Everything you Need to Know About Implementing GASB 65 Florida Governmental A&A Conferences May 7, 8, & 9, 2014 cliftonlarsonallen.com
Learning Objectives Gain an understanding of GASB No. 65, Items Previously Reported as Assets and Liabilities Effectively identify items now classified as deferred inflows and deferred outflows Identify steps to effectively implement this standard 2
Background GASB Statement No. 65 3
GASB 65 Effective Dates Financial Statements for periods beginning after December 15, 2012. So: December 31, 2013 June 30, 2014 September 30, 2014 4
Background GASB Concepts Statement No. 4 issued in 2007 identified 5 elements of a statement of financial position: Assets Liabilities Deferred outflows Deferred inflows Net position GASB Statement No. 63 incorporated these elements and changed GASB No. 34 s statement of financial position 5
Concept Statement No. 4 States. The recognition of deferrals is limited to those instances specifically identified by GASB, so GASB needed to provide a standard that addressed items already deferred in the financial statements That standard is GASB No. 65 6
Key Definitions Deferred outflows of resources A consumption of net assets that is applicable to a future period. Positive effect on net position, similar to an asset Deferred inflows of resources An acquisition of net assets that is applicable to a future period. Negative effect on net position, similar to a liability 7
Items Previously Reported as Assets and Liabilities GASB Statement No. 65 8
Assets That Will Remain Assets Prepaid items The portion of bond issuance costs related to prepaid insurance General accounts receivable Rights to future revenues purchased from outside of the reporting entity Grants paid out in advance of meeting eligibility requirements, other than timing requirements 9
Assets That Will Change to Deferred Outflows Deferred amounts from refunding debt due to the difference between the reacquisition price required to pay refunded debt and the net carrying amount of the refunded debt Grants paid out in advance of meeting a timing requirement Interfund purchases of future revenues Loss on the sale of property that is accompanied by a leaseback 10
Liabilities That Will Remain Liabilities Grant funds received in advance of meeting eligibility requirements, other than timing requirements Refunds imposed by a regulator Resources received in advance of an exchange transaction unearned revenue Derived tax revenue received in advance Premium revenues from public entity risk pools 11
Liabilities That Will Change to Deferred Inflows Deferred amounts from refunding debt due to the difference between the reacquisition price and the net carrying amount of the refunded debt Grant funds received in advance of meeting a timing requirement Taxes received in advance Proceeds from the sale of future revenue Gain on the sale of property that is accompanied by a leaseback Unavailable revenue 12
Items No Longer Deferred At All Previous liabilities which are now inflows Loan origination fees Commitment fees Fees received for the sale of loans Previous assets which are now outflows Loan origination costs Costs to acquire loans Debt issuance costs (other than the portion related to prepaid insurance) Initial costs incurred by the lessor in an operating lease Acquisition costs for risk pools 13
Other Provisions Use of the term deferred is reserved for deferred inflows and deferred outflows and should be limited to these concepts Major fund determination should include deferred outflows with assets and deferred inflows with liabilities for calculation purposes 14
Implementation GASB Statement No. 65 15
Steps to take for implementation Ensure bond issuance costs are broken out from discounts and premiums Review grants paid in advance for timing or other requirements Apply retroactively by restating financial statements for all periods presented (fully-comparative statements). If restatement is impractical, the cumulative effect of applying this statement should be reported as a restatement of beginning net position or fund balance If financials are restated opinion letter will include an Emphasis-of-Matter paragraph explaining restatement Determine if net effect of implementation will be material (be sure to evaluate for major enterprise funds individually)
Disclosures Details of different types of deferred inflows and outflows are to be disclosed either on the face of the financial statement or in the footnotes Explain the effect and reason for the effect on net position, if significant Related assets and deferred inflows Related liabilities and deferred outflows 17
Disclosures How about disclosures about changes in long-term liabilities? Should info be provided about changes in deferred outflows/inflows of resources arising from debt refunding transactions? Answer: Not required b/c they do not affect longterm liabilities (GASB Implementation Guide 2013-14 Ch. Z.65.1) 18
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Non-exchange Transactions Per GASB 33, paragraph 7, four classes of non-exchange transactions: Derived Tax Revenues result from assessments made by governments on exchange transactions Imposed Nonexchange Revenues come from assessments made by governmental entities on nongovernmental entities that are not assessments on exchange transactions Government-mandated Nonexchange Transactions result from a government requiring another (recipient) government to perform a particular program and providing the funding for the program Voluntary Nonexchange Transactions come from legislative or contractual agreements entered into willingly between governmental or nongovernmental entities. 20
Non-exchange Transactions Revenue Recognition: Derived tax revenues Period when underlying exchange takes place Report advance receipts as liabilities Under modified accrual basis of accounting, report deferred inflows of resources for resources that do not meet the availability criteria 21
Non-exchange Transactions Revenue Recognition: Imposed non-exchange transactions Report as revenue when resources are required to be used or first period that use is permitted Report deferred inflows of resources for resources received or reported as a receivable before such period Under modified accrual basis of accounting, report deferred inflows of resources for resources that do not meet the availability criteria 22
Non-exchange Transactions Revenue Recognition: Government-mandated nonexchange transactions and voluntary non-exchange transactions when all eligibility requirements have been met Report deferred inflows of resources for resources received or reported as a receivable before time requirements are met but after all other eligibility requirements have been met (grantor would report deferred outflows of resources) Under modified accrual basis of accounting, report deferred inflows of resources for resources that do not meet the availability criteria 23
Non-exchange Transactions Per GASB 33, paragraph 20, four kinds of eligibility criteria: Required Characteristics of Recipients the recipient has the characteristics specified by the provider Time Requirements period in which resources are required to be used, as specified by the provider Reimbursements resource provider may specify that a recipient cannot qualify for non-exchange resources without first incurring allowable costs under the provider's program Contingencies the provider s offer of resources is contingent upon a specified action of the recipient. 24
Example 1 - Questions A CDBG entitlement city receives its 2013-14 $290,000 SHIP allocation from FL Housing Finance Corporation SHIP dollars may be used to fund emergency repairs, new construction, rehabilitation, down payment and closing cost assistance, acquisition of property for affordable housing, and other similar uses Funds must be spent within a three year period What eligibility requirements are there? When would the City recognize the revenue? 25
Example 1 - Answers Requirement to use the resources within three years is not a time requirement Should recognize receivables and revenues, for the full amount of the award, on the first day of the state's fiscal year Is there a purpose restriction? YES = restricted fund balance AND net position 26
Example 2 - Question Same as Example 1, except that the State of Florida requires the return of resources not used by the end of three years, and after 2 years, it becomes apparent the City will have unused resources at the end of three years What is the accounting treatment, if any? 27
Example 2 - Answer Once the determination is made, the City would recognized an expense and a liability The portion to be returned would also wipe out restricted fund balance and net position related to SHIP 28
Example 3 - Question The City receives $290,000 in grant funding from HUD for FY 2015-16 relating to the NSP 5 program. Only 40% can be spent in year one, up to 70% can be spent in year two, and the entire 100% shall be spent by year 3 Is revenue recognition the same in this case? 29
Example 3 - Answer In this case.no! A stipulation of this kind would be time requirements and in year 1 would require recognition of revenue of only $116,000 and the remaining $174,000 would be recorded as deferred inflow of resources 30
Example 4 - Questions A developer completes construction of an industrial park and turns over the water, sewer, and power lines to the City, as stipulated in an agreement made at the onset of construction. Under the agreement, the City is not required assume responsibility for the power lines until the industrial park is completed; the developer is responsible until completion. Is this an exchange or non-exchange transaction? How should the City record? 31
Example 4 - Answers Voluntary non-exchange transaction Eligibility requirement = completion of the industrial park The city should recognize capital assets and capital contribution revenues for the water, sewer, and power lines when the industrial park is completed 32
Example 4a - Question Same scenario, except based on City ordinance, whenever a developer donates infrastructure assets, the developer is required to make a one-time $800,000 contribution to the City, which is based on the assessed value of the property. Is this an exchange or non-exchange transaction? How should the $800k contribution, which was made upon completion of construction, be recognized by the City? 33
Example 4a - Answer Imposed non-exchange transaction The city should recognize a receivable and a revenue when an enforceable legal claim arises that is, when the infrastructure is substantially complete Purpose restriction? Yes! So restricted fund balance/net position 34
Example 4b - Question Same scenario, except that the City accepts payment plans with developers So City assesses 20% every year for five years How to recognize the revenue? 35
Example 4b - Answer The city should recognize a receivable and a revenue for the PV of discounted cash flows for entire contribution requirement, less estimated uncollectible amounts, in the period when the infrastructure is substantially complete If reported in a governmental fund, recognize revenue each year when available; remaining uncollected amount should be reported as deferred inflow of resources 36
Example 4c - Question Same scenario, but per ordinance, the City must spend each year s contribution for maintenance on the infrastructure (cannot spend less in Year 1 and more in Year 2, for example). Any unspent amount after each year is promptly returned to the developer. Is revenue recognition the same or different? 37
Example 4c - Answer The City should recognize a receivable and a revenue each year for that year's contribution. Contributions received in advance should be reported as deferred Inflows of resources 38
Example 5 - Question FDOT distributes money to transit agencies throughout Florida to be used only for bus purchases and existing transit system modernization projects. Before a transit agency can receive funding, it must apply for the resources and identify the actual modernization projects and plans within the application. Once the application is approved and resources awarded, each transit agency may spend the available money over an indefinite period of time. 39
Example 5 Question cont. One requirement for each local transit agency is to submit semi-annual reports documenting the status of each project FDOT approved ABC Transit Agency s application on September 10, 2014 for a $1.2m award. The full amount of the award was to be received in January 2015. The first semi-annual report to FDOT is due by the end of March 2015. How much grant revenue should ABC Transit Agency recognize and when? What if the application was accepted on November 20, 2014, but Transit Agency A felt there was a greater than 50% chance it would be accepted as of 9/30/14? 40
Example 5 Answer Once FDOT approves ABC Transit Agency s application for an award and the applicable period begins, then recognize revenue The applicable period begins with the first day of the state s fiscal year to which the award applies and extends indefinitely Since award isn t received until after the availability period, record a receivable, offset by deferred inflow of resources 41
Example 6 - Question Section 197.222, FL Statutes, allows an alternative plan for payment of property taxes. A taxpayer who elects to pay taxes by the installment method will make payments based on an estimated tax equal to the actual taxes levied on the property in the previous year ¼ of total estimated taxes due to be paid by June 30, 2014 and September 30, 2014 ¼ of total estimated taxes plus adjustment to actual payments to be made by December 31, 2014 and March 31, 2015 How to recognize these payments? 42
Example 6 - Answer Taxes received in advance: record as deferred inflow of resources Follow revenue recognition criteria relating to imposed non-exchange transactions (property taxes earned when levied) 43
Refunding Debt Example Reacquisition Price = The amount required to repay the previously issued debt. Includes principal of the old debt and any call premium (in an advance refunding, it is the amount placed in escrow that, together with interest earnings is necessary to pay interest and principal on the old debt) Net Carrying Amount (of old debt) = The amount due at maturity, adjusted for any unamortized premium or discount
Refunding Debt Example Refunded GO Bonds with $10,000,000 outstanding principal and 10 years remaining until maturity. Refunded bonds had unamortized discount of $125,000 and unamortized bond issuance costs of $65,000 Refunding bonds have life of 15 years There is a $50,000 call premium Refunding bonds have $225,000 in underwriting fees, attorney costs, and other issuance related costs, as well as $75,000 in bond insurance costs 45
Refunding Debt Example Reacquisition Price - $10,000,000 + $50,000 = $10,050,000 Less Carrying Amt - $10,000,000 - $125,000 = $9,875,000 Deferred Outflow (Loss) on Refunding of $175,000 Amortized as component of interest expense over 10 years as the remaining life of the refunded debt is shorter than the life of the new refunding debt. If refunded debt had unamortized premium of $125,000, rather than discount, result would be a Deferred Inflow (Gain) on refunding of ($75,000)
Refunding Debt Example What to do with the bond issuance costs, old and new? $65,000 old issuance costs either restate of beginning net position or fund balance or expense, depending on materiality considerations $75,000 in insurance costs record as prepaid bond insurance (asset) and amortize over life of refunding bonds issued All other bond issuance costs expense in period incurred!
Andrew Laflin, CPA Manager, Public Sector Group andrew.laflin@claconnect.com 813-384-2711 cliftonlarsonallen.com twitter.com/ CLA_CPAs facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 48