Articles from the GASB Report

Board Meeting Highlights—April 2015

The GASB held public meetings April 21–23 to discuss issues associated with its projects on Other Postemployment Benefits (OPEB), the Hierarchy of Generally Accepted Accounting Principles (GAAP), External Investment Pools, Fiduciary Responsibilities, Tax Abatement Disclosures, and Leases. This article addresses key decisions made by the Board during its deliberations on these projects. (For complete minutes of the Board meeting, visit the project pages devoted to each project on the GASB website.) In addition, the Board discussed and approved the proposed technical plan for the second third of 2015.

OPEB

The Board reviewed “preballot” drafts of three final Statements
  • Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68
  • Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
  • Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions.
The Board provided edits, recommendations, and suggestions for clarification on the draft documents. The Board directed the staff to prepare final “ballot” drafts for the June Board meeting.

GAAP Hierarchy

The Board discussed several topics concerning the Exposure Drafts, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, and Implementation Guide 20XX-1, and reviewed preballot drafts of the final Statement and Guide.

GAAP Hierarchy

The Board evaluated respondents’ comments regarding inclusion of the current definition of a government in the Codification instructions as Category B guidance. The definition is now presented in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guides, Health Care Organizations and State and Local Governments. The Board tentatively agreed that the definition of a government, which had previously been cleared by the Board, should be included in the Codification instructions in the final Statement. The Board also discussed a preballot draft of the final Statement and suggested clarifying edits.

Implementation Guide

The Board tentatively agreed to make clarifying edits to various questions and answers contained in the preballot draft of the Implementation Guide.

The Board will vote on a ballot draft of the final Statement at the June Board meeting and will consider clearing the final Guide at the June teleconference meeting.

External Investment Pools

The Board continued its initial deliberations about the proposed criteria for an exception that would allow external investment pools to report all of their investments at amortized cost instead of fair value. The Board discussed research findings on liquidity fees and redemption gates, and considered disclosure requirements and the effective date of the standards.

Liquidity Fees and Redemption Gates

At the March 2015 meeting, the Board requested additional research by the project staff surrounding external investment pools’ abilities to impose liquidity fees or redemption gates. The Board wanted more information about these withdrawal restrictions before deciding whether or not to propose that having the ability to impose a fee or a gate should be criterion for pools seeking to report at amortized cost. The project staff presented research findings on potential legal issues surrounding pools’ abilities to implement a fee or a gate, tentative pool participant views on fees and gates, and other redemption management methods that pool sponsors have in order to address liquidity risks. The Board tentatively decided that pools do not need to have the ability to impose redemption gates or liquidity fees in order to qualify for amortized cost reporting.

Disclosures

The Board next discussed disclosure requirements for pools reporting all of its investments at amortized cost. The Board tentatively decided that external investment pools reporting at amortized cost should be required to follow the disclosure requirements of Statement No. 72, Fair Value Measurement and Application, as these pools will be required to disclose the fair value of investments in the notes. The Board also tentatively agreed that governments sponsoring pools or participating in one should disclose information about liquidity fees and gates, withdrawal limits, and waiting periods that apply to pool participants.

Effective Date and Transition

The Board considered several options regarding the proposed effective date, in light of the effective dates of existing pronouncements, new Statements to be approved in June, and the effective date of the 2014 amendments to Securities and Exchange Commission (SEC) Rule 2a7, which prompted this project. The Board tentatively decided that the most appropriate option would be for periods beginning after June 15, 2015, except for the requirement for monthly shadow pricing, which would be effective for periods beginning after December 15, 2015.

The 2014 amendments to SEC Rule 2a7 take effect in 2016. As such, any new standards must be finalized before that effective date or else pools would need to adopt the SEC 2014 amendments in order to report all of its investments at amortized cost (under Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, as amended).

The Board also considered transition provisions for the standards and tentatively decided that pools should implement the standards prospectively. This would require no change in beginning balances, no restatements of prior financial statements, and no retroactive disclosure reporting.

The Board also tentatively decided that pools currently reporting or not reporting all of its investments at amortized cost should be allowed, upon initial effectiveness of the proposed Statement, to elect to report all of its investments at amortized cost going forward.

The Board discussed what consequences should arise for a pool that violates any of the proposed criteria during the year—specifically, if the pool can return to reporting all of it investments at amortized cost. The Board discussed violations that would be in the control of management versus violations that would be outside the control of management (such as a downgraded security or a merging of companies that would cause a diversification violation). The Board discussed potential consequences of either violation and tentatively decided that pools that temporarily are unable to meet all criteria may still be allowed to report at amortized cost. The actions and reasons for the violation, along with the consequences, will be discussed at the May teleconference meeting.

Tax Abatement Disclosures

The Board continued its review of issues raised by stakeholders in response to the Exposure Draft, Tax Abatement Disclosures, which was issued in October 2015. The Board’s discussion focused on three main issues:
  • The relevance of the proposed guidance to the GASB’s conceptual framework
  • The general disclosure principles proposed in the Exposure Draft
  • The proposed disclosures of general descriptive information about tax abatements.
Objectives of Financial Reporting and Methods of Communication

The Board considered respondent comments regarding whether the proposed disclosures met the objectives of financial reporting as described in GASB Concepts Statement No. 1, Objectives of Financial Reporting. The Board continues to believe that the proposed disclosures are important to meeting the following objectives: (1) determining whether current-year revenues were sufficient to pay for current-year services (interperiod equity); (2) compliance with finance-related legal and contractual obligations; (3) providing information about sources and uses of financial resources; and (4) providing information about the financial position and economic condition of a governmental entity.

The Board also considered respondent comments regarding the appropriate method of communication for information about tax abatements. The results of research conducted by the GASB and others, as well as responses to the Exposure Draft, led the Board to tentatively conclude that information about tax abatements is essential to understanding a government’s financial position and inflows and outflows of resources. Based on Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, the Board tentatively decided that such information should be reported in the notes to the financial statements.

General Disclosure Principles

The Exposure Draft set forth proposals of general principles for the disclosure of tax abatement information. In reviewing those principles, the Board tentatively decided that information about the tax abatements of other governments that reduce the revenues of the reporting government should be disclosed by the reporting government. The Board also tentatively concluded that that information should be presented separately from information about the reporting government’s own tax abatements.

Furthermore, the Board tentatively decided the following about the level of detail of disclosures:
  • Governments should organize information about their own tax abatements by major tax abatement program.
  • Governments may aggregate information about the tax abatements of other governments as if for a single program.
  • A government may disclose information about individual tax abatement agreements. If so, it should disclose all individual abatements above a quantitative threshold selected by the government. The threshold should be based on a percentage of the total dollar amount of all abated taxes during the reporting period.
The Board tentatively decided to retain the general principle that disclosure of tax abatement information would begin in the period in which the tax abatement is entered into and continue until the tax abatement expires, unless otherwise specified.

Disclosure of General Descriptive Information

The Board also considered respondent comments regarding the disclosures of general descriptive information proposed in the Exposure Draft. The Board tentatively decided that the following brief general descriptive information should be included in the notes to the financial statements for a government’s own tax abatement agreements:
  • The name and purpose of the tax abatement program, and the specific taxes being abated
  • The authority under which the tax abatement agreement is entered into
  • The criteria that make a recipient eligible to receive a tax abatement
  • The mechanism by which taxes are abated
  • Provisions for recapturing abated taxes, if any, including the conditions under which abated taxes become eligible for recapture
  • The types of commitments made by the recipients of tax abatements.
Regarding tax abatement agreements entered into by other governments that affect the reporting government’s tax revenues, the Board tentatively agreed that the reporting government should disclose the name of the government that entered into the tax abatement agreement and the specific taxes being abated. The Board tentatively decided not to retain the Exposure Draft proposals to disclose the following information about the tax abatement agreements of other governments: purpose; authority; mechanism; recapture provisions and conditions; and recipient commitments.

The Board also considered respondent recommendations that governments be required to disclose (a) the amount of abated taxes recaptured during the reporting period, and (b) the amount eligible to be recaptured as of the end of the reporting period but not yet recaptured. The Board had considered these disclosures as part of the development of the Exposure Draft and concluded that this information is captured in the amounts reported in the financial statements—as revenue and receivables, respectively—unlike the amount of taxes abated, which generally is not recorded in a government’s accounting system. After considering the comments of the respondents, the Board tentatively decided not to require these disclosures.

Leases

The deadline for submitting written comments on the Preliminary Views, Leases, was March 6, 2015. During the comment period for the Preliminary Views, a field test was distributed to individuals representing governments that report leases in their financial statements. The Board reviewed the field test results and began redeliberations of the Leases project at the April meeting in light of public hearing testimony, field test results, and comment letters received during due process. The Board began its discussion of the Leases project by reviewing the results of a field test conducted with governments during the comment period on the Preliminary Views. The Board then deliberated on several topics including differences between the Financial Accounting Standards Board’s (FASB) and GASB’s proposed leases guidance, based on tentative conclusions reached during the FASB’s deliberations that occurred since the release of the GASB’s Preliminary Views; the definition of a lease; and the scope of the project.

Definition of a Lease

The Board tentatively agreed that an Exposure Draft of a proposed Statement on leases should carry forward the term contract, rather than the term agreement, within the definition of a lease. With regard to the term nonfinancial asset, the Board tentatively decided that the Exposure Draft should clarify the meaning of this term by defining the term as follows:

An asset that is not a financial asset, as that term is defined in Statement No. 72, Fair Value Measurement and Application. Nonfinancial assets include land, buildings, use of facilities or utilities, materials and supplies, intangible assets, or services.

The Board also tentatively decided that the definition of a nonfinancial asset should include intangible assets as an example of a nonfinancial asset.
 
Scope

The Board discussed nonexchange leases and tentatively agreed that the Exposure Draft should carry forward the phrase “in an exchange or exchange-like transaction” as part of the definition of a lease, thus excluding nonexchange arrangements from the Leases guidance. The Board concluded that the substance of these arrangements is something other than a lease and, therefore, outside of the scope of the leases project.

The Board also redeliberated issues related to the scope of the leases project. First, the Board tentatively agreed that the scope exclusions in the Preliminary Views should continue in the proposed Leases guidance. The exclusion would apply to lease contracts concerning natural resources, leases of biological assets, licensing contracts, and service concession arrangements.

The Board then discussed leases involving intangible underlying assets and tentatively agreed that the scope exclusions should be expanded to include leases of all intangible assets. The Preliminary Views document only proposed excluding certain licensing contracts, not all intangible assets. The Board believes that leases of intangible assets can be considered for a potential separate project.

The Board redeliberated certain scope related issues that, based on constituent feedback, might require additional clarification. The Board tentatively decided that licensing contracts for computer software should be separately mentioned under the scope exclusion.

Fiduciary Responsibilities

The deadline for submitting written comments on the Preliminary Views, Financial Reporting for Fiduciary Responsibilities, was March 6, 2015. During the comment period for the Preliminary Views, a field test was distributed to individuals representing governments that report fiduciary activities in their financial statements. At the April meeting, the Board reviewed the field test results. Redeliberations will begin at the June meeting.