Marcy Twyman, Managing Shareholder Crawford & Associates, P.C.
A “lot of water has gone under the bridge”, so to speak, since we last talked about GASB pronouncements. In case you didn’t know, I’m a huge Thunder fan. And my last blog post is dated May 13, 2016. At that time, we had just won the Western Conference semi-finals and were getting ready to face the Golden State Warriors in the Western Conference Finals. And we all know what happened in the infamous Game 6 of that series. Even though we were up 3-1 in the series and led most of Game 6, we lost not only that game, but the next one as well. And then the most awful July 4th when the unthinkable happened—Kevin Durant leaves the Thunder to go play with the enemy. Yep, our beloved KD is playing with the Golden State Warriors who are now up 3-1 against the Cleveland Cavaliers in the NBA Finals. You can guess who I’m rooting for.
Anyway, I say all that to say, there’s been a lot of activity for GASB since that time as well. So let’s get caught up. We have four additional standards to implement in the near future.
Statement No. 83, Certain Asset Retirement Obligations – Some of you (like me) may be asking: “What’s an Asset Retirement Obligation (ARO)?” While it’s not anticipated that this will have a significant impact on most governments, we still need to be aware of what it pertains to, in case something like this ever comes up in your government or governmental client.
There are GASB standards already in existence that address some types of AROs. For example, Statement No. 18 related to accounting for landfill closure and postclosure care costs. That’s a form of ARO. Also Statement No. 49 that addresses pollution remediation activities also relates to ARO.
But this standard addresses different kinds of AROs. Here are some examples: 1) retirement of sewage treatment plants; 2) retirement of x-ray machines; 3) retirement of magnetic resonance imaging machines; 4) retirement of research facilities owned by public universities like nuclear research reactors. These kinds of assets may have to be disposed in a certain way due to radioactive material or waste generated by equipment regulated by federal, state or local laws and regulations. So while these transactions may not occur very frequently or at several governments, be aware there is now a standard that addresses accounting for these types of liabilities when they occur.
The technical definition of an ARO is: “a legally enforceable liability associated with the retirement of a tangible capital asset”. If your government has a legal obligation to perform future asset retirement activities related to a tangible capital asset, it should recognize a liability based on the guidance in this statement.
This statement must be implemented for periods beginning after June 15, 2018. If you have a June 30 year end, that would be effective as of June 30, 2019.
Statement No. 84, Fiduciary Activities – This new standard, unlike the previous one, will likely affect many governments. That’s probably the reason for the extended required implementation date. To allow governments plenty of time to identify and classify their fiduciary activities, the board permits governments to wait until periods beginning after December 15, 2018, to implement this standard. For June 30 year ends, that would be effective June 30, 2020.
So here are the highlights of this standard:
Statement No. 85, Omnibus 2017 – And no, we’re not talking about a bus that takes you to the Omniplex (grin). We’re talking about a collection of practice issues that are clarified or corrected from previous statements. So this one covers a myriad of topics. And some of these may have already been implemented by some governments. Here’s the list. It’s rather long.
So if any of these items apply to your government, read more in Statement 85. This one is effective for reporting periods beginning after June 15, 2017. That’s June 30, 2018 for June 30 fiscal year ends. But as previously mentioned, some of these have already been implemented. And that’s okay because earlier application is encouraged.
Statement No. 86, Certain Debt Extinguishment Issues – If you’re one of those lucky governments that has cash available to pay off existing indebtedness and you place that cash in an irrevocable trust to extinguish that debt, then this statement is for you. Current guidance for in substance defeasance of debt only applies when using refunding debt proceeds to defease the debt. Now we have similar guidance in Statement 86 for defeasing debt with existing resources. One big difference, though, is that in financial statements using the economic resources measurement focus, governments should recognize any difference between the reacquisition price (the amount required to be placed in the trust) and the net carrying amount of the debt defeased in substance using only existing resources as a gain or loss in the period of the defeasance. This is recognized immediately and not amortized over a longer period. There are also provisions for note disclosures related to these types of debt defeasance.
And there’s more in this statement that applies to all debt extinguishments, whether through a legal extinguishment or through an in-substance defeasance. If you have any remaining prepaid insurance related to these extinguished debt, that should be included in the net carrying amount of debt for purpose of calculating the difference between the reacquisition price and the net carrying amount of the debt.
Another additional disclosure is required for all in-substance defeasance transactions. One of the criteria for determining an in-substance defeasance is that the trust hold only monetary assets that are essentially risk-free. If the substitution of essentially risk-free monetary assets with monetary assets that are not essentially risk-free is not prohibited, governments should disclose that fact in the period in which the debt is defeased in substance. In subsequent periods, governments should disclose the amount of debt defeased in substance that remains outstanding for which that risk of substitution exists.
This Statement is effective for periods beginning after June 15, 2017. That’s June 30, 2018 for those June 30 fiscal year ends.