GASB 34 Implementation Training Presented by: Office of Quality Assurance and Consultation

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GASB 34 Implementation TrainingPresented
byOffice of Quality Assuranceand Consultation

• Crit Luallen
• Auditor Of Public Accounts
• 105 Sea Hero Road, Suite 2
• Frankfort, KY 40601
• [phone]
• crit.luallen_at_kyauditor.net

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GASB 34 Implementation

• GASB 34 must be
• implemented by
• June 30, 2004
• by all remaining governmental entities

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What is GASB?

• Governmental Accounting Standards Board
• Responsible for developing standards of state and
  local governmental accounting and financial
  reporting that will
• Result in useful information for users of
  financial reports
• Guide and educate the public, including issuers,
  auditors and users of those financial reports

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Questions and Answers

• Has DLG accepted the GASB 34 requirements, and
  will they offer assistance?
• Several DLG employees have attended GASB 34
  training, and are familiar with the new reporting
  model. Their role has not changed due to the new
  requirements, and therefore should continue to
  provide the same support services as in the past.

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Questions and Answers

• If there is no statutory requirement for fiscal
  courts to follow GAAP, why should we implement
  GASB 34?
• Implementing the GASB 34 reporting model will not
  affect the basis of accounting for fiscal courts.
  A new Practice Aid titled Applying OCBOA in
  State and Local Governmental Financial
  Statements states financial presentation
  requirements of GASB 34 should be implemented in
  a complete set of modified cash basis financial
  statements.

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CNN Report on GASB 34
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Capitalization Policy
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Establish a Capitalization Policy

• Before you value your assets, the Fiscal Court
  must establish a capitalization policy.
• Establishes the threshold for reporting capital
  assets on the financial statements
• Keeps the bookkeeper from being overburdened by
  tracking immaterial assets for reporting purposes
• Inventory will still need to be tagged and
  tracked for internal control purposes.
• Goal is to capture the material amounts or items
  of your inventory (at least 80 of total asset
  value)

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Capitalization Thresholds

• Example
• Equipment Threshold - 5000
• Purchase of 40 handguns at 500 each Total
  20,000
• Individually may not be significant, however,
  cumulatively may be material
• May need to consider combining assets into groups

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Questions and Answers

• What is the advantage of establishing a 5,000
  capitalization threshold vs. a 1,000 threshold?
• The capitalization threshold is at the fiscal
  courts discretion. However, setting a higher
  threshold may reduce the volume of work without
  greatly affecting the dollar amount reported in
  the financial statements but avoid setting too
  high and understating the fiscal courts assets.

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Questions and Answers

• Are capitalization thresholds subject to change?
• A fiscal court may change its capitalization
  threshold after it is initially established.
  However, the change should be documented and
  approved by the fiscal court.

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• Identifying Capital Assets

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What are Capital Assets?

• Capital Assets are assets that have a useful life
  greater than one year.
• Infrastructure is considered a capital asset but
  is required to be reported separately and will be
  discussed separately.

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Capital Asset Examples

• Land
• Buildings
• Vehicles
• Equipment
• All other tangible or intangible assets used in
  operations and with initial lives extending
  beyond a single reporting period

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When do we have to do this?

• All capital assets (land, buildings,
• vehicles, etc.) must be inventoried by
  June 30, 2004 regardless of age.
• All capital assets above capitalization threshold
  must be reported in implementation year!

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Donated Assets

• Since fiscal courts report on the modified cash
  basis, donated assets do not have to be reported.
• An inventory of donated assets should be
  maintained by the fiscal court for identification
  and insurance purposes.

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• Valuing Capital Assets

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Historical Cost

• If you know the actual historical cost of the
  asset, use it!
• Historical cost is original cost or purchase
  price of the asset.
• Include any installation expenses, such as
• Computer network installation

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Estimating Historical CostFor Buildings(if you
dont know actual historical cost)

• Estimate the construction cost of a building for
  2004 and deflate that cost back to the year of
  construction.
• This historical cost estimate can be used when
  the actual cost is unknown.

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Estimating Historical Cost for Buildings

• Assume building constructed in 1985 with no
  available construction cost records
• Estimate the construction cost of what it would
  cost to build today
• 2004 Construction Cost 4,000,000
• 2004 Construction Cost Index 3859
• 1985 Construction Cost Index 2428

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How to deflate construction cost

• Deflate back to the year of construction using a
  Building Cost Construction Index
• Construction Cost Index Percentage
• 2428/3859 63
• Construction Cost Today x Cost Index Percentage
• 4,000,000
• x 63
• 2,520,000 1985 Estimated Historical Cost

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Exercise 1Calculating Estimated Historical Cost

• Building
• 30,000 square feet, 2 story
• Fireproof structural steel frame
• Construction Year 1990
• 2004 Construction Cost 2.5 million or 85/sq.
  foot
• 1990 Cost Index Average 2702
• Cost Index Percentage 2702/3859 70
• Calculate Estimated Historical Cost

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Exercise 1 - Solution

• Historical Cost Estimate Calculation
• 2004 Construction Cost x Cost Index Percentage
• 2,500,000
• x 70
• 1,750,000 1990 Estimated Historical Cost

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Questions and Answers

• Can fiscal courts use KACo appraisals to value
  buildings?
• When estimating historical costs, appraisals
  based on current replacement costs may be used to
  estimate current value and deflate back to the
  appropriate year. However, fiscal courts should
  determine whether appraisals are based on
  replacement costs or an unacceptable basis for
  financial statement reporting (such as fair
  value).

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Questions and Answers

• Should contents be included as part of a
  buildings value?
• No, the building and contents should be reported
  and valued separately.

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Depreciating Capital Assets
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Five elements must be known to calculate
depreciation

• Date the asset was placed in service
• Historical cost or estimated historical cost
• Estimated useful life
• Salvage value (if any)
• Depreciation method
• Straight-line Depreciation

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Capital Asset Useful Lives

• The useful life is the life of the asset until it
  needs replacement or major renovation
• Most capital assets have an identifiable useful
  life and can be depreciated over that life.
• Useful Life Table from State of KY can be used as
  a guide
• These are only estimates and can be modified for
  assets with a particular usage to fit your
  situation.

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Capital Asset Salvage Value

• The estimated value of the asset at the end of
  its useful life.
• Not all assets will have a salvage value
• For buildings, 15-20 of historical cost can be
  designated as salvage value
• Some assets may have a predetermined salvage
  value estimate from vendor

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Questions and Answers

• Is a salvage value required for calculating
  depreciation?
• No, the fiscal court may determine that some
  assets are scrapped at the end of their useful
  lives, or that no salvage value exists. In those
  situations, there is no requirement to
  arbitrarily set a salvage value.

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Depreciation Approach

• Straight-line depreciation based on historical or
  estimated historical cost
• Provides accounting information
• Cost of Asset
• Less Salvage Value
• Depreciable Cost
• Divided by Useful Life
• Depreciation Expense for each year

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Accumulated Depreciation

• Total depreciation expense from acquisition thru
  current year
• Annual Depreciation Expense
• Multiply Number of Years Owned (thru June 30)
• Accumulated Depreciation
• Historical Cost
• Less Accumulated Depreciation
• Current Asset Value at June 30

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Calculating Depreciation for Capital Assets
1985 Estimated Historical Cost 2,520,000

• Step 1
• Historical Cost
• Minus Salvage Value
• Depreciable cost
• Divided by Useful Life
• Annual Depreciation Expense
• Step 2
• Annual Depreciation Expense
• Multiply by Age of Asset
• Accumulated Depreciation
• Step 3
• Historical Cost
• Minus Accumulated Depreciation
• Asset Value at June 30, 2004

• Step 1
• 2,520,000 Historical Cost
• - 504,000 Salvage Value (20 of HC)
• 2,016,000 Depreciable Cost
• / 45 Years
• 44,800 Annual Depreciation
• Step 2
• 44,800 Annual Depreciation
• x 19 Years
• 851,200 Accumulated Depreciation
• Step 3
• 2,520,000 Historical Cost
• - 851,200 Accumulated Depreciation
• 1,668,800 Asset Value at June 30, 2004

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Exercise 2Calculating Depreciation

• From Exercise 1
• 1990 Estimated Historical Cost 1,750,000 (from
  Exercise 1)
• Age 14 years
• Useful Life 40 years
• Salvage Value 350,000

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Exercise 2 - Solution

• Step 1
• 1,750,000 Historical Cost
• - 350,000 Salvage Value (20 of HC)
• 1,400,000 Depreciable Cost
• / 40 Years
• 35,000 Annual Depreciation
• Step 2
• 35,000 Annual Depreciation
• x 14 Years
• 490,000 Accumulated Depreciation
• Step 3
• 1,750,000 Historical Cost
• - 490,000 Accumulated Depreciation
• 1,260,000 Asset Value at June 30, 2004

• Step 1
• Historical Cost
• Minus Salvage Value
• Depreciable cost
• Divided by Useful Life
• Annual Depreciation Expense
• Step 2
• Annual Depreciation Expense
• Multiply by Age of Asset
• Accumulated Depreciation
• Step 3
• Historical Cost
• Minus Accumulated Depreciation
• Asset Value at June 30, 2004

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Exercise 3Calculating Depreciation

• Assume purchase of 10 computers at 2,100 each
• Total Cost 21,000
• Useful Life of 5 years
• Placed in service July 2000
• 1,000 Salvage Value
• Using the straight-line depreciation method,
  calculate the Annual Depreciation and Asset Value
  as of June 30, 2004

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Exercise 3 - Solution

• Step 1
• Historical Cost
• Minus Salvage Value
• Depreciable cost
• Divided by Useful Life
• Annual Depreciation Expense
• Step 2
• Annual Depreciation Expense
• Multiply by Age of Asset
• Accumulated Depreciation
• Step 3
• Historical Cost
• Minus Accumulated Depreciation
• Asset Value at June 30, 2004

• Step 1
• 21,000 Historical Cost
• - 1,000 Salvage Value
• 20,000 Depreciable Cost
• / 5 Years
• 4,000 Annual Depreciation
• Step 2
• 4,000 Annual Depreciation
• x 4 Years
• 16,000 Accumulated Depreciation
• Step 3
• 21,000 Historical Cost
• - 16,000 Accumulated Depreciation
• 5,000 Asset Value at June 30, 2004

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Infrastructure

• Phase III Government Requirements
• Only required to report newly constructed
  infrastructure placed in service after June 30,
  2003
• NOT required to report infrastructure constructed
  prior to July 1, 2003

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What exactly does this mean for Phase III
Governments?

• If road is resurfaced on June 29, 2003
• Reporting the resurfacing is not required since
  it is prior to
• July 1, 2003.

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Identifying Infrastructure
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Infrastructure Asset Examples

• Roads
• Bridges
• Tunnels
• Drainage systems
• Water and sewer systems
• Dams
• Lighting systems

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Questions and Answers

• Are state or federal highways that run through a
  county reported in the fiscal court financial
  statements?
• No, those assets will be reported by the state
  and federal governments.

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Questions and Answers

• What about if a county shares some roads with a
  city? Which government should report those
  assets?
• When the title to infrastructure is unclear,
  consider which government maintains the asset.

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• Depreciating Infrastructure

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Five elements must be known to calculate
depreciation

• Date infrastructure was placed in service
• Historical cost or estimated historical cost of
  infrastructure
• Estimated useful life
• Salvage value (if any)
• Depreciation method
• Straight-line Depreciation

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Infrastructure Useful Lives

• Most infrastructure has an identifiable useful
  life and can be depreciated over that life.
• Examples
• New Paved Subdivision Roads 25 years
• Resurfaced Roads 12 years (can be considered a
  road improvement if original construction is not
  fully depreciated)
• Bridges 50 years
• These are only estimates and can be modified to
  fit each individual situation and road usage.

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Infrastructure Salvage Value

• Salvage Value Estimates
• 20 of construction costs for paved roads/streets
  and bridges
• 10 of construction costs for unpaved roads and
  sidewalks
• Salvage value for infrastructure would include
  the road bed which would not be replaced during
  resurfacing

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Calculating Depreciation for Infrastructure

• Historical Cost of 20 miles of Paved Road
  10,000,000
• Placed in Service October 1, 2003

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Calculating Depreciation for Infrastructure

• Step 1
• Historical Cost
• Minus Salvage Value
• Depreciable cost
• Divided by Useful Life
• Annual Depreciation Expense
• Step 2
• Annual Depreciation Expense
• Multiply by Age of Asset
• Accumulated Depreciation
• Step 3
• Historical Cost
• Minus Accumulated Depreciation
• Asset Value at June 30, 2004

• Step 1
• 10,000,000 Historical Cost
• - 2,000,000 Salvage Value (20 of HC)
• 8,000,000 Depreciable Cost
• / 25 Years
• 320,000 Annual Depreciation
• Step 2
• 320,000 Annual Depreciation
• x 1 Years
• 320,000 Accumulated Depreciation
• Step 3
• 10,000,000 Historical Cost
• - 320,000 Accumulated Depreciation
• 9,680,000 Asset Value at June 30, 2004

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Exercise 4Depreciating Infrastructure

• 1,800,000 Historical Cost for 20 miles of
  Resurfaced Road
• Placed in service February 2004
• Resurfaced Roads have no salvage value
• Using the straight-line depreciation method,
  calculate the Annual Depreciation and the Asset
  Value as of June 30, 2004

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Exercise 4 - Solution

• Step 1
• Historical Cost
• Minus Salvage Value
• Depreciable cost
• Divided by Useful Life
• Annual Depreciation Expense
• Step 2
• Annual Depreciation Expense
• Multiply by Age of Asset
• Accumulated Depreciation
• Step 3
• Historical Cost
• Minus Accumulated Depreciation
• Asset Value at June 30, 2004

• Step 1
• 1,800,000 Historical Cost
• - 0
• 1,800,000 Depreciable Cost
• / 12 Years
• 150,000 Annual Depreciation
• Step 2
• 150,000 Annual Depreciation
• x 1 Years
• 150,000 Accumulated Depreciation
• Step 3
• 1,800,000 Historical Cost
• - 150,000 Accumulated Depreciation
• 1,650,000 Asset Value at June 30, 2004

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APA Website

• www.kyauditor.net
• Roll mouse over GASB 34 for menu
• Select GASB 34 General Information for list of
  various tools

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Managements Discussion and Analysis
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Managements Discussion Analysis (MDA)

• Information required to be presented in the
  audit report, separate from the basic financial
  statements.

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Where is the MDA located in the audit report?

• MDA, prepared by the countys
• managers, precedes the presentation of
• basic financial statements.

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When should MDA be completed?

• Begin upon completion of the Treasurers Annual
  Settlement or 4th Quarter Financial Report
• Submit to auditors before the end of fieldwork

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Common Components of MDA

• Introduction
• Financial Highlights
• Overview of the Financial Statements
• Financial Analysis of the County as a whole
• Financial Analysis of the Countys Funds

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Common Components of MDA (continued)

• General Fund Budgetary Highlights
• Capital Assets
• Debt
• Economic Factors and Next Years Budget and Rates
• Contacting the County

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Introduction

• Provides an overview
• Read in conjunction with the financial statements

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Financial Highlights

• How did net assets change over the year?
• Did governmental activities revenues exceed
  expenditures?
• Did business-type activities revenues exceed
  expenditures?
• Did the County receive any significant grants?
• Was a large portion of debt paid-off? Incurred?
• How did the general fund do in the current year?
  Deficit or surplus fund balance?

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Overview of the Financial Statements

• The two government-wide financial statements
• Statement of Net Assets
• Statement of Activities
• The various fund financial statements
• Notes to the financial statements
• Required Supplementary Information
• Basis of accounting

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Financial Analysis of the County as a whole

• Did net assets increase or decrease during the
  year and what brought about this change?
• Did governmental activities increase or decrease?
  What was the reason?
• Did business-type activities increase or
  decrease? What was the reason?

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Financial Analysis of the Countys Funds

• Did the Countys funds increase or decrease over
  the course of the year?
• What brought about these increases or decreases?
• Did taxes increase or decrease and why?
• Was a major construction project started?
• Did major types of expenditures increase or
  decrease and why?

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General Fund Budgetary Highlights

• Did the County amend the original budget for the
  general fund and why?
• How much did revenues and expenditures exceed or
  fall below the final budget and why?

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Capital Assets

• Did the County invest more funds in capital
  assets in the current year?
• What types of capital assets did the County
  purchase?
• How did the County fund these capital assets?

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Debt

• Did the Countys debt increase or decrease during
  the year? Why?
• Did the County obtain new debt?
• Did the County pay-off current debt?
• Is the debt related to governmental activities or
  business-type activities?

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Economic Factors and Next Years Budget and Rates

• What is currently known that will impact the next
  budget?
• Did tax rates increase?
• Will the County start fee pooling?
• Did the County impose a new tax?
• Was a lawsuit recently settled?

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Contacting the County

• If citizens have questions, they may call, write
  or email.
• Telephone number
• County address
• Email address

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Auditors Responsibility for Reporting on MDA

• Failure to prepare an MDA will not affect the
  auditors opinion on the financial statements
• Auditors must include an explanatory paragraph
  if
• MDA is omitted, or
• MDA contains materially misleading information

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Questions and Answers

• If a county transitions to a 70,000 county, how
  would large changes in the financial statements
  be explained?
• MDA provides a great opportunity to explain
  these types of variances.

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Questions?

• Alicia Allen Boyd, CPA
• [phone] Ext. 450
• alicia.boyd_at_kyauditor.net
• Rob Ovesen
• [phone] Ext.454
• rovesen_at_kyauditor.net