the accounting and auditing year in review - gfoa.org accounting and auditing year in review monday...
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The Accounting and Auditing Year in Review Monday May 23, 2016 | 10:30 a.m. – 12:10 p.m. | 2 CPE Robert W. Scott, Director of Finance, City of Brookfield,
Wisconsin R. Kinney Poynter, Executive Director, National Association of
State Auditors, Comptrollers, and Treasurers Stephen J. Gauthier, Director of Technical Services,
Government Finance Officers Association
THE AUDITING YEAR IN REVIEW 2016 GFOA Annual Conference Toronto, ON May 23, 2016 R. Kinney Poynter, Executive Director, NASACT
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Today’s Agenda • Current Issues in Public Sector Auditing
1. OMB’s Uniform Guidance
2. Auditing Standards Update 3. Other Emerging Issues
§ Transparency Reporting – The DATA Act § Continuing Disclosures – Role for Auditors?
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OMB Grant Reform
• Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (“Uniform Guidance”) • Final Rule issued on December 26, 2013
• Contained in 2 CFR Part 200 • Effective dates:
• Federal agencies on December 13, 2014 • Subpart F audit requirements are applicable to fiscal
years beginning on or after December 26, 2014
• Interim Rule (for agencies) issued on December 19, 2014
• Resources: • http://www.whitehouse.gov/omb/grants_docs/ • https://cfo.gov/cofar/
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OMB Uniform Guidance • Goals of the new guidance:
• Strengthen oversight of federal funds to reduce the risk of fraud, waste and abuse
• Streamline guidance for federal awards to ease administrative burden
• More effectively focus federal resources on improving performance and outcomes while ensuring financial integrity
• Deliver on the promise of more efficient, effective and transparent government
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Grant Reform Implementation • OMB continues to work on a series of FAQ’s to clarify the
guidance • Most recent update in September 2015
• Currently 100 FAQs
• Technical correction issued in September 2015 • OMB has developed metrics to identify if the reforms have
achieved the stated purpose of increasing efficiencies and reducing burden
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Audit Requirements – Single Audits • Major Program Determination (200.518)
• Basic four-step process remains in place • Group all programs as Type A or B • Identify and select high-risk Type A programs • Identify and select high-risk Type B programs • Select additional programs to meet required coverage rules
• However, modifications are made to each step
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Audit Requirements – Single Audits • High-Risk Type A Programs (200.518(c))
• Considered high-risk if the most recent period had a high-risk audit finding: • Modified opinion • Material weakness in internal control • Known or likely questioned costs exceeding 5% of total program
expenditures • Revisions should reduce burden by having fewer high-risk Type A
programs
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Audit Requirements – Single Audits • High-Risk Type B Program (200.518(d))
• Perform risk assessments on Type B programs until at least 25% of low-risk Type A programs have been identified as high-risk Type B programs • Auditors should use an approach that provides an opportunity for
different high-risk Type B programs to be audited as major over a period of time
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Audit Requirements – Single Audits • Final Step (200.518(e))
• Auditor must audit all of the following as major programs: • All Type A programs not identified as low risk • All Type B programs identified as high risk • Such additional programs to meet the minimum coverage rules
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Implementation Issues • Risk Assessments for Type B programs
• All high-risk Type B programs identified through risk assessment must be tested as major
• If you risk assess too many Type B programs, you will over audit • Example: With 10 low-risk Type A programs, you only need to select 3
high-risk Type B programs (25%). But, if you conduct risk assessments on 10 Type B programs and 7 are deemed high risk, you will have to audit all 7 as major programs.
• Key: Stop risk assessing Type B programs when the threshold is met!
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Implementation Issues • Heavy Audit Burden in Year 3 (2018)
• New high-risk criteria will cause more Type A programs to be deemed low-risk
• However, all Type A programs must still be tested as major at least once every three years • As a result, there will be a heavy audit burden in year 3 due to large number
of low-risk Type A programs that must be tested as major • “Smoothing” of major programs over three-year period is a solution
• Potential FAQ will address this concern • Auditors should be planning ahead now!
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Implementation Issue • Audit findings follow-up (200.511)
• Auditee is responsible for follow-up and corrective action on all audit findings
• Corrective action plan and summary schedule of prior audit findings must include findings relating to the financial statements which are reported under GAGAS. • Must now include non-federal findings in CAP and schedule of prior
audit findings.
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Implementation Issues • DUNS Number Requirement Eliminated?
• Yes (sort of) • Yes, joint interim final rule in December 2014 removed all references to
DUNS • Replaced with “unique entity identifier” for SAM (System for Award
Management) • Change in terminology created confusion
• Not to be confused with FAIN which applies to the specific award
• But, currently SAM still requires the DUNS Number
• May be a foreshadowing of changes ahead
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Relevant FAQs • Effective Dates and Incremental Funding (.110-7)
• How does the effective date apply to incremental funding? • Effective for first funding increment issued on or after 12/16/14 for:
• new awards and for agencies that consider incremental funding to be opportunities to change award terms and conditions
• For incremental funding not subject, non-Federal entities are not obligated to separate and track old funds and new funds, but may do so at their discretion.
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Relevant FAQs • Is accrual basis of accounting required for determining
federal awards expended? • No, the non-federal entity may make this determination consistent
with its established accounting method to determine expenditures including accrual, modified accrual or cash basis
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Relevant FAQs • Are GAAP-based financial statements required?
• No. While using GAAP is preferable, some non-federal entities use a special-purpose framework (e.g., cash, modified-cash, or regulatory) either voluntarily or because they are required to by law or regulation • However, the auditor must include an emphasis of matter paragraph
stating noncompliance with GAAP • If a regulatory basis is used for general use purposes, the auditor must
issue an adverse GAAP opinion, in addition to an opinion on the special-purpose framework being used
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Relevant FAQs • Are audit costs allowable? (200.425)
• Internal audit costs of the non-Federal entity are allowable when they support the Single Audit process (200.425-1, 200.425-5)
• Legislative and performance audits are not allowable (200.425-1, 200.425-3)
• Financial statement audit cost is allowable (200.425-2, 200.425-4)
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Relevant FAQs • Government-wide Audit Quality Project (200.513(a)(3))
• Will the project begin in 2018? • No. The project will examine single audits submitted to the FAC no
earlier than 2018 and will, therefore, occur in 2019 or 2020 as determined by OMB.
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Pension Plan Costs - Allowability • Section 200.431(g)(3)
• “For entities using accrual based accounting, the cost assigned to each fiscal year is determined in accordance with GAAP” • GASB 68 calculated pension costs differ from the amounts funded
• HHS DCA is currently disallowing amounts funded in excess of GASB 68 amount
• OMB is currently analyzing situation
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AUDIT STANDARDS UPDATE
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AICPA ASB Update • New Audit Standards
• SAS No. 130 (October 2015) • SAS No. 131 (January 2016)
• New Attestation Standards • SSAE No. 18, Attestation Standards: Clarification and
Recodification (April 2016) • The “clarity project” for attestation standards!
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SAS 130 • An Audit of Internal Control Over Financial Reporting That
Is Integrated With an Audit of Financial Statements • Moves AT 501 into SASs since these engagements are required to
be integrated with an audit of financial statements
• Effective date • Integrated audits for periods ending on or after December 15, 2016 • www.aicpa.org
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SAS 130 • Includes the following changes:
• Auditors must examine and report directly on the effectiveness of IC over financial reporting • No longer an option to examine and report on management’s assertion
about IC effectiveness • Terminology changes to align with GAAS
• Significant account or disclosure changed to • Significant class of transactions, account balance, or disclosure
• Allows the auditor to use the work of internal auditors pertaining to IC effectiveness
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SAS 131 • Amendment to SAS No. 122, Forming an Opinion and
Reporting on Financial Statements • Clarifies the format of the auditor’s report when the audit is
conducted in accordance with PCAOB standards but the audit is not under PCAOB jurisdiction • Applies primarily to clearing agencies and futures commission brokers
registered with the CFTC
• Effective date • Audits of financial statements for periods ending on or after June
15, 2016 • www.aicpa.org
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SSAE 18 • Attestation Standards, Clarification and Recodification
• Establishes requirements for performing and reporting on examinations, reviews, and agreed-upon procedures
• Effective Date • Practitioners’ reports dated on or after May 1, 2017
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SSAE 18 • Similar format as the clarity standards for SASs
• Designated as AT-C • Establishes objectives for each AT-C section • Includes a definitions section • Separates requirements from application and other explanatory
material
• Minimal new requirements
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GAO’s Government Auditing Standards • Major revision in 2011 – pretty quiet since, but now
ramping up • Potential areas for revision:
• Clarified Format • Internal Control • Ethics • Independence • Skills, Knowledge, and Experience • Auditor Preparation of Financial Statements • Management Assertions in Performance Audits • External Peer Review • Continuing Professional Education
• http://gao.gov/yellowbook/overview
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OTHER EMERGING ISSUES
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Increasing Transparency: The Continuing Story • ARRA
• Final report May 2014
• FFATA • Monthly reporting of federal awards and contracts at prime/first-tier
sub levels • Ongoing
• DATA • Passed into law on May 9, 2014 • Amends FFATA
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DATA Act: Full Disclosure of Federal Funds • Any funds expended by a Federal agency (or component)
must be reported monthly (when practicable) but not less than quarterly
• 10 specific items are listed, e.g., • amount of budget authority appropriated • amount obligated • accounts from which the appropriations are obligated, etc.
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DATA Act: Data Standards • Government-wide financial data standards shall be
established for all federal funds and be used by both federal agencies and recipients
• Must include common data elements for financial and payment information • Goal is to improve the usability, transparency and accountability of
financial and performance information
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DATA Act: Data Elements • 57 elements overall
• Many from FFATA • e.g., legal business name and address, CFDA number, award ID,
current value of the award, primary place of performance, etc. • Eight new ones required by the DATA Act
• e.g., object class, appropriations account, budget authority appropriated, obligation, unobligated amount, other budgetary resources, program activity, and outlay
• Finalized on August 31, 2015
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DATA Act: Section 5 Pilot Program • A pilot program shall be established to develop
recommendations for the: • Use of standardized reporting elements across the Federal
government • Elimination of unnecessary duplication in financial reporting, and • Reduction of compliance costs for recipients
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DATA Act: Section 5 Pilot Program • May 2015 pilot launch
• Deployed a blog-type dialogue for opportunities to reduce burden and compliance costs for Federal award recipients
• Launched a Common Data Element Repository Library (C-DERL)
• Launched an expanded Grants.gov portal to promote easier access to grants’ lifecycle information
• Discussing revisions to the data collection form to include info from the schedule of federal awards
• HHS Data Act Program Management Office is currently testing pilot models
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DATA Act: Section 5 Pilot Program – Current Test Models • C-DERL
• An “authoritative” online repository of grants-related standards, definitions and context.
• Hypothesis • If recipients are provided standard definitions of data elements, they will
be able to accurately complete forms more timely • Test
• Determine if there is a difference in recipient burden based on access to C-DERL
• Identify duplicate forms and ways to amend forms to reduce burden
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DATA Act: Section 5 Pilot Program – Current Test Models • Consolidated Federal Financial Report (FFR, SF 425)
• FFR is currently submitted through multiple entry systems • Hypothesis
• A “single point of entry” would be more efficient than submitting the same data on multiple forms to multiple reporting avenues
• Test • Working with Administration for Children and Families (ACF) to test
ACF’s grant recipient reporting consolidated FFR into the Payment Management System
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DATA Act: Section 5 Pilot Program – Current Test Models • Single Audit Reporting (two items)
• Combined DCF and SEFA • Common Notice of Award (NOA) Cover Sheet
• Hypothesis • Some data on the DCF and SEFA are duplicative; burden can be
reduced • Standardized NOA would facilitate access to standardized data
needed for SA reports
• Testing • Currently developing “Long Form SF-SAC” • Standardized NOA will be developed by Grants.gov; focus group
will test efficiency gains
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DATA Act: Section 5 Pilot Program – Current Test Models • Learn Grants
• Involves a newly created grants information gateway portal expansion of Grants.gov
• Hypothesis • Grants lifecycle info located in one place will improve grant
recipients’ access to resources and knowledge
• Test • Focus groups will test their knowledge with and without access to
Learn Grants
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DATA Act: Timeline/Deadlines • May 2015
• Establish data standards
• May 2017 • Federal agencies must report spending data using data standards
• August 2017 • OMB must report Section 5 pilot results
• May 2018 • Federal agencies must post spending data in machine-readable
formats
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DATA Act: Resources • Want to know more?
• USA Spending • https://www.usaspending.gov/Pages/data-act.aspx
• Spending Transparency Collaboration (GitHub) • https://fedspendingtransparency.github.io/
• National Dialogue on Reducing Burden • https://cxo.dialogue2.cao.gov/a/pages/gsa-challenges
• Open Beta (discusses the schema) • https://openbeta.usaspending.gov
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Municipalities Continuing Disclosure Cooperation (MCDC) Initiative • SEC initiative
• Encourages issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws
• In return, SEC will recommend favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in prior bond offerings about their compliance with continuing disclosure obligations
• Deadlines: • September 10, 2014 for dealers • December 1, 2014 for issuers
• Currently monitoring SEC enforcement • Insights on SEC’s view on materiality
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Municipalities Continuing Disclosure Cooperation (MCDC) Initiative • Results
• Three rounds of fines and penalties against 72 underwriters (96% of market share) totaling $18 million • July 2015 – 36 firms fined $9.3 million • October 2015 – 22 firms fined $4.1 million • February 2016 – 14 firms fined $4.6 million
• Now the attention turns to issuers!
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Municipal Disclosure – Key Requirements • SEC Rule 15c2-12
• Underwriters are prohibited from purchasing or selling municipal securities unless an issuer has committed to annually provide financial information and operating data • Continuing disclosure agreement (CDA) • Electronic Municipal Market Access (EMMA)
• www.msrb.org
• Material events (12) • 17 CFR 240.15c2-12
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Municipal Disclosure – Does the Auditor Have a Role? • Compliance testing
• Direct and material effect on the financial statements? • Quantitative vs. Qualitative materiality
• Management representations • Inquire of management?
• PPC and AICPA • PPC ALG 904.75-.82 • AICPA 2016 Audit Risk Alert for SLG
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THE ACCOUNTING YEAR IN REVIEW 2016 GFOA Annual Conference Toronto, ON May 23, 2016 Stephen J. Gauthier, Director of Technical Services, GFOA
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Today’s agenda • Ten new final GASB statements
• Five on postemployment benefits • Five on other topics
• GAAP Hierarchy (GASB 76) • Tax abatement disclosure (GASB 77) • Investment pools (GASB 79) • Blending if sole corporate member (GASB 80) • Irrevocable split-interest agreements (GASB 81)
• Three new exposure drafts • Fiduciary activities (12/15) • Certain asset retirement obligations (12/15) • Leases (1/16)
• New implementation guidance • Reporting model
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Postemployment benefits • Pensions
• GASB Statement No. 73 • Benefits offered through plans not qualifying as trusts • Technical amendments
• GASB Statement No. 78 • Benefits offer through multiple-employer plans shared with
nongovernment employers • GASB Statement No. 82
• Technical issues (including employer-paid employee contributions)
• OPEB • GASB Statement No. 74 - plans • GASB Statement No. 75 - employers
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POSTEMPLOYMENT BENEFITS Pensions (GASB 73, 78, 82) OPEB (GASB 74, 75)
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PENSION BENEFITS OFFERED THROUGH PLANS THAT DO NOT QUALIFY AS TRUSTS/TECHNICAL AMENDMENTS GASB Statement No. 73 Effective date: FYE 6/30/17 - guidance on nonemployer contributors
FYE 6/30/16 - everything else
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Scope of GASB pension standards • Plans administered through trusts or equivalent
arrangements • Contributions are irrevocable • Assets may be used only to provide pensions to plan members in
accordance with plan terms • Legally protected from creditors
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Issue • Pension arrangements not administered through a trust or
equivalent arrangement • Same objectives as other pension arrangements • Only difference = no fiduciary net position (FNP)
• Conclusion • Apply the provisions of GASB 67 and GASB 68 accordingly
• Report both accumulated assets and total pension liability • Use discount rate for an unfunded liability
• High-grade municipal rate
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Technical amendments • Notes to schedules of RSI
• “Information about investment-related factors that significantly affect trends in the amounts reported” • Limited to those factors over which the pension plan or participating
governments have influence
• Separately financed pension liability • Exclude payables for unpaid financing obligations associated with
the pooled portion of the total pension liability • Even if separate payment terms
• Support not qualifying as special funding situation • Recognize revenue when reported as a change in the net pension
liability
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BENEFITS OFFERED THROUGH MULTIPLE-EMPLOYER PLANS THAT INCLUDE NONGOVERNMENTAL EMPLOYERS GASB Statement No. 78 Effective date: FYE 12/31/16
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Overview • Challenge
• Employers in cost-sharing plans where neither the plan itself nor most of its participating employers are governmental entities. • Difficult or impossible to obtain information to comply with GASB
Statement No. 68
• Resolution • Remove from scope of GASB Statement No. 68 • Provide an alternative approach
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Criteria to qualify • Plan not a state or local pension plan • Plan provides benefits to employees of nongovernmental
employers • No single government/governmental employers in the
aggregate predominant
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Financial reporting • Continue earlier guidance for cost-sharing plans
• Pension expense/expenditure = employer contributions associated with the period • Even if billed in a subsequent period
• Employer liability limited to unpaid contributions
• Required supplementary information (RSI) • Required contributions (ten most recent years)
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TECHNICAL ISSUES GASB Statement No. 82 Effective date: FYE 6/30/17
Actuarial assumptions - first period in which measurement date on or after 6/15/17 if measurement date other than employer year end
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Three issues • Measure of payroll
• Replace covered-employee payroll with covered payroll • Covered-employee payroll (total compensation) • Covered payroll (portion of payroll on which contributions are based)
• Selection of assumptions • Actuarial assumptions cannot deviate from Actuarial Standards of
Practice (ASOPs)
• Classification of employer-paid member contributions • Treat as member contribution
• Classified like similar forms of compensation other than pensions (fringe benefits)
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OTHER POSTEMPLOYMENT BENEFITS (OPEB) GASB Statement Nos. 74 & 75 Effective date: Plans - FYE 6/30/17
Employers - FYE Fiscal year ending 6/30/18
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Background • Economic substance of OPEB
• Employee compensation paid in a later period • Substantively equivalent to pensions
• Treatment until now • Parallel treatment for pensions and OPEB
• Compromised by recent pension changes
• New GASB OPEB standards • Restore parallel treatment
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Fundamental OPEB changes • Employer liability
• Net employer liability vs. unfunded contributions
• Employer expense • Recognition divorced from funding
• Cost-sharing plans • Employer’s proportionate share of total liability and expense
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Other observations • Incorporates guidance on pensions not administered
through a trust (no need for OPEB equivalent of GASB 73) • Retains special OPEB features
• Requirement to consider an implicit rate subsidy as OPEB • Alternative measurement method for small employers and plans
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Other observations (cont.) • Broadened sensitivity disclosure
• +/- 1% in the discount rate
• +/- 1% in the health-care trend rate
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TOPICS OTHER THAN POSTEMPLOYMENT BENEFITS GAAP Hierarchy (GASB 76) Tax abatement disclosure (GASB 77) Investment pools (GASB 79) Blending if sole corporate member (GASB 80) Irrevocable split-interest agreements (GASB 81)
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THE HIERARCHY OF GAAP FOR STATE AND LOCAL GOVERNMENTS GASB 76 Effective date: FYE 6/30/15
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New hierarchy • Two levels of authoritative sources of GAAP
• Highest level – requires GASB approval • Second level – requires GASB clearance
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AUTHORITATIVE GUIDANCE Category A Category B
GASB Statements (including previously
issued interpretations)
GASB Technical Bulletins (TB)
GASB Implementation Guides (IG)
Applicable AICPA literature cleared by
GASB
Key changes • Implementation Guides now authoritative
• Need for due process • Scope limited to clarifying, explaining, or elaborating • Illustrative material consigned to nonauthoritative appendices
• Equal authority • GASB Original Pronouncements • GASB Codification of Governmental Accounting and Financial
Reporting Standards
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Nonauthoritative guidance • GASB Concepts Statements • Literature of other standard-setting bodies
• Financial Accounting Standards Board • Federal Accounting Standards Advisory Board • International Public Sector Accounting Standards Board • International Accounting Standards Board • Relevant AICPA guidance not cleared by the GASB
• Widely recognized and prevalent practices • Literature of other professional associations • Literature of regulatory agencies • Accounting textbooks, handbooks, and articles
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Application of nonauthoritative guidance • No specific authoritative guidance?
• Consider authoritative guidance for similar transactions and events • Unless application by analogy prohibited
• How to evaluate nonauthoritative sources? • Consistency with GASB Concepts Statements • Relevance to the particular circumstances • Specificity of the literature • General recognition of the issuer/author as an authority
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TAX ABATEMENT DISCLOSURE GASB Statement No. 77 Effective date: FYE 6/30/15
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Tax expenditures • “Opportunity cost” of foregoing the collection of taxes to
which otherwise entitled • Subcategories
• Tax exemptions • Tax deductions • Tax abatements
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Definition: tax abatements • A reduction in tax revenues that results from an
agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments
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Essential characteristics • Type of revenue
• A tax (not a fee or charge)
• Existence of an agreement • Identifiable agreement with a specific individual or entity
• Government promises to reduce the counterparty’s tax liability • The counterparty promises to take certain actions
• Must precede any reduction in taxes • Does not have to be in writing • Does not have to be legally enforceable
• Purpose • Promote economic development or otherwise benefit the
government or its citizens
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Two types of tax abatements • Agreements of the government itself • Agreements of others that reduce the government’s
revenue
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Level of detail • Distinguish:
• Government’s own agreements • Organized by major tax abatement program, even for abatements that
are disclosed individually • Agreements of others that reduce the governments revenue
• Organized by government and specific tax abated, even for abatements that are disclosed individually
• Individual display • Criterion = quantitative threshold
• Different thresholds may be used for government’s own agreements and agreements of others
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Duration and legal limitations • Required only as long as abatements are outstanding
• Information on a government’s associated commitments not necessary once fulfilled
• Governments are not required to present information if they are legally prohibited from doing so (although that fact must be disclosed)
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Agreements of the government (1/2) 1. A brief description that includes:
• Names and purposes of tax abatement programs • Specific taxes being abated • Authority for entering into the tax abatement agreement • Eligibility criteria for recipients • Abatement mechanism
• How taxes are reduced (reduction of tax liability, rebate, reduction of assessed value)
• How the amount is determined (specific dollar amount or percentage of taxes owed)
• Provisions for recapturing abated taxes (“claw-back” provisions) and the conditions for recapture
• Type of commitments made by recipients
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Agreements of the government (2/2) 2. Gross dollar amount of revenue reduction in period
(accrual basis) 3. If amounts received/receivable from other governments
• Names • Authority • Dollar amount received/receivable
4. Commitments in addition to tax reduction (until fulfilled) • Types • Most significant individual commitments
5. Quantitative threshold for disclosure by individual agreement
6. Description of general nature of information omitted because of legal prohibition and specific source of latter
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Agreements of other governments 1. A brief description that includes:
• Names of governments • Specific taxes being abated
2. Gross dollar amount of revenue reduction in period (accrual basis)
3. If amounts received/receivable from other governments • Names • Authority • Dollar amount received/receivable
4. Quantitative threshold for disclosure by individual agreement
5. Description of general nature of information omitted because of legal prohibition and specific source of latter
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EXTERNAL INVESTMENT POOLS GASB Statement No. 79 Effective date: Generally FYE 6/30/16
Additional 6 months (certain requirements)
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Issue • Money-market mutual funds
• Allowed to use amortized cost • Fair value normally approximates amortized cost
• Traditional criteria = SEC 2a7
• Challenge • Continued use of SEC Rule 2a7 no longer practical
• Resolution • Set specific GASB criteria to replace SEC Rule 2a7
• When a pool is allowed to report all of its investments at amortized cost • When participants in a pool are allowed to report their participation in
the pool using a net asset value (NAV) based on amortized cost
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Criteria for a pool to qualify (1/2) 1. Stable net asset value (NAV) per share 2. Portfolio maturity
• Remaining maturity ≤ 397 days • Weighted average maturity ≤ 60 days • Weighted average life ≤ 120 days
3. Portfolio quality • Highest credit rating category
4. Portfolio diversification • Single issuer≤ 5 % total assets
84
Criteria for a pool to qualify (2/2) 5. Portfolio liquidity
• Acquisition of illiquid security • Liquid must remain ≥ 95% total assets
• Acquisition of any security • Daily liquid must remain ≥10% total assets • Weekly liquid must remain ≥ 30% total assets
6. Monthly calculation of a fair value shadow price • Deviation > 0.5% price/share = disqualification for use of amortized
cost
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BLENDING IF SOLE CORPORATE MEMBER GASB Statement No. 80 Effective date: FYE 6/30/17
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Background • Situation
• Desire to increase services or spin off operations • Legally separate entities that are component units
• Governing bodies comprise • Representatives of the community • Primary government as sole corporate member
• Typically have not qualified for blending • Not the same board • Services not (almost) exclusively provided to government • Primary government not responsible for all debt
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Challenge and solution • Theory
• Blending should be used if a component unit functions essentially as part of the government • Certainly the case if the government is the sole corporate member
• Solution • Establish an additional criterion for blending
• Unit incorporated as not-for-profit corporation (but not included based on GASB 39), and
• Primary government is sole corporate member
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IRREVOCABLE SPLIT-INTEREST AGREEMENTS GASB Statement No. 81 Effective date: FYE 12/31/17
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Background • Irrevocable split-interest agreements
• Donor resources conveyed to intermediary • Government • Other beneficiary
• For unconditional benefit of government and other beneficiary • Lead interest
• Access to resources during term of agreement • Annuity • Percentage of fair value (unitrust)
• Remainder interest • Access to resources at termination of agreement
• Terms based on • Specific number of years (period-certain term) • Lifetime (life-contingent term) • Combination
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Government as intermediary (1/3) • Timing of recognition
• Agreement executed and • Assets received
• Elements recognized • Assets for donated resources • Liability to third party (= “split” interest) • Deferred inflow of resources (= government’s share)
• Government may be • Lead interest beneficiary • Remainder interest beneficiary
• Changes in value of assets – direct adjustment • Asset • Liability/deferred inflow
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Government as intermediary (2/3) • Government as lead interest beneficiary
• Liability to remainder interest beneficiary • Deferred inflow for government’s lead interest • Revenue as payments are received
• Government as remainder interest beneficiary • Liability to lead interest beneficiary • Deferred inflow for government’s remainder interest • Revenue only at term of agreement
• If actual residual amount exceeds deferred inflow • Gain (accrual) • Revenue (modified accrual)
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Government as intermediary (3/3) • Life interest in real estate
• Donated asset • Investment or capital asset (acquisition value)
• If capital asset, depreciate/amortize during the term of the agreement • Reduction of deferred inflow of resources.
• Liability for legal obligation to sacrifice resources (future insurance, maintenance, or repairs).
• Deferred inflow of resources for the difference • Revenue at term of the agreement
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Third party as intermediary (1/2) • Elements to be recognized
• Asset (fair value) • Deferred inflow of resources
• Timing of recognition • Sufficient information to measure the government’s beneficial interest
• The government is specified by name as beneficiary. • The agreement is irrevocable. • The donor has not granted variance power to the intermediary. • The donor does not control the intermediary. • The agreement establishes a legally enforceable right for the government.
• Lead interest • As payments received: - asset/ + revenue
• Remainder interest • Upon distribution: - asset/ + revenue
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NEW EXPOSURE DRAFTS Fiduciary activities (12/15) Certain asset retirement obligations (12/15) Leases (1/16)
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FIDUCIARY ACTIVITIES GASB Exposure Draft (12/15) Proposed effective date: FYE 12/31/18
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Background • Issues
• What constitutes fiduciary responsibility? • When should liabilities to beneficiaries be recognized? • How to distinguish among fiduciary fund types?
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Proper use of fiduciary funds • Three tests
• Control • Hold assets, or • Ability to administer or direct use, exchange, or employment of the
present service capacity of the assets. • External source
• Assets cannot be derived solely from own source revenue • Distinct from the government
• Administered through a trust of which government is not a beneficiary, or • Beneficiaries not required to be residents or recipients of goods and
services, or • Not part of the financial reporting entity and not recipients of goods and
services, or • Pass-through grant with no administrative or direct financial involvement
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Fiduciary fund types • Pension (and other employee benefit) trust funds
• Unchanged
• Investment trust funds • Unchanged
• Private-purpose trust funds • Assets held in trust that cannot be reported in either a pension trust
fund or an investment trust fund
• Custodial funds • Assets not held in trust
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Exception • Business-type activities
• May report asset and liability (vs. separate fiduciary fund) if resources are to be held for three months or less • Cash flows from operating activities in the business-type activity’s
statement of cash flows.
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Liability recognition • Demand for the resources has been made, or • No further action or condition is required to be met to be
entitled to receive the resources. • Example, tax collections on behalf of other governments.
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Detail for additions and deductions • Basic rule for all trust funds
• Additions by source • Separately report
• Investment income • Investment costs (that is, costs that are separable from both investment
income and administrative expense) • Net investment income.
• Deductions by type • Separately report administrative costs
• Exception • Custodial funds that hold resources for three months or less
• Option to report single aggregated totals for • Additions • Deductions
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ASSET RETIREMENT OBLIGATIONS GASB Exposure Draft (12/15) Proposed effective date: FYE 12/31/18
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Background • Asset retirement obligation (ARO)
• Legally enforceable liability associated with the retirement of a tangible capital asset • Sale, abandonment, recycling, other
• Source of obligation (external obligating event) • Existing laws and regulations • Legally binding Contracts • Court judgments
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Recognition and measurement • Recognize ARO liability when
• Incurred • External obligating event • Internal obligating event
• Reasonably estimable • Measure ARO based on current costs (not present value)
• Best-estimate approach that takes into account all available evidence (including the likelihood of potential cash flows) • Probability weighting of potential outcomes if sufficient evidence is available
or can be obtained at reasonable cost
• Classify • Normally deferred outflow
• Expense over useful life of the asset • Sometimes immediate expense
• Example: asset abandoned prior to being placed into service
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Remeasurement • Periodically evaluate factors that could affect outflows
• General inflation/deflation • Price increases/reductions for specific outlay elements • Changes in technology • Changes in laws, regulations, contracts, or court judgments • Changes in the type of equipment, facilities, and services that
will be used
• Treatment of effect of remeasurement • Prior to retirement?
• Adjust deferred outflow • Expense over remaining life of asset
• Subsequent to retirement? • Immediate recognition
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Fiscal funding and assurance provisions • Do not net liability and assets restricted for repayment
• Disclose assets restricted for repayment in notes (if not displayed on face)
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Disclosure • General description. • Methods and assumptions used to measure the liability • Estimated remaining useful life of the tangible capital
asset • How funding and assurance provisions are being met • Assets restricted for payment of liability (if not separately
reported in the financial statements) • If a liability for as ARO is not yet recognized because it
cannot reasonably be estimated, disclosure of that fact and the reasons for it
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LEASES GASB Exposure Draft (1/16) Proposed effective date: FYE 12/31/19
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Definition • A contract that conveys the right to use a nonfinancial
asset (the underlying asset) for a period of time in an exchange or exchange-like transaction
• Exclude • Leases of intangible assets • Leases of biological assets, including timber • Contracts that meet the definition of a service concession
arrangement (GASB Statement No. 60)
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Lessee accounting • Statement of net position
• Recognize a lease liability at the beginning of a lease (unless short term) • Present value of payments to be made over the lease term
• Recognize an intangible asset for the right to use the capital asset • Value of the lease liability plus
• Payments to lessor at or before lease begins • Certain indirect costs
• Statement of resource flows • Reduce liability for payments • Recognize interest expense • Amortize lease asset
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Lessor accounting • Statement of net position
• Recognize a lease receivable at the beginning of a lease (unless short term) • Present value of lease payments to be received over the lease term • Continue to report the capital asset underlying the lease
• Recognize a deferred inflow of resources • Value of the lease receivable plus
• Payments received at or before lease begins that relate to future periods (rent for the lease’s last month)
• Statement of resource flows • Reduce receivable for payments • Recognize interest revenue • Recognize lease revenue from the deferred inflow
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Short-term leases • Definition
• A lease that, at its beginning, has a maximum possible term under the contract of 12 months or less • Includes options to extend
• Accounting • Lessee
• Recognize expense/expense based on the payment provisions of the contract
• Lessor • Recognize revenue based on the payment provisions of the contract
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Key changes • Lease accounting only if ownership does not ultimately
transfer to the lessee • Otherwise a financed sale/purchase of an asset
• Treatment • Lessees report intangible asset for right to use underlying capital
asset • Not the underlying asset itself
• Lessors continue to report underlying capital asset and a lease receivable
• Distinction • Long-term leases vs. short-term leases (proposed) • Capital leases vs. operating leases (current)
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NEW IMPLEMENTATION GUIDANCE GASB Implementation Guidance Update – 2016 Effective date: FYE 6/30/17
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Content • 83 new questions
• Examined in final session on Wednesday: Say It Isn’t So!: Financial Reporting Deficiencies and Misunderstandings
• 41 revised questions
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REPORTING MODEL Forthcoming GASB Invitation to Comment
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Recently discussed issues • Recognition in governmental fund financial statements
• Exploring three options • Near-term financial resources • Working capital • Total financial resources
• Alternative formats for the statement of resources flows • Current format • Alternative format (distinguishes short-term and long-term
activities)
• Potential use of “natural” classifications
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