By Patricia Duperron, CPA
GASB has several new pronouncements that will be effective in the current year and future years:
GASB Statement No. 72, Fair Value Measurement and Application, addresses accounting and reporting issues related to fair value measurements. Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. For those who also audit other nonprofit and for-profit entities, this definition should be familiar as it is the same as Accounting Standards Codification (ASC) 820. Fair value is an exit price and is not adjusted for transaction costs, such as broker fees when selling an investment. The assumption is that the transaction takes place in a government’s principal market or the most advantageous market if there is no principal market. The principal market is the one with the greatest volume of activity for the asset or liability. The most advantageous market is the one that maximizes the price that would be received.
The pronouncement provides for three valuation techniques: the market approach, the cost approach and the income approach. The valuation technique should be consistently applied, maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The hierarchy of inputs used to measure fair value falls into three categories: Level 1 is quoted market prices for identical assets or liabilities; Level 2 is for observable inputs either directly or indirectly; Level 3 is unobservable inputs. Illustrations 1-3 in Appendix C of GASB Statement No. 72 provide examples of Level 1, 2 and 3 inputs. Illustration 5 of Appendix C provides example disclosures.
Certain items currently measured at fair value will now be measured at acquisition value (an entry price): donated capital assets, donated works of art, historical treasures and capital assets received in a service concession arrangement. Certain items that were excluded by GASB 31 continue to be excluded from fair value calculations. Some examples include investments in 2a7-like pools, money market instruments that have a remaining maturity at time of purchase of one year or less, and investments in life insurance policies.
The pronouncement defines an investment as a security or other asset that (a) a government holds primarily for the purpose of income or profit and (b) its present service capacity is based solely on its ability to generate cash or to be sold to generate cash. The purpose is determined at acquisition. Illustration 4 in Appendix C provides examples for applying the definition of an investment. The pronouncement will be effective for the years ending June 30, 2016, and will require restatement of prior periods.
GASB Statement No. 73, Accounting and Reporting for Pensions and Related Assets not within the Scope of GASB 68 and Amendments to GASB 67 and 68, applies the approach to accounting and financial reporting established in GASB 68 to all pension plans that are not within the scope of GASB 68, with certain modifications. Because plans that are not held in trust do not have any assets accumulated, the total pension liability must be recorded instead of the net pension liability under GASB 68. The discount rate must be the yield or index rate for 20-year tax-exempt bonds with an average rating of AA/Aa or higher. Governments cannot use the long-term rate, which would allow for a smaller liability. Any assets held to pay pension benefits should be reported as assets of the employer.
Amendments to GASB 67 and 68 relate to information about investment-related factors and clarify that only information about trends that the plan has influence over should be presented. It also clarifies that payables to a pension plan for any unpaid financing obligations are not separately financed specific liabilities as defined by GASB 67. The last amendment relates to recognizing revenue for support of nonemployer contributions to a pension plan and requires that the contribution be recognized in the same period as the change in the net pension liability is recognized. The amendments will be effective for years ending June 30, 2016.
GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans, addresses an issue related to union-sponsored plans that are not governmental plans but provide benefits to governmental employees as well as employees of other employers. Even though the plans meet the requirements of GASB 68, they are not governmental plans and report under Financial Accounting Standards Board (FASB) guidance. Because of this, governments were not able to get the information from the plans that was required by GASB 68. The pronouncement excludes such plans from GASB 68 and instead requires pension expense to be recognized equal to the employer’s required contributions during the reporting period. There is a specific note disclosure required and 10-year required supplementary information (RSI) schedule of employers’ required contributions with retroactive reporting for all 10 years. The pronouncement will be effective for years ending Dec. 31, 2016, with early application encouraged.
GASB Statement No. 82, Pension Issues, addresses three issues that arose during implementation of GASB 67 and 68. The first relates to the definition of covered payroll included in RSI. GASB 67 defined covered-employee payroll as the payroll of employees that are provided pensions through the plan. GASB 25 and 27 defined covered payroll as all elements included in compensation paid to active employees on which contributions to a pension plan are based–basically pensionable wages. Using the new definition, plans had a hard time getting the total payroll information from the employers as employers only reported to the plans the amount of pensionable wages. This pronouncement changes it back to the old definition: compensation paid to employees on which contributions are based. Restatement will be required for all prior year ratios included in RSI.
The pronouncement also clarifies that a deviation from actuarial standards is not considered to be in conformity with the requirements of GASB 67 or 68 for selection of assumptions in determining the total pension liability. GASB became aware that actuaries may deviate from the actuarial standards to derive reports for plan management but this pronouncement bans such practices for external financial reporting.
The last issue relates to employer-paid member contributions, commonly referred to as employer pick-up. When an employer pays contributions on behalf of members they should be classified as member contributions for GASB 67 plan statements and as employee contributions for GASB 68 reporting and included in salary expense. The issue arose because GASB 67 and 68 required those payments to be classified as employee contributions if the employer reported salary expense; otherwise the payments were classified as employer contributions. This became a challenge for cost-sharing plans in determining an employer’s proportionate share of the collective net pension liability (NPL). Because the allocation of pension amounts is based on contributions, some employers would be allocated a larger share of the NPL if they picked up member contributions. GASB concluded that those payments should not be pension expense. The pronouncement is effective for years ending June 30, 2017.
Other Postemployment Benefits (OPEB) Standards
GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans other than Pension Plans, addresses reporting for state and local government OPEB plans that are administered through trusts and replaces GASB Statement No. 43 for those plans. While the financial statements will be very similar to current statements, the pronouncement provides for enhanced note disclosures and new Required Supplementary Information (RSI). RSI will consist of (1) schedule of changes in net OPEB liability and related ratios; (2) schedule of employer contributions (if actuarially determined); and (3) schedule of investment returns (annual money-weighted rate of return). Each schedule should be for the most recent 10 years.
The pronouncement also requires the net OPEB liability to be measured as the total OPEB liability less the amount of the plan’s net position and specifies the approach to measuring the liability (entry age normal as a level percent of pay). The discount rate will be the long-term rate to the extent there is a plan net position and the municipal bond rate once net position is depleted. However, one blended rate is used. To do this, governments will need to project future revenues and payments. The pronouncement will be effective for years ending June 30, 2017.
GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, establishes requirements for governments that provide their employees with OPEB through a trust and replaces GASB Statement No. 45 for those government employers. The most significant change is that governments will now be required to recognize their net OPEB liability, which is the difference between the total OPEB liability (the portion of the present value of projected benefit payments that is attributed to past periods) and the value of OPEB assets available to pay pension benefits. Additional note disclosure and the first two RSI schedules from GASB 74 will be required. This requirement also applies to cost sharing, multiple-employer plans and plans that are not administered through a trust. Unlike pension plans, which most governments have been funding for quite a while, many OPEB plans are severely underfunded, and the liability to be recorded will be significant.
The statement mirrors the pension requirements of GASB 68. Most changes in the net OPEB liability will be included in current period expense. Other components, such as changes in economic assumptions, will be recognized over a closed period equal to the expected remaining service lives of all employees that are provided benefits. Differences between expected and actual investment rate of return will be recognized in expense over a closed five-year period. The pronouncement will be effective for years ending June 30, 2018.
GASB is working on Implementation Guides for GASB Statements 74 and 75 and expects to issue the Statement 74 Guide draft in October 2016 and finalize it in February 2017. The Statement 75 Guide draft should be issued in June 2017 and finalized in Nov. 2017.
Other GASB Pronouncements
GASB Statement No. 77, Tax Abatement Disclosures, will not result in any accounting or reporting changes but will require specific note disclosures in the financial statements. Tax abatements are widely used by state and local governments to encourage economic development. Tax abatement is defined as an agreement between a government and a taxpayer in which the government agrees to forego tax revenues and the taxpayer agrees to take a specific action that contributes to economic development or achieves a public benefit. The statement requires disclosure about a reporting government’s own tax abatement agreements and those that are entered into by other governments that reduce the reporting government’s tax revenues (such as when a city or county enters into an agreement that reduces a school district’s tax revenue). Disclosure requirements include the number of tax abatement agreements entered into during the reporting period; the total number in effect at end of the reporting period; the dollar amount by which tax revenues were reduced during the period; and a description of other commitments made in the agreements. Disclosures should be organized by each major program and should continue until the tax abatement agreement expires. The pronouncement will be effective for years ending Dec. 31, 2016.
GASB Statement No. 79, Certain External Investment Pools and Pool Participants, establishes the criteria for an external investment pool to measure all of its investments at amortized cost. If a pool meets the criteria and measures its investments at amortized cost, pool participants should also measure their investment in the pool at amortized cost. If the pool doesn’t meet the criteria, the pool should apply the provisions of paragraph 16 of GASB 31. This statement was issued to address changes the Securities and Exchange Commission (SEC) made in the Investment Company Act of 1940, Rule 2a7, which contains the regulations applicable to money market funds. Under GASB 31, pools that were “2a7 like” were allowed to use amortized cost. Due to the SEC change in the 2a7 rules, GASB issued this statement to update the guidance for pools. The pronouncement will be effective for years ending June 30, 2016.
GASB Statement No. 80, Blending Requirements for Certain Component Units, requires that component units incorporated as a nonprofit, when the primary government is the sole member, should be reported as a blended component unit. Component units that are included in accordance with GASB 39 are excluded from this statement. The pronouncement will be effective for years ending June 30, 2017.
GASB Statement No. 81, Irrevocable Split-Interest Agreements, provides recognition and measurement guidance when a government is a beneficiary of a split-interest agreement. Governments will be required to recognize assets, liabilities and deferred inflows of resources at fair value at the inception of the agreement and must re-measure them annually. Examples include charitable lead trusts, charitable remainder trusts, life-interest in real estate and charitable annuity gifts. The pronouncement will be effective for years ending Dec. 31, 2017.
Other GASB Projects
GASB issued the Exposure Draft, “Certain Asset Retirement Obligations,” that applies to certain asset retirement obligations, such as nuclear power plants and sewage treatment facilities, which would require governments to recognize a liability and deferred outflow when the liability is both incurred and reasonably estimable. Similar to the rules over landfills, the liability should be based on the current value of the expected future outlays. The expected effective date is for years ending Dec. 31, 2018.
GASB issued an Exposure Draft, “Fiduciary Activities,” related to fiduciary activities which would establish criteria for reporting fiduciary activities and replace agency funds with a new custodial fund for activities that are not held in trust. For activities for which a trust agreement exists, an investment trust fund or private purpose trust fund will be used. Pension funds not held in trust would be classified as custodial funds. The expected effective date is for years ending Dec. 31, 2018.
The GASB Exposure Draft, “Leases,” would require governments to recognize a lease liability and an intangible right-to-use lease asset. Lessors would recognize a lease receivable and deferred inflow of resources and would not derecognize the underlying asset. This differs from private sector standards. Short-term leases (maximum term of 12 months or less) are excluded. The expected effective date is for years ending Dec. 31, 2019.
GASB is reexamining the financial reporting model and GASB Statement Nos. 34, 35, 37, 41 and 46, and GASB Interpretation No. 6, and considering presentation alternatives for resource flows. It recently initiated projects to re-examine going concern disclosures and footnote disclosures.
GASB is also reviewing debt extinguishments when only existing resources are placed in an irrevocable trust for the purpose of extinguishing debt and has tentatively decided that in-substance defeasance treatment should be applied. The difference between the reacquisition price and net carrying amount would be recognized immediately, unlike GASB 7 and 23, which allow for the difference to be deferred. GASB expects to issue an exposure draft on this topic in August 2016 and to be finalized in May 2017.
The GASB Omnibus Project will address several practice issues covering a variety of topics. An exposure draft is planned for September 2016 and the final is expected in March 2017.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com