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Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

Governmental Accounting Standards Board (GASB) Statement No. 93 Replacement of Interbank Offered Rates

Summary

With the global reference rate reform and the London Interbank Offered Rate (LIBOR) disappearing at the end of 2021, GASB Statement No. 93 was issued to address the accounting and financial impacts for replacing a reference rate. 

The article below is focused on Hedging Derivative Investments and amendments impacting Statement No. 87, Leases. We have not included guidance related to the Secured Overnight Financing Rate or the Up-Front Payments. 

Background

We have all heard that by the end of 2021, LIBOR will cease to exist in its current form. LIBOR is one of the most commonly used interbank offered rates (IBOR). Now what?

In March 2020, the GASB provided guidance to address the accounting treatment and financial reporting impacts of the replacement of IBORs with other referenced rates while maintaining reliable and comparable information. Statement No. 93 specifically addresses previously issued Statements No. 53, Accounting and Financial Reporting for Derivative Instruments, and No. 87, Leases, to provide updated guidance on how a change to the reference rate impacts the accounting for hedging transactions and leases.  

Here are our analyses of what is changing as well as easy-to-understand and important considerations for your organization as you implement the new standards.

Part 1: Hedging Derivative Instruments

The original guidance under Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, requires that a government terminate a hedging transaction if the government renegotiates or amends a critical term of a hedging derivative instruction. 

Reference rate is the critical term that differentiates Statement No. 93 from Statement No. 53. The newly issued Statement No. 93 provides an exception that allows for certain hedging instruments to hedge the required accounting termination provisions when the IBOR is replaced with a new reference rate. 

In order words, under Statement No. 53, a modification of the IBOR would have caused the hedging instrument to terminate. However, Statement No. 93 now provides an exception to the termination rules as a result of the end of LIBOR. According to Statement No. 93, the exception is allowable when: 

  1. The hedging derivative instrument is amended or replaced to change the reference rate of the hedging derivative instrument’s variable payment or to add or change fallback provisions related to the reference rate of the variable payment.
  2. The reference rate of the amended or replacement hedging derivative instrument’s variable payment essentially equates to the reference rate of the original hedging derivative instrument’s variable payment by one or both of the following methods:
    • The replacement rate is multiplied by a coefficient or adjusted by addition or subtraction of a constant; the amount of the coefficient or constant is limited to what is necessary to essentially equate the replacement rate and the original rate
    •  An up-front payment is made between the parties; the amount of the payment is limited to what is necessary to essentially equate the replacement rate and the original rate.
  3. If the replacement of the reference rate is effectuated by ending the original hedging derivative instrument and entering into a replacement hedging derivative instrument, those transactions occur on the same date.
  4. Other terms that affect changes in fair values and cash flows in the original and amended or replacement hedging derivative instruments are identical, except for the term changes, as specified in number 1 below, that may be necessary for the replacement of the reference rate.

As noted above, there are term changes that may be necessary for the replacement of the reference rate are limited to the following

  • The frequency with which the rate of the variable payment resets
  • The dates on which the rate resets
  • The methodology for resetting the rate
  • The dates on which periodic payments are made.

Many contracts that will be impacted by LIBOR will be covered under Statement No. 93. The statement was created in order to ease with the transition and not create unnecessary burdens on the organizations. 

Part 2: Leases

Under the original guidance of Statement No. 87 Leases, lease contracts could be amended while the contract was in effect. This was considered a lease modification. In addition, the guidance states that an amendment to the contract during the reporting period would result in a separate lease. Examples of such an amendment included change in price, length, or the underlying asset.  

Included within Statement No. 93, are modifications to the lease standard as it relates to LIBOR. In situations where a contract contains variable payments with an IBOR, an amendment to replace IBOR with another rate by either changing the rate or adding or changing the fallback provisions related to the rate is not considered a lease modification. This modification does not require a separate lease. 

When is Statement No. 93 effective for me?

The removal of LIBOR as an appropriate interest rate is effective for reporting periods ending after June 31, 2021. All other requirements of Statement No. 93 are effective for all reporting periods beginning after June 15, 2022. Early adoption is allowed and encouraged. 

What should I do next? 

We encourage all those that may be impacted by LIBOR—whether with hedging derivative instruments, leases, and/or specific debt arrangements—to review all of their instruments to determine the specific impact on your organization. This process will be time consuming, and may require communication with the organizations with whom you are contracted to modify the terms so that they are agreeable to both parties.

If you would like more information about early adoption, or implementing the new Hedging Derivative Instruments or Leases, please contact Katy Balukas or Grant Ballantyne.
 

Article
The clock is ticking on LIBOR. Now what?

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

GASB Statement No. 96 Subscription-Based Information Technology Agreements

Summary

GASB Statement No. 96 defines the term Subscription-Based Information Technology Agreements (SBITA) as “a contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.”

GASB Statement No. 96 determines when a subscription should be recognized as a right-to-use subscription, and also determines the corresponding liability, capitalization criteria, and required disclosures. 

Why does this matter to your organization?

In 2018, Financial Accounting Standards Board (FASB) issued Accounting Standards Updated (ASU) 2018-15: Cloud Computing Arrangements for Service Contracts, and we knew it would only be a matter of time when a similar standard would be issued by the Governmental Accounting Standards Board (GASB). Today, more and more governmental entities are purchasing software in the cloud as opposed to a software that is housed locally on their machine or network. This creates the need for updated guidance in order to improve overall financial reporting, while maintaining consistency and comparability among governmental entities. 

What should you do?

We are going to walk through the steps to determine if a SBITA exists—from identification through how it may be recognized in your financial statements. You can use this step-by-step guide to review each individual subscription-based software to determine if Statement No. 96 applies.

Step 1: Identifying a SBITA

There is one important question to ask yourself when determining if a SBITA exists:

Will this software no longer work/will we no longer be able to log in once the contract term ends?

If your answer is “yes”, it is likely that a SBITA exists.  

Step 2: Determine whether a contract conveys control of the right to use underlying IT assets

According to Statement No. 96, the contract meets the right to use underlying IT assets by:

  • The right to obtain the present service capacity from use of the underlying IT assets as specified in the contract
  • The right to determine the nature and manner of use of the underlying IT assets as specified in the contact

Step 3: Determine the length of the subscription term

The subscription term starts when a governmental entity has a non-cancellable right to use the underlying IT assets. This is the period during which the SBITA vendor does not have the ability to cancel the contract, increase or decrease rates, or change the benefits/terms of the service. The contract language for this period can also include an option for the organization or the SBITA vendor to extend or terminate the contract, if it is reasonably certain that either of these options will be exercised.

Once a subscription term is set, your organization should revisit the term if one or more of the following occurs:

  • The potential option (extend/terminate) is exercised by either the entity or the SBITA vendor 
  • The potential option (extend/terminate) is not exercised by either the government or the SBITA vendor
  • An extension or termination of the SBITA occurs 

If the maximum possible term under the SBITA contract is 12 months or less, including any options to extend, regardless of their possibility of being exercised, an exception for short-term SBITAs has been provided under the statement. Such contracts do not need to be recognized under the Statement and the subscription payments will be recognized as outflows of resources. 

Step 4: Measurement of subscription liability 

The subscription liability is measured at the present value of the subscription payments expected to be made during the previously determined subscription term. The SBITA contract will include specific measures that should be used in determining the liability that could include the following:

  • Fixed payments
  • Variable payments
  • Payments for penalties for termination
  • Contract incentives
  • Any other payments to the SBITA which are included in the contract

The future payments are discounted using the interest rate that the SBITA charges to your organization. The interest rate may be implicit in the contract. If it is not readily determinable, the rate should be estimated using your organization’s incremental borrowing rate. 

Your organization will only need to re-measure the subscription liability is there is a change to the subscription term, change in the estimated amounts of payments, change in the interest rate the SBITA charges to your organization, or contingencies related to variable payments. A change in the discount rate alone would not require a re-measurement. 

Step 5: Measurement of subscription asset

The SBITA asset should be measured at the total of the following:

  • The amount of the initial measurement of the subscription liability (noted in Step 4 above)
  • If applicable, any payments made to the SBITA vendor at the beginning of the subscription term
  • The capitalized initial implementation costs (noted in Step 6 below)

Any SBITA vendor incentives received should be subtracted from the total.

Step 6: Capitalization of other outlays

In addition to the IT asset, Statement No. 96 provides for other outlays associated with the subscription to be capitalized as part of the total subscription asset. When implementing the IT asset, the activities can be divided into three stages: 

  • Preliminary project stage: May include a needs assessment, selection, and planning activities and should be recorded as expenses.
  • Initial implementation stage: May include testing, configuration, installation and other ancillary charges necessary to implemental the IT asset. These costs should be capitalized and included in the subscription asset.
  • Operation and additional implementation stage: May include maintenance and troubleshooting and should be expensed.

Step 7: Amortization

The subscription asset are amortized over the shorter of the subscription terms or the useful life of the underlying IT assets. The amortization of the asset are reported as amortization expense or an outflow of resources. Amortization should commence at the beginning of the subscription term. 

When is this effective?

Statement No. 96 is effective for all fiscal years beginning after June 15, 2022, fiscal and calendar years 2023. Early adoption is allowed and encouraged.

Changes to adopt the pronouncement are applied retroactively by restating previously issued financial statements, if practical, for all fiscal years presented. If restatement is not practical, a cumulative effect of the change can be reported as a restatement to the beginning net position (or fund balance) for the earliest year restated. 

What should you do next? 

With any new GASB Standard comes challenges. We encourage governmental entities to re-review their vendor contracts for software-related items and work with their software vendors to identify any questions or potential issues. While the adoption is not required until fiscal years beginning after June 15, 2022, we recommend that your organization start tracking any new contracts as they are entered o starting now to determine if they meet the requirements of SBITA. We also recommend that your organization tracks all of the outlays associated with the software to determine which costs are associated with the initial implementation stage and can be capitalized. 

What are we seeing with early adoption?

Within the BerryDunn client base, we are aware of at least one governmental organization that will be early adopting. We understand that within component units of state governments, the individual component unit is required to adopt a new standard only when the state determines that they will adopt.

If you are entering into new software contracts that meet the SBITA requirements between now and the required effective date, we would recommend early adoption. If you are interested in early adoption of GASB Statement No. 96, or have any specific questions related to the implementation of the standard, please contact Katy Balukas or Grant Ballantyne

Article
Our take on SBITA: Making accounting for cloud-based software less nebulous

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

GASB Statement No. 97, Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans (GASB 97) addresses specific practice issues that have arisen related to retirement plans. The standard can be roughly divided into two parts, each of which focus on a different aspect of governmental retirement plan accounting. 

Part 1: Component units

Over the years, GASB has wrestled with clarifying exactly what entities should be included in a set of stand-alone financial statements. In general, it defined a financial reporting entity as a stand-alone government and all entities for which it is financially accountable, known as component units. One of the many situations where the government is financially accountable for another entity is where the majority of the entity’s board is appointed by the government. 

GASB 97 clarifies that when the entity has no governing board and the government performs the functions that a board would normally perform, the consideration of consolidation should be the same as if the government appointed a voting majority of a hypothetical governing board. This portion of the standard is consistent with previously issued implementation guides. 

What is new is that GASB 97 creates an exception, allowing defined contribution pension plans, defined contribution OPEB plans, and certain Section 457 plans who do not have a board to be excluded from consideration as a component unit. While GASB believes that it would be appropriate to include them like other entities, they listened to stakeholders who voiced their concerns about the costs of presenting defined contribution plans as component units. Their research showed that most stakeholders do not use information related to defined contribution plans presented as component units of governments, although if the government controls the assets, such information is more valued. GASB decided to balance the costs of preparation with the usefulness of the information.  

Additionally, for the purposes of determining component units, the government is not considered to have a financial burden for defined contribution pension plans and defined contribution OPEB plans that are administered through trusts. 

What should you do? 

First, the intended impact is that there will be fewer defined benefit plans presented as component units. If you currently present a defined benefit plan as a component unit, you may be able to save money by excluding them from the government-wide financial statements. 

Second, if you currently report a defined contribution plan that is administered through a trust as a component unit, you should reassess whether that is still considered a component unit. Remember, even if it is not a component unit, GASB Statement No. 84 Fiduciary Activities may still require it to be included in the financials if the primary government controls the assets. 

When does this apply? 

These changes are effective immediately. 

Part 2: Section 457 plans

Back in 1997 when GASB Statement No. 32 was issued, GASB did not believe it likely that plans established under Internal Revenue Code (IRC) section 457 would be pension plans because at that time, most Section 457 plans did not have employer contributions. In the more than twenty years that have passed since then, the IRC and characteristics of some of these plans have changed, forcing GASB to reconsider their classification. With the issuance of GASB 97, the board stated that it believes Section 457 plans could indeed be pensions. Therefore, Section 457 plans which fit the definition of a pension trigger the same reporting requirements of any other pension plan. 

What should you do? 

If your governmental organization has an employee benefit plan under Section 457, you should take the following steps: 

First, determine whether the plan is a “pension plan” or not. Pension plans provide retirement income or other postemployment benefits such as death benefits, life insurance, and disability benefits. Pensions do not include postemployment healthcare benefits and termination benefits. 

Despite the common usage of “pension” to mean only defined benefit plans, the statement is clear that the term “pension plan” includes defined contribution plans as well.

If the plan fits this definition, proceed to the next step. If not, this statement does not impact you. 

Second, if your Section 457 plan meets the definition of a pension plan and either issues its own standalone financial statements or is included in the financial statements of another government, those financial statements should include all financial reporting requirements that are relevant to pension plans. 

Generally, this means that GASB Statement No. 68 Accounting and Financial Reporting for Pensions (GASB 68) and all its related disclosure requirements are applicable, although there are some plans that don’t fall within GASB 68’s scope where GASB Statement 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 applies instead. The additional requirements will not look the same for all entities; defined benefit and defined contribution plans have different reporting requirements and their footnote disclosures will differ. 

When does this apply? 

The requirements related to Section 457 plans apply to fiscal years beginning after June 15, 2021. Some stakeholders requested that GASB delay the adoption due to COVID-19, but the GASB believes that the adoption date they set provides sufficient time for adoption. 

What else do you need to know? 

If your retirement plan falls within the scope of this pronouncement, you may have new costs to deal with, including potentially having to consult with an actuary to develop a model to prepare the new disclosures if you have a defined benefit pension. Fortunately, the GASB believes that most of the additional disclosures will relate to defined contribution pensions which have simpler note disclosures. 

If you would like more information or have questions about your specific situation, please contact Nathan Dunlap or Grant Ballantyne. We’re here to help.
 

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GASB 97: What's new, what to do, and what you need to know

Read this if your organization operates under the Governmental Accounting Standards Board (GASB).

Along with COVID-19 related accounting changes that require our constant attention, we need to continue to keep our eyes on the changes that routinely emerge from the Governmental Accounting Standards Board (GASB). Here is a brief overview of what GASB Statement No. 93, Replacement of Interbank Offered Rates, Statement No. 96, Subscription-Based Information Technology Arrangements, and Statement No. 97 Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, may mean to you. If you want more detail, we’ve included links to more analyses and in-depth explanation of what you need to know now.

GASB 93

We have all heard that by the end of 2021, LIBOR will cease to exist in its current form. In March 2020, the GASB provided guidance to address the accounting treatment and financial reporting impacts of the replacement of interbank offered rates (IBORs) with other referenced rates, while maintaining reliable and comparable information. Statement No. 93 specifically addresses previously issued Statement Nos. 53 and 87 to provide updated guidance on how a change to the reference rate impacts the accounting for hedging transactions and lease arrangements.  Read more in our article The Clock is Ticking on LIBOR. Now What?

GASB 96

GASB Statement No. 96 defines the term Subscription-Based Information Technology Agreements (SBITA) as “A contract that conveys control of the right to use another party’s (a SBITA vendor’s) information technology (IT) software, alone or in combination with tangible capital assets (the underlying IT assets), as specified in the contract for a period of time in an exchange or exchange-like transaction.”

GASB Statement No. 96 determines when a subscription should be recognized as a right-to-use subscription, and also determines the corresponding liability, capitalization criteria, and required disclosures. Learn why this matters and what you need to do next: Our Take on SBITA: Making Accounting for Cloud-Based Software Less Nebulous

GASB 97

GASB Statement 97 addresses specific practice issues that have arisen related to retirement plans. The standard is roughly divided into two parts—component units and Section 457 plans—each of which focus on a different aspect of governmental retirement plan accounting. Help your organization gain an understanding of the standard with our article GASB 97: What is New, What Should I Do, and What Else do I Need to Know.

If you have questions about these pronouncements and what they mean to your organization, please contact Grant Ballantyne.

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Update for GASB-governed organizations: Lease accounting, LIBOR transition, SBITA, and Section 457 plans

Read this if you are a not-for-profit organization. 

Due to the impacts of COVID-19, on June 3, 2020, FASB issued an Accounting Standards Update (ASU) that granted a one-year effective date delay for NFPs to adopt the new revenue recognition standards (Topic 606). The ASU permitted NFPs that had not yet applied the revenue recognition standard to do so for annual reporting periods beginning after December 15, 2019. Many NFP’s choose to take advantage of this delay. 

However, the clock is ticking on FASB’s revenue recognition changes, as most NFP’s will have to adopt the revenue recognition changes shortly. With that in mind – let’s revisit Topic 606 and what it could mean for your organization. 

The overarching goal of the changes to revenue recognition is to converge disparate standards across industries, all while making the information more useful to users. The core principle of the standard is that “the organization should recognize revenue to depict the transfer of goods or service in an amount that reflects the payment for which the organization expects to be entitled for those goods and services.” 

A five-step process and a simplified approach 

To achieve that core principle, your organization will need to apply a five-step model to some of your revenues streams:

  1. Identify the contract(s) with a customer
  2. Identify the separate performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the separate performance obligations
  5. Recognize revenue when or as a performance obligation is satisfied

While the process can be broken down into five simple steps, the task of reviewing revenue streams and specific contracts can be quite daunting in implementation.

Additional disclosures needed

Whether your organization is currently implementing, or soon will, you will want to make sure you understand the extensive disclosures required under the standards. Annual disclosures include the following:

  • Qualitative information about how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flow
  • Opening and closing balances of contract assets, contract liabilities, and receivables from contracts with customers
  • Descriptions of performance obligations

We are here to help

We recognize the difficult task ahead for our clients in analyzing their multiple contract vehicles and revenue streams in implementing the new standards. To help our clients through the process, we are offering revenue standard workshops. This workshop can be tailored to your needs, with an in-depth meeting to review the standard, consider your significant revenue streams, and a walkthrough the five-step process. We will leave you with an easy to use template for analyzing future revenue streams along with recommendations for your current revenue recognition system and process. 

Don’t wait until the financial year has come to a close to review your processes and systems in place, we are available now to work with you to prepare for the new standard. Contact Chris Mouradian or Sarah Belliveau to find out how you can join the list of organizations getting ahead of the new standard.

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Financial Accounting Standards Board (FASB) revenue recognition changes: What it means for NFPs