1 FGFOA Boot Camp – Day 2 Intermediate Government AccountingPresented by Lynda M. Dennis, PhD, CPA, CGFO 1

2 Overview Financial reporting Review of Day 1 InvestmentsBasic governmental accounting & reporting concepts Investments Fixed assets & depreciation Long-term liabilities Fund equity Financial reporting entity Financial reporting Grant accounting 2

3 Review of Day 1 Governmental Accounting & Financial Reporting3

4 Activities of GovernmentGovernmental General Public safety Business-type Transportation – air, land, sea Utilities Economic development Fiduciary Agency Pension & investment trusts 4

5 Categories & Types of FundsGovernmental funds General Fund Special revenue funds Capital projects funds Debt service funds Permanent funds 5

6 Categories & Types of FundsProprietary funds Enterprise funds Internal service funds Fiduciary funds Agency funds Investment trust funds Private-purpose trust funds Pension & OPEB trust funds 6

7 Measurement Focus WHAT is measured?Economic resources measurement focus Measure inflows & outflows of economic resources Current (i.e. financial ) & noncurrent (i.e. economic) Capital assets & long-term debt Focuses on operational accountability Whether management efficiently uses resources in providing services 7

8 Measurement Focus WHAT is measured?Current financial resources measurement focus Measure inflows & outflows of current financial resources Cash & other liquid assets Payables from cash & other liquid assets Focuses on fiscal accountability Whether managers have met budgetary & other legal financial requirements 8

9 Basis of Accounting WHEN are elements recognized?Modified accrual basis of accounting Revenues recognized when measurable & available Expenditures recognized when incurred Expected to be liquidated with current financial resources Accrual basis of accounting Revenues recognized when earned Expenses recognized when incurred 9

10 Investments 10

11 Investments Securities/other assets acquired primarily for obtaining income/profit Safe & prudent Investment policy dictates types & duration of investments Adopted by governing body Should also have Periodic review of policy Periodic investment/portfolio reports

12 Investments Risks Custodial credit risk Market riskParty holding security will fail to return principal Market risk Investment/collateral value declines Government risk most often results from interest rate shifts Problem Poster Children Orange County, California Florida Local Government Investment Pool US financial crisis

13 Valuation of InvestmentsMethodology depends on type of investment GASB Statement No. 72 effective FYE 9/30/16 Valuation methods Fair value Price that would be received to sell an asset or paid to transfer a liability In an orderly transaction Between market participants At the measurement date Changes in FV = investment income

14 Valuation of InvestmentsMethodology depends on type of investment GASB Statement No. 72 effective FYE 9/30/16 Valuation methods Amortized cost Historical cost + amortization of discount/premium Amortization = investment income Sales prior to maturity = gain/loss Historical cost Principal dollars invested in security, contract, pool

15 Valuation of InvestmentsFair value investments All debt & equity securities Open-end mutual funds Participating interest earning investment contracts External investment pools

16 Valuation of InvestmentsAmortized cost investments Participating interest earning investment contracts & certain money markets with remaining maturity at purchase of one year or less Commercial paper Banker acceptances US Treasury, agency, & instrumentality securities

17 Valuation of InvestmentsHistorical cost investments Non participating interest earning investment contracts Nonnegotiable CDs Repurchase agreements 2a7-like eternal investment pools - $1 Not SEC registered but acts as if it is NAV not at $1 use FV Proposed standard to elect to use amortized cost for all investments Proposed effective date = PB after 6/15/15 except for provisions relating to shadow price calculations

18 Repurchase AgreementsGovernment transfers excess cash to broker-dealer/financial institution to earn additional investment income Broker-dealer/financial institution provides securities as collateral to government & agrees to repay cash & interest in exchange for same securities at later date Most considered nonparticipating interest earning investment contracts Valued at historical cost

19 Repurchase AgreementsTypes of repurchase agreements Overnight repurchase agreement Fixed interest rate Mature next day Term repurchase agreement Fixed maturity date & interest rate Open repurchase agreement No defined maturity date Either party may terminate daily Interest rate set daily

20 Reverse Repurchase AgreementsMaster repurchase agreement Documents transactions & ownership interests

21 Reverse Repurchase AgreementsOpposite of repurchase agreement Government is seller-borrower who transfers specific securities to broker-dealer/financial institution in return for cash Government agrees to repay cash & interest in exchange for return of same securities at later date Done to address temporary cash needs without having to liquidate investments Collateral securities remain on government’s balance sheet Some risk exposure Interest rates shift & securities must be liquidated at loss to return cash to broker/dealer

22 Internal & External Investment PoolsInternal investment pool Commingles funds of reporting entity Value investments as if held by individual participating funds External investment pool Commingles funds of legally separate entities Internal portion = “Equity in Pooled Cash & Investments” External portion = separate fiduciary fund (Investment Trust Fund)

23 Fixed Assets & Depreciation23

24 General Capital AssetsLong-lived assets used by activities reported in governmental funds Includes Infrastructure Intangible assets NOT capital assets that are specifically associated with activities reported in proprietary & fiduciary funds 3 4

25 Classifications of General Capital AssetsLand Buildings Improvements Other than Buildings Machinery and Equipment Construction Work in Progress Infrastructure (e.g., roads, streets, bridges) Networks = assets providing particular type of service Subsystems of networks = all assets making up similar portion/segment of network Intangible assets 3 4

26 Capitalizing Assets Record at historical cost or estimated historical cost Additions & improvements extending life = capitalize No threshold specified by GAAP GFOA recommends $5,000 May have different levels for different types of assets

27 Assigning Costs to General Capital AssetsFollow the cost principle (subject to materiality threshold) Invoice cost or historical cost All other necessary & reasonable costs to place asset into use Excluding forgone cash discounts & financing charges 3 7

28 Assigning Costs to General Capital AssetsRecord donated assets at fair value on date of gift (changes to acquisition value with GASB No. 72) Use lower of book value or fair value if received from another fund Not recorded at fund level for governmental funds 3 7

29 General Capital AssetsAccounting for General Capital Assets General capital assets are: Capitalized as governmental activities accounts in the GWS Depreciated in the GWS Debited to expenditures in the appropriate governmental fund 3 6

30 Depreciation Accounting & ReportingRecorded in GWS & certain fund level statements Depreciation not recorded on inexhaustible assets Depreciate over estimated useful life No specific method required by GAAP Composite depreciation Annual rate – dissimilar assets Group depreciation Annual rate – similar assets Straight line most common method

31 Depreciation Accounting & ReportingOption for infrastructure - modified approach Asset management system Up-to-date inventory Condition assessments & summary using scale Annual estimate of cost to maintain at adopted level Documentation of condition level Complete condition assessment at least every 3 years Disclose results of 3 most recent complete condition assessments If don’t meet, change to depreciation in next FY

32 Capital Projects FundsInvolve long-lived assets Buildings, roads & bridges, etc. Usually Involve a construction project Have in-depth construction estimate & timeline Require long-range planning & significant financing Project-life rather than annual focus

33 Capital Projects FundsProject authorization/preconstruction phase Usually included in multiyear CIP several years before start of project Usually requires long-term financing Voter approval required for general obligation (property tax-supported) bonds or special sales taxes for capital projects Apply for & obtain other LT financing &/or grants

34 Construction in ProgressNondepreciable until complete Contract accounting applies Retainage accounts Interest costs incurred during construction NOT capitalized for governmental assets IS capitalized for business-type assets “Matching” of depreciation to all related costs of an asset

35 Costs Incurred After AcquisitionAdditions/betterments vs. replacements/ maintenance Capitalize costs of additions & betterments Don't capitalize replacements & maintenance expenditures Replacements that are partly additions or betterments Capitalize as appropriate Remove cost of old asset Requires judgment to determine whether an asset has been enhanced 3 13

36 Typical Financing Sources for General Capital AssetsLong-term bonds AVT-supported bonds (GOBs) Revenue-supported bonds (PIRBs) Long-term loans/mortgages Governmental grants (federal or state) Transfers from other funds Gifts from individuals/organizations 3 5

37 Typical Financing Sources for General Capital AssetsCapital leases Certificates of participation (COPs) Special development districts Tax increment financing Transportation development districts Etc. 3 5

38 Accounting for Acquisition of Capital AssetsGeneral Fund purchased office equipment for the Mayor’s office & paid $50,000 cash General Fund: Expenditures – Capital Outlay 50,000 Cash ,000 Governmental Activities: Equipment ,000

39 Disposition of General Capital AssetsGovernment-wide & fund level (proprietary & fiduciary) Remove original cost of assets being disposed Only part is disposed Remove pro-rata share of cost & related accumulated depreciation Governmental fund level Record proceeds received as revenue 3 14

40 Accounting for the Disposition of General Capital AssetsMachine sold for $500. Originally purchased for $8,000 using GF revenues. It was fully depreciated. General Fund: Cash 500 Revenues—Misc. (or OFS) 500 Governmental Activities: Accumulated Depreciation 8,000 Equipment 8,000 Gain on Sale of Equipment 500

41 Accounting for the Disposition of General Capital AssetsAssume a building with an original cost of $100,000 (from tax-supported bonds) is demolished; cost of demolition was $5,000. It was fully depreciated. General Fund: Expenditures 5,000 Cash ,000 Governmental Activities: Loss on Disposal of Building 5,000 Accumulated Depreciation 100,000 Buildings 100,000 Cash 5,000 3 16

42 Accounting for Capital ProjectsApproval is obtained for a federal grant as partial funding for a city’s office building project. Capital Projects Fund:* Due from Federal Government 100,000 Revenues ,000 Governmental Activities: Program Revenues—Public Works— Capital Grants and Contributions 100,000 * In reality, grant would be recorded as revenue when received. 3 22

43 Accounting for Capital ProjectsWill obtain interim financing, (to complete architectural & engineering design). Assume $50,000 was borrowed from the General Fund, to be repaid later from bond proceeds. Capital Projects Fund: Cash 50,000 Interfund Loans Payable—Current ,000 Governmental Activities: No entry needed. 3 23

44 Accounting for Capital ProjectsBonds with a face value of $5,000,000 were issued at 101 to finance the project. Capital Projects Fund: Cash 5,050,000 Other Financing Sources—Bond Proceeds 5,000,000 Due to Debt Service Fund 50,000 Governmental Activities: Bonds Payable 5,000,000 Premium on Bonds Payable 50,000 3 26

45 Accounting for Capital ProjectsAmount due from the federal government for the previously recorded capital grant was received in full Capital Projects Fund: Cash 100,000 Due from Federal Government 100,000 Governmental Activities: Same entry. 3 27

46 Accounting for Capital ProjectsThe $50,000 due the General Fund was repaid. Capital Projects Fund: Interfund Loans Payable—Current 50,000 Cash 50,000 Governmental Activities: No entry needed. 3 28

47 Accounting for Capital ProjectsA partial billing of $3,000,000 was received from Capital Construction Company. Capital Projects Fund: Construction Expenditures 3,000,000 Contracts payable 3,000,000 Governmental Activities: Construction in Progress ,000,000 Contracts Payable 3,000,000 3 30

48 Accounting for Capital ProjectsThe amount due Capital Construction Company was paid, net of a 5% retained percentage, which in conformity with the provisions of the contract, was withheld pending final inspection. Capital Projects Fund: Contracts Payable 3,000,000 Contracts Payable— Retained Percentage 150,000 Cash 2,850,000 Governmental Activities: Same entry. 3 31

49 Accounting for Capital ProjectsCapital Construction Company completed the building & tendered its final bill of $2,000,000. Capital Projects Fund: Construction Expenditures 2,000,000 Contracts Payable 2,000,000 Governmental Activities: Construction Work in Progress 2,000,000 3 32

50 CPF - Illustrative TransactionsThe City paid the amount due Capital Construction, except for a 5% retained percentage Capital Projects Fund: Contracts Payable 2,000,000 Contracts Payable— Retained Percentage 100,000 Cash 1,900,000 Governmental Activities: Same entry. 3 33

51 Accounting for Capital ProjectsUpon final inspection, the City incurred $75,000 of additional costs for interior rework. Work was done by General Fund employees. The remaining retained percentage was paid to the contractor. Capital Projects Fund: Contracts Payable— Retained Percentage 250,000 Cash 250,000 ($75,000 to the General Fund; balance to the contractor) Governmental Activities: Same entry. 3 34

52 Accounting for General Long-Term Liabilities & Debt ServiceBonds Compensated Absences Capital Leases Year-end Accruals

53 Liability Basics CurrentObligations expected to be paid/liquidated in current fiscal period Year-end accruals Noncurrent Not expected to be paid/liquidated within current fiscal period Bonds Capital leases Pensions & OPEB Compensated absences, claims & judgments

54 General Long-term LiabilitiesDebt & other long-term liabilities Arise from activities of governmental funds that are not accounted for as liabilities of a proprietary or fiduciary fund Debt reported in a proprietary or fiduciary fund with general obligation (“full faith and credit”) backing Contingent liability should be disclosed in the FS notes 3 54

55 Examples of General Long-term LiabilitiesBonds Tax-supported bonds Revenue bonds Long-term notes Capital lease obligations Unfunded compensated absences (vacation and sick leave) Unfunded pension obligations Unfunded OPEB Long-term portion of judgments and claims 3 55

56 Bonds Payable & Debt Service

57 Bonds Payable Issued for short-term purposes ExamplesTax/bond/grant anticipation notes Record as current liabilities Issued for long-term purposes Example Construction projects “Pay as you use” Governmental funds record other financing use

58 Bond Basics Types of BondsTerm All principal due in full at end of specified term Sinking funds often used to obtain better rates, etc. Serial Bonds mature serially over entire term of the bonds Level debt service vs. level principal Conduit debt obligation Government issues debt for third party (not part of reporting entity) Not obligated to repay = do not record, notes only

59 Bond Basics Types of BondsDemand Government issued bonds with a put option Bondholder can require government to pay principal & accrued interest Government must usually repay within 1-30 days = CURRENT LIABILITY Exceptions to recording as current liability relate to take-out agreements & related term Examples Auction rate securities Commercial paper

60 Accrued Interest on Bonds SoldCash received from investors for interest accrued from date of bonds issue date Government-wide level Usually recorded as credit to Accrued Interest Payable or Interest Expense Fund level Might be recorded as a revenue of DSF In reality - usually recorded as credit to Accrued Interest Payable or Interest Expense 3 39

61 Arbitrage Rebates Interest received by investors on most bonds issued by SLGs is exempt from federal (& some state) income taxes Investors willing to accept a lower interest rate on these bonds (i.e. net of tax rate) Governments formerly could issue bonds at a low tax-exempt rate, invest the proceeds in high yield taxable securities, then use the resulting arbitrage spread for capital/operating purposes Known as ARBITRAGE 3 61 41

62 Arbitrage Rebates Federal law & IRS regulations require arbitrage earnings, subject to certain exemptions, be paid to the IRS as arbitrage rebates Five year analysis Very technical field of expertise 3 62 41

63 Debt Service Funds Financial resources set aside for principal &/or interest on general LT liabilities only Resources may come from Taxes Levied by DSF Levied by GF and transferred to DSF Special assessments Hold number of funds to a minimum GASB recommends single DSF for all tax-supported debt serviced by property taxes 3 63

64 Accounting Debt ServiceModified accrual Exception = interest & principal generally recognized in period legally due FYE exception Budgetary accounting typically used Serial bonds Amount budgeted for revenues/IFTs usually amount needed that fiscal year for matured principal & interest 3 64

65 Accounting for Debt ServiceTerm bonds (or deferred serial bonds) Additional revenues/IFTs usually budgeted to meet sinking fund requirements as well as amount needed for current year interest Sinking fund investments reported at fair value Changes in fair value reported as a component of investment earnings 3 65

66 Accounting for Debt ServiceBonds are issued on 1/2/09 & pay interest of $100,000 semiannually on 1/1 and 7/1. The fiscal year ends on 12/31/09. Q: What amount of expenditures would be recognized in fiscal 2009? A: Only the 7/1/09 interest payment, or $100,000, would be recognized as an expenditure of 2009. B: Alternatively, both the 7/1/0 & 1/1/10 payments would be recognized as 2009 expenditures. 66

67 Illustrative Transactions— Serial Bond DSFA city issued $100,000 of 6% serial general obligation (G.O.) bonds on Dec. 1, Interest on GOBs of $3,000 is due 6/1/09 & 12/1/09, & in decreasing amounts every 6/1 & 12/1 for the next 19 years. First principal maturity of $5,000 is due 6/1/09. DSF or CPF Cash 100,000 Other financing sources 100,000 Governmental Activities: Serial Bonds Payable 100,000 3 67

68 Illustrative Transactions— Serial Bond DSFFY 2009 approved budget requires GF to transfer $11,000 to DSF for debt service (principal repayment of $5,000 & two interest payments totaling $6,000 ($3,000 each)). Debt Service Fund: Due from General Fund/Cash 11,000 OFS—Interfund Transfers In 11,000 General Fund Other financing uses 11,000 Due to DSF/Cash 11,000 3 68

69 Illustrative Transactions— Serial Bond DSFOn May 28, 2009, the transfer from GF was received. Debt Service Fund: Cash , Due from General Fund 3,000 General Fund Due to DSF 3,000 Cash 3,000 (Note: If OFS-Interfund Transfers In had not been accrued at the time the budget was recorded, then OFS-Interfund Transfers In would be credited here rather than Due from General Fund) 3 69

70 Illustrative Transactions— Serial Bond DSFThe June 1, 2008, interest payment was made on schedule Debt Service Fund: Expenditures—Bond Interest 3,000 Cash 3,000 3 70

71 Illustrative Transactions— Serial Bond DSFRemaining $8,000 transfer was received from GF 11/29/09. On 12/1, City paid interest & principal maturing that date. Debt Service Fund: Dr. Cr. Cash 8,000 Due From General Fund 8,000 Expenditures—Bond Principal 5,000 Expenditures—Bond Interest 3,000 Cash 8,000 General Fund: Due to DSF 8,000 3 71

72 Illustrative Transactions— Serial Bond DSFAdjusting entry on December 31, 2009: Governmental Activities: Dr Cr. Expenses—Interest on Long-Term Bonds 475 Accrued Interest Payable 475 (Calculation: 1 month of accrued interest = $95,000 of remaining bonds X .06 ÷ 12 = $475) Note: Interest is not accrued in debt service fund since not appropriate under modified accrual. Will be accrued for GWS. 3 72

73 Bond Refundings

74 Bond Refundings Pay off existing debt before due dateCurrent refunding Use cash (available or bond proceeds) to immediately retire bonds Advance refunding Establish irrevocable trust for money set aside to retire bonds at early call date Requires original bond indenture to have a call provision Bond holders usually receive a premium for an early call Deferred gain = deferred inflow/deferred loss – deferred outflow

75 Bond Refundings May do by issuing new debt Why do it this way?Better interest rate Free up pledged revenue stream Eliminate onerous covenants In-substance defeasance If not legally/in-substance defeased, can not remove old debt from books Irrevocable trust = in-substance defeasance Adequate funds & future earnings to repay old debt at early call date (& between then & now)

76 Advance Refundings Legal or in-substance defeasanceOld liability is removed from governmental activities In-substance Proceeds placed in irrevocable trust & liability removed Legal defeasance Debt legally satisfied based on debt instrument even though not repaid JEs similar to those for regular refundings 76

77 Debt Refunding Transactions$100,000 of previously issued bonds are refunded with new $100,000 bonds with lower interest payments When refunding (new) bonds are issued: Debt Service Fund: Cash (restricted) 100,000 Other Financing Sources— Proceeds of Refunding Bonds 100,000 If old bonds are not retired by end of fiscal year, both issues would be reported as long-term debt in governmental activities if no in-substance defeasance occurs. 3 77

78 Debt Refunding TransactionsAssuming old bonds are retired/defeased shortly after issue of refunding bonds: Debt Service Fund: Dr Cr. Other Financing Uses—Refunded Bonds 100,000 Cash 100,000 (Note: Report only the new issue as debt in governmental activities. Disclosures required if in-substance defeasance.) 3 78

79 Other Long-term Liabilities

80 Capital Leases Governmental assets – fund level statementsAt inception “Proceeds” = other financing sources “Expenditure” = NPV of future MLP/fair value Payments made “Debt service” = expenditure Governmental assets – government-wide statements “Proceeds” = LTD “Leased assets” = NPV of future MLP/fair value Proprietary fund = same as private sector lease accounting

81 Accounting for Capital LeasesFollow GASB No. 62 criteria to determine if capital/operating lease Record capital assets in GWS at present value of minimum lease payments or fair value, if lower Record expenditure in governmental fund using asset & making payments GASB current project will require all assets leased for more than 12 months to be accounted for as an intangible lease asset with a corresponding capital lease obligation. 3 81 12

82 Compensated Absences Liability for unused sick/vacation timeAccrue as earned if Employee right to receive compensation relates to prior service Probable employer will compensate employee for benefits through Paid time off AND Cash at termination/retirement Separate between current & noncurrent

83 Year-end Accruals

84 Payroll Liability for amounts paid in new year for services rendered in prior year Salaries Overtime Taxes Benefits Pro rate using number of days in prior year/total days in pay period

85 Unbilled Utility RevenuesRevenue & receivable for amounts billed in new year for services provided in prior year May need to look through billings for entire first month of new year Receivable = “Unbilled Utility Services)

86 Governmental Funds Proprietary Funds Fiduciary FundsFund Equity Governmental Funds Proprietary Funds Fiduciary Funds

87 Fund Equity Assets + deferred outflows – liabilities – deferred inflows = fund equity Governmental fund level Fund balance Nonspendable, restricted, committed, assigned, unassigned Proprietary & fiduciary fund level Net position Net investment in capital assets, restricted, unrestricted Government-wide – ALL activities

88 Governmental Fund EquityCategories based on relative strength of control constraints Nonspendable Fund Balance Restricted Fund Balance Committed Fund Balance Assigned Fund Balance Unassigned Fund Balance

89 Governmental Fund BalanceNonspendable Can not be spent because EITHER Not in spendable form Not expected to be converted to cash Inventories Prepaids Other LT loans & notes receivable Property acquired for resale Some exceptions Legally/contractually required to be maintained intact Permanent fund corpus

90 Governmental Fund BalanceRestricted External parties, constitution, enabling legislation Committed Government constraint using its highest level decision-making authority Ordinance Assigned Intended for specific use by government Unassigned No constraints – general fund only

91 Recording Transactions Exercise

92 The Financial Reporting Entity

93 The Financial Reporting EntityConsists of the primary government and all component units for which the primary government is financially accountable Component units are reported by Discrete (separate column) presentation Separate column for major CUs Blended presentation CU’s financial information included with appropriate fund columns of the PG 3 93

94 The Financial Reporting EntityPrimary government Statute Separately elected governing body Special purpose governments Ultimately accountable to its electorate Legally separate Fiscally independent

95 Examples of Primary GovernmentsA state government General purpose local government City, town, parish, etc. Special purpose government Separately elected governing body Legally separate Fiscally independent of other state/local governments Examples School districts, special districts, etc. 95

96 The Financial Reporting EntityComponent Units Financial accountability Appoint voting majority of board Modify/approve rate/fee changes or budget Remove appointed governing body members at will

97 The Financial Reporting EntityComponent Units Financial accountability Veto, overrule or modify other types of decisions Appoint, hire, reassign or dismiss management Create financial benefit or burden

98 The Financial Reporting EntityComponent Units Imposition of will Ability to access CU resources Assumed obligation to finance deficits/provide financial support Obligated in some manner for CU debts CU provides financial benefit or is financial burden Omission is misleading to financial statement users

99 Component Units Certain Tax Exempt OrganizationsRelationship & significance Meet all three tests re: economic resources Separate economic resources benefit PG PG can access separate economic resources Economic resources significant to PG Also consider those closely related to or financially integrated with PG

100 Examples of Component UnitsGovernmental component units Dependent special districts Port authorities Universities Hospitals Not-for-profit component units Volunteer fire departments Libraries Museums 3 100

101 Component Unit Issues 501 (c) (3) entities CUs with GTAs & BTAsDifferent FS format 501 (c) (3) entities CUs with GTAs & BTAs Differing fiscal year ends FYE within PG FY CU FYE 1st quarter of PG FY Inter-agency transactions Role in MD&A - focus is PG

102 Reporting Entity Exercise

103 Government-wide Statements Fund level Statements Reconciling ItemsFinancial Reporting Government-wide Statements Fund level Statements Reconciling Items

104 Financial Reporting Management responsibility GPFS requiredMinimum acceptable “Liftable”

105 General Purpose External Financial ReportsManagement’s discussion and analysis Government-wide Fund financial financial statements statements Notes to the financial statements Required supplementary information (other than MD&A) 105

106 Required Financial StatementsGovernment-wide financial statements: Accrual basis Information about overall government Internal service funds “rolled up” Intragovernmental activities eliminated Fiduciary funds excluded Activities Governmental Business type 106

107 Government Wide StatementsDemonstrate OPERATIONAL accountability Results of operations Financial condition Medium & LT effects of current & past decisions Service levels from existing revenues Effects of current-period operations on future service needs Financial position & financial condition Economic resources & full accrual

108 Government Wide StatementsBasic financial statements MD&A Statement of Net Position Statement of Activities Footnotes RSI Pensions OPEB Infrastructure (modified approach) Budget to actual Investment trusts

109 Government Wide StatementsRequired columns PG governmental activities PG business activities Total for PG Component units Optional column for total reporting entity

110 Statement of Net PositionSimilar to balance sheet Net position format encouraged Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position Balance sheet format allowed Assets + Deferred Outflows = Liabilities + Deferred Inflows + Net Position Ordered as to relative liquidity Separate amounts for due in more than one year Minimize internal balances Not for CUs

111 Statement of Net PositionSimilar to balance sheet Net position Net investment in capital assets Net of accumulated depreciation & OS debt Unspent proceeds – unspent & OS debt = restricted net position Restricted net position Legal constraints Unrestricted net position No designations on face

112 Statement of ActivitiesSimilar to income statement Government purpose = services Net expense/revenue column Three categories of expenses Governmental activities At least at same level as fund statements Business-type activities Different identifiable activities Component units

113 Statement of ActivitiesProgram revenues - columns Charges for services Operating grants & contributions Capital grants & contributions Full accrual accounting = related capital assets reported on statement of net position

114 Statement of ActivitiesGeneral revenues – bottom All others Other Contributions to endowments & permanent funds Special & extraordinary items Transfers

115 Fund Level Statements Fund financial statements:Presented for major funds & nonmajor funds in the aggregate Two governmental fund financial statements Three proprietary fund financial statements Two fiduciary fund financial statements 115

116 Fund Level Statements Fund level financial statements:Short-term focus - financial accountability Reported based on type of fund Governmental funds - modified accrual Proprietary funds - essentially same as for-profit entities Information on fund level financial statements must be reconciled to information reported in GWS 116

117 Major Funds Applies only to governmental & enterprise fundsAlways general fund Never internal service fund Meet both criteria 10% same element for fund category or type 5% same element for all fund type combined Any other selected by government

118 Calculation of Major Funds Expenditures Major Fund City of Example Calculation of Major Funds Expenditures Major Fund Assets & Deferred Outflows Liabilities & Deferred Inflows Revenues Expenses General 1,000,000 250,000 10,000,000 9,900,000 Always Grants 50,000 10,000 1,500,000 1,400,000 Debt Service 5,000 500,000 495,000 Capital Projects 5,000,000 5,500,000 Yes Total Governmental 6,055,000 760,000 22,000,000 17,295,000 Water Fund 7,000,000 4,500,000 Golf Fund 50,000,000 49,000,000 20,000,000 Total Enterprise 60,000,000 56,000,000 25,000,000 24,500,000 Total All Funds 66,055,000 56,760,000 47,000,000 41,795,000 Governmental 10% 605,500 76,000 2,200,000 1,729,500 Enterprise 10% 6,000,000 5,600,000 2,500,000 2,450,000 Total 5% 3,302,750 2,838,000 2,350,000 2,089,750

119 Governmental Fund StatementsFinancial resources & modified accrual Two statements Balance Sheet Statement of Revenues, Expenditures & Changes in Fund Balance Columns Major funds & aggregate non major funds Reconciliation to GWS required

120 Proprietary Fund StatementsEconomic resources & full accrual Three statements Balance Sheet or Statement of Net Position Classified format Three categories of net assets Statement of Revenues, Expenses & Changes in Net Position Statement of Cash Flows Columns Major funds & aggregate non major funds Reconciliation to GWS not usually needed

121 Fiduciary Fund StatementsEconomic resources & full accrual Two statements Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net Position One column for each fund type No total columns Agency funds – external parties only

122 Budget to Actual ComparisonsMinimum presentation Three columns for each governmental fund reported Original budget Final budget Actual Variance column is OPTIONAL Title should be objective vs. subjective

123 Budget to Actual ComparisonsBudget basis Reconcile differences to Statement of Revenues, Expenditures & Changes in Fund Balance Face or in notes to RSI (or notes in BFS) Disclose expenditures exceeding budget for individual funds

124 What MD&A Isn’t The auditor’s responsibilityReplacement for transmittal letter Made up only of graphics Focused on entire reporting entity PG only Place to put just about anything Boilerplate discussion & technical jargon

125 What MD&A Is Management’s responsibilityDiscussion of the financial statements Analysis of financial position and results of operations SIGNIFICANT changes

126 MD&A Budget Variance AnalysisAn analysis of significant variations Original & final budget Final budget & actual results Only General Fund (or equivalent) required Explain why variances occurred

127 MD&A-Expectations Description of currently known (to management) facts, decisions, or conditions Through date of report No specific “title” per GASB #34 Event already occurred or contracted for Not things that might happen Expected to have significant effect on Financial position (net position) Results of operations (revenues, expenses, & other changes in net position)

128 Examples of Currently Known FactsAward and acceptance of a major grant Adjudication of a major lawsuit Significant change in the property tax base An increase in the state sales tax rate Flood causing major damage to infrastructure

129 Exploring Real World Financial Statements

130 Cost Principles ReportingAccounting for Grants Cost Principles Reporting

131 OMB Reforms Implementation GuidanceReason for changes Super circular issued 12/26/13 Uniform guidance issued 12/19/14 Effective 12/26/14 NFPs & IHEs have one-year grace period for procurement standards If opt for this, existing documented procurement policies need to specify the entity continues to comply with A-110 for one additional year beginning post 12/26/14 Codified within 2 CFR Part 200 Federal department & agency acceptance & implementation HHS most differences with Uniform Guidance Most impacted Deferral of effective date for purchasing policies

132 Areas of reforms Administrative requirements Cost principlesCommon Rule A-102 A-110 A-89 Cost principles A-21 A-87 A-122 Hospitals under DHHS (45 CFR Part 75, Appendix E) These retained until changed in the near future Single Audit requirements Part 200 Subpart A-F AppendicesV-XI

133 Reforms - AdministrativeFunding notices 60 day notice required Agencies may change but no less than 30 days Standard format

134 Reforms - AdministrativePre-award consideration of proposal’s merit & each applicant’s financial risk Disclosure of conflict of interest & relevant criminal violations Agencies to impose specific conditions where necessary to mitigate potential risks of waste, fraud & abuse Pass through entities specifically required to consider as well

135 Reforms - AdministrativePre-award consideration of proposal’s merit & each applicant’s financial risk Agency may use risk based approach to evaluate applicant risk considering Financial stability Quality of management systems & ability to meet management standards History of performance Reports & findings from Single Audits Applicant ability to effectively implement statutory, regulatory, or other imposed requirements

136 Reforms - AdministrativeIn addition to previous requirements, Financial Management System MUST include Effective IC over & accountability for all funds, property & other assets Comparison of expenditures with budget for each award Written procedures To implement cash management requirements For determining allowability of costs in accordance with cost principles

137 Reforms - AdministrativeUse of COSO internal control framework – best practice Must have system of IC Specific certifications required by recipient management as part of application

138 Reforms - Cost PrinciplesDoes not apply to fixed amount awards New guidance for indirect costs De minimus 10% of Modified Total Direct Cost (MTDC) Pass through entities required to provide indirect cost rate to subrecipients Existing negotiated rates remain effective until re-negotiated Supplies increased to $5,000 Budgeting for contingencies for certain awards Documentation of cost accounting practices

139 Reforms - Cost PrinciplesSalaries & benefits charged to awards Personnel activity reports not explicitly required Focus is on IC & procedures that account for all work performed Accurate personal compensation between federal & nonfederal projects May be required if entity records do not meet documentation standards

140 Reforms - Cost PrinciplesSalaries & benefits charged to awards Must be based on records that accurately reflect work performed Supported by IC system Incorporated into entity records Nonexempt employee time records MUST indicate total hours worked each day Reasonably reflect total activity performed Allocation based on budget estimates only not acceptable Time records for exempt employees

141 Reforms – Cost PrinciplesAll purchase types must comply with entity’s procurement standards Purchase complies with entity’s documented & in place policies Purchase is necessary Open competition Conflict of interest policy Proper documentation for purchase

142 Reforms - Cost PrinciplesProcurement methods Micro purchases < $3,000 ($2,000 for construction & subject to Davis Bacon) To extent practicable must distribute among qualified suppliers Small purchases < $150,000 Small & informal procurement methods Need quotes (price &/or rate) from “adequate” number qualified sources Entity written policy to define “adequate” Sealed bids > $150,000 Only SLGs & tribes required to advertise & open bids publicly Preferred for construction projects

143 Reforms - Cost PrinciplesProcurement methods Competitive proposals > $150,000 More than one source Written method of evaluation & selection needed Preferred for fixed fee or cost reimbursement Award MUST go to “most advantageous” proposal Sole source must meet at least one of the criteria Single source availability Public emergency Written request made & approved by grantor Competition determined to be inadequate

144 Reforms - Cost PrinciplesProcurement methods Profit MUST be negotiated as separate element of price when there is no cost competition Noncompetitive purchases – all levels, special circumstances More focus on performance vs. compliance Formal contract administration & project management procedures should be adopted & modified for Collection of performance data that ties contractor performance to contract/PO requirements Links between performance management activities & performance reporting required for efficiency purposes Establishment of performance metrics & corrective action procedures

145 Reforms – Monitoring & ReportingRecipient responsible for monitoring compliance & performance expectations Federal entity required to use OMB approved data elements Recipient must submit reports (annually – quarterly) Annual reports due within 90 days Quarterly reports due with 30 days Performance reports MUST contain Comparison of accomplishments to objectives Reason goals not met Other information as appropriate

146 Reforms – Monitoring & ReportingConstruction performance reports only when necessary above Inspections Certification of percentage of completion Recipient MUST notify grantor – as soon as a condition is known Problems, delays, adverse conditions materially impacting performance & objectives Favorable developments

147 Reforms – Single Audit SEFARequired to include total amount to subrecipients Each program Noncash assistance etc. in SEFA Notes required to state whether entity elected to use 10% de minimis cost rate

148 Reforms – Single Audit Auditee required to request peer review report in RFP FAC to make reporting packages available to public Follow up & corrective action – auditee Summary schedule of prior findings to include FS related findings Describe reasons for any recurring finding Management decisions may be based on FS findings

149 Allowable Costs in Federal GrantsNecessary & reasonable for efficient performance of the federal award Employee compensation, cost materials, depreciation, etc. Special/unusual costs require advanced understanding with awarding/cognizant agency Unallowable costs Alcoholic beverages, bad debt expense, CEO salary (some exceptions) 1

150 Questioned Costs

151 Accounting for Grants Cost Concepts

152 Cost and Cost Concepts Cost object Direct cost Indirect costAny item/purpose for which costs need to be measured Grant, program, division, etc. Direct cost Can be clearly identified with/directly related to a single cost object Economically feasible manner Indirect cost Cannot be clearly identified with/directly related to a single cost object

153 Cost and Cost Concepts Common cost Joint costRelated to two or more cost objects Cost objects could be achieved separately Occupancy costs – multiple use facility Joint cost Cost objects can not be achieved separately Annual meeting costs, certain publications/brochures

154 Cost Allocation NOT cost assignment Direct costs Allocation criteriaCause and effect Most preferred Benefits received Equity Ability to bear Least preferred

155 Cause & Effect AKA causal criterionIdentification of activity causing costs to be incurred Difficult for indirect costs Statistical relationships vs. assumed relationship Best to use

156 Benefits Received AKA beneficial relationshipIdentification of users of outputs from activity Costs allocated among users proportional to benefit Direct costs – proxy for benefits

157 Equity Use when cost allocation used for reimbursementGrants Reasonable/fair means of establishing reimbursement basis Fairness not an operational criterion

158 Ability to Bear Cost allocation in proportion to some user attributeAttribute presumed to support charging costs to user Commercial vs. residential customers Least preferred

159 Allocation Methods Stand-alone Relative sales value (direct cost)Physical units

160 Stand Alone Allocation MethodClosest to “ability to bear” Allocates indirect costs to each final cost objective Proportional to SAC to independently accomplish one objective

161 Stand Alone Allocation MethodDisadvantages Allocation can change - SAC does not SAC changes, total basis changes SAC may not exist Assumes indirect costs functionally related to SAC

162 Stand-Alone Method Activity A: 500 X 750,000 = $375,000 1,000Activity B: X 750,000 = $300,000 Activity C: X 750,000 = $75,000 Problems: An allocation of indirect costs can change Stand-alone costs may not exist

163 Relative Sales Value Method (Direct Cost Method)Close to “ability to bear” & “cause & effect” Improvement over stand alone Sales value/direct cost as allocation basis

164 Relative Sales Value Method (Direct Cost Method)Assumes indirect costs incurred in same proportion & for same reason as direct costs (OMB “simplified method”) No change to expense for each objective compared to total direct costs Increases total reported for each objective

165 Direct Cost Method Cost Total Relative Indirect Allocated TotalObjective Direct Share Costs Costs Costs Costs Activity A: 2,500, , x 750, = $625, ,125,000 3,000 Activity B: , x 750, = , ,000 Activity C: , x 750, = , ,000 $3,000, $750,000 $3,750,000

166 Physical Units Allocation MethodConsistent with “cause & effect” Allocate costs to objectives proportional to units of activity/output for each objective May not reflect total effort needed to produce output Assumes indirect costs incurred proportional to some unit measure of activity/purpose

167 Cost Determination Allocation StepsReason(s) for cost information Cost objects or purposes Types of relevant costs Assign direct costs to cost objects Select allocation base(s) or cost drivers Allocate indirect costs Ensure appropriateness

168 Single Stage AllocationLabor Labor Hours Cost Driver Rent A B C Cost Assignment Allocation (Based on Labor Hours)

169 Two Stage Allocation A B C Natural Expense Purpose Labor HoursSpace Rent Equipment Rental Labor Hours Cost Driver Data Processing Computer Time Cost Driver Cost Assignment Stage 1 Allocation (Based on Labor Hours) Stage 2 Allocation (Based on Computer Time) A C B (1) (2) Purpose

170 Activity Based Costing

171 ABC Flow Diagram

172 Cost Allocation Exercise