is not
restricted, committed, or assigned to specific
purposes within the general fund.
◦ Residuals for expired purposes in other funds
86

Refers to economic stabilization, revenue
stabilization, budgetary stabilization, and
other similar intended “rainy day” funds.
◦ Authority to set aside





Statute
Ordinance
Resolution
Charter
Constitution
89

General Fund
◦ Restricted or committed, if meet criteria
◦ Unassigned, if do not meet criteria

Special Revenue Fund
◦ Only if resources derive from a specific restricted or
committed revenue source
90

Committed Fund Balance
◦ Government’s highest level of decision-making
authority
◦ Formal action required to be taken to establish,
modify, or rescind a fund balance commitment

Assigned Fund Balance
◦ Body or official authorized to assign
◦ Governmental policy
91
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
Disclose significant encumbrances by major
funds and nonmajor funds in aggregate
Nonspendable fund balance (if not separated
on face)
◦ Amount not in spendable form
◦ Amount legally or contractually required to be
maintained intact
92

Restricted, committed, or assigned fund
balance
◦ If displayed in aggregate on face
 Disclose major restricted resources
 Disclose major commitments
 Disclose major assignments
93

Stabilization arrangements
◦ Authority for establishing
 By statute or ordinance?
◦ Requirements for adding to stabilization amounts
◦ Conditions for spending amounts
◦ Stabilization balance, if not apparent on face
94

Minimum fund balance policy
◦ May have in lieu of stabilization amounts
◦ Describe policy for determining minimum amount
95

General fund
◦ Used to account for all financial resources not
accounted for in another fund

Capital projects funds
◦ Used to account for financial resources that are
restricted, committed, or assigned to
expenditure for capital outlays
 Unless financed by proprietary funds or assets to
be held in trust for those outside government
96

Debt service funds
◦ Used to account for financial resources that are
restricted, committed, or assigned to expenditure
for principal and interest

Permanent funds
◦ Used to account for resources restricted with
respect to “earnings” for support of government’s
own programs
97

Special revenue funds
◦ Account for proceeds of specific revenue sources
that are restricted or committed to expenditure for
specified purposes other than debt service or
capital projects
 Not used for resources held in trust for those outside
government.
98
Restricted or committed resources should be
“substantial” portion of inflows reported in fund.
◦ If not, should be reported in general fund.
 Investment earnings and transfers in may be reported
if restricted, committed, or assigned to specified
purpose of fund.

99
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
For FYE June 30, 2011 and thereafter
For fund balance reclassifications
◦ Restate fund balance for all prior periods presented
◦ Changes to fund balance information in statistical
section may be applied prospectively
100

Current Projects
◦ Postemployment Benefits Accounting and
Reporting
 ITC—Comment deadline is July 31, 2009
◦ Public and Private Partnerships
◦ Reporting Units/Statement 14 Revisited
◦ Recognition and Measurement Attributes
(Concepts Statement)
◦ Service Efforts and Accomplishments—
Suggested Reporting Guidelines for Voluntary
Reporting
101

Practice Issues
◦ Chapter 9 Bankruptcies
◦ Codification of AICPA Accounting Guidance
included in Statements of Auditing Standards
◦ Comprehensive Implementation Guide
◦ Financial Instruments Omnibus
◦ GAAP Heirarchy
102
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Research Agenda
◦
◦
◦
◦
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◦
Chapter 9 Bankruptcy
Economic Condition Reporting
Electronic Financial Reporting
FASB Pronouncements (pre-1989)
Fair Value Measurement
Investment Omnibus
103
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Downloads and ordering information
(Exposure documents, Statements, Q&As)
Summaries of standards
Project pages
Technical inquiry form
Staff contacts
105
Questions?
106