Implementation Guides – Why They Should Be Your Best Friends
You may ask yourself, “Aren’t GASB Implementation Guides (Guides) just for auditors? Are they really that important?” No, they’re not just for auditors, and, yes, they’re really that important. They’re extremely useful not just for auditors but for clients as well. When reading a new or existing GASB standard, it can be overwhelming whether it’s 10 pages or more than 100 pages. The Guides can be a resource to help a governmental entity navigate the application of the standards, taking into consideration its own unique circumstances. They provide a wealth of information that can help governmental entities properly apply the standards, and their importance has changed over time.
Let’s go back in time and examine the evolution of the Guides to further highlight how the importance of the Guides has evolved. Issued in March 2009, GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GASB 55), established what constituted generally accepted accounting principles (GAAP) for all state and local governmental entities. It listed the order of priority of pronouncements that a governmental entity should look to for accounting and financial reporting guidance. The four categories are noted in descending order of authority below:
Per GASB 55, the Guides were category d. guidance, which represented the lowest level in the GAAP hierarchy. Fast-forward six years later to June 2015, when GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments (GASB 76), was issued and superseded GASB 55. GASB 76 has the same objective as the previous standard. What’s different is the reduction of the GAAP hierarchy from four to two categories of authoritative GAAP, which resulted in raising the category of GASB Implementation Guides in the GAAP hierarchy.
The elevation of its position within the GAAP hierarchy increased the importance of the Guides when evaluating the appropriate guidance to consider and helped show why you should reference them often.
Purpose of GASB Implementation Guides
The Guides are questions submitted by various users of the standards to GASB that have been subsequently answered to help all users of the standards apply the guidance to their specific situations. The Guides help clarify, explain, or elaborate on the various standards’ requirements. It’s a mechanism that allows GASB to address a wide range of detailed issues in a single document. Some of the standards have their own implementation guides (like GASB 84 and 87), while other standards are covered in general implementation guides (like 2017-1).
Here’s a list of the current Guides available on GASB’s website:
Implementation Guide No. 2020-1, Implementation Guidance Update—2020
Implementation Guide No. 2019-3, Leases
Implementation Guide No. 2019-2, Fiduciary Activities
Implementation Guide No. 2019-1, Implementation Guidance Update—2019
Implementation Guide No. 2018-1, Implementation Guidance Update—2018
Implementation Guide No. 2017-3, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions (and Certain Issues Related to OPEB Plan Reporting) Implementation Guide No. 2017-2, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans
Implementation Guide No. 2017-1, Implementation Guidance Update—2017
Implementation Guide No. 2016-1, Implementation Guidance Update—2016
Implementation Guide No. 2015-1
GASB also issues an annual Comprehensive Implementation Guide (CIG) in addition to separate implementation guides that accompany major GASB standards. The guidance in the separate guides is eventually incorporated into the annual CIG. The most recent CIG is current as of June 30, 2020.
How the Guides Are Structured
Each implementation guide starts with an objective and then the applicability of the Guide indicating whether any of the questions in previous Guides have been superseded. Questions are classified as “new” or “amended,” and the questions in the implementation guide are grouped into categories to help the reader easily scroll through and find any topic that may be applicable.
For example, the GASB 84 implementation guide contains the following categories:
- Fiduciary Component Units
- Pension and OPEB Arrangements That Are Not Component Units
- Other Fiduciary Activities
- Investment Trust Funds
How to Use the Guides
- When a new Guide is issued, save the Guide to your computer. Since the Guides are PDFs, you can search them for keywords. In addition, if not done already, download the old Guides from GASB’s website.
- The CIG is divided into the various standards, so review those Guides for the standards you know are applicable to your organization (for example, GASB 77, Tax Abatements) and to determine if any of the questions are applicable.
- If implementing a new standard (such as GASB 87, Leases, or GASB 84, Fiduciary Activities), review the implementation guide in conjunction with the standard to help ensure your organization has a clear understanding of how you will implement any changes as needed.
Important Questions to Know
There are a lot of questions across all the Guides, and it can be hard to read (and remember) all of them, but here are some commonly overlooked questions that are important to know.
Implementation Guide 2019-3, Question 4.17
GASB 87, Leases, is already an overwhelming standard, so it’s nice to have an implementation guide that addresses specific issues as a result of this new standard. Some entities are getting tripped up on what constitutes a short-term lease. Question 4.17 provides clear guidance on how to determine if a lease meets the definition of a short-term lease.
Q—A government enters into a 12-month noncancellable lease in which the lessee has options to renew for 12 months at a time, up to 49 times. Is this agreement a short-term lease under Statement 87?
A—No. According to paragraph 16 of Statement 87, the maximum possible term of a short-term lease is required to be 12 months or less, including any options to extend. The presence of lessee renewal options, regardless of their probability of being exercised, means this lease does not meet the definition of a short-term lease.
Implementation Guide 2019-2, Question 4.10
One of the more significant transitions with the implementation of GASB 84, Fiduciary Activities, is the removal of “agency funds” and the addition of “custodial funds” to the four types of fiduciary activities. Custodial funds expand on the definition of agency funds to include any fund that meets the definition of a fiduciary fund but doesn’t qualify as one of the other three types of fiduciary funds. Question 4.10 in the 2019-2 implementation guide shows how funds or amounts that might not have been recorded as agency funds will now qualify as a custodial fund—the key being any funds the government agency holds for other organizations/agencies.
Q—A city is the custodian for the cash collected from fees charged by the local cemetery association for future maintenance of the cemetery. The association is a not-for-profit association and is not a component unit of the city. The activity is administered through a cemetery care trust in which the assets are (a) dedicated to providing cemetery plot maintenance to individuals who have paid the fees for such maintenance, in accordance with the benefit terms, and (b) legally protected from the creditors of the government. The board of the not-for-profit association establishes how the resources can be spent. Should the city report the cemetery care trust as a fiduciary activity?
A—Yes. The activity should be reported as a fiduciary activity because the city, as custodian, is holding and therefore controlling the assets (which meets the criterion in paragraph 11a of Statement 84). Furthermore, the assets are not derived from the city’s own-source revenues or from government-mandated nonexchange transactions or voluntary nonexchange transactions (which meets the criterion in paragraph 11b of Statement 84) and are held in a trust that meets the criteria in paragraph 11c(1) of Statement 84. (See also Questions 4.41 and 4.42.)
Implementation Guide 2019-1, Question 4.7
For nonexchange transactions, especially related to grant funding, it can be tricky to understand when to recognize the revenue and related expense, as funding can be received before the grant agreement and expenses can be expended long before that. Question 4.7 in the 2019-1 implementation guide clarifies that revenues can’t be recognized until an executed grant agreement is received, as the grant agreement establishes that the costs were allowable and will be reimbursed.
Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions
Q—A city government with June 30 fiscal year-end incurred costs for debris clearing and increased public safety protection as a result of a natural disaster that occurred on May 30, 20X8. The president of the United States declared a natural disaster and approved funding for the region affected. The city applied for federal funding, and it received a notice of award on June 29, 20X8. The city executed the grant agreement on July 5, 20X8. Can the city recognize voluntary nonexchange revenue as of June 30, 20X8, for the reimbursement of costs incurred related to the natural disaster that occurred that fiscal year?
A—No. Paragraph 15 of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, identifies expenditure-driven grant provision to be a form of stipulation that “is considered an eligibility requirement … and affects the timing of recognition. That is, there is no award—... the recipient has no asset (receivable)—until the recipient has met the provider’s requirements by incurring costs in accordance with the provider’s program.” In other words, in the absence of an executed grant agreement before the end of the reporting period, the city cannot establish that is has incurred allowable costs and, therefore, cannot establish the existence of an asset (a receivable) at June 30, 20X8; that is the case even when the city has incurred costs that could be reimbursable once the grant agreement is executed. Assets and revenue should be recognized for allowable costs only after the grant agreement is executed.
Implementation Guide 2019-1, Question 4.8
With the rise of natural disasters in 2020 (as if we needed anything else to deal with), question 4.8 in the 2019-1 implementation guide helps clarify how insurance recoveries should be recognized. If received in the same year as the natural disaster, recoveries should be netted against any related cleanup expenditures. Otherwise, recoveries should be reported as other financing sources or extraordinary items. However, note that GASB 62 clarifies what constitutes an extraordinary item. For example, hurricanes in the South/Southeast aren’t considered extraordinary. In addition, remember that FEMA funding isn’t considered an insurance recovery.
Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries
Q—Should insurance recoveries related to cleanup costs for storm damage, such as removal of downed trees and other debris, be netted against the related cleanup expenditures in governmental fund financial statements?
A—Insurance recoveries that are related to cleanup of storm damage and are realized, or are measurable and available, in the same year as the related cleanup expenditures should be netted against those expenditures. Insurance recoveries that are related to cleanup of storm damage and are recognized in subsequent periods should be reported as other financing sources or extraordinary items, as appropriate.
Implementation Guide 2016-1, Question 5.14
Calculating the net investment in capital assets portion of net position can get a bit confusing when trying to determine what debt is considered “capital-related” for purposes of netting against the related asset. Question 5.14 in the 2016-1 implementation guide (which amended question 7.23.6 in the 2015-1 implementation guide) clarifies that any refunding debt that’s refunding existing capital-related debt also is considered capital-related.
Q—If debt is issued to refund existing capital-related debt, is the new debt also considered capital-related?
A—Yes. Even though the direct connection between the capital assets and the debt issued to finance the construction or acquisition has been eliminated, the replacement debt assumes the capital characteristics of the original issue. However, if the new issue is refunding capital appreciation debt, only the portion of the new debt that refunds the original principal of the old debt should be considered capital-related. (See Question 7.22.9 in Implementation Guide 2015-1 about capital appreciation debt.)
Implementation Guide 2015-1, Question Z.23.1
Refunding of debt and the related accounting can be confusing, and the Guides have several questions that address them. Question Z.23.1 from the 2015-1 implementation guide addresses accrued interest and how any accrued interest on the old debt should be accounted for. Accrued interest represents a liability and should be recorded in interest expense and may be included in the reacquisition price if the transaction is an advanced refunding, as long as that amount also is placed in an escrow account.
Statement No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities
Q—A city government plans to advance refund its debt issuance the day before its accrued interest payment is due. The city intends to place the amount owed for the accrued interest in an escrow account. Should the accrued interest on the old debt before the advanced refunding be included in the reacquisition price for advance refunding?
A—Any interest accrued up until the date of refunding represents a liability that is separate from the refunding of the old debt and, thus, should be recorded in interest expense. Accrued interest on the old debt may be included in the reacquisition price for advance refunding. If that is done, the net carrying amount (footnote 4 of Statement 23, as amended) should include a like amount. Alternatively, the government could omit in the reacquisition price any amounts placed in an escrow account that pertain to the interest accrued on the old debt before the advanced refunding. Only the amount placed in the escrow account, including future interest earnings, that is necessary to pay interest and principal on the old debt and the call premium once the debt is advance refunded would be included in the reacquisition price. If this alternative is selected, the net carrying amount would not include a like amount.
Implementation Guide 2015-1, Question Z.23.2
Another confusing topic related to refunding of debt is the idea of the “shorter of” the remaining life of the debt or the new debt in determining the period the net gain/loss on refunding should be reported. Question Z.23.2 of the 2015-1 implementation guide addresses this concept, noting the life of the old debt is through the normal maturity date and not the date of the refunding.
Q—In a debt refunding, the difference between the reacquisition price and the net carrying amount of the old debt (refunded debt) should be reported as a deferred outflow of resources or as a deferred inflow of resources and recognized as a component of interest expense in a systematic and rational manner over the shorter of the remaining life of the old debt or the new debt (paragraph 4 of Statement 23, as amended). Does the remaining life of the old debt extend to its call date or its normal maturity date?
A—For purposes of determining the amortization period of the difference between the reacquisition price and the net carrying amount of old debt, the remaining life of the old debt extends to the normal maturity date.
Hopefully this article has helped you better understand the Guides and provided you with some beneficial tips when implementing a new standard and preparing your financial statements and related notes and/or journal entries. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.