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Financial Reporting and Regulatory Update

Second Quarter 2019

From the GASB

Final standards

Implementation guidance update

On May 2, 2019, the GASB issued Implementation Guide No. 2019-1, “Implementation Guidance Update – 2019,” to clarify, explain, or elaborate on certain GASB pronouncements. The guide includes 14 new questions and answers to address application of existing GASB standards covering various topics including the following:

  • Postemployment benefits – plan and employer (1-5)
  • Derivative instruments (6)
  • Nonexchange transactions (7)
  • Impairment of capital assets and insurance recoveries (8)
  • Intra-entity transfers of assets (9-10)
  • Fund balance reporting and governmental fund type definitions (11)
  • Tax abatement disclosures (12)
  • Irrevocable split-interest agreements (13-14)

In addition, the implementation guide amends four previously issued questions and answers from Implementation Guides 2015-1 and 2017-2.

Effective date

The requirements of this implementation guide are effective for reporting periods beginning after June 15, 2019. Early application is encouraged for guidance related to standards that already have been implemented.

Conduit debt obligations

On May 28, 2019,  the GASB issued Statement No. 91,  “Conduit Debt Obligations,” to provide guidance on how government issuers report conduit debt obligations. Conduit debt obligations are debt instruments issued by a state or local government to provide financing for a specific third party that is not part of the issuer’s financial reporting entity and primarily is liable for repaying the debt instrument.

Existing guidance for accounting for conduit debt obligations is found in GASB Interpretation No. 2, “Disclosure of Conduit Debt Obligations.” This guidance allowed government issuers to recognize conduit debt obligations as their own debt liability    or simply disclose the transaction in the notes to their financial statements. This  option has resulted in a disparity in practice among governments that issue conduit debt obligations, thus affecting the comparability of financial statement information.

This statement is designed to eliminate diversity in practice by:

  • Clarifying the definition of a conduit obligation
  • Providing a single method of reporting by eliminating the option for government issuers to recognize a conduit debt obligation as a liability
  • Broadening the definition of conduit debt obligations to include those for which government issuers 1) make related additional commitments, such as guarantees or moral obligation pledges, or 2) voluntarily agree to make debt service payments or request an appropriation for such payments, if necessary
  • Clarifying the accounting and financial reporting of additional commitments extended by issuers and arrangements associated with conduit debt obligations, which often are characterized in practice as leases but are not leases for financial reporting purposes
  • Improving note disclosures

While the statement stipulates that an issuer does not recognize a liability for the conduit debt obligation, an issuer that has made, or voluntarily provides, commitments would recognize a related liability and expense or expenditure if qualitative factors indicate that it is more likely than not (more than 50%) that it will support one or more debt service payments for a conduit debt obligation. The statement includes specific qualitative factors to be considered in place of extant guidance in GASB Statement

70 “Accounting and Financial Reporting for Nonexchange Financial Guarantees” or Statement 62, “Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.” 

Effective date

The requirements of this statement are effective for reporting periods beginning after Dec. 15, 2020. Early application is encouraged.

Implementation guide on fiduciary activities

On June 17, 2019, the GASB issued Implementation Guide 2019-2, “Fiduciary Activities.” The implementation guide contains questions and answers to clarify, explain, or elaborate on the GASB’s new standards on accounting and financial reporting for fiduciary activities, GASB Statement 84, “Fiduciary Activities.”

The GASB released Statement 84 in January 2017. The statement improves guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be reported. It establishes criteria for identifying fiduciary activities of all state and local governments focused on 1) whether a government is controlling the assets of the fiduciary activity and 2) the beneficiaries with whom a fiduciary relationship exists.

The implementation guide includes 52 new questions and answers to address accounting and financial reporting topics for fiduciary activities related to the following areas:

  • Identifying fiduciary activities (1-38)
  • Reporting fiduciary activities in fiduciary funds (39-46)
  • Statement of fiduciary net position (47)
  • Statement of changes in fiduciary net position (48-50)
  • Reporting fiduciary component units (51-52)

In addition, the implementation guide includes amendments to three previously issued questions and answers from Implementation Guides 2015-1 and 2017-2.

Effective date

The requirements of this statement are effective for reporting periods beginning after Dec. 15, 2018. Early application is encouraged if Statement 84 has been implemented. 

Proposals

Subscription-based information technology arrangements

On May 21, 2019, the GASB issued an exposure draft, “Subscription-Based Information Technology Arrangements,” to address questions regarding the proper accounting for and reporting of cloud computing and other remote-access forms of software applications and data storage that are subscription based. Although existing GASB literature addresses on-premise computer software – either developed internally or acquired through perpetual licensing agreements – the lack of guidance for subscription-based information technology arrangements (SBITAs) has caused inconsistency in accounting and financial reporting.

The proposed statement would apply many of the provisions of Statement 87, “Leases,” to subscription-based transactions. The exposure draft proposes:

  • An SBITA would be defined as a contract that conveys control of the right to use an SBITA vendor’s hardware, software, or both, including IT infrastructure, for a period of time in an exchange or exchange-like transaction.
  • Governments with SBITAs would recognize a right-to-use subscription intangible asset and a corresponding subscription liability (with an exception for short-term SBITAs with a maximum term of 12 months, in which case payments would be recognized as outflows of resources).

In addition, the exposure draft includes proposals related to outlays other than subscription payments, including accounting for implementation costs based on three different stages and note disclosures related to an SBITA.

Comments are due to the GASB by Aug. 23, 2019.

Public-private and public-public partnerships and availability payment arrangements

On June 13, 2019, the GASB issued an exposure draft, “Public-Private and Public- Public Partnerships and Availability Payment Arrangements,” to provide guidance to improve accounting and financial reporting for public-private and public-public partnership arrangements (both referred to as PPPs) and availability payment arrangements (APAs).

The provisions in the exposure draft would provide guidance for PPPs that are outside of the scope of the GASB’s existing literature for these types of transactions, specifically Statement 60, “Accounting and Financial Reporting for Service Concession Arrangements,” and Statement 87,  “Leases.” The proposed guidance also would make certain improvements to the guidance currently included in Statement 60 and provide accounting and financial reporting guidance for APAs.

PPPs

The exposure draft outlines that a PPP would include arrangements in which a government transferor contracts with a governmental or nongovernmental operator to provide public services by conveying control of the right to operate or use an infrastructure or other nonfinancial asset, the underlying PPP asset, for a period of time in an exchange or exchange-like transaction. Some PPPs meet the definition of a service concession arrangement (SCA). The exposure draft carries forward the definition and financial reporting requirements for SCAs that currently are included in Statement 60.

The proposed guidance includes the following financial reporting requirements:

  • PPPs that meet the definition of an SCA would apply the financial reporting requirements of Statement 60.
  • PPPs that meet the definition of a lease, but not the definition of an SCA, would apply the financial reporting requirements of Statement 87.
  • For all other PPPs that are not SCAs and are not leases, a transferor would recognize an asset for the underlying PPP asset and a deferred inflow of resources for consideration received or to be received as part of the PPP.
  • A governmental operator would report an intangible right-to-use asset related to  the underlying PPP asset that either is owned by the transferor or is the underlying asset of an SCA.

APAs

The exposure draft defines an APA as an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying infrastructure or other nonfinancial asset for a period of time in an exchange or exchange-like transaction.

The proposed guidance includes the following financial reporting requirements:

  • An APA related to activities previously defined and in which ownership of the asset transfers by the end of the contract should be accounted for as a financed purchase of the underlying infrastructure or other nonfinancial asset.
  • An APA that is related to operating or maintaining an infrastructure or other nonfinancial asset should be accounted for as an outflow of resources in the period to which payments relate.

Comments are due to the GASB by Sept. 13, 2019.

Internal Revenue Code Section 457  deferred  compensation   plans On June 28, 2019, the GASB issued an exposure draft, “Internal Revenue Code Section 457 Deferred Compensation Plans That Meet the Definition of a Pension Plan and Supersession of GASB Statement 32,” to provide guidance to clarify the accounting and financial reporting of IRC Section 457 deferred compensation plans.

The exposure draft proposes that if a Section 457 plan meets the definition of a pension plan in GASB guidance, the appropriate GASB pension standards should be applied to the financial reporting for that plan and for the benefits provided through that plan. Under existing guidance, Section 457 plans explicitly are excluded from    the pension standards.

The proposed guidance also would supersede the remaining provisions of Statement 32, “Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans,” as amended, by requiring investments of all

Section 457 plans to be valued as of the end of the plan’s reporting period in all circumstances, as is required for all other postemployment benefit plans.

Comments are due to the GASB by Sept. 27, 2019.