It Figures Podcast: S4:E14 – Demystifying Deferrals

Speaker 1:

From Carr, Riggs & Ingram, this is It Figures, the CRI podcast, an accounting, advisory, and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Rob Lemmon:

Hello and welcome to another episode of the CRI It Figures podcast. My name is Robert Lemmon, I work on the government industry line team. So today we’ve got a good governmental episode for everybody. We’re going to be talking about deferrals, everyone’s favorites, deferred inflows and deferred outflows. Now, many of you may have seen that CRI are doing a number of articles and webinars and useful tools on deferrals, so this is just another item in that catalog.

Today we’re going to be talking about the top five issues and challenges that we’ve seen clients have as it relates to deferrals. So I’m very lucky to have two terrific presenters to with me today. If you were able to attend our CPE webinar, I should say, recently, you will know Dean Mead and Becky Hammond. But if you haven’t heard that webinar, I recommend you check it out on our website, there’s recordings on there. But if you didn’t see that, I’ll introduce Becky now and Dean and let them say hello. So I’ll start with Dean. Dean Mead, he worked with the GASB for almost 25 years, so he’s a fantastic wealth of knowledge, understands this stuff inside and out. So Dean, do you want to say hi to the audience?

Dean Michael Mead:

Hi to the audience.

Rob Lemmon:

Short and sweet, thank you Dean. And Becky as well. Becky Hammond, she’s one of our governmental partners in New Orleans. Fantastic resource and has a ton of knowledge on this. And Becky, you’ve done a bunch of podcasts before so people might be familiar with you, but do you want to go ahead and introduce yourself as well?

Becky Hammond:

Hey everybody, it’s great to have you here with us today.

Rob Lemmon:

It’s good to have you back, Becky. It’s been a little while since we’ve done one of these. So I think we’ve got a really good topic here and I like the format. We’re doing something a bit different with this top five issues kind of approach. So great to have you two both with me doing this. So with that, I’m going to dive straight in. We’re talking deferred inflows and outflows, top five issues we’ve seen. Dean, we’re going to go from five down to one, kind of do they do a countdown, a chart show countdown style. Dean, what’s in at number five?

Dean Michael Mead:

Well, I have everybody fill in the drum roll in their own minds. Number five is general confusion about what deferrals are. There’s a really good reason why CRI conducted that webinar at the end of May and why we are providing these free articles and slide decks and videos and other resources to help educate the public about deferrals. It’s probably the most misunderstood aspect of state and local government financial reporting, the thing that is least familiar to someone who has seen the financial statements of companies or not-for-profits, and even among people who are knowledgeable about government finance or who have experience in government finance, deferrals can be challenging to understand or to explain to others.

And so that’s the going in problem that a lot of auditors and financial statement users and government financial statement preparers have, is the fact that you mentioned the word deferrals and people’s brains just shut down automatically. So hopefully as a result of this podcast and all of the other things that CRI is doing to educate the public, we’ll raise the general level of understanding of what deferrals are and disperse some of that brain fog that tends to settle in when people bring up the topic.

Becky Hammond:

Dean, I couldn’t agree more. Definitely in my role as an auditor, I see this all the time, and as a consult consultant as well. A lot of the extra consulting work that I do revolves around a assisting with pension and OPEB and lease calculations that deal with these deferrals. Even if the clients are knowledgeable, they just don’t want to deal with it. It’s just a lot of headaches and extra things that they would rather just a professional handle for them.

Rob Lemmon:

And Dean, I think I remember on the webinar you did a great job of describing how they just don’t fit into the category of assets or liabilities, and we’re talking about… Our item here at number five is not understanding what they are, and not understanding, for me, part of that is not understanding the difference between the deferrals and the asset or the liability category. So that was something I found really interesting when you did the webinar. I’ll keep with you, Dean, because I know you’re going to give us item number four on our countdown list. So what’s in it number four?

Dean Michael Mead:

Number four is creating names for deferrals other than those that GASB uses, including using the phrase deferred revenue. Let me start with deferred revenue because that was probably the number one example of something that used to be reported as a liability, but in many cases might have only been partially a liability. And a lot of what was reported as deferred revenue really was future revenues waiting to be recorded as revenue or as expenses, the things that GASB ended up requiring governments to report as deferred inflows and deferred outflows of resources. GASB in fact went so far in Statement 65 to explicitly prohibit the use of the word deferred for anything other than what it requires to be reported as a deferral so that there shouldn’t be anything called deferred revenue because GASB doesn’t require a deferral called deferred revenue. Using that term only risks confusing the user of the financial statements.

And the other thing I’d probably say in this area is that I think governments are coming from the right place in trying to be more specific in labeling their deferrals in their financial statements or in the notes, but in the process of doing so may make it seem like what they’re presenting is not specifically what the reader expects to see based upon their understanding of what GASB requires for deferrals. So I’ll give you one example that comes to mind. I’ve often seen this with respect to hedging derivative instruments, government calling the related deferrals annual changes in the fair value of effective hedges, which is technically correct, but raises a number of potential issues from the perspective of the financial statement user that may just end up confusing them in a way that simply calling it hedging derivative instruments probably wouldn’t confuse them.

Rob Lemmon:

Dean-

Becky Hammond:

I have to say Dean, I think that deferred revenue one was the hardest thing to implement when 65 came out for the practitioners and for the clients of ours. Because we called everything deferred revenue. What are we going to call it other than deferred revenue?

Rob Lemmon:

Yeah, Becky. If your clients are like mine, do you have a lot of unearned revenue now appeared? Is that the change that was made in a lot of yours?

Becky Hammond:

Absolutely. Yeah, that was the big one, unearned and… That was big. It’s still weird to this day to call it unearned instead of deferred, because it’s just the natural thing that that’s what it was.

Rob Lemmon:

And Dean, talking about those new titles and maybe potentially confusing titles on the face of the balance sheet, do you find that it’s a best practice to then add, in the footnotes, some good narrative explanation of what that title means and what’s included in that line item? Is that your kind of recommendation for any [inaudible 00:08:50]-

Dean Michael Mead:

I’m not so sure. I’m not so sure. As much as I’ve devoted much of my career to educating people about using financial statements and encouraging governments to be clear about what they’re presenting in their notes, they’re not meant to be educational in the sense that there’s an expectation that the user of the financial statement’s going to come in with some prior knowledge. And I think part of that may be understanding that there are certain types of deferrals that are required, and to the extent that they’re called the same thing by each government is going to be beneficial to the reader of the financial statements, rather than seeing the same thing described in multiple ways that may give the impression that it’s not the same thing when in fact it is.

Becky Hammond:

So more of a less is more thought process here, Dean?

Dean Michael Mead:

In this case, yeah. And nobody uses different words to call something a capital asset. It’s a capital asset. Receivables and payables are receivables and payables. It’s only in this area where I’ve seen, probably because of how confusing they are, governments trying to be more descriptive. And I appreciate that effort as long as it doesn’t get to the point where it actually makes something seem like an item that it’s not.

Rob Lemmon:

Sounds good. Good tips there, Dean. All right, well take us to number three. What’s in at number three?

Dean Michael Mead:

Number three is not presenting the required amount of detail about the types of deferrals. There are a lot of things that have, in the accounting standards, a required level of detail that governments can meet either on the face of the financial statements, if it’s not a lot to present and it doesn’t clutter the face, or they have the alternative to present the required level of detail in notes to financial statements and present an aggregated amount on the face. That’s true of receivables and payables, capital assets, long-term liabilities, and other items that can be shown in more aggregated amounts on the face and then presented to the required level of detail in the notes that go with the financial statements, and deferrals are the same. They can be presented as simply as a single total for deferred inflows and a single total for deferred outflows and all of the detail presented in the notes, or the detail by type of deferral can be presented on the face of the financial statements, in which case they don’t need to have a separate disaggregating note.

One thing that I think I would mention to go along with that is, because there are so few types of deferrals that are required, using an Other category in the disaggregation probably isn’t ever appropriate since they are very specific and very limited. And one other thing I’d mention as well is that in that disaggregation or on the face of the financial statements, because there are multiple deferrals related to pensions and to other post-employment benefits or OPEB, having a single pension related deferred inflows and pension related deferred outflows, and the same for OPEB, is sufficient for that purpose because governments are required to present those pension and OPEB related deferrals in much more detail in the notes related to pension and OPEB plans.

Rob Lemmon:

Excellent. So the takeaway is you’ve got to disaggregate somewhere, either in the notes or on the face of the financials, but if you’ve not disaggregated in either place, you’re probably missing some of the required disclosures. Is that a fair summary?

Becky Hammond:

Yeah, definitely.

Dean Michael Mead:

That sounds about right.

Becky Hammond:

And I would also-

Dean Michael Mead:

If only I could be that brief. Thank you, Rob.

Becky Hammond:

And I would add, too, that it’s not right or wrong either way, as long as you have the sufficient detail to meet the standards. That decision’s going to depend on the size and complexity of each entity, and so each entity has to make that decision for themselves.

Dean Michael Mead:

I think, if anything, and I may be stealing this from something that you said recently, Becky, is that as the number of types of deferrals grows, it becomes less possible to present them disaggregated on the face of the financial statements without making the financial statement look really cluttered. And so we may be moving in a direction where, particularly for larger governments that have more of the types of deferrals, that it will be much more common to see an aggregated amount on the face and all of the detail in the notes rather than on the face of the financial statements.

Becky Hammond:

Absolutely. That’s exactly what I said to you not that long ago.

Dean Michael Mead:

But I gave you proper credit.

Rob Lemmon:

I remember that from the webinar as well. Great advice. And I agree, Becky, I like to see them in the notes. I think that’s a better way to disaggregate and provide the extra detail. Well, the top three are in. Sorry, the first three are in, but we’re left with the top two, Becky, so bring us in with number two please.

Becky Hammond:

All right. Number two, confusion about presenting the deferrals net versus gross. This is especially true in pension and OPEB, pension more so than anything. I think the easiest way to remember this, subsequent contributions are only going to be outflows, anything to do with investments is always going to be net, and then everything else could have both. Both an outflow or an inflow depending on the situation. Dean, I think you have a little more advice on those items related to derivatives as well.

Dean Michael Mead:

Yeah. So hedging derivative… If a government has more than one hedging derivative instrument, and some of them have a deferred inflow position as of the date of the financial statements and others have a deferred outflow, then you’re going to see those amounts gross. On the hedging derivative instruments line, you’d see deferred outflows of resources and deferred inflows of resources. But for any individual derivative instrument, it’s either going to be in a deferred outflow position, because the instrument is in a liability position, or it’s going to be a deferred inflow of resources, because the instrument is in an asset position. It can only be one or the other. So if a government only has one, then you’re only going to see either deferred inflows or deferred outflows related to the derivative instruments. It’s only when they have multiple derivative instruments that are in different positions that you see both deferred inflows of resources and deferred outflows of resources for derivative instruments.

Becky Hammond:

Yeah. And with the pension and OPEB, the reason why it gets so crazy and gets confusing with both the outflows and inflows is because of all those layers over the multiple years. So there’s really no way to avoid having both. You just have to keep track of your layers properly and let the numbers fall where they are.

Rob Lemmon:

Excellent summary. Thank you. And now the big moment everyone’s been waiting for excitedly, the top of the charts, number one on our list. Becky, what do we have is the number one issue that people have with their deferred inflows and outflows?

Becky Hammond:

All right, there’s that drum roll in your head and here we go. Getting pension and OPEB disclosures wrong. In my practice, and in most of the financial statements that I read, this is the number one area where disclosures have errors in them. And largely because the disclosures are very difficult, they’re very long, they have to get information from multiple sources, and if your measurement and your reporting dates and even your evaluation dates are different from one another, then those dates kind of flip-flop back and forth in the disclosures and that becomes very confusing for the preparer and you wind up with dates all over the place. So this is definitely, I think, the hardest area to get right. Unless you really know what each disclosure is trying to accomplish, it’s pretty difficult and you can get confused very fast.

Rob Lemmon:

I couldn’t agree more, Becky. I see pension and OPEB problems in the notes all the time, and I do a lot of quality reviews and financial statement and [inaudible 00:18:26] reviews. Definitely it’s an area of issues. I sometimes wonder, Becky, these were big standards, the pension and the OPEB, there was a lot to digest there, and maybe the deferred inflow and outflow application was just a step too far. People were busy focusing on NPLs and OPEB liabilities and getting that all right and then did that… Like I said, it was a step too far to also digest the deferred inflow and outflow element too. I don’t know if that’s just my thought. But yeah, I would back that up as well and just say, this is certainly number one on my list. So Dean, what do you think about this one?

Dean Michael Mead:

I think at the risk of employing an overused phrase, it’s a perfect storm. You start with pension and OPEB liabilities, which are complex transactions and not well understood in terms of how you come up with that number because it’s almost like voodoo. It’s not, but for the typical layperson looking at that number, it can seem that way. You then add to that the fact that GASB provided this offset where you could, for a practical reason, measure the liability as early as a year before the date of the financial statements. It meant to make life easier for governments, but added a layer of confusion because of that split between when the liability is measured and everything else that’s in the financial statements. And then add one more-

Becky Hammond:

Yeah because now you’re presenting something that’s so old that often it’s already flipped the other way.

Dean Michael Mead:

It’s very possible. And then add to that the generally confusing topic of deferred inflows and deferred outflows, and it’s not hard to understand why there’s general confusion about that, and why the pension and OPEB deferrals in particular are an area of practice problem in governments that we all deal with.

Rob Lemmon:

Well, that’s been an excellent summary everyone. I really appreciate you guys taking the time to do this today. Obviously for our audience, this was just a summary of our top five items. We didn’t get too deep into the technical content, but hopefully it was useful and informative and a little bit insightful.

Now, if you did want to get into the technical content, as we mentioned earlier a couple of times, CRI is putting together a whole bunch of really good technical in-depth information and tools that anyone can access on the subject of deferred inflows and deferred outflows. As I mentioned earlier, there’s already been a webinar, CPE webinar, it was a two-hour session roughly. That recording’s available on the website, cricpa.com, and there’s going to be a variety of other tools, articles, and explanatory materials that can help you work through your deferral questions. If in doubt, you can always send us a question, we’d be happy to try and answer your specific questions. And Dean, you know were at the GASB for a long time, and GASB helps take questions as well. How would people submit a question to GASB?

Dean Michael Mead:

Go to GASB’s website, which is GASB.org, and look under the technical area and you will see a link to submitting questions directly to the GASB through a form on their website.

Rob Lemmon:

Excellent. So yeah, if anyone who really wants to get into the technical stuff, there’s plenty of options out there. CRI, again, we’re providing quite a few already and there’s more to come, so stay tuned for those. I’m going to sign off there and just thank Dean and Becky once again for the fantastic information and taking the time. Thank you to the audience for listening. I hope you can tune in again next time on our It Figures podcast. Have a good day. Bye.

Speaker 1:

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