GASB UPDATE

February 2013 1

The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought. 2

EFFECTIVE DATES FOR FYE JUNE 30

• • • 2013 o Statement 60—SCAs o o o Statement 61—Financial Reporting Entity Statement 62—Codification of AICPA and FASB Statement 63—Statement of Net Position 2014 o Statement 65—Assets and Liabilities Reclasses o o Statement 66—Technical Corrections Statement 67—Pension Plans 2015 o Statement 68—Pensions for Employers o Statement 69—Government Combinations 3

Statement No. 60,

Accounting and Financial Reporting for Service Concession Arrangements

4

SERVICE CONCESSION ARRANGEMENTS (SCA) • • SCA’s are a form of public-private or public public partnership The terms public-private partnership and public-public partnership are used to refer to a many types of arrangements: o Service arrangements o o Management service arrangements SCAs 5

SCOPE —WHAT IS AN SCA?

• See paragraph 4: o Transferor conveys to an operator the right and related obligation to provide public services through the operation of a capital assets in exchange for significant consideration o o o The operator collects and is compensated from fees from third parties The transferor determines or has the ability to modify or approve services the operator is required to provide, to whom the operator is required to provide services, and the prices or rates that can be charged for services The transferor is entitled to significant residual interest in the service utility of the capital asset at the end of the arrangement 6

REPORTING CAPITAL ASSETS

• If the capital asset associated with an SCA is a new capital asset or is constructed by the operator, or an existing capital asset that has been improved by the operator, then the transferor should report o o The new capital asset or the improvement at fair value when it is placed in operation, along with… Any contractual obligations recognized as liabilities, along with a corresponding deferred inflow of

resources

7

REPORTING UPFRONT OR INSTALLMENT PAYMENTS

• Transferor should report the upfront payment or the present value of installment payments as an asset (cash or receivable) and any contractual obligations recognized as liabilities along with a deferred inflow of resources • Revenue is recognized as the deferred inflow of resources is reduced over the term of the arrangement 8

RECOGNITION OF LIABILITIES

• Liabilities associated with the SCA should be recorded at their present value if a contractual obligation is significant and meets either of the following criteria: o o The contractual obligation directly relates to the capital asset (for example obligations for capital improvements, insurance or maintenance) The contractual obligation relates to a commitment made by the transferor to maintain a specific level of service in connection with the operation of the capital asset (for example, providing a specific level of police and emergency services for a facility) 9

OTHER REQUIREMENTS

• • • Disclosures for SCAs Accounting for an SCA by Governmental

Operators

Revenue sharing provisions 10

Statement No. 61,

The Financial Reporting Entity —Omnibus

11

OVERVIEW

The most significant effects of the amendments are to: o o o Increase the emphasis on financial relationships Clarify the requirements to blend certain component units Improve recognition of ownership interests   Joint ventures Component units 12

INCLUSION CRITERIA

• Statement 14 requires inclusion in the reporting entity if a Potential Component Unit is fiscally dependent. That is,  Budget, or   Setting taxes or charges, or Issuing debt • Statement 61 adds the additional requirement for a financial benefit or burden to exist before inclusion in the reporting entity is required 13

BLENDING REQUIREMENTS

• • Statement 14 requires blending if the Primary Government and a Component Unit have “substantively” the same governing body Statement 61 modifies that requirement to also include: o A financial benefit/burden relationship, or o Primary government has “operational responsibility for a Component Unit (For example, the Primary Government’s personnel manage the activities of the Component Unit like a fund or a department of the Primary Government) 14

BLENDING REQUIREMENTS

• The blending criteria is broadened to also include component units whose total debt outstanding is expected to be repaid entirely or almost entirely by revenues of the primary government.

o Even if the component unit provides services to constituents or other governments, rather than exclusively or almost exclusively to the primary government.

15

REPORTING EQUITY INTERESTS

Requires that a primary government report an asset for its equity interest in a discretely presented component unit: • Blended component units: If the component unit is blended, replace equity interest (decrease net position) with assets, deferred outflows of resources, liabilities, and deferred inflows of resources of the component unit…in other words report the component unit • Discretely presented component units: If the component unit is discretely presented, the financial statements of the reporting entity also will report the equity interest in the net assets of the component unit as an asset of the primary government.

GASB Update September 2012 16 16

NOTE DISCLOSURES

Clarifies that current disclosures require: • Rationale for including each component unit • Whether it is discretely presented, blended, or included as a fiduciary fund GASB Update September 2012 17 17

Statement No. 62,

Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements

18

BACKGROUND

• • • • • Conflict with or contradict GASB Standards o FASB Statement 43—Compensated absences Are not applicable to governments o FASB Statement 84—Convertible debt Rarely applicable to governments Are applicable to governments o FASB Statement 34—Capitalization of interest Issues to be addressed in other GASB projects 19

SIGNIFICANT TOPICS

• • • • • • • • • Special and extraordinary items (APB Opinion 30) Comparative financial statements (ARB 43) Related parties (FASB Statement 57) Prior-period adjustments (FASB Statement 16 and APB Opinion 9) Accounting changes and error corrections (APB Opinion 20 and FASB Interpretation 20) Contingencies (FASB Statement 5 and FASB Interpretation 14) Extinguishments of debt (APB Opinion 26 and FASB Statement 76) Inventory (ARB 43) Leases (FASB Statements 13, 22, and 98 and FASB Interpretations 23, 26, and 27) 20

SPECIALIZED TOPICS

• • • • • • • • • Sales of real estate (APB Opinion 30) Real estate projects (ARB 43) Research and development arrangements (FASB Statement 68) Broadcasters (FASB Statement 63) Cable television systems (FASB Statement 51) Insurance enterprises (FASB Statement 60) Lending activities (FASB Statement 91) Mortgage banking activities (FASB Statement 65) Regulated operations (FASB Statements 71, 90, and 101) 21

BASIC GUIDANCE

• Supersedes Statement 20!

o o o All applicable pre-11/30/89 standards are in GASB’s codification All applicable post-11/30/89 non-GASB standards are considered “other accounting literature” Accounting changes to apply Statement 62 should be retroactively applied 22

Statement No. 63,

Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position

23

BACKGROUND INFORMATION

Concepts Statement 4 identifies 5 elements that make up a statement of financial position:      Assets Liabilities Deferred outflows of resources Deferred inflows of resources Net position This differs from the composition currently required by Statement 34, which requires the presentation of    Assets Liabilities Net assets 24

DEFINITIONS

Deferred outflows of resources

reporting period : A consumption of net assets by the government that is applicable to a future

Assets

: Resources with present service capacity that the government presently controls

Liabilities

avoid : Present obligations to sacrifice resources that the government has little or no discretion to

Deferred inflows of resources of resources

applicable to a future reporting period : An acquisition of net assets by the government that is GASB Update September 2012 25 25

DISPLAY REQUIREMENTS

• • • Deferred outflows of resources should be reported in a separate section following assets Deferred inflows of resources should be reported in a separate section following liabilities Net position components resemble the existing components of net assets, but also include the effects of deferred outflows of resources and deferred inflows of resources • • • Net investment in capital assets Restricted Unrestricted 26

ILLUSTRATION

Sta te me nt of N e t Position

— — — — — — — — — — — — — — — — GASB Update September 2012 27 27

GOVERNMENTAL FUNDS

• Governmental activities in Government-wide statements: Statement of Net Position: • assets + deferred outflows – liabilities – deferred inflows = net position • Governmental fund format: Balance sheet: • assets + deferred outflows = liabilities + deferred inflows + fund balance GASB Update September 2012 28 28

WHAT’S REPORTED NOW?

• There are few items that GASB standards require to be reported as deferred outflows/inflows of resources as of today: • • Statement 53–Derivative Instruments Statement 60–Service Concession Arrangements • NOT SO FAST…Statements 65, 67, 68 and 69 also have items that are reported as deferred outflows of resources or deferred inflows of resources . GASB Update September 2012 29 29

NOTE DISCLOSURES

• Governments should provide details of different types of deferred amounts in the notes in significant components of the total deferred amounts are obscured by aggregation on the face of the statements • If the amount reported for a component of net position is significantly affected by deferred inflows or outflows, governments should disclose an explanation in the notes GASB Update September 2012 30 30

Statement No. 65,

Items Previously Reported as Assets and Liabilities

31

OBJECTIVE

• Objective of this Statement is to determine whether certain balances currently reported as assets and liabilities should continue to be reported as such or instead should be reported as: • • • • A deferred outflows of resources, or An outflow of resources (expense/expenditure); or A deferred inflows of resources, or An inflows of resources (revenue) GASB Update September 2012 32 32

DEFINITIONS

Deferred outflows of resources

reporting period : A consumption of net assets by the government that is applicable to a future

Assets

: Resources with present service capacity that the government presently controls

Liabilities

avoid : Present obligations to sacrifice resources that the government has little or no discretion to

Deferred inflows of resources of resources

applicable to a future reporting period : An acquisition of net assets by the government that is GASB Update September 2012 33 33

ITEMS REPORTED AS

DEFERRED OUTFLOWS

OF RESOURCES

• • • • Transactions in which the resulting item should be classified as deferred outflows of resources: Resources advanced to another government in relation to a government mandated nonexchange transaction or a voluntary nonexchange transaction when time requirements are the only eligibility requirements that have not been met by the other government (paragraph 19 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions) Deferred debit amounts resulting from the refunding of debt (paragraph 5 of Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, and paragraph 221 of Statement No. 62, Codification of Accounting Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements) The purchase of future revenues within the same financial reporting entity (paragraphs 13–16 of Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues) Deferred loss resulting from sale-leaseback transactions (paragraph 242 of Statement 62) 34 GASB Update September 2012 34

ITEMS REPORTED AS A

DEFERRED OUTFLOWS

OF RESOURCES

Transactions in which the resulting item should be classified as deferred outflows of resources: • Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for resale prior to the point of sale (paragraph 467 of Statement 62) • Fees paid to permanent investors to ensure the ultimate sale of loans prior to the point of sale (paragraph 469 of Statement 62) GASB Update September 2012 35 35

•

ITEMS REPORTED AS

OUTFLOWS

OF RESOURCES

Transactions in which the resulting item should be recognized as outflows of resources: • Acquisition costs for insurance entities and public entity risk pools (paragraphs 28–30 of Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and paragraphs 412–414 of Statement 62) • Initial direct costs incurred by the lessor for operating leases (paragraph 227 of Statement 62) • Debt issuance costs (paragraph 12 of Statement No. 7, Advance Refundings Resulting in Defeasance of Debt, and paragraph 187 of Statement 62) • Net balance (debit) of direct loan origination costs, including any portion related to points, related to lending activities (paragraph 45 of Statement 10 and paragraph 434 of Statement 62) GASB Update September 2012 36 36

ITEMS REPORTED AS

OUTFLOWS

OF

•

RESOURCES

Transactions in which the resulting item should be recognized as outflows of resources: • Fees paid related to a purchased loan or a group of loans (paragraph 442 of Statement 62) • Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for investment (paragraph 467 of Statement 62) • Net balance (debit) of direct loan origination costs, including any portion related to points, for mortgage loans held for resale after the sale occurs (paragraph 467 of Statement 62) • Fees paid to permanent investors to ensure the ultimate sale of loans after the ultimate sale occurs (paragraph 469 of Statement 62) GASB Update September 2012 37 37

•

ITEMS REPORTED AS A

DEFERRED INFLOWS

OF RESOURCES

Transactions in which the resulting item should be classified as deferred inflows of resources: Resources received in advance in relation to an imposed nonexchange transaction (paragraph 18 of Statement 33) • Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when time requirements are the only eligibility requirements that have not been met by the receiving government (paragraph 19 of Statement 33) • Deferred credit amounts resulting from the refunding of debt (paragraph 5 of Statement 23, and paragraph 221 of Statement 62) • Proceeds from the sale of future revenues (paragraphs 13–16 of Statement 48) • Unavailable revenue related to the application of modified accrual accounting (Statement No. 6, Accounting and Financial Reporting for Special Assessments, and Statement 33) GASB Update September 2012 38 38

ITEMS REPORTED AS

DEFERRED INFLOWS

OF RESOURCES

Transactions in which the resulting item should be reported as deferred inflows of resources: • Deferred gain resulting from sale-leaseback transactions (paragraph 242 of Statement 62) • Net balance (credit) of loan origination fees, excluding any portion related to points, for mortgage loans held for resale prior to the point of sale (paragraph 467 of Statement 62) • Net balance (credit) of loan origination fees related to points for lending activities and mortgage loans held for investment (paragraph 45 of Statement 10 and paragraphs 434 and 467 of Statement 62) • Resources generated by current rates intended to recover costs that are expected to be incurred in the future (paragraph 482 of Statement 62) • Gains or other reductions of net allowable costs intended to reduce rates over future periods (paragraph 482 of Statement 62) GASB Update September 2012 39 39

ITEMS TO BE REPORTED AS

INFLOWS

OF RESOURCES

Transactions in which the resulting item should be recognized as inflows of resources: • Net balance (credit) of loan origination fees, excluding any portion related to points, related to lending activities (paragraph 45 of Statement 10 and paragraph 434 of Statement 62) • Commitment fees realized upon exercise or expiration of the commitment (paragraphs 437 and 438 of Statement 62) • Commitment fees charged for entering into an agreement that obligates the government to make or acquire a loan or to satisfy an obligation of the other party under a specified condition when exercise is considered remote (paragraphs 437 and 438 of Statement 62) • Fees received related to a purchased loan or a group of loans (paragraph 442 of Statement 62) GASB Update September 2012 40 40

ITEMS TO BE REPORTED AS

INFLOWS

OF RESOURCES

Transactions in which the resulting item should be recognized as an inflow of resources: • Net balance (credit) of loan origination fees, excluding any portion related to points, for mortgage loans held for investment (paragraph 467 of Statement 62) • Net balance (credit) of loan origination fees, including any portion related to points, for mortgage loans held for resale after the sale occurs (paragraph 467 of Statement 62) • Fees that are realized after the funding of mortgage loans has occurred or after the commitment to guarantee the funding of mortgage loans expires (paragraph 469 of Statement 62) • Fees realized when a commitment is arranged directly between a permanent investor and a borrower (paragraph 470 of Statement 62) GASB Update September 2012 41 41

• • • • • •

ITEMS WHERE CLASSIFICATION WAS

NOT CHANGED

In the Basis for Conclusion the Board affirmed items resulting from the following transactions should be classified as an asset: Prepayments (paragraph 73 of NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles) Resources advanced to another government in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33) The purchase of future revenues from a government outside the financial reporting entity (paragraphs 13–16 of Statement 48) Initial subscriber installation costs in relation to cable television systems (paragraph 398 of Statement 62) Capitalized incurred costs related to regulated activities (paragraph 480 of Statement 62) Circumstances in which a pension plan’s net position exceeds the total pension liability GASB Update September 2012 42 42

ITEMS WHERE CLASSIFICATION WAS

NOT CHANGED

In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as a liability: • Resources received in advance in relation to a derived tax revenue nonexchange transaction (paragraph 16 of Statement 33) • Resources received in advance in relation to a government-mandated nonexchange transaction or a voluntary nonexchange transaction when eligibility requirements other than time requirements have not been met (paragraph 19 of Statement 33) • Resources received in advance of an exchange transaction (paragraph 23 of Statement 62) • Excess of initial hookup revenue over of direct selling costs in relation to cable television systems (paragraph 397 of Statement 62) • Premium revenues for insurance entities and public entity risk pools received in advance (paragraphs 19–21 of Statement 10, and paragraphs 405 and 406 of Statement 62) GASB Update September 2012 43 43

ITEMS WHERE CLASSIFICATION WAS

NOT CHANGED

In the Basis for Conclusion the Board affirmed the items resulting from the following transactions should be classified as a liability(continued): • Commitment fees charged for entering into an agreement that obligates the government to make or acquire a loan or to satisfy an obligation of the other party under a specified condition, unless exercise is remote (paragraphs 437 and 438 of Statement 62) • Fees that are received for guaranteeing the funding of mortgage loans (paragraph 469 of Statement 62) • Fees received for arranging a commitment directly between a permanent investor and a borrower (paragraph 470 of Statement 62) • Refunds imposed by a regulator (paragraph 482 of Statement 62) GASB Update September 2012 44 44

OTHER AREAS

• • Use of the term deferred should be limited to deferred inflows and deferred outflows of resources Major fund calculation guidance is amended • Use aggregate assets/deferred outflows and aggregate liabilities/deferred inflows in the calculation GASB Update September 2012 45 45

Statement No. 66,

Technical Corrections —2012

46

STATEMENT AMENDMENTS

• Amendments to Statement 10–Use of Special Revenue Funds to Report Risk Financing Activities • Amendments to Statement 62–Operating Leases • Amendments to Statement 62—Purchase of a Loan or Group of Loans • Amendments to Statement 62—Servicing Fees GASB Update September 2012 47 47

GASB'S PENSION STANDARDS

48

WHERE HAVE WE BEEN?

• • • • • • • Staff research completed in 2008 Invitation to Comment issue in March 2009 Preliminary Views issued in June 2010 3 Public Hearings held in October 2010 Exposure Drafts (employers, pension plans) issued in June 2011 3 Public Hearings held in October 2011 Statements 67 and 68 issued in June 2012 GASB Pension Standards 49 49

WHAT WAS THE STARTING POINT?

• • • • Current standards were issued in 1994 Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans Statement No. 27, Accounting for Pensions by State and Local Governmental Employers GASB’s strategic plan calls for the periodic reexamination of major standards GASB Pension Standards 50 50

WHY DID THE GASB LOOK AT THIS TOPIC?

• • • • • • What has changed since the issuance of current standards?

Relevant conceptual points—not available when Statements 25 and 27 were developed Concepts Statement No. 4, Elements of Financial Statements—Issued in June, 2007 Included the definition of a liability Concepts Statement No. 3, Communication Methods in General Purpose External Financial Statements That Contain Basic Financial Statements —Issued in April, 2005 Provided definitions of communications methods— including recognition/display in basic financial statements, notes to basic financial statements, and required supplementary information GASB Pension Standards 51 51

TYPES OF PLANS

• • Single-employer plans—involve only one government Multiple-employer plans—include more than one government • Agent multiple-employer plans—separate accounts are maintained to ensure that each employer’s contributions are used to provide benefits only for the employees of that government • Individual employers are responsible for benefits associated with their own employees only, and separate actuarial calculations are made for each participating government in the plan.

• Costs of administering the plan is shared by participating governments and the plan assets are pooled for investment purposes GASB Pension Standards 52 52

TYPES OF PLANS

• Multiple-employer plans—include more than one government • Cost-sharing multiple-employer plans—governments pool (share) the costs of providing benefits and administering the plan and the assets accumulated to pay benefits • A single actuarial valuation is conducted for all of the employees of the participating governments combined GASB Pension Standards 53 53

FUNDAMENTAL APPROACH

• • • Balance between a point-in-time measure of the employer’s obligation to employees and the measures over time of the cost to taxpayers of providing governmental services Employment-exchange transactions create an obligation of employer to employees to provide pension benefits in retirement • Annual exchanges, viewed by Board within context of a career-long employment relationship Accounting-based versus funding-based proposals (currently we compare the ARC with the actual payment made) GASB Pension Standards 54 54

RECOGNIZING A NET PENSION LIABILITY

• One of the most significant changes is the requirement for governments to recognize a net pension liability (difference between the total pension liability and the value of pension plan assets available to pay pension benefits) in their financial statements Currently: • • Governments disclose their total pension obligation (the AAL), the actuarial value of assets (AVA) in the pension plan’s trust, and the UAAL, which equals the difference between the AAL and AVA – these amounts are not recognized in the financial statements If an employer’s actual contributions have fallen short of the ARC, the accumulated shortfall is recognized in the financial statements as a net pension obligation (NPO) GASB Pension Standards 55 55

HIGHLIGHTS

Scope is limited to pensions provided through trusts that meet certain criteria Revises recognition, measurement, disclosure requirements for all employers   Liability  Measured net of pension plan’s fiduciary net position  Fully recognized in accrual-basis financial statements Changes in the liability  Some recognized as expense in the period of change  Others recognized over defined future periods Effective for FYE beginning after June 15, 2014 56

Statement No. 68,

Accounting and Financial Reporting For Pensions

57

SCOPE AND APPLICABILITY

Defined benefit and defined contribution pensions provided through trusts that meet the following criteria:  Employer/nonemployer contributions irrevocable  Plan assets dedicated to providing pensions  Plan assets legally protected from creditors Excludes OPEB!

Applies to employers and nonemployer contributing entities that have a legal obligation to make contributions to a pension plan  Special funding situations 58

DEFINED BENEFIT PENSIONS

Liabilities to the pension plan (payables) Liabilities to employees for pensions  Net pension liability (NPL)  Total pension liability (TPL), net of plan’s fiduciary net position  TPL = Actuarial present value of projected benefit payments attributed to past periods  Fiduciary net position as measured by pension plan Single/agent employers recognize 100% of NPL Cost-sharing employers recognize their proportionate share of the collective NPL 59

NPL: MEASUREMENT —TIMING

Potentially 3 different dates to consider!

 Employer’s FYE  Measurement date  Actuarial valuation date Measurement date (of NPL)  As of a date no earlier than end of prior fiscal year  Both components (TPL/plan net position) measured as of the same date Actuarial valuation date (of TPL)  If not measurement date, as of a date no more than 30 months prior to FYE  Actuarial valuation at least every 2 years 60

NPL: TIMING EXAMPLE

Employer Fiscal Year end of 6/30/15 When may measurement for the NPL occur?

When may the actuarial valuation be performed?

61

NPL: MEASUREMENT(

GENERAL APPROACH) 3 broad steps  Project benefit payments  Discount projected benefit payments to actuarial present value  Attribute actuarial present value to periods Methods and assumptions  Assumptions in conformity with ASOPs  Fewer options than in Statement 27 for methods and assumptions for GAAP reporting purposes  No changes required to actuarial methods and assumptions used to determine funding amounts 62

TOTAL PENSION LIABILITY (TPL): ILLUSTRATION P R O J E C T B E N E F I T S 25 40 P R E S E N T V A L U E A T T R I B U T I O N 62 D I S C O U N T 80 63

NPL: MEASUREMENT —PROJECTION

Benefit terms/agreements at the measurement date Current active and inactive employees Includes expectations of the following:  Salary changes  Service credits  Automatic postemployment benefit changes (COLAs)  Ad hoc postemployment benefit changes 64

NPL: DISCOUNT RATE

• • • Projected benefit payments must be discounted to their present value, which requires the selection of a discount rate. (for payments received in the future, a lower discount rate (rate of return) would require you to invest a larger amount today) Currently, the discount rate used for this purpose is the long term expected rate of return on pension plan investments, since it is those investment that ultimately will be used to make projected benefit payments In some cases…the assets held by a pension plan over time may be projected to not fully cover projected benefit payments.

65

NPL: DISCOUNT RATE

Under the new Standards, the discount rate should be a single rate that reflects:  The long term expected rate of return on plan investments to the extent that current expected future plan net position available for pension benefits are projected to be sufficient to make benefit payments  A high-quality 20-year municipal bond index rate or yield on tax exempt general obligation bonds (AA rated or higher or an equivalent rating) beyond the point at which plan net assets available for pension benefits are projected to no longer be available for long-term investment 66

NPL: FINDING THE DISCOUNT RATE

1.

2.

3.

4.

Compare projected benefit payments to the pension plan’s projected fiduciary net position in each period Apply relevant discount rate to each period’s projected benefit payments Total the present values of all projected benefit payments Determine the single rate that results in the same present value (if applied to all projected benefit payments) as using the two rates 67

NPL: FINDING THE DISCOUNT RATE

Crossover Point Crossover point Plan Net Position 68

NPL: FINDING THE DISCOUNT RATE

Projections of employer contributions  Apply professional judgment  Consideration of most recent 5-year contribution history  Reflect any known events or conditions  In other circumstances, projected contributions limited to average over most recent 5 years  Maybe modified by consideration of subsequent events  Basis for average determined by application of professional judgment 69

NPL: ATTRIBUTION METHOD

Attribution of the present value of projected benefit payments to periods (for accounting purposes and not for funding purposes):  Single attribution method: Based on entry age normal (used to be 6 methods available for use)  Attribution method: Level percentage of payroll – calculates payments so that they equal a constant percentage of projected payroll over time  Attribution period: over periods beginning in the first period in which the employee’s services lead to benefits under the plan and ending in the last period of the employee’s service 70

NPL: MEASURING PENSION EXPENSE

Pension expense in the financial statements is a product of the following:    Employees work and earn benefits The outstanding liability accrues interest Changes in the measurement of the TPL due to:    Actual economic and demographic changes differing from what was assumed Changing the assumptions about economic or demographic factors Changes in the terms of pension benefits  Changes in the measurement of plan net position due to:  Expected investment earnings  Effects other than investment earnings, such as receipt of contributions from the employer and employee and payment of benefits  Difference between actual investment earning and what was expected 71

NPL: DEFERRED EXPENSE RECOGNITION

The effects of the following items are reported as a deferred outflow of resources or a deferred inflow of resources and recognized as part of pension expense future reporting periods:  Differences between expected and actual changes in economic and demographic factors (remaining service periods of plan members)  Changes in the assumptions about economic and demographic factors (remaining service periods of plan members)  Differences between actual and projected earnings on plan investments (recognized over a five-year, closed period) 72

NPL: ILLUSTRATION

Balances—at 6/30/X8 Changes for the year:

Service cost Interest Benefit changes Experience loss (gains) Changes of assumptions Contributions - Employer Contributions - Employees Net investment income Expected return on plan Expected portion of differences between expected return on plan Non-expensed portion of plan investments above Refunds of contributions benefits paid Plan administrative costs Other changes Amortization

Net changes Balance—at 6/30/X9 Total Pension Liability (TPL) (a)

$ 3,045,893 101,695 231,141 $ (69,638) (2,780) (124,083) 136,335 3,182,228

Plan Net Position (b)

$ 2,283,333 109,544 51,119 199,273 (2,780) (124,083) (3,427) 8 229,654 $ 2,512,987

Net Pension Liability (NPL) (a) - (b)

$ 762,560

Deferred Outflows of Resources

$ 310,538

Deferred Inflows of Resources

$ 50,766 $ 101,695 231,141 (69,638) (109,544) (51,119) (199,273) 3,427 (8) (93,319) 669,241 $ (80,979) (80,979) 229,559 56,690 $ 16,804 (24,250) 49,244 100,010

Pension Expense

$ 101,695 231,141 (9,948) (51,119) (178,268) (4,201) 3,427 (8) 56,729 149,448 $ 149,448 73

NPL: COST-SHARING EMPLOYERS

• • • • • • Recognize proportionate shares of collective NPL, pension expense, deferred outflows of resources/ deferred inflows of resources Proportion (%) Basis required to be consistent with contributions Consider separate rates related to separate portions of collective NPL Use of relative long-term projected contribution effort encouraged Collective measure x proportion = proportionate share of collective measure GASB Pension Standards 74 74

• • •

NPL: COST-SHARING EMPLOYERS — ADDITIONAL CONSIDERATIONS

Potentially three items

1. Change in proportion 2. Difference between: • • The employer’s proportionate share of all employer contributions included in collective plan net position Contributions recognized by the employer in the measurement period 3. Employer’s contributions subsequent to measurement date

Items 1 & 2—expense in current and future periods (systematic/rational method, closed period equal to average of expected remaining service lives) Item 3—deferred outflow of resources, expense in next period

GASB Pension Standards 75 75

NPL: INVOLVEMENT OF NONEMPLOYER CONTRIBUTING ENTITIES • Statement addresses those with legal requirement to contribute directly to the pension plan o Special funding situations    Contribution amount not dependent upon events unrelated to pensions OR nonemployer is only entity with legal obligation to contribute Employer(s) and nonemployer contributing entity apply cost sharing measurement to collective NPL, expense, and deferred outflows/deferred inflows of resources – Nonemployer expense classified in same manner as similar grants to other entities Employer recognizes additional expense and revenue equal to nonemployer contributing entity’s proportionate share of collective expense (portion related to the employer) GASB Pension Standards 76 76

NPL: INVOLVEMENT OF NONEMPLOYER CONTRIBUTING ENTITIES •

Not special funding

• Employer recognizes revenue for change in NPL from contributions from nonemployer contributing entities (rather than expense) • Nonemployer entity classifies expense for contributions in same manner as similar grants to other entities GASB Pension Standards 77 77

NPL: NOTE DISCLOSURES —EMPLOYERS • •

Descriptive information

• • • • Type of plan, identification of administrator Benefit terms—types of benefits, key elements of benefit formula, classes of employees covered, legal authority Contributions—basis, authority, rates ($ or % of pay), contributions in reporting period Availability of plan report

Significant assumptions/other inputs in TPL

• • Inflation, salary changes, postemployment benefit changes, mortality assumptions, dates of experience studies Discount rate—rate, assumptions re: cash flows, how LTeRoR determined, municipal bond rate (if applicable), periods to which each rate applied, assumed asset allocation/expected real rates of return, NPL at discount rate +/- 1% GASB Pension Standards 78 78

NPL: NOTE DISCLOSURES —EMPLOYERS • •

Pension expense in current reporting period Deferred outflows/deferred inflows of resources

• • • Balances by source • Differences between expected and actual experience (TPL) • Changes of assumptions/other inputs (TPL) • • Net difference between projected and actual earnings on pension plan investments Individual items for cost-sharing and special funding situations • Employer’s contributions subsequent to measurement date Net impact on pension expense in each of the next 5 years and thereafter in the aggregate Amount that will be reduction of NPL GASB Pension Standards 79 79

NOTE DISCLOSURES (NPL) —EMPLOYERS •

Single/agent only

• Schedule of changes in NPL by source for current period • • Service cost, interest, benefit changes, contributions by source, plan investment income, etc.

If special funding situation: • • • • Amounts in schedule for collective NPL Nonemployer contributing entity’s proportionate share (amount) of collective NPL • Employer’s proportionate share of collective NPL Number of employees covered—inactive receiving benefits, inactive not receiving benefits, active Allocated insurance contracts GASB Pension Standards 80 80

NOTE DISCLOSURES (NPL) —EMPLOYERS •

Cost-sharing only

• • Employer’s proportion, basis for proportion, change in proportion Employer’s proportionate share (amount) of collective NPL • If special funding situation: • Nonemployer contributing entity’s proportionate share • Total of employer’s and nonemployer entity’s proportionate shares GASB Pension Standards 81 81

NPL: RSI —SINGLE/AGENT EMPLOYERS

• •

10-year schedules

• Changes in NPL by source • • TPL, pension plan fiduciary net position, NPL, plan net position as % of TPL, covered-employee payroll, NPL as % of covered-employee payroll • May be presented with changes in NPL by source If actuarially determined employer contribution (ADEC) • • ADEC, contributions in relation to the ADEC, difference, covered-employee payroll, contributions as % of covered employee payroll If no ADEC, but statutory or contractual contribution requirements, schedule similar to ADEC schedule Notes to RSI with methods and assumptions for ADEC and significant changes GASB Pension Standards 82 82

• •

NPL: RSI —COST-SHARING EMPLOYERS

10-year schedules

• • Employer’s proportion (%), proportionate share (amount) of collective NPL, covered-employee payroll, proportionate share as % of covered-employee payroll, pension plan’s net position as % of TPL • If special funding situation, also (1) nonemployer contributing entity’s proportionate share and (2) total of employer’s and nonemployer entity’s proportionate shares If statutory or contractual contribution requirements • Required contribution, contributions in relation to required, difference, covered-employee payroll, contributions as % of covered-employee payroll Notes to RSI with significant changes GASB Pension Standards 83 83

• NPL: NOTE DISCLOSURES/RSI —NONEMPLOYER CONTRIBUTING ENTITIES IN SFS Required information depends on how much of the NPL is recognized by the nonemployer entity • If substantial proportion, disclosures similar to cost-sharing employer • If less-than-substantial proportion, reduced information • Notes • Type of pension plan, identification of administrator • Contribution basis, authority, amount in reporting period • • Proportionate share (amount) of collective NPL, proportion (%), basis for proportion, change in proportion, expense, and deferred outflows/deferred inflows of resources RSI (10 years)—entity’s proportionate share (amount) of collective NPL, amount of contributions GASB Pension Standards 84 84

EFFECTIVE DATE AND TRANSITION

• • • Fiscal years beginning after June 15, 2014 Beginning deferred outflows/deferred inflows of resources balances all or nothing at initial implementation RSI schedules prospective if information not initially available GASB Pension Standards 85 85

Statement No. 67,

Financial Reporting for Pension Plans

An amendment of GASB Statement No. 25 86

HIGHLIGHTS

• • • Scope limited to defined benefit and defined contribution pension plans administered through trusts that meet certain criteria (same as criteria in Statement 68) Few changes from Statement 25 for financial statement recognition Notes/RSI changes primarily to reflect changes in measurement of liabilities of employers GASB Pension Standards 87 87

HIGHLIGHTS

• • • • • • • • • Notable changes in note disclosures/RSI Annual money-weighted rate of return (10 years in RSI) RSI for single-employer and cost-sharing pension plans (10 years): Schedule of changes in NPL by source Components of NPL/related ratios Schedule of actuarially determined contributions Aggregated employer-related information not required for agent pension plans Effective for FYs beginning after June 15, 2013 RSI schedules prospective (except for contribution schedule, if presented), if information not initially available GASB Pension Standards 88 88

Statement No. 69,

Government Combinations and Disposals of Government Operations

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BACKGROUND

      Historically, when combinations have occurred in the governmental environment, APB Opinion No. 16, Business Combinations was applied, to the extent possible.

In 2007, the FASB issued Statement No. 141(R) In 2009, the FASB issued Statement No. 164, Not-for-

profit entities: Mergers and Acquisitions

Recently, States have encouraged governments to consider the possibility of consolidation GASAC members considered the project prospectus in 2010…and the project was added to the GASB current agenda that year.

Organization of Standard 90

SCOPE

 Includes transactions that meet definitions for the following arrangements:  Government mergers—A government merger is a combination of legally separate entities in which no significant consideration is exchanged and either:  Two or more governments (or one or more governments and one or more nongovernmental entities cease to exist as legally separate entities and are combined to form one or more new governments or…  One or more legally separate governments or nongovernmental entities cease to exist and their operations are absorbed into, and provided by, one or more continuing governments 

Government acquisitions



Transfers of operations

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SCOPE

 Includes transactions that meet definitions for the following arrangements:  Government acquisitions—A government combination in which a government acquires another entity, or the operations of another entity, in exchange for significant consideration.  The consideration provided should be significant in relation to the assets and liabilities acquired. 

The acquired entity or operation becomes part of the acquiring government’s legally separate entity.

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SCOPE

 Includes transactions that meet definitions for the following arrangements:  Transfers of operations—A transfer of operations is a government combination involving the operations of a government or nongovernmental entity, rather than a combination of legally separate entities, in which no significant consideration is exchanged. Operations may be transferred to another existing entity or to a new entity.

 Transfers of operations to existing entities  Transfers of operations to form a new entity 93

SCOPE

 Definition of an Operation  An operation is an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets and liabilities  Service Continuation  To be considered a government combination, arrangements should result in the continuation of a substantial portion of the services provided by the previously separate entities or their operations. Service continuation means the new or continuing government intends to provide services similar to the formerly separate government, organization, or operations 94

GOVERNMENT MERGERS —BACKGROUND  Guided by State statues  Recent examples of government merger activities  Princeton, New Jersey  Louisville/Jefferson County  State of New York 95

GOVERNMENT MERGERS-RECOGNITION

 Recognition of a government merger (the merger date) depends on how the merger is arranged. Statement 69 includes provisions for the following government mergers:  New Governments  Merger date is the effective date of the merger  Continuing Governments  Merger date is as of the beginning of the reporting period 96

GOVERNMENT MERGERS-ACCOUNTING

 Measured using carrying values  May make adjustments to carrying values for:  Conforming accounting principles only  Inventory methods  New accounting principles  Impairment of capital assets  Eliminations…follow existing guidance in Statement 34 97

GOVERNMENT MERGERS-DISCLOSURES

 Basic information about the combination  Amounts recognized at the merger date for  Assets  Deferred outflows of resources  Liabilities  Deferred inflows of resources  Net position  Information about adjustments 98

GOVERNMENT MERGERS - ILLUSTRATION

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GOVERNMENT ACQUISITIONS

 Predominantly occur for those governments engaged in business type activities  Healthcare  Utilities  Colleges & Universities  Transportation  Solid Waste  Important scope reminder !

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GOVERNMENT ACQUISITIONS ACCOUNTING

 Recognition coincides with the closing date  Acquiring government recognizes the assets, deferred outflows of resources, liabilities, and deferred inflows of resources in conformity with authoritative guidance for SLGs  Paragraph 32, use of

Acquisition Value

…rather than fair value measurements  Why use acquisition value?

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GOVERNMENT ACQUISITIONS ACCOUNTING

 There are exceptions to the use of Acquisition Value that include the following:  MSWLF closure and post closure care costs or obligations for pollution remediation (use existing guidance!)  Postemployment benefits, compensated absences (use existing guidance!)  Investments (use fair value!)  Deferred outflows of resources or deferred inflows of resources of an acquiree (generally, use carrying values!) 102

GOVERNMENT ACQUISITIONS CONSIDERATION

 Consideration provided is measured in conformity with paragraphs 32—36.

 May incur a liability to former owners  Assumption of negative net position is not considered to be consideration for purposes of applying this Statement  Contingent consideration arrangements 103

GOVERNMENT ACQUISITIONS CONSIDERATION

 When consideration provided exceeds the value of net position acquired…report excess as a deferred outflow of resources. “Goodwill” is not reported.

 When consideration provided is less than the value of net position acquired…there are 2 possibilities:  Default is to reduce the acquisition value assigned to nonfinancial assets  Recognition of a contribution when arrangements clearly indicate such intent 104

GOVERNMENT ACQUISITIONS-NOTE DISCLOSURES

 Basic combination information  Description of consideration provided, including contingent arrangements if applicable  Total of net position acquired 105

TRANSFERS OF OPERATIONS BACKGROUND

 Many arrangements do not involve entire entities, arrangements may be referred to as follows:  Reorganizations  Redistrictings  Annexations  “Spin-Offs” 106

TRANSFERS OF OPERATIONS – OPERATIONS

 An Operation is an integrated set of activities conducted and managed for purposes of providing identifiable services with assets and liabilities.  Could be a department  Could be a fund  Could be only a specific activity of a fund or department  Use professional judgment!

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TRANSFERS OF OPERATIONS ACCOUNTING

 Generally follow the same accounting as required for government mergers. Use of carrying values and limited adjustments  Transfer date is the date the transferee obtains control  For a continuing government – reports a transaction during the reporting period for a transfer of operations  For a new entity – initial reporting period begins at the transfer date 108

TRANSFERS OF OPERATIONS ACCOUNTING

 Generally follow the same accounting as required for government mergers. Use of carrying values and limited adjustments  Transfer date is the date the transferee obtains control  For a continuing government – reports a transaction during the reporting period for a transfer of operations  For a new entity – initial reporting period begins at the transfer date 109

DISPOSALS OF OPERATIONS — BACKGROUND

 Necessary to have accounting for the transferor government.  FASB Guidance exists for discontinued operations and disposal activities  APB 30 for disposals was not carried forward into Statement 62  Scope includes disposals of operations that are transferred or sold…abandonments should look to the guidance in Statement 42 110

DISPOSALS OF OPERATIONS — ACCOUNTING

 Government recognizes a gain or loss on the disposal of operations. Reported as a special item.

 Government should consider and include in the gain or loss certain costs with regard to the disposal:  Termination benefits  Legal and professional fees  Any other costs associated with the disposal 111

DISPOSALS OF OPERATIONS —NOTE DISCLOSURES

 Description of the facts and circumstances about the disposal  Total expenses, distinguishing between operating and non operating, if applicable  Total revenues, distinguishing between operating and non operating, if applicable  Total governmental fund revenues and expenditures, if applicable.

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CURRENT GASB PROJECTS

• • • • • Fair Value Conceptual Statement on Recognition and Measurement GAAP Hierarchy OPEB Fiscal Sustainability—Projections 113

QUESTIONS?

Jeffery Bridgens, Senior Manager [email protected]

480-366-8328 114

CELEBRATING A CENTURY OF SERVICE

In 1913 an accountant opened a small practice in Seattle to serve the Pacific Northwest’s booming timber industry. Today, that practice is one of the largest accounting and consulting firms in the nation, serving businesses and organizations around the globe.

Yet while we’re pleased to celebrate our centennial, we remain focused on what’s truly mattered all along: you. Because anniversaries are nice. But providing you with vital insights to help your organization succeed? That counts.

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