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Financial Statement Review (Public)

LESSONS LEARNED FROM EARLY IMPLEMENTATION OF GASB STANDARDS EFFECTIVE 2013

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PRESENTER Jim Lanzarotta, CPA, Partner

National Practice Leader for Government Services

May 20, 2013 2

TODAY’S OBJECTIVES • Today’s program is designed to help you better understand: o Implementation issues for the newly effective accounting standards o Review of financial reporting best practices – Round 2

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OVERVIEW • • • • • • • •

Letter of transmittal Management discussion & analysis Service concession arrangements (GASB 60) Reporting entity (GASB 61) Codification of applicable FASBs (GASB 62) Basic financial statements Statement of Net Position (GASB 63) Footnotes

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LETTER OF TRANSMITTAL • Consider the Letter of Transmittal as an excellent way to tell the institution’s story – and perhaps with additional letters from the President or others? o (University of Arizona President’s letter example) o (Clemson Goals example) o (University of Michigan example)

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MANAGEMENT DISCUSSION AND ANALYSIS • Consider starting with discussion of statement of revenues and expenses – it generally drives changes in the statement of net assets!

• Provide the ‘why’ when commenting on significant changes from prior year (University of Idaho example)

• Stay away from covering topics/information not specifically required by GASB 34 • Adopt the ‘Dragnet’ approach – “just give me the facts…ma’am”

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MANAGEMENT DISCUSSION AND ANALYSIS

• Discussion of currently known facts, circumstances, decisions and their financial impacts could be significantly improved o (University of California example)

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Statement 60 Accounting and Reporting for Service Concession Arrangements

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SERVICE CONCESSION ARRANGEMENTS What is an SCA? An arrangement in which: • a transferor conveys to an operator the right and related obligation to provide services to the public through the operation of a capital asset, in exchange for significant consideration • the operator collects and retains fees from third parties

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SERVICE CONCESSION ARRANGEMENTS What is an SCA? An arrangement in which (continued): • the transferor determines, modifies, or approves: o What services the operator is required to provide o To whom the services will be provided o The prices or rates that will be charged • the transferor is entitled to significant residual interest in the capital asset (GASB 60 flowchart resource) 10

SERVICE CONCESSION ARRANGEMENTS TRANSFEROR ACCOUNTING • After initial measurement, the capital asset is subject to existing reporting requirements • Improvements made to the facility would increase the transferor’s asset • Does NOT depreciate if arrangement requires operator to return facility to transferor in its original or enhanced condition 11

SERVICE CONCESSION ARRANGEMENTS TRANSFEROR ACCOUNTING • A liability is recorded at present value if a contractual obligation exists AND if it meets either of the following criteria: o 1) Directly relates to the facility, OR o 2) Relates to a commitment by the transferor to maintain a minimum or specific level of service in connection with the operation of facility. 12

SERVICE CONCESSION ARRANGEMENTS • Revenue is recognized in a systematic and rational manner over the term of arrangement as the deferred inflow is reduced • Liability is reduced as transferor’s obligations are satisfied o When obligation is satisfied, a deferred inflow is reported and related revenue is recognized in systematic and rational manner over the term 13

SERVICE CONCESSION ARRANGEMENTS What about the Governmental operator?

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SERVICE CONCESSION ARRANGEMENTS Governmental operator • Reports an intangible asset for the right to access and use the property • Improvements made to the facility by the government operator increases the operator’s intangible asset if improvements increase the efficiency capacity of the facility 15

SERVICE CONCESSION ARRANGEMENTS Other provisions • Revenue-sharing arrangements o Governmental operator reports all revenues earned and expenses incurred o Unconditional payments treated like installments o The transferor recognizes conditional amounts when earned • Disclosures o Description of the arrangement including management’s objectives for entering the arrangement o Nature and extent of rights retained or transferred o Nature and amounts recognized in the statements 16

Statement 61 The Financial Reporting Entity—Omnibus

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REPORTING ENTITY The most significant effects of the amendments are to: o Increase the emphasis on financial relationships o Clarify the requirements to blend certain component units o Improve recognition of ownership interests  Joint ventures  Component units 18

REPORTING ENTITY • 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 (GASB 61 flowchart) 19

REPORTING ENTITY • Current year issues to consider

o Reporting options for FASB reporting component units (CIG 4.33.1-4) (University of Alaska Foundation) o Concerns that implementation of the GASB 61 will result in ‘de-blending’ entities formerly blended  Relationships that lack financial benefit/burden

o Need to review changes to bylaws and other governing documents that establish relationships

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POSSIBILITY OF DE-BLENDING Impact for “de-blending” situations: • • • • • • •

Formatting of the financial statements Statement of cash flows Note disclosures for major component units Segregation of disclosures for DCU’s Recognition of equity interests Changes in opinion units Group audit considerations 21

Statement 62 Codification of Pre-November 30, 1989 FASB and AICPA Pronouncements

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GASB 62 - CODIFICATION OF PRE-NOVEMBER 30, 1989 FASB AND AICPA PRONOUNCEMENTS • • • • • • • • •

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)

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GASB 62 - BASIC GUIDANCE • Supersedes Statement 20!

o All applicable pre-11/30/89 standards are in GASB’s codification o All applicable post-11/30/89 non-GASB standards are considered “other accounting literature” (Old GASB 20 footnote no longer needed) o Accounting changes to apply Statement 62 should be retroactively applied 24

BASIC FINANCIAL STATEMENTS GASB VS. FASB • Too often, state legal guidance is used • Guidance is currently only found in AICPA audit and accounting guides • GASB – Level B GAAP • FASB – other accounting literature (Link to State and Local Government Audit Guide)

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BASIC FINANCIAL STATEMENTS - GAAP • Reporting employee benefit trust funds

o If the University has fiduciary responsibilities for single employer pension and OPEB plans accounted for in separate legal trust accounts – the University should be including the trust fund financial statements within the University’s financial statements  Confusion interpreting guidance in GASB 34 (University of California example)

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Statement 63

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

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GASB 63 - 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

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GASB 63 - 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 (University of California example)

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GASB 63 – CURRENT DEFERRALS • There are few items that GASB standards require to be reported as deferred outflows/inflows of resources as of today: o Statement 53–Derivative Instruments o 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.

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GASB 63 - BASIC FINANCIAL STATEMENTS

• Statement of Net Position

o Account title for unearned revenue – still using ‘deferred revenue’ which used to be more appropriate for general government operations (Example)

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FOOTNOTES • Summary of significant accounting polices o Component unit disclosures

 Sufficient disclosures for the reader to understand – How an entity meets criteria to be reported as a component unit – Why a component unit is blended or discretely presented (Clemson University example)

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FOOTNOTES • Cash/Investments

o Investment disclosures should be organized by investment type, such as U.S. Treasuries, corporate bonds, or commercial paper. Dissimilar investments, such as U.S. Treasury bills and U.S. Treasury strips, should not be aggregated into a single investment type. o Disclosures should be made for fiduciary funds and component units when significant (CUS Investment Classifications)

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FOOTNOTES • Receivables

o Details about receivables aggregated in the financial statements when those aggregations obscure significant components of the receivables  (GASB Statement No. 38, Certain Financial Statement Note Disclosures, paragraph 13)

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FOOTNOTES • Capital assets

o Roll-forward table of classes of capital assets and balances (Capital asset roll-forward table example)

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FOOTNOTES • Long-term debt – general

o variable rate debt - often missing disclosure of the terms by which the interest rate varies  Watch your current and non-current classification for variable rate demand bonds

o Interest rate swaps

 Disclosure of significant terms and fair value

o Best practice, and GFOA Certificate requirements  Original amount of the debt issued (WSU example)  Applicability of Federal arbitrage regulations

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FOOTNOES • Pension plans – commonly missed disclosures o Type of plan – single, agent multi-employer, cost sharing defined benefit plan, defined contribution plan o Authority for making changes to both plan provisions, as well as contribution requirements

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FOOTNOTES • Pension plans – commonly missed disclosures o Value of plan net assets o Current years schedule of funding progress o Annual Pension Contribution (APC) and employer contribution information o Disclosures should focus on APC as adjusted for cumulative over/under funding

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REQUIRED SUPPLEMENTARY INFORMATION

• Omitting pension and OPEB trend information for sole and agent employer plans o Appears to duplicate information required in the notes – but still required

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QUESTIONS???

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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.

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Bio’s Jim Lanzarotta, Partner, is the national practice leader for the Firm’s State and Local Government Services Group. He is the AICPA’s representative to the Government Accounting Standards Advisory Council responsible for assisting the GASB with its project agenda, and providing feedback on proposed accounting standards and reporting issues. He just completed six years of service, the last three as chair, of the AICPA State and Local Government Expert Panel responsible for reviewing all proposed accounting and auditing standards and providing feedback on behalf of the AICPA, as well as updates to AICPA publications including the Audit Guide to State and Local Governments, Audit Risk Alerts, and Practice Aids. Moss Adams, LLP [email protected] 541-225-6070 42

Thank You

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