By Eric Berman
October 09, 2016
Like most of us, the summer is time to relax, be with friends, watch baseball and get ready for the annual audit season. But it was a fairly busy summer for the GASB. The GASB deliberated on six major projects throughout the summer, which will result in additional due process documents this fall and into next year. Most recently, an exposure draft Certain Debt Extinguishment Issues was released.
As part of our effort to make you feel understood, connected and confident, Eide Bailly is proud to actively participate in the standard setting process. Eide Bailly Partner Eric Berman attended the last few GASB meetings on our clients’ behalf in order to keep you ahead of changes coming in the future. Many things were discussed that may directly impact your operations into the future.
Financial Reporting Model Moves Toward Initial Feedback
Most of the meetings this year have focused on the Financial Reporting Model Improvements project. In June, Partner Eric Berman was in New York offering views on the initial stages of the project at a Roundtable Task Force meeting of industry experts involved with the project.
An Invitation to Comment (ITC) document is being released in December 2016 on the project, with an anticipated comment period ending on March 31, 2017.
An ITC is a GASB staff document designed to seek comments early in a project before the Board has achieved consensus. The GASB is expecting to receive a large amount of feedback on the document. As such, five public hearings are tentatively scheduled during late April and May 2017. Three additional user forums are expected to be held, soliciting feedback solely from the financial statement user community, including analysts, taxpayer groups and legislative members. Both the hearings and the user forums are tentatively slated to have conference calling ability so that all who want to participate can do so. The ITC represents a tremendous opportunity for all of us to provide feedback on how state and local government financial reporting (and auditing) will be shaped for many years to come.
The ITC is expected to ask for comment on:
At least two alternatives for the measurement focus and basis of accounting for governmental funds are expected to be included. One may drop pending discussions during the next few months. During the summer, the Board discussed the following approaches:
Appendices containing comparisons of common transactions found in governmental funds and resulting fund financial statements will be included as part of the ITC. The appendices will be vitally important to clarify each of the approaches.
Governmental Fund Statement of Cash Flows?
The Board is discussing the need for a statement of cash flows for the proposed accrual-based approaches (working capital and total financial resources). A statement of cash flows would not be necessary for the near-term approach as the inflows and outflows would be readily reconciled to cash, due to its shorter timeframe for recognition of transactions. Initial research indicated that users of financial statements desired a governmental fund-based statement of cash flows for accrual based models. Yet to be determined would be in either accrual-based approach, if a reconciliation between the information in the statement of cash flows and whatever statement of inflows and outflows results for governmental funds from the project may not be necessary as there may not be a subtotal for operating income in the inflows and outflows statement.
Adjustments to Reconciliation Between Fund Statements and Government-Wide Statements?
Depending upon any final change in the accounting model for governmental funds, the current reconciliation between the governmental fund statements and the government-wide statements may need to be adjusted. However, for the accrual-based models, the length and content of the reconciliation would be greatly diminished as only long-term accruals or capital assets and capital-related debt would need to be added. All other transactions would be reported in the financial statements for the accrual-based models. For the near-term approach, reconciliations would still include revenues, expenses and other elements that are not recognized in the fund statements, similarly to the current model.
Statement of Activities and other Fund Statement Changes?
Some users of the financial statements have been confused by the Statement of Activities as it is not in a traditional format like other financial statements. The ITC is expected to present a reformatted statement of activities with revenues presented first and expenses presented by function or program. The ITC will also introduce a proposed statement similar to information presented by not-for-profit organizations in order to satisfy the continuing need of users for transparency about the net cost of programs.
Upon the release of the ITC, Eide Bailly will hold forums on the provisions with you and webinars. These are in the process of being scheduled. All clients and non-clients are welcome to join. Details will be posted at http://www.eidebailly.com/about-us/events.aspx. It is vitally important to share your views with others in these forums and for all to comment to the GASB as your feedback will shape financial reporting and auditing in the future.
Other Projects at the GASB
The GASB focused on other projects during the summer including:
Certain Debt Extinguishment Issues Exposure Draft Released
The GASB released this exposure draft in late August. Three issues are proposed for change: Accounting and Financial Reporting for In-Substance Defeasance of Debt Using Only Existing Resources, Prepaid Insurance Related to Extinguished Debt and Notes to Financial Statements for In-Substance Defeasance Transactions.
Traditionally, governments have defeased debt (set aside bond proceeds in escrow to service future amounts) by selling refunding debt. However, some governments may use existing resources to retire future debt by not selling refunding debt. The exposure draft would have the same requirements for defeasance as other GASB provisions that have been in place since 1987. The resources must be placed in an irrevocable trust. Any differences between the amount to be placed in trust and the carrying value of the debt defeased would be identified as a gain or loss on defeasance. Any remaining prepaid insurance related to the debt would be included in the net carrying amount of the debt for the purpose of calculating gain or loss. Note disclosure on the transaction is also proposed, including the investment risk of the underlying assets placed in trust.
GASB has proposed an effective date for periods beginning after June 15, 2017. Comments are due by Oct. 28, 2016 on the proposal.
How will this affect my government? Some governments may generate a surplus or sell an asset where debt is outstanding. However, current GASB standards are not clear on the requirements for defeasance when no refunding debt is issued. Therefore, the proposal is targeted solely at the accounting and financial reporting should those matters occur and may have minimal effect on day-to-day operations of most governments.
Omnibus Exposure Draft to Be Released Shortly
Omnibus proposals are released every few years to ‘clean up’ current standards in alignment with recently issued standards. Issues are being proposed to change related to the reporting of component units, reclassification of negative goodwill in government combinations, fair value measurement and postemployment benefits.
Component Unit Changes, Again
GASB Statement No. 61 amended paragraph 54(a) in GASB Statement No. 14 relating to business-type activities (BTA). Amended language in the paragraph has been widely misinterpreted. The intent of that amendment was to give BTA governments the choice of either (1) providing the blended component unit information in a separate column or (2) consolidating the data into the single column of the BTA government. However, some have interpreted the words “may be blended” as an option to blend any component unit. The GASB will propose limiting to a single column presentation only for blended component units and not discretely presented component units.
No More Goodwill
GASB Statement No. 69 standardized the accounting and financial reporting for government combinations. The proposal will clarify that negative goodwill should not be reported when a government pays more funds in consideration than net position required.
Fair Value Measurement and Application Changes
There have been many questions on the implementation of GASB Statement No. 72. Real estate used in operations by insurance entities has been a source of some questions, due to existing provisions in GASB Statements No. 10 and No. 62. The proposed clarification would require insurance entities to classify real estate used in operations either as an investment or capital assets, based on whether the asset meets the definition of an investment in Statement No. 72. In addition, money market funds and participating interest-earning investment contracts will continue to be allowed to be presented at amortized cost as permitted by GASB Statement No. 31, paragraph 9.
As discussed in our previous newsletter, the GASB was slated to make changes to Statement 75 (OPEB) to the recently issued GASB Statements No. 78 and No. 82. This exposure draft contains those alignment proposals including provisions for on-behalf payments, payroll related measures, employer-paid member contributions and Taft-Hartley plans. Other provisions regarding note disclosure and required supplementary information changes are also proposed.
The proposed changes would be effective for reporting periods beginning after June 15, 2017. Comments are due in November.
ARO and Fiduciary Activities Nearing Final Standards
Throughout the summer, the GASB has deliberated final provisions of these projects.The Asset Retirement Obligations project (ARO) has had minimal controversial issues as much of the exposure draft has been confirmed. A final standard will be issued by the end of November.
Fiduciary Activities though has met with more controversy. GASB has decided to tentatively remove the term administer from the definition of a fiduciary activity and adjust the definition of direct. Direct is now expected to be defined in the following context:
The government, or its designee who is acting on behalf of the government, has the ability to use, exchange, or employ the assets. The designee, when applicable, is performing the government’s fiduciary duties and not assuming them. As a result, appointing a designee to act on its behalf does not change the fact that the government has the ability to use, exchange, or employ the assets.
Many other clarifications and changes are slated, including, but not limited to the rescinding of GASB Statement No. 32 related to Internal Revenue Code 457 Plan reporting.
Until a final standard is released in December, language will be unclear.
Discussions Continue on Leases Project
The Leases project was also a source of considerable discussions during the summer. These included:
All of these were discussed and some clarified, but without major changes from the exposure draft. A final standard is not expected until April of 2017 due to the extended deliberations on the project.
Implementation Guides Expected
Finally, the Board is expected to issue exposure drafts for the annual Implementation Guide update and the Implementation Guide – OPEB Plans during the next few months. The Implementation Guide for OPEB employers is not expected until the summer of 2017.