Tony Abeyta GOVERNMENTAL ACCOUNTING CHANGES ON THE HORIZON: WHY TRIBES NEED TO BE PROACTIVE Chris Tyhurst, CPA Chris Bitakis, CPA The information provided herein should not be construed as financial, investment, accounting, tax or legal advice.
AGENDA GASB 87 Leases GASB 84 Fiduciary Activities GASB s New Reporting Model Project 2
LEASES GASB 87 3
WHY NEW LEASING GUIDANCE WAS NEEDED Single Approach to accounting for/reporting of leases by state and local governments (including Tribes & their enterprises/component units): Previous leasing guidance predates the GASB and doesn't take the conceptual framework into consideration including the definitions of assets and liabilities; Prior lease standards allowed a lease to be structured in a manner that avoids reporting the economic substance of the transaction. That is, a long-term liability and related asset were not reported as a result of the lease transaction; Better aligns the accounting and financial reporting of lease arrangements with their economic substance; Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently reexamined their leases standards. 4
KEY PROVISIONS OF GASB 87 Guidance is based on underlying principle that leases are financings of the right to use an underlying asset for a period of time. Will eliminate the current distinction between operating and capital leases by treating all leases as financings. Lease definition now focuses on a contract that conveys control of the right to use another entity s non-financial asset - referred to in the new Statement as the underlying asset. Certain agreements are exempt from GASB 87. 5
WHAT IS THE GASB REQUIRING? Lessee government should recognize a lease liability and a lease asset at the commencement of the lease term, unless the lease is a short-term lease; or it transfers ownership of the underlying asset. Lessor government is required to recognize: (1) a lease receivable; and (2) a deferred inflow of resources. A lessor will continue to report the leased asset in its financial statements. 6
WHAT IS THE GASB REQUIRING? A Lessee will also report the following in its financial statements: Amortization expense for using the lease asset (similar to depreciation) over the shorter of the term of the lease or the useful life of the underlying asset. Interest expense on the lease liability. Non-disclosures about the lease, including a general description of the lease arrangement; amount of lease assets recognized; and schedule of future lease payments. Related party leases. Short-term leases: no required disclosures. 7
EXCEPTIONS Short-term leases, defined as lasting a maximum of 12 months at inception, including any options to extend Financed purchases Leases of assets that are investments Certain regulated leases, such as between municipal airports and air carriers 8
NEW CATEGORIES OF LEASES Short-term leases - Lessee should recognize short-term lease payments as outflows of resources (expenses) based on the payment provisions of the lease contract. No recognition of assets or liabilities associated with the right to use the underlying asset for short-term leases. Contracts that transfer ownership - A contract that transfers ownership of the underlying asset to the lessee by the end of the contract. The contract does not contain termination options, but may contain a fiscal funding cancellation clause that is not reasonably certain of being exercised. 9
INITIAL RECOGNITION, MEASUREMENT & SUBSEQUENT ACCOUNTING (CONTRACTS THAT TRANSFER OWNERSHIP) Recognize an intangible asset for the right to use the lease asset and a lease liability for future lease payments. Intangible asset is valued at the lease liability plus prepayments and initial direct costs that are ancillary to place asset in service. Lease liability is the present value of future lease payments (including fixed payments, variable payments based on index or rate, reasonably certain residual guarantees). Lease liability reduced and interest expense recognized for actual payments made. Amortization expense for using the lease asset over the shorter of the term of the lease of the useful life of the underlying asset. 10
ALL OTHER LEASES Any agreement that doesn t qualify as a short-term lease or ownership transfer contract will fall into this category. Accounting Initial Recognition and Measurement» The lessee should recognize a lease liability and an intangible right-to-use lease asset (lease asset). The lease liability will be measured at the present value of payments expected to be made during the lease term. Subsequent Recognition and Measurement» Lease payments will result in reduction of the lease liability and recognition of interest expense. The lease asset will be amortized over the shorter of the lease terms or the useful life of the underlying asset. 11
GASB 87 - LEASES Reassess the lease term only if one or more of the following occurs: The lessee or lessor elects to exercise an option, even though it was previously determined it was reasonably certain the lessee or lessor would not exercise that option. The lessee or lessor elects not to exercise an option, even though it was previously determined it was reasonably certain the lessee or lessor would exercise that option. An event specified in the lease contract that requires an extension or termination of the lease takes place. Lease Amendment (Modifications and Terminations) 12
GASB 87 - LESSEE PERSPECTIVE Lease Amendment (Modifications and Terminations) Lease modification: An amendment should be considered a lease modification unless the lessee's right to use the underlying asset decreases» New Lease: The lease modification gives the lessee an additional lease asset by adding one or more underlying assets not included in the original lease contract. The increase in lease payments for the additional lease asset does not appear to be unreasonable based on (1) the terms of the amended lease contract and (2) professional judgment, maximizing the use of observable information (for example, using readily available observable stand-alone prices). Accounting (lessee): Recognize a new intangible asset and lease liability separate from the most recent lease contract before modification. 13
GASB 87 - LESSEE PERSPECTIVE Lease Amendment (Modifications and Terminations): Lease Termination: if the lease amendment decreases the lessee s right to use the underlying asset, it should be considered a partial or full lease termination.» Accounting (lessee) Other Than Purchase: Reduce (partial termination) or remove (full termination) the lease asset and obligation; Recognize the difference as a gain or loss.» Accounting (lessee) Purchase of the Underlying Asset: Adjust the lease liability to reflect the payments yet to be made; Reflect the adjustment in cost of the purchased asset; Reclassify the lease asset to the appropriate asset class. 14
GASB 87 EFFECTIVE DATE AND TRANSITI0N Effective for reporting periods beginning after December 15, 2019. Earlier application is encouraged.» December 31, 2020» June 30, 2021» September 30, 2021 Changes adopted to conform to this statement should be applied retroactively by restating financial statements, if practicable, for all prior periods presented. Leases should be recognized and measured using the facts and circumstances that existed at the lease commencement date or the beginning of the earliest period restated, whichever occurred later. Leases between related parties (Tribal Governments, BTAs and DCUs) should recognize substance of the transaction, when substance is significantly different from legal form. A short-term lease is long-term if parties have an understanding that lease will be extended for several years. 15
STEPS TO CONSIDER PRIOR TO IMPLEMENTATION 1. Analyze existing lease contracts and gather information for reporting and disclosure requirements. 2. Implement internal controls and address potential changes in polices, agreements (amendments and terminations) and accounting software. 3. Work with grant providers to address changes in lease reporting. 4. Analyze any potential issues with existing and future debt covenants (potentially amend existing loan agreements). 16
UNIQUE CONSIDERATIONS FOR TRIBES Gaming hardware/software leases Fixed amount vs. percent of revenue Rights (oil, gas, gaming machines) Interfund leases between Tribal government and enterprises/blended component units Leases between Tribal government and discretely presented component units 17
FIDUCIARY ACTIVITIES GASB 84 18
IS THE ACTIVITY A FIDUCIARY ACTIVITY? This is the first question to answer determination can be complicated If yes, then report in fiduciary funds. If no, then report in governmental or business-type activities, or not at all. 19
FIDUCIARY COMPONENT UNITS Legally separate entities meeting the GASB 14 definition of a component unit. Typically include: Pension plans and OPEB plans administered through trusts. Other trusts that benefit individuals or other organizations/governments. 20
OTHER FIDUCIARY ACTIVITIES (NOT COMPONENT UNITS) Certain pension and OPEB plans administered through a trust Other activities in which the government controls the assets and the assets are not derived solely from the government s ownsource revenues. 21
FIDUCIARY FUNDS Once you determine the activity is a fiduciary activity, then report it in one of the following fiduciary funds: Pension (and other employee benefit) trust funds Investment trust funds Private-purpose trust funds Custodial funds 22
TWO IMPORTANT QUESTIONS WHEN NOT A COMPONENT UNIT Trust Assets 1. Does the Tribe control the assets? 2. Are the assets derived solely from the Tribe s own-source revenue? If yes to both, then the trust is not a fiduciary activity. It would be reported with the Tribe s governmental or business-type activities. 23
CONTROL OF ASSETS A government controls the assets of an activity if the government (a) holds the assets or (b) has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended recipients. Restrictions from legal or other external restraints that stipulate the assets can be used only for a specific purpose do not negate a government's control of the assets. 24
OWN-SOURCE REVENUES Own-source revenues are revenues that are generated by a government itself. They include exchange and exchange-like revenues (for example, water and sewer charges) and investment earnings. Derived tax revenues (such as sales and income taxes) and imposed non-exchange revenues (such as property taxes) also are included. 25
EXAMPLE MINOR S TRUST Assumptions: 1. Not a legally separate entity 2. Tribe doesn t hold the assets, but they decide how and when it gets distributed to minors 3. Funded with gaming revenue under approved revenue allocation plan This is not a fiduciary activity, and therefore not reported in a fiduciary fund, but rather reported with the Tribe s governmental or business-type activities. 26
GASB 84 EFFECTIVE DATE Effective for reporting periods beginning after December 15, 2018 Year-ends:» December 31, 2019» June 30, 2020» September 30, 2020 27
NEW REPORTING MODEL PROJECT GASB Project 28
BACKGROUND GASB 34 has been in effect for 15 years now GASB decided to revisit the reporting model to see what s working and what isn t Several areas are being considered This presentation will focus on the proposed changes to governmental fund reporting 29
FINANCIAL REPORTING MODEL IMPROVEMENTS GOVERNMENTAL FUNDS Objective: To make the statements more understandable for those making decisions based on a government s fiscal health First invitation to comment concluded on March 31, 2017 More opportunities to comment in the future on Preliminary Views and Exposure Draft Preliminary Views expected July 2018 Exposure Draft expected April 2020 Consideration of Final Statement: November 2021 30
CURRENT CONCERNS Effectiveness of governmental fund financial statements Guidance for complex transactions Governmental fund financial statements include the effects of certain assets and liabilities, no long-term debt or capital assets, but include notes receivable, prepaid and inventory 31
KEY CONSIDERATIONS IN DEVELOPING POTENTIAL IMPROVEMENTS Significance of the budget to the governmental fund financial statements Improving Utility and Understanding Objectives of Financial Reporting Benefits and Costs 32
3 RECOGNITION APPROACHES Alternatives for Governmental Fund Financial Statements: The near-term financial resources approach (near-term approach) The short-term financial resources approach (short-term approach) The long-term financial resources approach (long-term approach) All 3 approaches have potential benefits and challenges 33
COMMON CHARACTERISTICS OF THE 3 APPROACHES Relationship with budgetary reporting Focus on financial resources Same-page reconciliation and clearer descriptions Guidance for Complex Transactions 34
OTHER GOVERNMENTAL FUND FINANCIAL STATEMENT ISSUES Two formats are being considered for Resource Flows Statement: Existing statement of revenues, expenditures and changes in fund balances The current and long-term activity format (inflows and outflows) The short-term approach and long-term approach would include a statement of cash flows. 35
LATEST NEWS: AICPA Q&A SECTION 9160, OTHER REPORTING MATTERS Dual auditors opinion GASB is GAAP The financial statements are not GAAP The financial statements present fairly in accordance with FASB standards 36
MORE TO COME 37
QUESTIONS? Please don t hesitate to contact us if you have any questions! Chris Tyhurst, CPA Principal ctyhurst@redw.com 602.730.3669 Chris Bitakis, CPA Senior Manager cbitakis@redw.com 505.998.3496 38