GASB 63 and 65 (Deferred Outflows and Deferred Inflows) – A Summary

It’s time to pay closer attention to two standards issued by the Governmental Accounting Standards Board (GASB):

  • Statement No. 63 – Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position
  • Statement No. 65 – Items Previously Reported as Assets and Liabilities

What are the effective dates for Statements 63 and 65?

  • GASBS 63 is effective for periods beginning after December 15, 2011; earlier application encouraged
  • GASBS 65 is effective for periods beginning after December 15, 2012; earlier application encouraged

It is best to implement GASBS 63 and 65 at the same time.

What is the purpose of these changes?

To put it succinctly, GASB is using one of its conceptual statements (specifically Concepts Statement 4) to make revisions to reporting requirements (to include deferred outflows and deferred inflows).

Prior to GASBS 63 and 65, debit balances were reported on the statement of net position (balance sheet) as assets; similarly, all non-equity credits were reported as liabilities. The new standards add deferred outflows and deferred inflows to the mix.

All debit balances in the statement of net position will be reported as:

  • Assets
  • Deferred Outflows

Assets represent present service capacity to the government; deferred outflows (e.g., prepaid bond insurance) represent the consumption of net position applicable to future reporting periods.

Liabilities represent amounts to be paid; however, some amounts previously reported as liabilities (e.g., deferred property taxes) involve no future payment. Consequently, with the implementation of GASB 63, all non-equity credits in the statement of net position will be reported as:

  • Liabilities
  • Deferred Inflows

The difference in liabilities and deferred inflows is primarily resources that are going out and resources that are coming in. Liabilities normally represent a future surrender of resources; deferred inflows do not.

What are the main points of GASBS 63?

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This statement distinguishes assets from deferred outflows of resources and liabilities from deferred inflows of resources.

Additionally, many of your financial statement titles (e.g., Statement of Net Position), categories (e.g., Assets and Deferred Outflows of Resources), and notes will change. Net Assets will now be labeled Net Position.

The five elements of the statement of net position are:

  1. Assets
  2. Deferred Outflows of Resources
  3. Liabilities
  4. Deferred Inflows of Resources
  5. Net Position

The three categories of net position are:

  1. Net Investment in Capital Assets
  2. Restricted
  3. Unrestricted

Note – The requirement to change to a statement of net position (rather than a statement of net assets) – a GASBS 63 change – occurs one year earlier than the requirements of GASBS 65; you are required to change the term net assets to net position even though you may not have any deferred outflows or inflows until GASBS 65 is implemented – possibly a year later. Again it is easier to simply implement both GASBS 63 and 65 at the same time (both can be early adopted).

What are the main points of GASBS 65?

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  • It identifies the specific items to be categorized as deferred inflows and deferred outflows.
  • It clarifies the effect of deferred inflows and deferred outflows on the major fund determination.
  • It limits the use of the term deferred in financial statements.

What are some examples of specific items to be categorized as deferred inflows and deferred outflows?

  • The gain or loss from current or advance refundings of debt (the gain or loss will no longer be netted with the related debt but will be shown separately as a deferred outflow or a deferred inflow)
  • Prepaid insurance related to the issuance of debt
  • Property taxes received or accrued prior to the period in which they will be used

How should debt issuance costs be treated?

Debt issuance costs should be expensed when incurred. GASB concluded that debt issuance costs do not relate to future periods, and, therefore, should be expensed.

If your government has debt issuance costs (recorded as assets), you will need to remove them as you implement these standards (using a prior period adjustment).

How should cash advances related to expenditure-driven grants be recorded?

Cash advances from expenditure-driven grants should be recorded as unearned revenue (a liability). The key eligibility requirement for an expenditure-driven grant is the use of funds (which does not occur until funds are spent). Any grant funds received prior to meeting eligibility requirements will be shown as a liability. It is improper to use the word deferred for this line item; for example, deferred revenue is not appropriate. The more appropriate title is unearned revenue.

How do these standards affect the determination of major funds?

Assets should be combined with deferred outflows of resources and liabilities should be combined with deferred inflows of resources for purposes of determining which elements meet the criteria for major fund determination.

Corporate Account Takeover

Thieves gain access to company bank accounts and make fraudulent transfers of cash

Some thieves gain control of company bank accounts using a corporate account takeover scheme. And with that control they steal money. Below you’ll see how this type of theft occurs.

On March 17, 2010, cyber thieves hacked into the computers of Choice Escrow and stole the login ID and password to their online banking account. With that information, the thieves were able to submit a $440,000 wire transfer from Choice Escrow’s bank account to an account in Cyprus.

Corporate account takeover

Courtesy of istockphoto.com

When Choice Escrow and the bank were unable to resolve their differences, Choice Escrow filed suit. The back-and-forth legal battle lasted until March 18, 2013 when a court ruled the loss was the responsibility of Choice Escrow. A major determining factor in the decision was Choice Escrow’s refusal of the dual control security mechanism offered by Bancorpsouth Bank. According to Article 4A of the Uniform Commercial Code, if an institution offers a reasonable security procedure to a commercial customer and that customer turns down that security procedure, then the customer is liable in the event of a loss.

Bancorpsouth Bank offered dual control to Choice Escrow twice. Not only did the bank offer this security feature to Choice Escrow, but Bancorpsouth also documented the customer’s refusal to use the security feature. The documentation of the customer’s refusal of the security features was a determining factor in this case. From a bank’s perspective, this case underscores the importance of a written agreement with commercial online banking customers and, more importantly, the importance of documenting the security procedures offered to those customers. From a user’s perspective, the case highlights the need to use the security procedures offered.

Corporate Account Takeover

Corporate account takeover is a term which has become more prevalent over recent years. Generally speaking, corporate account takeover occurs when an unauthorized person or entity gains access or control over another entity’s finances or bank accounts. This usually results in the theft of money in the form of fraudulent wire transfers or ACH transactions.

These fraud schemes first began to be noticed in 2005 but have since become much more widespread and frequent. Recent statistics have revealed that the fraudsters carrying out these schemes are actually becoming less successful in getting money out of a bank account. This reduction is due to both increased efforts on the part of the financial institutions, as well as better education of the customer to help them avoid becoming a target.

Usually, the financial institutions themselves are not the targets of the attack but rather the corporate customers of the institution. Using malware, social engineering and various other methods, the fraudster obtains information about the customer’s online banking credentials. Once the online banking credentials have been obtained, a request for wire or ACH transfers is placed by the thief. Any business may be targeted for these types of attacks, but those at risk mostly are small businesses, governments, and nonprofits who have limited resources to protect against such threats.

This Post Contributed by John McLeod

This post was contributed by John McLeod, one my firm associates who audits financial institutions and specializes in technology issues. John is a CPA and is CISA certified. He often speaks to banking groups about technology and internal controls. You can reach him at jmcleod@mmmcpa.com.

Click here to see my recent post about wire fraud prevention.