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Focus on Public Sector: GASB Issues Statements No. 63 & 64

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In June 2011, the Governmental Accounting Standards Board (GASB) issued two new pronouncements.
August 23, 2011

In June 2011, the Governmental Accounting Standards Board (GASB) issued two new pronouncements:

  1. Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
  2. Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions.

Statement No. 63

Statement No. 63 provides guidance for reporting deferred outflows of resources and deferred inflows of resources within the financial statements of governmental entities.

These elements were previously identified and defined in GASB Concepts Statement No. 4, Elements of Financial Statements, but no guidance was provided on the financial statement presentation.

Deferred outflows of resources are defined as a consumption of net assets by the government that is applicable to a future reporting period. They are required to be reported in the statement of financial position in a separate section following assets.

Deferred outflows differ from a prepaid expense. Prepaid expenses result from a current cash outlay that will be recorded as an expense in future periods. Deferred outflows represent future cash outlays that are incorporated as part of a liability on the current period’s financial statements.

Similarly, deferred inflows of resources are defined as an acquisition of net assets by a government that is applicable to a future reporting period. They should be reported in the statement of financial position in a separate section following liabilities.

Deferred inflows differ from deferred revenue. Deferred revenue results from a current cash receipt that will be recorded as revenue in future periods. Deferred inflows represent future cash inflows that are incorporated as part of an asset on the current period’s financial statements.

Certain transactions that require the use of deferred outflows and inflows have already been identified in Statement No. 53, Accounting and Financial Reporting for Derivative Instruments and Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements.

Additionally, Statement No. 63 renames the statement of net assets as the statement of net position. The statement of net position should report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position. Governments are encouraged to present the statement of net position in a format that displays:

Assets

+    Deferred outflows of resources
-     Liabilities
-     Deferred inflows of resources
=    Net position

Net position represents the difference between all other elements in a statement of financial position and should be displayed in three components: net investment in capital assets; restricted (distinguished between major categories of restrictions); and unrestricted.

The elements of net position are similar to those of net assets and deferred inflows and outflows should be allocated to the restricted components if associated with restricted assets or liabilities.

The statement is effective for financial statements for periods beginning after December 15, 2011; however, earlier application is encouraged.

Statement No. 64

Statement No. 64 designates specific circumstances where hedge accounting may continue after the termination of the hedging derivative instrument.

Under the provisions of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, a government is to cease hedge accounting upon the termination of the hedging derivative instrument, resulting in the immediate recognition of the deferred outflows or inflows of resources as a component of investment income.

However, in many instances, governments have managed to replace their swap counterparty or swap counterparty’s credit support providers by amending existing swap agreements or by entering into new swap agreements.

Therefore, Statement No. 64 was issued to clarify the circumstances in which an effective hedging relationship continues after these events occur.

Under Statement No. 64, a hedging derivative instrument is considered terminated unless an effective hedging relationship continues when all of the following criteria are met:

  • Collectability of swap payments is considered to be probable.
  • The swap counterparty of the interest rate swap or commodity swap, or the swap counterparty’s credit support provider, is replaced with an assignment or in-substance assignment.
  • The government enters into the assignment or in-substance assignment in response to the swap counterparty, or the swap counterparty’s credit support provider, either committing or experiencing an act of default or a termination event as both are described in the swap agreement.

The provisions of this statement are effective for financial statements for periods beginning after June 15, 2011. Earlier application is encouraged.

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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