In 2020 the Governmental Accounting Standards Board plans to finalize its guidance on the transition away from Libor and to take a comprehensive look at government financial reporting.
GASB Chairman David Vaudt outlined those in a recent interview as the highlights of what he expects to be a busy year.
The transition away from Libor, an acronym for the London Inter Bank Offered Rate, is a “practice issue,” Vaudt said. In the other instance, the board is stepping back to take a big picture look at government financial reporting with three projects involving financial reporting model improvement; second, revenue and expense recognition and lastly, the disclosure framework.
Vaudt has dubbed them as “the big three.” They are multi-year projects that started in late 2016 and will extend past 2021.
Near-term, GASB’s final guidance on the Replacement of Interbank Offered Rates is expected to be issued in March, giving state and municipal governments plenty of time to make adjustments before Libor is phased out by the end of 2021.
The guidance will help issuers avoid adverse tax consequences from changing the terms of debt, derivatives, and other financial contracts to alternative reference rates.
S&P Global estimates there are 1,400 different municipal bond market issuers with variable rate debt.
The phase out of Libor was recommended by the Alternative Rates Reference Committee created by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York.
The Treasury and Internal Revenue Service also have proposed transition regulations that, like GASB’s guidance, are expected to be finalized in 2020. No target date has been announced for those regulations.
Almost two thirds of the nation’s 90,000 local governments, states another other governmental taxing units use Generally Accepted Accounting Principles promulgated by GASB. They include almost all large cities, states and government agencies that are followed by credit agencies.
The GASB guidance proposes removal of all inter-bank offered rates as an appropriate benchmark interest rate effective for reporting periods beginning after Dec. 15, 2020.
The proposal was broadened beyond Libor to include all other IBORs offered in other countries, including Switzerland, Japan and the European Union.
The proposed statement allows governments to continue using hedge accounting for certain hedging derivative instruments that are amended or replaced to change the reference rate from an IBOR.
It also clarifies the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item and that the uncertainty associated with reference rate reform does not, by itself, affect the probability that an expected transaction will occur.
“What we are providing is an exception if you meet certain conditions and those conditions would be, one the instrument has to be amended or replaced to change that Libor reference rate and then adjustments to the new rate are limited to those that are necessary to equate the new rate to the old rate,” Vaudt said. “And then if you are ending one agreement and replacing it and entering into a new agreement, those two agreements have to occur on the same date.”
As for GASB’s "big three" projects, the first started in December 2016 with an invitation to comment on possible improvements to the current model for financial reporting which was established in 1999.
Vaudt said GASB’s research found that the model is working well and the current project is seeking improvements.
GASB received about 100 letters in response to its initial announcement at the end of 2016 and another 100 following its publication of its preliminary views on the subject released in September 2018.
An exposure draft is expected to be published in June 2020 on the measurement and basis for governmental fund types.
GASB has tentatively decided to propose a short term financial resources measurement focus. It would say the payment terms should be established based on the contractual terms. Items from long term transactions should be recognized when due and the recognition period should be one year.
This will bring consistency in the reporting of governmental funds, according to Vaudt, because the recognition period varies.
Some jurisdictions currently recognize taxes up to 60 days after the end of the fiscal year. Other jurisdictions use 60 days for all revenues, while others use 90 days for some revenue or 180 days for other revenue.
“Under this new proposal, everyone would be using one year recognition period, bringing consistency in the requirement for that short term focus,” Vaudt said.
“The one year period is based on the date the transaction occurs.”
The second big project involving revenue and expense recognition is now called exchange and non-exchange transactions by GASB.
The guidance regarding exchange transactions is limited and the guidance on non-exchange transactions can be improved and clarified, according to Vaudt.
This project began in January 2019 with an invitation to comment which drew more than 50 responses.
GASB expected to publish its preliminary view in June, which will involve what the board is calling categories A and B.
A Category A transaction would be an acquisition coupled with a sacrifice. According to GASB, in this category rights and obligations are dependent on the existence of each other. Examples of Category A would be a performance contract or a supply contract.
A Category B transaction would be either an acquisition or a sacrifice, but not both. Examples of Category B would be a driver’s license or a government assistance payment such as a welfare check.
Vaudt said that the current system uses a similar concept that is not as definitive in the way it looks at transactions.
An exposure draft of the second project is expected to be published in late 2021.
The third big GASB project involves the disclosure framework for deciding what footnotes are needed to understand a financial statement.
The current standard requires that the footnotes contain information that’s essential to understanding the financial statement.
“But we tell people that ‘essential’ is in the eye of the beholder,” said Vaudt. “So what this project is looking in a more objective way at what footnotes are essential.”
GASB plans to release an exposure draft in February regarding how evidence is evaluated. It will ask whether the users are using the information in the footnotes and whether, if additional information became available, how the users would use that information.
