Norwalk, CT, April 22, 2013—The Governmental Accounting Standards Board (GASB) today approved a new Statement that provides accounting and financial reporting guidance to state and local governments that offer nonexchange financial guarantees and for governments that receive guarantees on their obligations.

GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, requires a state or local government guarantor that offers a nonexchange financial guarantee to another organization or government to recognize a liability on its financial statements when it is more likely than not that the guarantor will be required to make a payment to the obligation holders under the agreement.

A nonexchange financial guarantee is a credit enhancement or assurance offered by a guarantor without receiving equal or approximately equal value in exchange. The guarantor agrees to pay an obligation holder in the event that the issuer of the obligation is not able to make its required payments to the obligation holder. Nonexchange financial guarantees can include guarantees by a state for bonds issued by local governments within that state or guarantees of mortgage loans to individuals, if equal or approximately equal value is not received in exchange.

Nonexchange financial guarantees often are not reflected in the financial statements or notes of either the government guarantor or the government issuer of the obligation because such guarantees are typically extended without any payment in return. Nonetheless, financial guarantees represent potential claims on a government’s resources when it is the guarantor, and a potential reduction of a government’s obligations when it is the issuer of the obligation.

“In the current economic environment, investors are increasingly seeking credit enhancements and assurances, including financial guarantees, to minimize the possibility of nonpayment,” said GASB Chairman Robert H. Attmore. “Statement 70 responds to the need for consistent recognition and disclosure guidance for nonexchange financial guarantees. This Statement also will enable financial statement users to better assess the probability that governments will repay obligation holders.”

Statement 70 also requires:

A government guarantor to consider qualitative factors when determining if a payment on its guarantee is more likely than not to be required. Such factors may include whether the issuer of the guaranteed obligation is experiencing significant financial difficulty or initiating the process of entering into bankruptcy or financial reorganization.

An issuer government that is required to repay a guarantor for guarantee payments made to continue to report a liability unless legally released. When a government is released, the government would recognize revenue as a result of being relieved of the obligation.

A government guarantor or issuer to disclose information about the amounts and nature of nonexchange financial guarantees.

The requirements of this Statement are effective for reporting periods beginning after June 15, 2013. Early application of the standard is encouraged.

Statement 70 will be available for download at no cost from the GASB website in May. Printed copies of the Statement will be available for purchase soon thereafter. A plain-language description of the new requirements also will be available on the GASB website.

U.S. and international standard setters on May 16 issued a revised proposal intended to improve transparency in public and private entities’ accounting for leases by requiring them to recognize assets and liabilities arising from leasing transactions on their balance sheet.

The exposure draft, “Leases (Topic 842): a revision of the 2010 proposed Accounting Standards Update, Leases (Topic 840),” modifies the proposed guidance issued by the Financial Accounting Standards Board and the International Accounting Standards Board in August 2010. (Prior coverage .)

Under the latest proposal, a lessee would be required to recognize assets and liabilities for the rights and obligations created by leases. The proposal also directs lessees and lessors to classify their leases according to whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the leased asset.

During a webcast introducing the proposal, FASB member Russell Golden said leasing is an important activity for many organizations because it represents a “means of gathering access to assets, obtaining finance, and reducing an organization’s exposure to the risk of asset ownership.”

Golden, whose term as FASB chair begins July 1, said the existing accounting models, which require lessees and lessors to classify their leases as either capital leases or operating leases, often don’t accurately represent leasing transactions. Several users have to adjust reported financial information to reflect the assets and liabilities arising from leases, he added.

According to FASB, the proposed dual-model approach for the recognition, measurement, and presentation of expenses and cash flows from leases will better reflect the differing economics of leasing transactions. Under the proposed approach, a lessee would report a straight-line lease expense in its income statement for most property leases, but for most leases of assets other than property, the lessee would present the interest on the lease liability separately from the amortization of the right-of-use asset.

Golden said it’s important for statements’ users to have a “complete and understandable picture of an organization’s leasing activity,” which can include leases of real estate, vehicles, and construction equipment. He added that the proposed guidance would require lessees to provide disclosures that enable investors and users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from the leases.

Despite its perceived benefits, the revised approach for lease accounting was opposed by some constituents and FASB members, whose alternative views are presented in the exposure draft.

Current FASB Chair Leslie Seidman said in a release that the decision to revise the original proposal to distinguish among types of leases for income statement and cash flow purposes was made in response to feedback received from stakeholders. The revised, converged proposal is responsive to the “widespread view of investors that leases are liabilities that belong on the balance sheet,” she added.

FASB and the IASB also made changes to the accounting model for lessors to ensure consistency with both the lessee accounting proposal and the revenue recognition standard.

FASB and the IASB decided that the existing separate accounting model for leveraged leases would not be retained for the proposed guidance. The exposure draft proposes to amend guidance in Accounting Standards Codification Topic 740, “Income Taxes,” regarding leveraged leases.

According to the proposal, respondents are encouraged to submit one comment letter to either FASB or the IASB. An effective date for the proposed requirements will be determined after the public feedback has been jointly considered by the boards.

Warren Kitchens of Dixon Hughes Goodman LLP told Tax Analysts the new framework will make companies’ assessments of leasing transactions more complex. Some companies implementing the new requirements will have to contend with significant timing differences that could result in additional deferred tax assets and liabilities, he said.

FASB and the IASB will accept written comment on the revised exposure draft until September 13.

The full proposal is available at:

http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175826935767&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs.)

by Thomas Jaworski

Incentives for economic and community development is the subject of the Senate Finance Committee’s sixth tax reform options paper, which the committee released May 15.

Options listed for reforming the mortgage interest deduction include gradually repealing it, reducing the amount of the deduction for more expensive homes, denying the deduction for second homes, converting the deduction to a credit, and converting it to an above-the-line deduction.

The low-income housing tax credit is also discussed in the paper. Options for it include its repeal, reform, or expansion, or an equivalent reduction in tax on rental income.

The paper suggests that the state and local sales tax deduction could be repealed, permanently extended, limited in value, or capped based on adjusted gross income. Another option the paper lists is allowing non-itemizers to claim either the sales tax deduction or a deduction for state and local real property taxes.

The paper also looks at the tax treatment of bonds and community development incentives, such as the new markets tax credit, the historic preservation tax credit, and tax relief packages for declared national disaster areas. It also discusses options for providing state and local tax uniformity, listing several ideas that would serve as alternatives or exemptions to the Marketplace Fairness Act.

The full paper is available at:

http://www.finance.senate.gov/issue/?id=9d5f328c-d707-44e1-af07-c31d8340c4f8

The Governmental Accounting Standards Board (GASB) has approved a new Statement that provides accounting and financial reporting guidance to state and local governments that offer nonexchange financial guarantees and for governments that receive guarantees on their obligations.

GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, requires a state or local government guarantor that offers a nonexchange financial guarantee to another organization or government to recognize a liability on its financial statements when it is more likely than not that the guarantor will be required to make a payment to the obligation holders under the agreement.

A nonexchange financial guarantee is a credit enhancement or assurance offered by a guarantor without receiving equal or approximately equal value in exchange. The guarantor agrees to pay an obligation holder in the event that the issuer of the obligation is not able to make its required payments to the obligation holder. Nonexchange financial guarantees can include guarantees by a state for bonds issued by local governments within that state or guarantees of mortgage loans to individuals, if equal or approximately equal value is not received in exchange.

Nonexchange financial guarantees often are not reflected in the financial statements or notes of either the government guarantor or the government issuer of the obligation because such guarantees are typically extended without any payment in return. Nonetheless, financial guarantees represent potential claims on a government’s resources when it is the guarantor, and a potential reduction of a government’s obligations when it is the issuer of the obligation.

“In the current economic environment, investors are increasingly seeking credit enhancements and assurances, including financial guarantees, to minimize the possibility of nonpayment,” said GASB Chairman Robert H. Attmore. “Statement 70 responds to the need for consistent recognition and disclosure guidance for nonexchange financial guarantees. This Statement also will enable financial statement users to better assess the probability that governments will repay obligation holders.”

Statement 70 also requires:

A government guarantor to consider qualitative factors when determining if a payment on its guarantee is more likely than not to be required. Such factors may include whether the issuer of the guaranteed obligation is experiencing significant financial difficulty or initiating the process of entering into bankruptcy or financial reorganization.

An issuer government that is required to repay a guarantor for guarantee payments made to continue to report a liability unless legally released. When a government is released, the government would recognize revenue as a result of being relieved of the obligation.

A government guarantor or issuer to disclose information about the amounts and nature of nonexchange financial guarantees.

The requirements of this Statement are effective for reporting periods beginning after June 15, 2013. Early application of the standard is encouraged.

The full report can be found at:

http://www.gasb.org/cs/BlobServer?blobkey=id&blobwhere=1175826859554&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

Private bank loans are riding a wave of popularity among cities, counties and other U.S. local governments, leaving the $3.7 trillion municipal bond market racing to assess and contain any risks they may pose, a white paper said on Wednesday.

“Bank loans provide issuers with access to capital, supply needed cash flow…and can be easier and less costly to obtain for an issuer than a public debt issuance,” a task force that included members of nine major banking, investing, trading, and bond organizations said in the white paper.

But a loan could “introduce potential risks that may impact a bondholder’s willingness to continue to hold the issuer’s bonds, affect bond ratings or impact pricing in the secondary market.”

The climb in borrowing, either by selling bonds to banks or through direct loans, has been swift and steep. U.S. banks held a record high level of municipal bonds and loans in the final quarter of 2012, $363.1 billion, according to the Federal Reserve, one of the few sources of data on the loans.

The public is often in the dark about the details of the borrowing, with investors and regulators sometimes having to wait for annual statements to learn loans even exist.

“I think it’s great that there’s again another opportunity, another tool for state and local governments to tap, but I do think we do need to be vigilant about some of the pitfalls in that private funding market,” Municipal Securities Rulemaking Board (MSRB) Executive Director Lynnette Kelly said last month.

“What are the terms of those bank loans and do state and local governments really understand the risks involved with bank loans? Are those loans being disclosed? Is there a refinancing risk in five years, seven years, 10 years – whenever these great loans come due?” she added in a speech to a meeting of state treasurers.

The MSRB is a self-regulatory organization that writes the rules for the market that the Securities and Exchange Commission enforces. In a statement on Wednesday, Kelly commended the task force for assisting issuers by laying out possible ways to disclose the loans.

Issuers do not have to provide offering documents when they take out the loans, and they do not have to tell traders in the secondary market about them. Last year, though, the MSRB began pushing for voluntary disclosure.

The task force, which included representatives from the American Bankers Association and the Securities Industry and Financial Markets Association, suggested disclosing bank documents such as the financing agreements or providing summaries that cover the loan’s terms. It emphasized that issuers should promptly post the information.

Banks have long made tax-exempt and taxable bank loans to issuers, but since 2009, they have been more willing “to make an increasing amount of tax-exempt bank loans to issuers as an alternative to publicly offered tax-exempt bond issues,” according to the white paper.

The 2009 federal stimulus plan raised the amounts of “bank-qualified obligations” that banks could hold, as part of a grander scheme to thaw a municipal credit freeze. In 2009 and 2010, issuance of the obligations doubled.

Essentially, the obligations are exceptions to part of the tax code that prevents banks from deducting the carrying cost of municipal bonds from their taxes. By doing so, the tax code eliminates the appeal of most tax-exempt debt for banks.

When the stimulus plan expired issuance of the qualified obligations slowed, but the public sector continued relying on banks in general, the task force found.

“Contrary to the expectations of many participants in the municipal market, however, banks have continued to make a substantial amount of bank loans on a non-bank-qualified basis since Jan. 1, 2011,” according to the white paper.

Many loans are being used as substitutes for the liquidity facilities and letters of credit that banks provide to back variable-rate demand bonds, according to Thomas Jacobs, who tracks products related to municipal bonds as a vice president for Moody’s Investors Service.

Direct borrowing is less expensive for both issuers and banks than selling variable-rate bonds with support facilities, according to the rating agency.

• More than 75 preconference seminars, concurrent sessions, and discussion groups
• Unparalleled opportunities to earn continuing professional education (CPE) credit
• General sessions featuring nationally recognized speakers
• Ben Stein to deliver Monday keynote address.
• Evening social events to facilitate networking with colleagues
• A robust exhibit hall with hands-on demonstrations of the latest products and services

Register here:

http://www.eventscribe.com/2013/GFOA/

The United States Conference of Mayors (USCM) has released a report that shows how efficient procurement practices can reduce public infrastructure costs allowing local government to contain costs and reduce the need to increase consumer rates. Prepared by the USCM Mayors Water Council, the report titled Municipal Procurement Process Improvements Yield Cost-Effective Public Benefits, focuses on the short-comings of traditional procurement practices, and uses procurement of public water and wastewater pipes to illustrate the benefits of applying life-cycle analysis to identify pipe materials that offer cost savings and extend the useful design performance of the system.

The full report is available at:

http://usmayors.org/pressreleases/uploads/2013/0422-release-waterreport.pdf

Only a few, isolated local governments are likely to experience significant negative pressure on their finances because of the ongoing federal sequestration, says Moody’s Investors Service in the report “The Sequester Series: Limited Impacts on Local Governments.” Those vulnerable are in regions with economies heavily dependent on defense spending or health care.

“Sequestration will strain the US economy to some extent, but any material impact on regional economies will be limited to areas with substantial dependence on defense spending or health care,” says Rachel Cortez, a Moody’s Vice President — Senior Analyst. “In these regions, local governments relying on revenues from income taxes and sales taxes may face some budget pressures as layoffs, furloughs, and hiring freezes reduce disposable income and consumer spending.”

Direct government funding makes up only 5% of the general revenue of local governments taken together. Therefore the impact of the sequestration on local government budgets is mainly through its drag on the economy, which reduces local government income tax and sales tax revenues because of declines in disposable income and consumer spending. These tax sources make up about 10% of local government revenues.

Defense spending cuts will moderately pressure several regional economies, as the sequestration requires a 7.8% cut in discretionary defense spending in federal fiscal year 2013. Areas with relatively high dependence on federal employment include the Georgia MSAs of Warner Robins and Hinesville-Fort Stewart. Areas with large exposures to federal procurement contracts include Oshkosh-Neenah WI, Idaho Falls, ID, and Amarillo, TX.

Sequestration cuts also include a 2% reduction in Medicare reimbursement to hospitals and other healthcare providers. As hospitals cope with tighter operating margins, areas with significant healthcare employment may see some economic consequences. Such areas include Rochester, MN, McAllen-Edinburg-Mission, TX, and Brownsville-Harlingen, TX.

For more information, Moody’s research subscribers can access this report at:

http://www.moodys.com/research/The-Sequester-Series-Limited-Impacts-on-Local-Governments–PBM_PBM152247.

The Governmental Accounting Standards Board has released a white paper articulating the differences between private sector and governmental accounting.

http://www.gasb.org/cs/BlobServer?blobkey=id&blobwhere=1175826684726&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs