Articles from the GASB ReportBoard Meeting Highlights
The GASB held public meetings May 5 (by teleconference) and May 28–29, 2014, to discuss issues associated with its projects on Fair Value Measurement and Application, Postemployment Benefits, Leases, Fiduciary Responsibilities, and Tax Abatement Disclosures. 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 and approved for issuance an Exposure Draft, Fair Value Measurement and Application. The Exposure Draft is available free on the GASB website. The deadline for providing comments is August 15, 2014. The Exposure Draft proposes how fair value would be measured, identifies the financial statement elements that would be measured at fair value, and details the disclosures about fair value that governments would make in the notes to the financial statements.
The GASB will be conducting two free webinars related to the proposals on fair value. A CPE webinar will be conducted on July 15, 2014, beginning at 1:00 pm EDT. A webinar for financial statement users (with no CPE credit) will be held on July 17, 2014, also beginning at 1:00 pm EDT. The webinar for financial statement users will be followed by a brief online survey to obtain feedback on the proposals. Information about registering for the webinars will be available soon on the GASB website.
The Board reviewed and approved for issuance three Exposure Drafts of proposed Statements:
- Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
- Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions
- 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 Exposure Drafts on other postemployment benefits (OPEB) would replace the current guidance in Statements 43 and 45. The proposed approach would effectively extend to OPEB the same accounting and financial reporting as required for pensions under Statements 67 and 68. The latter statements apply to pensions administered through trusts that meet three specific criteria. The third Exposure Draft primarily proposes guidance for pensions that are not administered through such trusts.
Educational materials and other information about these proposals can be found in a new section of the GASB website devoted to OPEB. The GASB also will be conducting two free webinars related to the proposals on OPEB. A CPE webinar will be conducted on July 30, 2014, beginning at 1:00 pm EDT. A webinar for financial statement users will be held on August 8, 2014, also beginning at 1:00 pm EDT. The webinar for financial statement users will be followed by a brief online survey to obtain feedback on the proposals. Information about registering for the webinars will be available in July on the GASB website.
The Board began deliberations on potential revisions to the standards on lease accounting focused primarily on accounting and financial reporting by lessors. The discussion included recognition of assets and liabilities associated with leasing, revenue recognition by lessors, short-term leases, and the measurement of the lease receivable.
Asset and Liability Recognition by Lessors
The Board tentatively decided to propose that the lessor’s right to receive payments would be recognized as an asset—the lease receivable. The Board also tentatively decided that collectability of the payments and uncertainties surrounding unreimbursable costs to the lessor would not be stated as factors in recognition of the lease receivable. The Board believes this is unnecessary because a government would not enter into a contract if it had significant doubts about whether it would be paid by the lessee. Issues associated with the measurement of a lease receivable are addressed later in this article.
The Board tentatively decided to propose for all leases that a governmental lessor would not derecognize the underlying leased asset and would not recognize a residual asset. One reason for this is that certain leased assets, such as buildings, may be the subject of multiple leases, which would complicate the process of derecognition. As a practical matter, if the lessor continues to report the leased asset in its financial statements, there is no need to recognize a residual right to the asset.
The Board also tentatively decided to propose that the lessor would not recognize a liability for a continuing performance obligation associated with the lessee’s right to use the asset. The requirement to permit the lessee use of the lease asset may be viewed by some as a performance obligation. However, the Board believes such an obligation does not constitute a liability—an obligation to sacrifice resources that a government has little or no discretion to avoid.
Revenue Recognition by Lessors
The Board tentatively decided to propose that a lessor recognize a deferred inflow of resources, measured at the lease receivable amount plus any cash received up front, at the beginning of the lease. A lessor would then recognize lease revenue over the lease term on a systematic and rational basis. The Board also tentatively decided to propose that the lessor recognize interest revenue over the term of the lease receivable.
The Board’s general approach in this project has been to view all leases as forms of financing, effectively the same as other types of lending (from the lessor’s perspective) and borrowing (from the lessee’s perspective). Similar to other forms of lending, the lessor would recognize lease revenue (related to the principal portion of a lease payment) and interest revenue separately.
The Board reconsidered the definition of a short-term lease and tentatively decided that it should be defined (for both lessees and lessors) as a lease that, at its beginning, has a maximum possible term under the contract of 12 months or less, including any options to extend. The Board also tentatively decided to propose that a required exception to recognition and measurement for lessors be made for short-term leases. The Board then discussed the lessor accounting treatment for short-term leases and tentatively decided that lessors would recognize lease payments as revenue based on the terms of the lease contract. These decisions parallel the Board’s earlier tentative decisions with respect to lessees.
Measurement of the Lease Receivable
The Board tentatively decided to propose that the initial measurement of the lease receivable generally be calculated as the discounted future payments to be received during the lease term, subject to a provision for uncollectible accounts. Lessors would use the same definition of lease term as previously tentatively decided by the Board for lessees. The discount rate used by the lessor would be the rate the lessor charges the lessee. The following types of payments would be included in the initial measurement of the lease receivable:
- Fixed payments required for the lease term
- Variable payments that depend on an index or rate and that are measured using the index or rate at the beginning of the lease
- Variable lease payments that are in-substance fixed
- Residual value guarantees that are in-substance equivalent to fixed lease payments.
The Board then discussed other issues relating to the initial measurement of the lease receivable. The Board tentatively decided to propose that lessors recognize as an expense the initial direct costs in the period in which those costs are incurred.
Regarding subsequent measurement of the lease receivable, the Board tentatively decided that a lessor should remeasure a lease receivable by calculating the amortization of the discount on the lease receivable and reducing the lease receivable by the actual lease payment amount less the amortization of the discount. The Board also tentatively decided that the lessor should reassess the lease term only when the lessee actually extends or terminates the lease opposite of what was previously expected. The Board tentatively decided that there should be a remeasurement of a lease receivable when the result of a change in an index or a rate used to determine lease payments during the reporting period may be significant.
The Board discussed impairment of a lease receivable and tentatively decided that an adjustment to the receivable for a change in lease term should be recognized as an adjustment to the related deferred inflow of resources. The Board also tentatively decided that an adjustment to the receivable for a change in the rate upon which variable payments are based should be recognized as revenue or expense.
At a prior meeting, the Board tentatively decided to propose that a government had a fiduciary responsibility—and, therefore, would present fiduciary fund financial statements—if it met the definition of a fiduciary. The Board’s deliberations in May focused on certain aspects of that definition, as well as fiduciary reporting by governments that are stand-alone business-type activities (BTA).
Definition of a Fiduciary
The Board considered the difference between (1) a government that has assigned and can reassign the responsibility for administering the exchange of assets and (2) a government that has no responsibility for administering the exchange of assets but can establish parameters for those who are responsible.
The Board tentatively agreed to the following regarding a government that has assigned and can reassign the responsibility for administering the exchange of assets:
- The government has assigned or can assign the responsibility for administering the exchange of assets to another party such as an asset manager.
- The government is considered to still have control over the assets if it has the ability to reassign that responsibility to someone else.
- The government does not have responsibility for administering the exchange of assets but can establish parameters for those who are responsible for administering the exchange of assets (for example, establishing a menu of investment options).
- The government allows an individual or entity other than itself to make decisions about the types of assets held (which is why the government is considered to not have control over the assets).
- The government does not have the ability to reassign the responsibility for administering the exchange of assets without the agreement of the individual that has the responsibility.
The Board discussed whether the tentative decisions it previously reached would be applicable to stand-alone BTAs that also engage in fiduciary activities. The Board tentatively decided to propose that a stand-alone BTA also engaging in fiduciary activities (1) meets the proposed tentative definition of a fiduciary and (2) should report that activity in general purpose external financial reports in a separate fiduciary fund section and not combined with the BTA’s operations. The research conducted by the GASB staff with users that analyze BTAs found that their needs did not substantially differ from those of users analyzing general purpose governments that engage in fiduciary activities. The Board believes, therefore, that any requirements to report on fiduciary activities should apply equally to general purpose governments and stand-alone BTAs.
Tax Abatement Disclosures
The Board began to consider what information about tax abatement agreements is essential to financial statement users and, therefore, might be proposed as disclosure requirements. The Board’s discussion was solely on the essentiality of the potential disclosures and consistency with the objectives of financial reporting but without consideration of level of detail or aggregation. General disclosure principles on level of detail and aggregation, and specific provisions for tentatively agreed-upon disclosure proposals, will be discussed in July.
The Board discussed the following potential disclosures for tax abatements:
- The name of the recipient
- The amount of abatements in the current year
- The amount of abatements remaining in future years
- The duration of abatements.
The Board tentatively decided to propose requiring disclosure of the amount of taxes abated in the current year and the duration of abatements. The Board tentatively agreed that duration disclosure would take the form of the remaining years on the agreement(s). Both disclosures would be necessary to assessing the impact that tax abatements have on a government’s ability to raise resources and to cover current-period costs, and on its financial health.