GASB Issues Statement No. 65: Items Previously Reported as Assets and Liabilities
March 2, 2012
GASB Statement 65 establishes accounting and financial reporting standards for when certain items previously reported as assets or liabilities are reported as either deferred outflows of resources or deferred inflows of resources. The standard also addresses subsequent expense and revenue recognition of the deferral. The provisions of Statement 65 are effective for financial statements for periods beginning after December 15, 2012 – FY14 for the vast majority of public colleges and universities.
Concepts Statement No. 4 defines deferred outflows of resources as a consumption of net assets by the government that is applicable to a future reporting period and deferred inflows of resources as an acquisition of net assets by the government that is applicable to a future reporting period. Deferred outflows of resources have a positive effect on net position that is similar to assets, but are not assets. Deferred inflows of resources have a negative effect on net position that is similar to liabilities, but are not liabilities.
Since the issuance of Concept Statement No. 4, it has been a challenge for many accountants to grasp the difference between assets and liabilities and deferred outflows of resources and deferred inflows of resources, respectively. What makes certain deferrals assets or liabilities and others deferred inflows or outflows of resources? Simplistically, an asset or liability exists, rather than a deferred outflow or inflow of resources, when a governmental entity is obligated to perform or receive a service. For example, public colleges and universities can consider service or performance requirements within the context of the familiar elements of prepaid insurance and deferred tuition revenue. Deferred tuition is a liability because revenue is not earned until the institution performs a service. Prepaid insurance is an asset because the insurers have an obligation to perform in accordance with the contract over the insurance service period.
Prior to the issuance of Statement 65, only two issued pronouncements have identified balance sheet elements that should be classified as resource deferrals. Specifically, Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires the reporting of a deferred outflow of resources or a deferred inflow of resources for the changes in fair value of hedging derivative instruments, and Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, requires a deferred inflow of resources to be reported by a transferor government in a qualifying service concession arrangement.
Statement No. 65 identifies the following deferrals.
Refunds related to debt defeasance and capital lease changes
Concerning debt defeasance, the difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources or a deferred inflow of resources. The deferral is subsequently amortized and recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.
For capital leases, refunds by the lessor to the lessee must relate to tax-exempt debt where there is a perceived economic advantage. In such cases the lessee adjusts the lease obligation to the present value of the future minimum lease payments with the resulting difference reported as a deferred outflow of resources or a deferred inflow of resources. The deferral is amortized in a rational manner over the shorter of the old or new remaining lease term and recognized as interest expense.
Government-Mandated Nonexchange Transactions and Voluntary Nonexchange Transactions
Providers of resources in government-mandated or voluntary nonexchange transactions frequently establish eligibility requirements. Resources transmitted before the eligibility requirements are met (excluding time requirements) should be reported as assets by the provider and as liabilities by the recipient. Resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred outflow of resources by the provider and a deferred inflow of resources by the recipient.
For example the Federal government provides Pell Grant resources to eligible students and eligibility is determined via a formula that is applied to a student’s “Free Application for Federal Student Aid.” Pell Grant dollars submitted to a public institution (for financially eligible students enrolled at the college or university) before the start of the semester would be reported as a deferred inflow of resources by the public institution (recipient). As a practical matter, such deferrals are only relevant for external financial reporting when Pell Grant dollars are received before the fiscal year end for a future semester (e.g. received before a June 30 year end for summer or fall semesters).
Sale Leaseback Transactions
The gain or loss on the sale of property that is accompanied by a leaseback of all or any part of the property for all or part of its remaining economic life should be recorded as a deferred inflow of resources or a deferred outflow of resources, respectively, and recognized in a systematic and rational manner over the lease term in proportion to the recognition of the leased asset.
Loan Origination Fees and Costs
Points received by a lender in relation to a loan held for investment should be reported as a deferred inflow of resources and recognized as revenue, in a systematic and rational manner over the duration of the related loan. If the loan is held for sale, origination fees, including any portion related to points, and direct loan origination costs should be recorded as a deferred inflow of resources and a deferred outflow of resources, respectively, until the related loan is sold. Once the related loan is sold, the amount reported as a deferred inflow of resources related to the loan origination fees, including any portion related to points, and the amount reported as a deferred outflow of resources related to the direct loan origination costs should be recognized as revenue and expense, respectively, in the period of sale.
Fees Related to Loans Held for Sale
Prior to the sale of loans, any fees paid to permanent investors should be recorded as a deferred outflow of resources until the sale of the loan occurs.
The provisions of Statement 65 are effective for financial statements for periods beginning after December 15, 2012 – FY14 for the vast majority of public colleges and universities
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