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Financial Reporting and Regulatory Update

Third Quarter 2019

From the GASB

Final standards

Implementation guidance on leases

On Aug. 15, 2019, the GASB issued Implementation Guide No. 2019-3, “Leases.” The guide contains questions and answers to clarify, explain, or elaborate on the GASB’s new standards on accounting and financial reporting for leases, GASB Statement 87, “Leases.”

Statement 87, released in June 2017, includes guidance that establishes a single approach to accounting for and reporting leases by state and local governments based on the foundational principle that leases are financings of the right to use an underlying asset.

The implementation guide includes 80 new Q&As to address accounting and financial reporting topics for leases relative to the following areas:

  • Scope and applicability of Statement 87 (1-11)
  • Lease term (12-16)
  • Short-term leases (17-20)
  • Contracts that transfer ownership (21-22)
  • Lessee and lessor recognition and measurement for leases other than short-term leases and contracts that transfer ownership (23-36) and (43-53)
  • Notes to financial statements – lessees and lessors (37-42) and (54-55)
  • Lease incentives (56-57)
  • Contracts with multiple components (58-62)
  • Contract combinations (63-64)
  • Lease modifications and terminations (65-70)
  • Sale-leaseback transactions (71-72)
  • Lease-leaseback transactions (73-74)
  • Intra-entity leases (75)
  • Effective date and transition of Statement 87 (76-77)

Effective date

The requirements of this statement are effective for reporting periods beginning after Dec. 15, 2019. Early application is encouraged if Statement 87 has been implemented. 

Proposals

Replacement of interbank offered rates

On Sept. 26, 2019, the GASB issued an exposure draft, “Replacement of Interbank Offered Rates,” to assist state and local governments in the transition away from existing interbank offered rates (IBORs) to other reference rates.

Governments, on occasion, have entered into agreements in which variable payments made or received depend on an IBOR, such as the LIBOR. Due to global reference rate reform, LIBOR is expected to cease to exist in its current form in 2021, so governments are amending or replacing financial instruments tied to LIBOR.

If this reference rate upon which variable payments are made or received is changed, current GASB guidance will be affected. For instance:  

  • The provisions of Statement 53, “Accounting and Financial Reporting for Derivative Instruments,” require that governments terminate hedge accounting if they change a critical term of a hedging derivative instrument, such as the reference rate of its variable payment. 
  • Under Statement 87, “Leases,” replacement of the rate on which variable payments depend in a lease contract would require that a government apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable.

The exposure draft addresses accounting and financial reporting implications that result from IBOR replacement by proposing the following:

  • “Providing an exception for certain hedging derivative instruments to the hedge accounting termination provisions when an IBOR is replaced as the reference rate of the hedging derivative instrument
  • “Clarifying the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item
  • “Clarifying that the uncertainty related to the continued availability of IBORs does not, by itself, affect the assessment of whether a hedged expected transaction is probable
  • “Removing LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap
  • “Identifying the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates for the qualitative evaluation of the effectiveness of an interest rate swap
  • “Clarifying the definition of reference rate, as it is used in Statement 53
  • “Providing an exception to the lease modifications guidance in Statement 87 for certain lease contracts that are amended to replace an IBOR as the rate upon which variable payments depend”

Comments are due to the GASB by Nov. 27, 2019.

Omnibus 20XX

To improve consistency and comparability in accounting and financial reporting, on July 9, 2019, the GASB issued an exposure draft, “Omnibus 20XX,” which addresses accounting and financial reporting issues identified during the implementation and application of certain GASB pronouncements.

The exposure draft covers these issues:

  • “The effective date of Statement No. 87, ‘Leases,’ for interim financial reports
  • “Reporting of intra-entity transfers of assets between a primary government employer and a component unit pension plan or other postemployment benefit (OPEB) plan
  • “The applicability of Statements No. 73, ‘Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68,’ as amended, and No. 74, ‘Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans,’ as amended, to reporting assets accumulated for postemployment benefits
  • “The applicability of certain requirements of Statement 84, ‘Fiduciary Activities,’ to postemployment benefit arrangements
  • “Measurement of liabilities (and assets, if any) related to asset retirement obligations (AROs) in a government acquisition
  • “Reporting by public entity risk pools for amounts that are recoverable from reinsurers or excess insurers
  • “Reference to nonrecurring fair value measurements of assets or liabilities in authoritative literature
  • “Terminology used to refer to derivative instruments”

Comments were due to the GASB by Oct. 4, 2019.