GASB 34 IMPLEMENTATION TRAINING Presented by:

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GASB 34 IMPLEMENTATION TRAININGPresented by

• Office of Quality Assurance and Consultation
• Auditor of Public Accounts

Edward B. Hatchett Auditor of Public Accounts 105
Sea Hero Road, Suite 2 Frankfort, KY 40601 (502)
573-0050 ehatchett_at_kyauditor.net
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Introduction
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What is GASB?

• Governmental Accounting Standards Board
• State and Local Governments are required to look
  to the Governmental Accounting Standards Board
  (GASB), established in 1984 as the
  standard-setting authority for generally accepted
  accounting principles (GAAP)
• GAAP describe the body of principles that govern
  the accounting for financial transactions
  underlying the preparation of a set of financial
  statements

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GASB Statement 34

• More accurately reflects the financial activities
  of state and local governments in their financial
  reports
• Reports on the overall state of the government's
  financial health, not just its individual "funds"
• Provides the most complete information ever
  available about the cost of delivering services
  to their citizens

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GASB 34 Implementation Dates

• Operating Revenue
• as of 6/30/99
• 100M
• 10M-100M
• -10M
• Operating Revenue
• Total Revenues LESS
• -bond proceeds
• -transfer amounts

• Required Date of Implementation by
• 6/30/02
• 6/30/03
• 6/30/04

• Phase
• I
• II
• III

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Components of the GASB 34 Reporting Model

• Management discussion and analysis
• (New and will be discussed separately)
• Government-wide financial statements
• Fund financial statements
• Notes to the financial statements
• Other required supplementary information

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Basis of Accounting

• Generally Accepted Accounting
• Principles (GAAP)
• Accrual basis of accounting
• Modified accrual basis of accounting
• Other Comprehensive Basis of
• Accounting (OCBOA)
• Cash basis of accounting
• Modified cash basis of accounting

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Accrual Basis of Accounting

• Revenues are recognized when earned and realized,
  or realizable
• Expenses are recognized in the period incurred,
  without regard to the time of receipt or payment
  of cash
• Applied to the Government-Wide Financial
  Statements, Proprietary Fund Financial
  Statements, and Fiduciary Fund Financial
  Statements

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Modified Accrual Basis of Accounting

• Revenues are only recognized to the degree that
  they are available to finance expenditures of the
  fiscal period
• Debt service payments and specific accrued
  liabilities are only recognized as expenditures
  when payment is due because it is only at that
  time that they normally are liquidated with
  expendable available financial resources
• Recognizes increases and decreases in financial
  resources only to the extent that they reflect
  near-term inflows or outflows of cash
• Applicable to Governmental Funds

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Cash Basis of Accounting

• Revenues are recorded when received and
  expenditures are recorded when monies are paid
• Long-term assets are not capitalized, therefore,
  no depreciation or amortization is recorded
• No accruals are made for encumbrances,
  payroll-related expenses, or pension costs
• No prepaid assets are recorded

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Modified Cash Basis of Accounting(as defined by
the APA for local governments)

• Long-term assets are capitalized and reported on
  the Balance Sheet net of accumulated depreciation
• Depreciation expense is reported in the Statement
  of Activities
• Modified cash basis financial statements are
  intended to provide more information to users
  than cash basis statements while continuing to
  avoid the requirements of GAAP.

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Components of the GASB 34 Reporting Model
(Continued)

• Government-Wide Financial Statements (New Format)
• Statement of net assets
• Capital assets (previously in account group if
  you are on GAAP basis)
• Long-term Debt (previously in account group if
  you are on GAAP basis)
• Statement of activities
• Function

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Components of the GASB 34 Reporting Model
(Continued)

• Fund Financial Statements(No Significant
  Changes)
• Various financial statements
• Focus on information about the governments major
  funds

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Components of the GASB 34 Reporting Model
(Continued)

• Notes to the Financial Statements
• (No significant changes)
• Provide useful information
• Essential to user in understanding the financial
  statements

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Components of the GASB 34 Reporting Model
(Continued)

• Other Required Supplementary Information
• Budgetary comparison schedules
• No significant changes
• General fund
• Major special revenue funds

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Special-Purpose Governments

• Engaged in a single government program
• The Fund Financial Statements and the
  Government-Wide Financial Statements may be
  combined using a columnar format
• The combined financial statement reconciles
  individual line items of fund financial data to
  government-wide data in a separate column on the
  financial statement

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Special Purpose Governments

• Engaged only in business-type activities
• Only required to present
• MDA
• Statement of Net Assets
• Statement of Revenues, Expenses, and Changes in
  Fund Net Assets
• Statement of Cash Flows
• Notes to the Financial Statements
• RSI

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Capital Assets
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Capital Assets have initial useful lives
extending beyond a single reporting period

• land,
• buildings,
• building improvements,
• easements,
• equipment,
• machinery,

• vehicles,
• works of art and historical treasures,
• library books,
• and all other tangible or intangible assets used
  in operations.

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Source for Capital Assets

• For GAAP entities
• General Fixed Assets Account Group
• Complete listing of capital asset
• No longer reported as an account group
• For OCBOA entities
• Physical inventory
• Purchasing documents

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Establish a Capitalization Policy

• A written capitalization policy must be
  developed, officially approved, and implemented
  for financial statement reporting
• Includes the dollar threshold for each asset
  class
• Includes the estimated useful life for each asset
  class
• Includes the depreciation method for each asset
  class

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Estimating Building Historical Cost

• Assume building constructed in 1985 with no
  available construction cost records
• Estimate the construction cost of what it would
  cost to build today
• Deflate back to year of construction using a
  Building Cost Construction Index

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Estimating Building Historical Cost

• Calculation
• 2002 Construction Cost 4,000,000
• Construction Cost Index
• 1985 Index / 2002 Index Cost Index Percentage
• 2002 Construction Cost Index Percentage
  2428/3623 67
• 2002 Construction Cost x Cost Index Percentage
• 4,000,000 x 67 2,680,000 (1985 Estimated
  Historical Cost)
• Building Construction Cost Index Website
• http//enr.construction.com/features/conEco/costIn
  dexes/bldIndexHist.asp

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How do you depreciate capital assets?
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Five elements must be known to calculate
depreciation

• Date the asset was placed in service
• Historical cost or fair market value for donated
  items
• Estimated useful life
• Salvage value (if any)
• Depreciation method
• Straight-line Depreciation

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Useful Lives of Capital Assets

• Most capital assets have an identifiable useful
  life and should be depreciated over that lifetime

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Salvage Value of Capital Assets

• The estimated value of the asset at the end of
  its useful life such as the
• scrap value,
• resale value,
• trade-in value,
• pre-determined value for the structure

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Depreciation Approach

• General straight-line depreciation to the
  original book value
• Provides accounting information only
• Cost of Asset
• Less Salvage Value
• Depreciable Cost
• Divided by Useful Life
• Equals Annual Depreciation Expense

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Accumulated Depreciation

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

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How to use the Straight-Line Depreciation Method

• 11,000 Copier
• Useful Life of 5 years
• Placed in service July 2000
• 1000 Salvage Value
• Straight-line Depreciation
• 2,000 per year depreciation
• (Cost Salvage Value) divided by Useful Life
  Depreciation Cost per year
• (11,000 1000) / 5 years 2,000 Annual
  Depreciation
• Age of Asset x Annual Depreciation Accumulated
  Depreciation
• 3 years x 2,000 6,000 Accumulated
  Depreciation
• Cost Accumulated Depreciation Asset Value at
  June 30, 2003
• 11,000 - 6,000 5,000 Asset Value at June 30,
  2003

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Are library books considered capital assets?

• Library books, as well as other assets, with
• useful lives exceeding one year may be
• considered capital assets. Note, however,
• this is dictated by your capitalization
• policy.

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Implementation Guide 1 (Q.26)

• Are library books depreciable capital assets?
• If library books are considered to have a useful
  life of greater than one year, they are capital
  assets and are depreciable. Because most library
  collections consist of a large number of books
  with modest values, group or composite
  depreciation methods may be appropriate. In
  certain situations, library books may be
  considered works of art or historical treasures
  and could be reported using the provisions in
  paragraphs 27 through 29.

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GASB Statement 34, para. 27- Reporting works of
art and historical treasures

• Governments are encouraged, but not required, to
  capitalize a collection (and all additions to
  that collection) whether donated or purchased
  that meets all of the following conditions
• a. Held for public exhibition, education, or
  research in furtherance of public service, rather
  than financial gain
• b. Protected, kept unencumbered, cared for,
  and preserved
• c. Subject to an organizational policy that
  requires the proceeds from sales of collection
  items to be used to acquire other items for
  collections.

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GASB Statement 34, para. 29 - Reporting works of
art and historical treasures

• Capitalized collections or individual items that
  are exhaustible, such as exhibits whose useful
  lives are diminished by display or educational or
  research applications, should be depreciated over
  their estimated useful lives. Depreciation is not
  required for collections or individual items that
  are inexhaustible.

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Implementation Guide 2 (Q.30)

• Should a governments capitalization policy be
  applied only to individual assets or can it be
  applied to a group of assets acquired together?
  Consider a government that has established a
  capitalization threshold of 5,000 for equipment.
  If the government purchases 100 computers
  costing 1,500 each, should the computers be
  capitalized?

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Implementation Guide 2 (Answer to Q. 30)

• Authoritative pronouncements do not address the
  manner in which a capitalization policy should be
  established and applied. However, capitalization
  policies adopted by a government should find an
  appropriate balance between ensuring that all
  material capital assets, collectively, are
  capitalized and minimizing the cost of record
  keeping for capital assets. It may be
  appropriate for a government to establish a
  capitalization policy that would require
  capitalization of certain types of assets whose
  individual acquisition costs are less than the
  threshold for an individual asset. Computers,
  classroom furniture, and library books are assets
  that may be immaterial for capitalization on an
  individual basis, yet might be considered
  material collectively

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Managements Discussion and Analysis (MDA)
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Managements Discussion Analysis (MDA)

• Information required to be presented in the
  audit report, separate from the basic financial
  statements.
• MDA, prepared by the Librarys
• managers, precedes the presentation of
• basic financial statements.

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When must MDA be completed?

• Begin MDA preparation after closing of books
• 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 Library as a whole
• Financial Analysis of the Librarys 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 Library

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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 Library 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
• Special Purpose Government-combined statements
• Notes to the financial statements
• Required Supplementary Information
• Basis of accounting

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Financial Analysis of the Library 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 Librarys Funds

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

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Debt

• Did the Librarys debt increase or decrease
  during the year? Why?
• Did the Library obtain new debt?
• Did the Library pay-off current debt?
• What is the new debt related to?

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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?
• Did the Library impose a new tax?
• Was a lawsuit recently settled?

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Contacting the Library

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

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Auditors Reporting and Required Supplementary
Information

• 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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GASB Statement 34 Resources

• GASBs Guide to Implementation of GASB Statement
  34 on Basic Financial Statements- and
  Managements Discussion and Analysis- for State
  and Local Governments
• GASBs Guide to Implementation of GASB Statement
  34 and Related Pronouncements
• http//www.gasb.org/repmodel/gasb34main.html
• Select Resources On Line and Early
  Implementers of Statement 34 for example
  financial statements prepared using Statement 34
  and Statement 34 implementation discussions

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GASB Statement 34 Resources

• www.kyauditor.net
• Select GASB 34 and click on section for City
  Officials and Managers
• APA GASB 34 Team
• call 1-800-KYALERT or
• email APAGASB34TEAM_at_kyauditor.net