GASB 99 – What Does It Do?
Over the years, the Governmental Accounting Standards Board (GASB) has issued various pronouncements ambiguously named “Omnibus.” Omnibus statements are often overlooked for a variety of reasons:
- Omnibus statements rarely focus on one primary topic; they don’t pave new ground, but rather amend previously issued guidance.
- It is difficult to understand what is being amended.
- Several statements are often issued in a similar timeframe.
The latest omnibus statement, GASB 99, was overlooked for reason number three; it was issued just weeks prior to the issuance of GASB 100 and 101.
Government Accounting Standards Board (GASB) Statement No. 99, Omnibus 2022 was released in April 2022. The statement aims to improve the consistency and comparability of accounting and financial reporting by addressing two areas: (1) practical issues that arose during the implementation of certain GASB statements, and (2) guidance on accounting and financial reporting for financial guarantees.
This article explains everything you need to know about GASB 99 and provides a summary of key updates.
Understanding GASB 99: Clarifications on Lease Terminology
Option To Terminate vs Termination Option
The GASB is very particular about terminology, so varied phrasing indicates a distinction. Paragraph 12 of GASB 87, Leases, refers to an “option to terminate” and then on the last line of that paragraph, uses the phrase “termination option.” The only other place “termination option” is used is in paragraph 19, which provides for contracts that transfer ownership. Additionally, some questions were raised after the issuance of GASB 87 about the last sentence of paragraph 12:
“Provisions that allow for termination of a lease due to (1) purchase of the underlying asset, (2) payment of all sums due, or (3) default on payments, are not considered termination options.”
Why would the purchase of the underlying asset not be considered a termination option when such an event would seemingly terminate the lease? Why would the payment of all sums due not end the lease? This is because the last sentence is intended to refer to the “termination options” in paragraph 19. In other words, for purposes of determining whether a contract is one that transfers ownership, the purchase of the underlying asset or payment of all sums due are not “termination options.” However, an option to purchase the underlying asset should be considered an option to terminate for purposes of determining the lease term, relevant only if the purchase option is available during the term rather than just at the end. This scenario is understandably confusing and GASB 99 is intended to provide clarity.
GASB 99 provides two clarifications:
- The last sentence of paragraph 12 should only be applied to the provisions in paragraph 19. This is made clearer in the codification instructions where it shows that sentence being moved to the paragraph that discusses contracts that transfer ownership.
- A better description of what an option to terminate is and isn’t in a more principles-based way, rather than an explicit rule. The new provision states:
An option to terminate is an unconditional right that exists within the lease contract. A provision that gives a lessee or lessor the right to terminate the lease only in certain circumstances or upon the occurrence of certain events, such as the action or inaction of the other party to the lease contract, should not be considered an option to terminate the lease.
Ideally those amendments would have been applicable last year when GASB 87 was implemented. However, the GASB believed that there wasn’t enough time for preparers to understand and apply the new guidance, so it will be effective this year. Similar amendments to clarify “option to terminate” were also made to GASB 94 and 96.
The Impact of GASB 99 on GASB 96 Subscription-Based Information Technology Arrangements
Because many governments are entering into their implementation year of , it’s important to understand how GASB 99 amended GASB 96. All of the provisions that amend GASB 96 are also effective for the upcoming year.
There were three specific amendments that the Omnibus makes to GASB 96. The first clarifies what an option to terminate is and isn’t, which also affects GASB 87 and GASB 94. The second amendment relates to short-term SBITAs and the third amendment relates to the remeasurement of a subscription liability.
Short-Term SBITAs
One of the favorite provisions of GASB 96 effectively scopes out SBITAs with a maximum possible term of 12 months. Technically, GASB 96 does not scope out short-term SBITAs, rather it requires a different accounting treatment. But the accounting treatment prescribed is the same as what would be applied had they been scoped out.
The short-term exception was originally adopted in GASB 87 but was carried over to GASB 96 without any modifications. It’s inclusion in GASB 96 was for the same reason as GASB 87: the Board wanted to provide some relief to financial statement preparers in instances in which the effect would not be significant. However, not all members of the GASB were in favor of providing the short-term exception. The concern expressed during deliberations was that it would be an exception that could potentially be abused by preparers looking to avoid reporting leases on their net position statements. The exception made it through to the pronouncement for the reasons expressed in the basis for conclusions, but the Board believes that this is an exception that would be applicable only in rare instances.
After the issuance of the GASB 87 and 96, the GASB received questions regarding the treatment of short-term SBITAs that are subsequently modified. Once a SBITA is assessed to be short term, is it always short term? No, if a short-term SBITA is amended and the amendment affects the subscription term, then it should be reassessed. That reassessment of the maximum possible term should be made from the inception of the arrangement, rather than from the date of the modification. For example, if an 11-month subscription (maximum term) is modified at month 10, and the modification extends the life for siz additional months, it would no longer meet the criteria for the short-term exception. Obviously, if this is a one-off short-term SBITA, the amount likely would not be material. The rule is intended to prevent governments from routinely entering into short-term SBITAs with the intent of modifying in order to continue to take advantage of the exception.
Remeasurement
GASB 96 provides guidance on how to measure a subscription liability and when it is appropriate to remeasure. After describing the circumstances in which a subscription liability should be remeasured, paragraph 21 states that, “…A subscription liability is not required to be remeasured solely for a change in an index or rate used to determine variable payments.”
The wording of paragraph 21 is problematic because it implies that a government as the option of remeasuring the subscription liability if the index or rate changes. A remeasurement option, akin to a fair value option, was not the original intent of that provision. GASB 99 amends that provision by stating that a subscription should not be remeasured solely for a change in an index or rate.
That amendment is also applied to GASB 87 and 94. In addition to amending , 94, Public-Private and Public-Public Partnerships and Availability Payment Arrangements, and 96, Subscription-Based Information Technology Arrangements, the 2022 Omnibus (GASB Statement No. 99) also provides guidance for accounting for exchange and exchange-like financial guarantees.
GASB 99: Exchange or Exchange-Like Financial Guarantees Guidance
What Is a Financial Guarantee?
The easily searched definition of a financial guarantee is “an agreement that guarantees a debt will be repaid to a lender by another party if the borrower defaults.” This situation is like a college student buying their first car with a parent to cosign. A guarantor and a cosigner are not the same thing, but are similar. A college student might not have the income history or credit to buy a car themselves without an extremely high interest rate, but adding a parent to the loan makes the transaction possible. Similarly, some governments agree to guarantee the debt for other governments or private parties.
Why Do Governments Provide Guarantees?
There are a variety of reasons that a government may offer financial guarantees. Some governments, such as finance authorities, are created for the sole purpose of issuing debt for other governments or helping other governments issue debt. Providing guarantees may be a part of their normal business. Some higher-level governments (state agencies or counties) may help lower-level governments to issue debt to provide services for common constituencies. A guarantee from a higher-level government may help secure more favorable terms and some governments guarantee debt for private parties as part of an economic development initiative.
Didn’t the GASB Issue Guidance on Financial Guarantees a Few Years Ago?
Yes. GASB Statement No 70, Nonexchange Financial Guarantees, was effective in 2014. As its name suggests, that pronouncement was focused entirely on nonexchange financial guarantees, and provided guidance for both the government issuing guaranteed debt and the government providing the guarantee. Prior to GASB 70, financial guarantees were covered under the contingency guidance which required governments providing guarantees to report liabilities when it became probable that indemnification payment would be made. The problem in practice was that “probable” was not consistently understood and many governments were not recognizing those liabilities until they were actually required to pay out indemnifications. GASB 70 changed the threshold to “more likely than not” which is clearly defined as more than 50%. GASB 70 also required that certain disclosures be made in financial statements.
Why Are Financial Guarantees Included in the 2022 Omnibus?
GASB 70 focused entirely on nonexchange financial guarantees because nonexchange guarantees where much more prevalent than exchange or exchange-like guarantees. At the time, the GASB was concerned that the revenue recognition aspect of exchange or exchange-like financial guarantees made them much more complicated, and they had a looming revenue recognition project. Some hoped that project may take care of the revenue recognition issue, but it did not. Financial instruments are currently scoped out of the revenue and expense recognition project.
After several years, the GASB noted some indications that governments were engineering financial guarantees to meet the “exchange-like” criterion, which would allow them to apply the perceived more favorable threshold of “probable.” “Exchange-like” is subjective and requires judgement. How does one determine the fair value of a financial guarantee? Some governments were charging nominal fees to provide guarantees, passing them off as exchange-like and then not stressing about recognizing indemnification liabilities. Addressing this unintended consequence became a priority for the GASB.
What Does the 2022 Omnibus Prescribe About Exchange or Exchange-like Financial Guarantees?
If the GASB had intended to make substantial changes, the Omnibus would not have been the place to address the issue. The six paragraphs related to financial guarantees in GASB 99 is a long way to say that governments who provide exchange or exchange-like financial guarantees should provide the same guidance from GASB 70.
What Does the GASB 99 NOT Do?
GASB 99 does not address the revenue recognition issue, even though it is the reason exchange or exchange-like financial guarantees was excluded from GASB 70 initially. There was no lack of effort, but in the end, there was not a clear method that governments use when determining the fees to charge. In some cases, it may be appropriate to report the fee as unearned revenue, recognizing it as revenue over the guaranteed period, and the fee amount might be a function of underwriting and a calculated risk exposure that a government is taking on. In other cases, the government may charge a fixed fee for all guarantees it provides, so it may make sense to recognize the revenue up front when the guarantee is extended. In all cases, the GASB decided that there was sufficient guidance that already exists to which governments can analogize, depending on how the fee charged is determined.
Another area that GASB 99 does not provide guidance for is governments that issue guaranteed debt in an exchange or exchange-like transaction. Because governments often purchase insurance related to debt, issuances the GASB did not want to unintentionally issue guidance that could reach beyond its intended purpose. By aligning the accounting treatment of exchange and exchange-like financial guarantees with nonexchange financial guarantees, there would no longer be an incentive for governments to engineer those transactions for a more favorable threshold. As a result, the prevalence of such transactions should continue to be minimal.
How Cherry Bekaert Can Help
Cherry Bekaert’s Government and Public Sector Accounting Advisory team provides a comprehensive GASB-as-a-Service offering* that helps governments overcome staffing and technical challenges. We have a dedicated team of professionals who only provide governmental accounting advisory services for governments with the confidence that their needs will not be placed second to competing audit regulatory deadlines.
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