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Focus on Public Sector: Begin Planning for GASB Statements No. 59 and No. 60

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The Governmental Accounting Standards Board (GASB) issued Statements No. 59 and No. 60 in late 2010.
March 17, 2011

The Governmental Accounting Standards Board (GASB) issued Statements No. 59 and No. 60 in late 2010.

Statement No. 59 is effective for fiscal year 2011 for most organizations. Statement No. 60 will not be effective until 2012; however, the statement mandates substantial changes to the way governments account for service concession arrangements.

RubinBrown has summarized each statement to assist our governmental and public college and university contacts and clients.

GASB Statement No. 59, Financial Instruments Omnibus (GASB Statement No. 59) contains a variety of provisions that modify existing financial reporting requirements for certain financial instruments and external investment pools. The significant provisions are:

Unallocated insurance contracts (i.e. insurance contracts not associated with a specific member’s benefits) held by a pension or other post-employment benefit (OPEB) trust fund must now be reported at fair value in accordance with GASB Statement No. 31. Previously, pension and OPEB trust funds were permitted to report unallocated insurance contracts at their contract value.

Under GASB Statement No. 31, investments in a 2a7-like pool ( an investment pool that is not registered with the Securities and Exchange Commission but operates itself in a manner consistent with the SEC’s Rule 2a7 of the Investment Company Act of 1940) are to be reported at the net asset per share value for the pool. GASB Statement No. 59 clarifies that a 2a7-like pool must satisfy all the requirements of SEC Rule 2a7, including that a group of individuals fulfills the functions of a board of directors.

The interest rate risk disclosures required by GASB Statement No. 40 are only applicable to debt mutual funds and investment pools, not to equity mutual funds and investment pools.

Contracts that require penalty payments for nonperformance are not considered derivatives under GASB Statement No. 53. Similarly, contracts based on specific volumes of sales or service revenues are not considered derivatives under GASB Statement No. 53.

Certain financial guarantee contracts are not considered to be derivatives under GASB Statement No. 53. GASB Statement No. 59 modifies the definition of such financial guarantee contracts to state that such contracts must not be entered into as an investment derivative instrument primarily for the purpose of obtaining income or profit.

GASB Statement No. 59 is effective for periods beginning after June 15, 2010.

GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements (GASB Statement No. 60) defines a service concession arrangement as an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which:

The transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset in exchange for significant consideration, and

The operator collects and is compensated by fees from third parties.

Examples of service concession arrangements include the operation of a city zoo or a parking garage on behalf of a government, or the construction and operation of a tollway on behalf of a government.

Transferors under service concession arrangements should recognize the facility subject to the arrangement as a capital asset. New facilities constructed or acquired by the operator should be reported at fair value by the transferor. The transferor will also recognize a liability for the present value of significant contractual obligations to sacrifice financial resources as a result of the arrangement.

Such obligations might include obligations for capital improvements, insurance, or maintenance to the underlying facility, providing a specific level of police and emergency services for the facility, or providing a minimum level of maintenance to areas surrounding the facility.

As obligations are satisfied, a deferred inflow of resources should be reported and the related revenue should be recognized in a systematic and rational manner over the remaining term of the arrangement.

Operators under service concession arrangements should report an intangible asset for the right to access the facility and collect third-party fees from its operation at cost (for example, the amount of an up-front payment or the cost of construction of or improvements to the facility).

The cost of improvements to the facility made by the governmental operator during the term of the arrangement should increase the governmental operator’s intangible asset if the improvements increase the capacity or efficiency of the facility.

The intangible asset should be amortized over the term of the arrangement in a systematic and rational manner.

GASB Statement No. 60 is effective for periods beginning after December 15, 2011.

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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