The GAAP Year in Review

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The GAAP Year in Review

• Practice Update
• Stephen J. Gauthier
• Tuesday, November 16, 2004

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Topics

• Disclosures for investments
• Disclosures for derivatives
• Tobacco Settlement accounting
• Reporting budgetary perspective differences
• Impairment of capital assets
• Other postemployment benefits
• Statistical presentations

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Disclosures for investments

• Part 1

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GASB Statement No. 3 modifications

• Exception reporting for custodial credit risk
• Elimination of activity disclosures
• Significantly higher level of custodial credit
  risk during the year than at year end
• Positions in types of investments not held at
  year end

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Expanded disclosure

• Ratings for debt securities
• Concentration risk
• Interest-rate risk
• Foreign currency risk
• Deposit and investment policies

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Clarifications

• Special treatment only for explicitly guaranteed
  federal securities
• Must indicate amount in each ratings category
• Effect of reset dates on interest risk disclosure
• Legal restrictions v. policies

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Disclosures for derivatives

• Part 2

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Interim disclosures

• Objectives
• Significant terms
• Fair value
• Associated debt
• Credit risk

• Interest rate risk
• Basis risk
• Termination risk
• Rollover risk
• Market-access risk

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Clarification

• Not generally applicable to embedded derivatives

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Tobacco Settlement accounting

• Part 3

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Accounting

• Financing authority normally blended component
  unit
• No revenue recognized prior to shipment of
  cigarettes
• Accounting Principles Board Opinion No. 16,
  Business Combinations
• Concept of common control as applied to asset
  and revenue recognition

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Effect on financial reporting entity
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Reporting budgetary perspective differences

• Part 4

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Background

• Budget structure not compatible with fund
  structure
• Application of rules
• Is a budget comparison required?
• Only required for general fund and major special
  revenue funds
• Is a budget comparison permitted?
• Only permitted for general fund and major special
  revenue funds

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Resolution

• Budgetary presentation required despite
  perspective difference
• Use budgetary structure for presentation
• Must be presented as required supplementary
  information rather than as basic financial
  statement

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Impairment of capital assets

• Part 5

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GASB approach

• Indicators of impairment
• Evidence of physical damage
• Changes in legal or environmental factors
• Technological changes or obsolescence
• Changes in manner or duration of use
• Construction stoppage
• Only permanent impairments recognized

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GASB approach (cont.)

• Test of impairment
• Outside of regular life cycle
• Magnitude of decline significant
• Change in demand does not of itself constitute an
  impairment
• Method of Calculation will vary
• Related to nature of impairment
• Report net of insurance recoveries

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Clarifications

• Insurance recoveries/gain/loss separate from
  restoration or replacement of asset
• No later recoveries of losses once recognized

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Other Postemployment Benefits

• Part 6

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Approach

• Employer cost normally will be based on annual
  required contribution (ARC)
• Accounting liability will occur only if ARC not
  fully funded
• Actuarial accrued liability only gradually
  amortized as component of ARC (30 year maximum)

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Implicit rate subsidy

• Key change from original proposal for employers
• Nature of change
• Employers originally exempt if retirees pay full
  amount of their healthcare premium
• Employers must now accrue any retiree costs
  indirectly included in active employee healthcare
  premiums (indirect rate subsidy)

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Calculation of age-adjusted premiums
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Calculation of common or blended premium
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Calculation of implicit rate subsidy
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Application of matching principle to active
employee premiums
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Treatment in final standard
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Clarifications

• Need for trust or equivalent arrangement to
  qualify as employer contribution
• Need to adjust ARC to calculate cost if funding
  departs from ARC.

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Statistical presentations

• Part 7

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Five objectives organizing principles

• Provide information on financial trends
• Provide information on revenue capacity
• Provide information on debt capacity
• Provide demographic and economic information
• Provide operating information

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Narrative requirements

• Description of the different types of information
• Explanation of unfamiliar concepts
• Explanation of how information provided elsewhere
  may help reader better appreciate a given
  presentation
• Explanation of significant trends, significant
  changes in trends, and anomalous data
• Source of data not extracted from financial
  statements

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Clarification

• Points of reference should be changed to suit the
  governments specific circumstances
• Additional presentations must be justified on the
  basis of the five identified objectives