Articles from the GASB Report

Board Meeting Highlights

The GASB held public meetings April 8–10, 2014, to discuss issues associated with its projects on Fair Value Measurement and Application, Postemployment Benefits, Leases, Fiduciary Responsibilities, and Tax Abatement Disclosures. The Board also began a discussion of its technical plan for May–August 2014. This article addresses key decisions made by the Board during its deliberations on these topics. (For complete minutes of the Board meeting, visit the project pages devoted to each project on the GASB website.)

Fair Value Measurement and Application

The Board reviewed the preballot draft of an Exposure Draft, Fair Value Measurement and Application. The Board directed the staff to prepare a ballot draft for review at the Board’s teleconference meeting on May 5. It is expected that the Exposure Draft will be issued for public comment later in May, with a 90-day comment period.

During the discussion of the draft due process document, the Board considered two substantive matters. The Board considered whether acquisition value should be applied to nonmonetary assets acquired in an exchange but tentatively agreed not to propose that requirement in the Exposure Draft. The Board also tentatively agreed that securitized mortgage loan receivables held by housing finance agencies should be classified as investments.

Postemployment Benefits

The Board reviewed a ballot draft of an Exposure Draft, Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans That Are Not Administered through Trusts That Meet Specified Criteria and Amendments to Certain Provisions of GASB Statements 67 and 68. The Board tentatively agreed on various clarifying changes to the draft. Statements No. 67, Financial Reporting for Pension Plans, and No. 68, Accounting and Financial Reporting for Pensions, apply to pensions administered through trusts that meet three criteria. This proposal would apply to pensions excluded from the scope of those Statements. The Exposure Draft is expected to be issued for public comment in June, together with two Exposure Drafts on other postemployment benefits (OPEB).

Leases

The Board’s discussion of potential revisions to the accounting and financial reporting standards for leases addressed note disclosures by lessees. Specifically, the Board considered lessee disclosure of general descriptions of leases and information related to assets and liabilities, expenses, obligations and commitments, and short-term leases.

General Descriptions

The discussion of potential note disclosure requirements for lessees began with general descriptions of leasing arrangements. The Board tentatively agreed to propose that lessees to disclose a general description of their leasing arrangements, including (1) the basis, and terms and conditions, on which variable lease payments are determined and (2) the existence, and terms and conditions, of residual value guarantees provided by the lessee. Both of these proposed requirements are consistent with proposals made by the Financial Accounting Standards Board (FASB) in its own project on leases.

The Board tentatively decided, however, not to propose that lessees be required to disclose: (1) the existence and terms of purchase options; (2) the existence, and terms and conditions, of renewal and termination options; (3) restrictions or covenants imposed by leases; or (4) information about significant assumptions and judgments made in accounting for leases. The Board’s tentative decisions about the measurement of lease assets and liabilities would include options if they are probable of being exercised. In the Board’s view, qualitative information about the circumstances under which options would be exercised is not an essential additional disclosure. Although disclosures about restrictions and covenants is required under existing lease standards, a similar disclosure is not required for other types of financings, such as long-term bonds, and the Board does not believe there is a rationale for requiring such a disclosure only for leases. Lastly, the Board believes that information about significant assumptions and judgments could be useful but, considering that many governments have multiple leasing arrangements, could not envision a manner in which the disclosure could be aggregated and presented in a meaningful and understandable manner that would provide decision-useful information or would assist a user in assessing accountability.

Lease Assets and Liabilities

The deliberations on potential lessee disclosures continued with assets and liabilities. The Board tentatively agreed to propose that lessees disclose only the general reconciliations of the changes in the lease liability and of the changes in capital assets currently required by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, rather than require a more detailed reconciliation. The Board does not believe that the benefit of more detailed disclosure would justify the additional cost to governments. The Board tentatively agreed to propose that the total amount of assets recorded under leases, and the related accumulated amortization, be disclosed separately from owned assets. They Board views leased assets are a major class of capital assets and current standards require disaggregated disclosures of capital assets by major class. However, the Board tentatively decided not to propose that lease assets be further disaggregated by major classes of underlying assets.

Lease Expenses

Regarding potential disclosures involving lease expenses, the Board tentatively decided not to propose that lessees separately disclose the amount of amortization expense recognized for lease assets primarily because that information appears as a deduction in the reconciliation and additional detail does not appear to be useful to financial statement users. The Board did tentatively decide to propose that lessees disclose the total variable lease payments actually incurred. Furthermore, the Board tentatively decided to propose that the due process document supersede any existing disclosures related to operating leases.

Lease Obligations and Commitments

The Board tentatively agreed to propose retaining the current requirement for lessees to disclose a maturity analysis of future minimum lease payments that shows the payments for each of the first five years and five-year increments thereafter, with the payments shown undiscounted and total interest summed for all years. Furthermore, the Board tentatively decided to propose a requirement for lessees to disclose commitments relating to leases, other than short-term leases, for which the lease term has not begun.

Short-Term Leases

One of the Board’s overarching tentative decisions in the leases project is that all leases be accounted for as capital leases except for short-term leases—those with a term of 12 months or less. At this meeting the Board tentatively decided that the existing disclosure requirements for accounting policies are sufficient to cover disclosure of accounting treatment for short-term leases. The Board also tentatively agreed to propose a requirement for lessees to disclose the amount of expense and expenditure recognized for the period related to short-term leases. The Board also considered but tentatively decided not to propose a requirement for lessees to disclose commitments under short-term leases or qualitative information about circumstances when the next period’s short-term lease expense is expected to be significantly different than the current period’s expense.

Other Lessee Disclosures

The Board deliberated over a variety of other potential lessee disclosures. The Board’s complete tentative decisions related to lessee disclosures can be found on the Leases project page on the GASB website.

Fiduciary Responsibilities

At a prior meeting, the Board tentatively defined a fiduciary as, “A government that controls assets other than those that can be used to support the government’s own programs.” The Board tentatively agreed to modify the proposed tentative definition of a fiduciary to remove the reference to a “government’s own programs.” The remainder of the Board’s deliberations on the Fiduciary Responsibilities project at this meeting focused on issues related to the term “control.”

Concept of Control

The Board tentatively agreed to propose that whether a government is controlling fiduciary assets be based on (1) when a governmental entity has a responsibility for administering the exchange of the assets and (2) the legal structure that defines the relationship of the governing body to the fiduciary activity. When a governmental entity can make decisions about the types of assets held or assign the responsibility for those decisions, the governmental entity has the ultimate responsibility for administering the exchange of assets.

The Board continued deliberations by discussing the potential relationships between the legal structure that defines the relationship of the governing body to the fiduciary activity and when a governmental entity has a responsibility for administering the exchange of the assets, and the effect these relationships have on determining whether a government is controlling fiduciary assets. The Board tentatively agreed to propose the following as representing control of fiduciary assets by a government:
  1. A governmental entity that is directly holding the assets, regardless of its responsibility for administering the exchange of those assets
  2. A governmental entity that is directly responsible for administering the exchange of assets, regardless of the legal structures that might separate the governmental entity and the entity that is holding the assets
  3. A governmental entity that has assigned its responsibility for administering the exchange of assets but maintains the ability to reassign that responsibility, regardless of the legal structures that might separate the governmental entity and the entity that is holding the assets.

The Board also tentatively agreed to propose that the following indicate that a government does not control fiduciary assets:
  1. A governmental entity that is acting as a trustee for fiduciary assets and has no responsibility for administering the exchange of assets, but maintains the ability to establish parameters for those that have the responsibility
  2. A governmental entity that is neither directly holding nor acting as a trustee for fiduciary assets and has no responsibility for administering the exchange of assets, but maintains the ability to establish parameters for those that have the responsibility
  3. A governmental entity that is neither directly holding nor acting as a trustee for fiduciary assets and has no responsibility for administering the exchange of assets.

Administrative and Direct Financial Involvement

The Board continued deliberations by reconsidering whether the administrative and direct financial involvement provisions, provided in Statement No. 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, should be utilized as criteria to determine whether a government is a fiduciary. The Board tentatively agreed to propose that, in the absence of a trust or equivalent arrangement, administrative and direct financial involvement be utilized as criteria to determine whether a government is a fiduciary. The Board also tentatively agreed to propose that the due process document issued on the Fiduciary Responsibilities Project solicit feedback on whether the activity of a government that is controlling assets to be used to provide benefits to individuals, organizations, or other governments and meets one of the five criteria for administrative or direct financial involvement (monitors, determines eligibility, exercise discretion, matches contributions, or is liable), should be reported in the primary government’s revenues and expenses, rather than in a fiduciary fund.

Definition of a Fiduciary

The Board concluded deliberations by discussing a modified proposed tentative definition of a fiduciary. The Board tentatively agreed to propose that a fiduciary be defined as “A government that controls assets either (1) as a trustee for the sole benefit of its own employees or recipients other than the financial reporting entity or (2) for which it does not have administrative or direct financial involvement over the assets or those assets are used to provide benefits to individuals that are not part of its citizenry, or organizations or other governments that are not part of the financial reporting entity.”

Tax Abatement Disclosures

The Board began deliberations on the Tax Abatement Disclosures project, focusing on defining the scope of transactions that will be covered by this project and creating a tentative definition of the term tax abatement. The Board discussed whether to include the following components in the definition of a tax abatement: (a) the mechanism for reducing taxes, (b) the purpose of the tax abatement, (c) the breadth and applicability of abatement programs, (d) the existence of an agreement, and (e) the type of revenue being abated.

The Board tentatively agreed to include the purpose of the tax abatement, the existence of an agreement, and the type of revenue being abated in the tentative definition of a tax abatement. In the Board’s view, these characteristics clearly distinguish tax abatements from the broader population of transactions that result in taxes and other revenues being reduced. The mechanism for reducing taxes and the breadth and applicability of abatement programs were tentatively excluded from the definition, however. Tax abatements use a wide variety of mechanism to reduce taxes and, although they typically are given to fewer taxpayers than most tax reductions, there is no definitive metric that would allow availability and eligibility to be employed as meaningful distinguishing characteristics of tax abatements.

Based on these tentative decisions, the Board tentatively agreed to propose the following definition for a tax abatement, for the purposes of this project, subject to further revision after subsequent deliberations:

For financial reporting purposes, a tax abatement is a reduction in taxes that results from an agreement between one or more governmental entities and an individual taxpayer in which (a) one or more governmental entities forgo tax revenues that the taxpayer otherwise would have been obligated to pay and (b) the taxpayer promises to take a specific action that contributes to economic development or otherwise benefits the government(s) or its citizens.
 
Further, the Board tentatively agreed that the scope of possible standards that it will consider for tax abatement disclosures should be limited to transactions that meet the proposed definition of a tax abatement.

Technical Plan

The Board reviewed the proposed technical plan for the second third of 2014. The Board tentatively agreed that an additional due process document (Preliminary Views) should be added for both the Leases project and the Fiduciary Responsibilities project and that the project timetables should be adjusted based on the additions of the Preliminary Views. In addition, the Board tentatively agreed that a Comprehensive Implementation Guide update should not be issued in 2014 to allow staff to devote additional time to activities associated with the implementation of the new pension standards.

The Board will conclude its consideration of the proposed technical plan at its May 5 teleconference meeting.