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FGFOA Boot Camp Governmental Accounting

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Title: FGFOA Boot Camp Governmental Accounting


1
FGFOA Boot Camp Governmental Accounting Day
Two November 18, 2014
  • Presented by
  • Diane Reichard, CPA, CGMA, CGFO, CPFO

2
Agenda
  • Review Government Fund Accounting
  • Various Accounting Issues
  • Investments
  • Fixed assets and depreciation
  • Long-term liabilities
  • Fund equity
  • Financial Reporting
  • Grant Accounting

3
Governmental Fund Accounting Review
4
Financial Statement Users
  • Taxpayers
  • Citizens
  • Oversight legislative bodies
  • Investors creditors
  • Management

5
What is a Fund?
  • Self-balancing set of accounts
  • Cash and financial resources
  • Liabilities
  • Residual equity/balances
  • Changes in net assets

6
How Many Funds?
  • At least one General fund
  • More funds more complexities
  • Minimum number of funds
  • Sound financial management
  • Meet legal requirements
  • Based on accounting objectives

7
When to Create A New Fund
  • New accounting standard
  • Change in state constitution
  • Grant required
  • New activity
  • Level of financial control
  • Management

8
Fund Structure
  • Governmental funds
  • General operations
  • Financial resources
  • Proprietary funds
  • Business type operations
  • Economic resources
  • Fiduciary funds
  • Trust agreement
  • Agency relationship
  • Resources held for others

9
Activities of Funds
  • Governmental funds
  • General
  • Public Safety
  • Proprietary funds
  • Economic Environment - Utilities
  • Transportation air, land, sea
  • Fiduciary funds
  • Agency
  • Pension Trust

10
Governmental Fund Types
  • General Fund
  • Special Revenue Funds
  • Debt Service Funds
  • Capital Projects Funds
  • Permanent

11
Governmental Funds
  • Financial resources measurement focus
  • Modified accrual basis of accounting
  • Account for expenditures of financial resources
    (not expenses)
  • Capital assets recorded as expenditures
  • Long-term liabilities are expenditures and NOT
    recorded in governmental funds

12
Proprietary Fund Types
  • Enterprise
  • Fees charged to external users
  • Operating net income
  • Internal Service
  • Reimbursement from
  • Primary government users
  • Component units
  • Other governments

13
Proprietary Funds
  • Economic resources measurement focus
  • Full accrual basis of accounting
  • Account for expenses of economic resources
  • Capital assets long-term liabilities ARE
    recorded in proprietary funds on the Balance
    Sheet
  • Depreciation expense on capital assets recorded

14
Fiduciary Fund Types
  • Agency
  • Investment Trust
  • Private-Purpose Trust
  • Pension and OPEB Trust

15
Fiduciary Funds
  • Full accrual accounting
  • Economic resources measurement focus
  • Capital assets long-term liabilities ARE
    recorded
  • Additions and Deductions
  • Not revenues or expenses

16
GAAP and GASB
  • GAAP generally accepted accounting principles
  • GASB Government Accounting Standards Board
  • Established 1984
  • Standards for State and Local Governments
  • Financial accounting
  • Financial reporting
  • Statutory requirement to use GAAP

17
Measurement Focus
  • WHAT is measured - Economic Resources
  • Change in economic position
  • Inflows and outflows of economic resources
  • Current and noncurrent
  • Capital assets and long-term debt
  • Focuses on operational accountability
  • Whether management efficiently uses resources in
    providing services

18
Measurement Focus
  • WHAT is measured - Financial Resources
  • Change in spendable resources
  • Inflows and outflows of current financial
    resources
  • Cash other liquid assets
  • Payables from cash and other liquid assets
  • Focuses on fiscal accountability
  • Whether managers have met budgetary and other
    legal financial requirements

19
Basis of Accounting
  • WHEN to measure
  • When transaction/event recognized
  • Accrual
  • Modified accrual
  • Measurable and available
  • Trust Funds
  • Expendable or non expendable

20
Accrual Basis of Accounting
  • WHEN to measure
  • Revenues recognized when earned
  • Expenses recognized when incurred

21
Modified Accrual Basis
  • WHEN to measure
  • Revenues recognized when measurable available
  • 60 day criteria
  • Expenditures recognized when incurred
  • Expected to be liquidated with current financial
    resources

22
Measurement Focus and Basis
23
Role of the Budget
  • Public process representation
  • Legal contract
  • Estimated revenues and appropriations
  • Statutory requirements
  • Not required for all funds
  • On GAAP basis
  • Should be tied to strategic plan

24
Budget Document
  • Operations guide
  • Communication device
  • Financial plan
  • Policy document

25
Budget
  • Legal standing
  • Legal level of control
  • Administrative level of control
  • Budgetary basis of accounting
  • Timing
  • Perspective
  • Entity

26
Budget Process
  • Preparation
  • Approval
  • Execution
  • Evaluation

27
Encumbrances in Action
Date Reference Vendor Description Appropriations Encumbrances Expenditures Available
1/1/08 2008 Budget     1,000,000     1,000,000
1/15/08 PO 100   Copper tubing   1,000   999,000
1/20/08 Inv 200 Acme Invoice for PO 100   (1,000) 1,000 999,000
1/21/08 Inv 250 Office Depot Office supplies     100 998,900
1/31/08 PR Journal   January payroll     100,000 898,900
2/1/08 PO 101 Home Depot PVC pipe   10,000   888,900
2/10/08 Inv 300 Home Depot Partial shipment   (5,000) 5,000 888,900
2/20/08 Inv 350 Home Depot Shipped in full   (4,500) 4,500 888,900
2/22/08 PO 101 Home Depot Close PO   (500)   889,400
5/31/08 Budget cut     (100,000)     789,400
28
Management Responsibility
  • Fraud prevention
  • Detection
  • Deterrence programs

29
Internal Control Definition
  • A process effected by an entitys board of
    directors, management other personnel, designed
    to provide reasonable assurance regarding the
    achievement of objectives.
  • Effectiveness efficiency of operations
  • Reliability of financial reporting
  • Compliance with applicable laws regulations

30
COSO Internal Control Framework
  • Control environment
  • Risk assessment
  • Control activities
  • Information and communication
  • Monitoring

31
  • Fund Classification Exercise
  • Fund Exercise Part II
  • Budget Exercise
  • Internal Control Exercise

32
Financial Reporting Entity
33
The Financial Reporting Entity
  • Consists of the primary government (PG) and all
    component units (CU) for which the primary
    government is financially accountable
  • Component units are reported by
  • Discrete (separate column) presentation for each
    major CUs
  • Blended presentation - CUs financial information
    included with appropriate fund columns of the PG

34
The Primary Government
  • Statute
  • Separately elected governing body
  • Special purpose governments
  • Legally separate elected governing body
  • Ultimately accountable to its electorate
  • Fiscally independent

35
Primary Government Examples
  • A state government
  • General purpose local government
  • City, town, or county
  • Special purpose government
  • Legally separate elected governing body
  • Fiscally independent of other state/local
    governments
  • School districts, special districts, etc.

36
Component Units
  • Appoint voting majority of board
  • Modify/approve rate/fee changes or budget
  • Remove appointed governing body members at will
  • Veto, overrule or modify other types of decisions
  • Appoint, hire, reassign or dismiss management
  • Create financial benefit or burden

37
Component Units (continued)
  • Ability to access CU resources
  • Obligation to finance deficits
  • Responsible in some manner for CU debts
  • CU provides financial benefit or is financial
    burden
  • Omission is misleading to financial statement
    users

38
Component Units Certain Tax Exempt Organizations
  • Relationship significance
  • Meet all three tests
  • 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

39
Component Unit Examples
  • Governmental component units
  • Dependent special districts
  • Port authorities
  • Universities
  • Hospitals
  • Not-for-profit component units
  • Volunteer fire departments
  • Libraries and Museums
  • Hospitals

40
Component Unit Issues
  • Different FS format
  • 501 (c) (3) entities
  • CUs with GTAs BTAs
  • Differing fiscal year ends
  • FYE within PG Fiscal Year
  • CU FYE 1st quarter of PG Fiscal Year
  • Inter-agency transactions
  • Role in MDA - focus is PG

41
Various Accounting Issues Investments
42
Statutory Guidance
  • Florida law
  • Florida Statutes 218.415 and 280
  • Allowable securities
  • Security maturity
  • Credit quality
  • Bank deposits
  • FDIC insurance
  • Collateralization

43
Investment Policy Roadmap
  • Financial Institutions
  • Safekeeping
  • Internal controls
  • Investment instruments
  • Investment limitations
  • Reporting
  • Policy approval
  • Investment Policy Basics
  • State/local laws
  • Scope
  • Risks
  • Objectives
  • Standards of Care
  • Investment Committee

44
GFOA Guidance
  • Goals safety, liquidity, yield
  • Portfolio management policy
  • Evaluate credit risk
  • Structure maturities based on cash flow
  • Identify portfolio segmentation
  • Liquidity - money market, SBA
  • Enhanced cash - 90 days to 18 months
  • Reserves - longer term 18 months to 5 years

45
Scope of Policy
  • Fund type
  • General
  • Enterprise
  • Trust funds
  • Exclusions - Debt service reserve funds
  • Adopted by governing body
  • Periodic review of policy
  • Periodic investment reports

46
Objectives
  • Safety of principal
  • Security type
  • Bank deposits
  • Local government pools
  • Liquidity
  • Money market funds, bank, pools
  • Yield
  • Market influenced
  • Watch credit risk

47
Standards of Care
  • Prudent investor rule
  • Investments shall be made with judgment and care,
    under circumstances then prevailing, which
    persons of prudence, discretion and intelligence
    exercise in the management of their own affairs,
    not for speculation, but for investment,
    considering the probable safety of their capital
    as well as the probable income to be derived.
  • Ethics policy
  • Conflicts of interest
  • Delegation of authority

48
Financial Institutions
  • Source of security investments
  • Primary /regional dealers
  • Capital strength, references, audited financial
    statements
  • Banks
  • Capital, assets, management, credit rating

49
Investment Instruments
  • List allowable investments
  • Define terms
  • Credit criteria (Moodys, SP)
  • Maturity restrictions - may vary by fund
  • Security list
  • Treasuries
  • Agencies
  • Money market funds
  • Repurchase agreements
  • Securities lending
  • Callable/puttable securities
  • Commercial paper
  • Mutual funds
  • Bank deposits
  • CDs

50
Investment Strategy
  • Diversification
  • Maturity
  • Credit
  • Issuer
  • Competitive bids for securities
  • Bloomberg
  • Fund type
  • Strategy may differ based on purpose of fund

51
Custody/Safekeeping
  • Third party custody/safekeeping is essential
  • Securities should be held in an acceptable
    custody/safekeeping arrangement
  • Ownership of securities should be evidenced by a
    safekeeping receipt or securities should be held
    in a trust custody account

52
Internal Controls
  • Investment officer is responsible for maintaining
    internal control structure
  • Key issues
  • Collusion
  • Separation of activities
  • Security safekeeping
  • Wire transfer authority
  • Transaction confirmations
  • Review and monitoring

53
Internal Control
  • Separate record keeping/transaction
  • Custodial safekeeping
  • Written confirmations
  • Procedures for transactions
  • Criteria for selection
  • Who to call
  • Required forms
  • Competitive bids
  • Transfer funds

54
Control Credit Risk
  • Credit (default risk) issuer will be unable to
    redeem the investment at maturity
  • Evaluate and make decisions
  • Develop investment policies
  • Develop administrative systems and internal
    controls
  • Know investments

55
Control Credit Risk
  • Compile list of pre-approved issuers
  • Establish minimum credit rating
  • AI/PI
  • Long-term debt rating of at least A
  • Limit purchases to issuers with 500 million in
    total assets
  • Monitor trends in financial condition
  • www.fitchibca.com
  • www.moodys.com
  • www.standardandpoors.com

56
Control Interest Rate Risk
  • Interest rate risk changes in financial market
    will reduce value of debt
  • Interest rate risk can be minimized
  • Limit investments in portfolio to rapid market
    swings
  • Diversify maturities in portfolio
  • Structure portfolio securities mature to meet
    cash flow requirements

57
Procedures to Protect
  • Evaluate results
  • Compare to previous year
  • Annual Revenue-Important to budget
  • Determine how to modify
  • Keep current with market
  • Read available information/daily reports
  • Wall Street journal
  • Consult with Investment Manager

58
Procedures to Protect
  • Reporting Requirements
  • GASB 31
  • Financial Statements
  • Commission and City Manger
  • Internal checks and balances
  • Vacation for employee
  • Segregation of duties
  • Provide custodial agreements
  • Evaluate annually

59
Investment Risks
  • Custodial credit risk
  • Party holding security will fail to return
    principal
  • Market risk
  • Investment/collateral value declines
  • Government risk most often results from interest
    rate shifts

60
Valuation Methodology
  • Fair value
  • Price willing buyer would pay seller in arms
    length transaction
  • Changes in FV investment income
  • Historical cost
  • Principal dollars invested in security
  • Amortized cost
  • Historical cost amortization of
    discount/premium
  • Amortization investment income
  • Sales prior to maturity gain/loss

61
Fair Value Investments
  • All debt and equity securities
  • Open-end mutual funds
  • Participating interest earning investment
    contracts
  • External investment pools

62
Historical Cost Investments
  • Non participating interest earning investment
    contracts
  • Nonnegotiable CDs
  • Repurchase agreements
  • 2a7-like eternal investment pools - Not SEC
    registered but acts as if it is, NAV not at 1
    use FV

63
Amortized Cost Investments
  • Participating interest earning investment
    contracts and certain money markets with maturity
    of one year or less at time of purchase
  • Commercial paper
  • Banker acceptances
  • US Treasury, agency, and instrumentality
    securities

64
Repurchase Agreements
  • Master repurchase agreement Documents,
    transactions and ownership interests
  • Government transfers excess cash to broker-dealer
    to earn additional investment income
  • Broker-dealer provides securities as collateral
    to government and agrees to repay cash and
    interest in exchange for same securities at later
    date
  • Most considered nonparticipating interest earning
    investment contracts - Valued at historical cost

65
Repurchase Agreement Types
  • Overnight repurchase agreement
  • Fixed interest rate
  • Mature next day
  • Term repurchase agreement
  • Fixed maturity date and interest rate
  • Open repurchase agreement
  • No defined maturity date
  • Either party may terminate daily
  • Interest rate set daily

66
Reverse Repurchase Agreements
  • Opposite of repurchase agreement
  • Government, seller-borrower, transfers specific
    securities to broker-dealer/ financial
    institution in return for cash
  • Government agrees to repay cash and interest in
    exchange for return of same securities at later
    date
  • Addresses temporary cash needs without
    liquidating investments
  • Collateral securities remain on balance sheet
  • Exposure risk if interest rates shift and
    securities must be liquidated at loss to return
    cash to broker/dealer

67
Investment Pools
  • Internal investment pool
  • Commingles funds of reporting entity
  • Values 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)

68
Various Accounting Issues Fixed Assets and
Depreciation
69
Basic Transactions
  • Assets
  • Liabilities
  • Revenues - gains
  • Expenses/expenditures - losses
  • Other sources and uses

70
Asset Transactions
  • Inventory
  • Accounts Receivable
  • Prepaid expenses
  • Property, plant and equipment
  • Valuation and impairment
  • Capitalization and depreciation
  • Restricted assets

71
Inventory Asset Transactions
  • Purchase (financial resources)
  • Expenditures Supplies, etc.
  • Cash/AP
  • Consumption (economic resources)
  • Inventory Supplies, etc.
  • Cash/AP

72
Prepaid Expense Transactions
  • Current financial resources
  • Expenditures
  • Cash/AP
  • Non current financial resources
  • Prepaid expenses
  • Cash/AP

73
Capital Asset Classifications
  • Land
  • Buildings
  • Improvements Other than Buildings
  • Machinery and Equipment
  • Construction Work in Progress
  • Infrastructure (roads, streets, bridges)
  • Networks - assets for a particular service
  • Subsystems of networks - assets that make up a
    segment of the network

74
General Capital Assets
  • Long-lived assets used by activities reported in
    governmental funds
  • NOT capital assets that are specifically
    associated with activities reported in
    proprietary and fiduciary funds

75
Recording General Capital Assets
  • Capitalized as governmental activities accounts
    in the GWS
  • Depreciated in the GWS
  • Debited to expenditures in the appropriate
    governmental fund

76
Valuation of Capital Assets
  • Purchased capital assets
  • Invoice or historical cost
  • Estimated cost if actual cost is unknown
  • Donated assets
  • Estimated fair value at time of gift
  • Use book value if coming from another fund
  • Intangible assets
  • Historical cost if purchased
  • Different GAAP for self developed

77
Capitalizing Assets
  • Additions or improvements that extend the useful
    life
  • No specific threshold specified by GAAP
  • GFOA recommends 5,000
  • May have different levels for different types of
    assets
  • Include all necessary and reasonable costs to
    place asset into use exclude cash discounts and
    financing charges

78
Depreciation of Capital Assets
  • Capital assets are depreciated over their
    estimated useful lives
  • Exceptions
  • Land
  • Construction in progress
  • Certain collections
  • Infrastructure reported using the modified
    approach

79
Depreciation Method
  • Straight line is the most common
  • Depreciate at an annual rate over the estimated
    useful life
  • Composite for dissimilar assets
  • Group for similar assets
  • Report depreciation expense in GWS
  • Disclose depreciation expense charged to
    functions in notes

80
Modified Approach
  • May use for certain infrastructure assets instead
    of depreciation if certain requirements are met
  • Maintain asset management system
  • Condition assessment on current inventory
  • Estimated cost to maintain at adopted level
  • Document the condition level
  • Complete assessment every three years
  • Disclose results

81
Costs Incurred After Acquisition
  • Additions/improvements vs. replacements/maintenanc
    e
  • Capitalize costs of additions and improvements
  • Don't capitalize replacements and maintenance
    expenditures
  • Replacements that are partly additions or
    improvements
  • Capitalize as appropriate
  • Remove cost of old asset
  • Requires judgment to determine whether an asset
    has been enhanced

82
Accounting for Acquisition
of Capital Assets
  • General Fund paid 50,000 cash for office
    equipment for the Mayors office.
  • General Fund
  • Expenditures Capital Outlay 50,000
  • Cash 50,000
  • Governmental Activities
  • Equipment 50,000
  • Cash 50,000

83
Disposition of Capital Assets
  • Government-wide and fund level (proprietary and
    fiduciary)
  • Remove original cost of assets being disposed
  • Only part is disposed
  • Remove pro-rata share of cost and related
    accumulated depreciation
  • Governmental fund level
  • Record proceeds received as revenue

84
Disposition of Capital Assets
  • Sold fully depreciated machine for 500.
    Originally purchased for 8,000 using GF
    revenues.
  • General Fund
  • Cash 500
  • RevenuesMisc. (or OFS) 500
  • Governmental Activities
  • Cash 500
  • Accumulated Depreciation 8,000
  • Equipment 8,000
  • Gain on Sale of Equipment 500

85
Disposition of Capital Assets
  • A fully depreciated building with an original
    cost of 100,000 (from tax-supported bonds) is
    demolished cost of demolition was 5,000.
  • General Fund
  • Expenditures 5,000
  • Cash 5,000
  • Governmental Activities
  • Loss on Disposal of Building 5,000
  • Accumulated Depreciation 100,000
  • Buildings 100,000
  • Cash 5,000

86
Capital Projects Funds
  • Project-life rather than annual focus
  • Long-lived assets
  • Buildings, roads bridges, etc.
  • Usually
  • A construction project
  • Have in-depth construction estimate and timeline
  • Require long-range planning and significant
    financing

87
Capital Projects Funds
  • Project 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 and obtain other long-term financing or
    grants

88
Capital Asset Financing Sources
  • Long-term bonds
  • AVT-supported bonds (GOBs)
  • Revenue-supported bonds (PIRBs)
  • Long-term loans/mortgages
  • Government grants (federal or state)
  • Transfers from other funds
  • Gifts from individuals/organizations

89
Capital Asset Financing Sources (continued)
  • Capital leases
  • Certificates of participation (COPs)
  • Special development districts
  • Tax increment financing
  • Transportation development districts

90
Construction in Progress
  • Nondepreciable until complete
  • Contract accounting applies
  • Retainage accounts
  • Interest costs incurred during construction
  • NOT capitalized for governmental assets
  • IS capitalized for business-type assets

91
Accounting for Capital Projects - Grant
  • Federal grant approval is obtained as partial
    funding for a citys office building project.
  • Capital Projects Fund
  • Due from Federal Government 100,000
  • Revenues
    100,000
  • Governmental Activities
  • Due from Federal Government 100,000
  • Program RevenuesPublic Works
  • Capital Grants and Contributions
    100,000
  • In reality, grant would be recorded as revenue
    when received.

92
Accounting for Capital Projects - Grant
  • Amount 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.

93
Accounting for Capital Projects - Interfund
  • Obtained interim financing to complete
    architectural and engineering design. Borrowed
    50,000 from the General Fund that will be repaid
    from bond proceeds.
  • Capital Projects Fund
  • Cash 50,000
  • Interfund Loans PayableCurrent
    50,000
  • Governmental Activities
  • No entry needed.

94
Accounting for Capital Projects - Interfund
  • The 50,000 due the General Fund was repaid.
  • Capital Projects Fund
  • Interfund Loans PayableCurrent 50,000
  • Cash 50,000
  • Governmental Activities
  • No entry needed.

95
Accounting for Capital Projects - Bond
  • Bonds 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 SourcesBond Proceeds
    5,000,000
  • Due to Debt Service Fund 50,000
  • Governmental Activities
  • Cash 5,050,000
  • Bonds Payable 5,000,000
  • Premium on Bonds Payable 50,000

96
Accounting for Capital Projects
  • A 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 3,000,000
  • Contracts Payable 3,000,000

97
Accounting for Capital Projects
  • The 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.

98
Accounting for Capital Projects
  • Capital 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
  • Contracts Payable
    2,000,000

99
Capital Projects Fund Transaction
  • The 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.

100
Accounting for Capital Projects
  • Upon final inspection, the City incurred costs of
    75,000 for interior rework performed 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.

101
PPE Transactions
  • Modified accrual
  • Expenditures Capital Outlay
  • Cash/AP
  • Full accrual
  • Property, Plant Equipment
  • Cash/AP
  • Depreciation Expense
  • Accumulated Depreciation

102
Various Accounting Issues Long-Term Liabilities
and Debt Service Bonds Compensated
Absences Capital Leases Year-end Accruals Fund
Equity
103
Long-term Liabilities
  • Bonds
  • 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

104
Liability Transactions
  • Unearned revenues
  • Accruals
  • Year end
  • Compensated absences
  • Interfund debt
  • Long term debt
  • Types
  • Accounting
  • Liabilities paid from restricted assets

105
Unearned Revenue Transactions
  • Modified accrual not available
  • Full accrual earnings process not complete
  • Cash
  • Unearned/Deferred Revenue

106
General Long-term Liabilities
  • General long-term liabilities
  • Bonds, notes, compensated absences, etc.
  • General obligation bonds
  • Aka full faith and credit
  • Revenue bonds
  • Mortgages/Loans
  • Litigation
  • Reported in GWS but not in fund financial
    statements

107
Accounting Transactions Long-term Debt
  • Modified accrual
  • Expenditures Debt Service Principal
  • Expenditures Debt Service Interest
  • Cash/AP
  • Full accrual
  • LT Debt Outstanding (principal)
  • Interest Expense
  • Cash/AP

108
Liability Basics
  • Current
  • Obligations expected to be paid/ liquidated in
    current fiscal period
  • Year-end accruals
  • Current portion of long-term debt
  • Noncurrent
  • Not expected to be paid/liquidated within current
    fiscal period
  • Bonds/capital leases
  • Pensions and OPEB
  • Compensated absences, claims judgments

109
Reporting Long-term Liabilities
  • Debt and 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

110
Bonds Payable
  • Issued for short-term purposes
  • Tax/bond/grant anticipation notes
  • Record as current liabilities
  • Issued for long-term purpose
  • Construction projects
  • Pay as you use
  • Governmental funds record other financing use

111
Types of Bonds
  • Term
  • Principal due in full at end of specified term
  • Sinking funds used to obtain better rates
  • Serial
  • Bonds mature over entire term of the bonds
  • Level debt service vs. level principal
  • Conduit debt obligation
  • Government issues debt for third party
  • Third party is obligated to repay
  • Government does not record, notes only

112
Types of Bonds
  • Demand
  • Government issued bonds with put option
  • Bondholder can require government to pay
    principal and accrued interest
  • Government must repay within 1-30 days CURRENT
    LIABILITY
  • Exceptions to recording as current liability
    relate to take-out agreements and related term
  • Examples Auction rate securities, Commercial
    paper

113
Accrued Interest - Bonds Sold
  • Cash received from investors for interest accrued
    from date of bonds issue date
  • Government-wide level
  • 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

114
Arbitrage Rebates
  • Interest received by investors on bonds issued by
    SLGs is exempt from federal and some state income
    taxes
  • Investors willing to accept a lower interest rate
    on these bonds (i.e. net of tax rate)
  • Governments could issue bonds at a low tax-exempt
    rate, invest the proceeds in high yield taxable
    securities, then use the resulting spread for
    capital purposes
  • Known as ARBITRAGE

115
Arbitrage Rebates
  • Federal law and 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

116
Debt Service Funds
  • Financial resources set aside for principal and
    interest on general long-term 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

117
Accounting Debt Service
  • Modified accrual principal and interest are
    generally recognized in period legally due
  • FYE exception
  • Budgetary accounting used
  • Serial bonds - budget transfer revenues totaling
    the amount needed that fiscal year for matured
    principal and interest
  • Term bonds budget additional transfer revenues
    to meet sinking fund requirements and the amount
    needed for current year interest
  • Sinking fund investments - reported at fair value
    with the changes shown as a component of
    investment earnings

118
Accounting for Debt Service
  • Bonds issued January 2, 2009. 100,000 in
    interest paid semiannually on January 1 and July
    1. The fiscal year ends December 31, 2009.
  • Q What amount of expenditures would be
    recognized in fiscal year 2009?
  • A Only the July 1, 2009 interest payment, or
    100,000, would be recognized as an expenditure
    of 2009.
  • B Both the July 1, 2009 and January 1, 2010
    payments would be recognized as 2009
    expenditures.

119
Serial Bond DSF Transactions
  • City issued 100,000 of 6 serial general
    obligation (G.O.) bonds on December 1, 2008.
    Interest of 3,000 is due June 1 and December 1,
    2009. Amounts decrease every June 1 and December
    1 for the next 19 years. Principal maturity of
    5,000 is due June 1, 2009.
  • DSF or CPF
  • Cash 100,000
  • Other financing sources 100,000
  • Governmental Activities
  • Cash 100,000
  • Serial Bonds Payable 100,000

120
Serial Bond DSF Transactions
  • The approved FY 2009 budget requires General Fund
    to transfer 11,000 to DSF for principal payment
    of 5,000 and two interest payments totaling
    6,000 (3,000 each).
  • Debt Service Fund
  • Due from General Fund/Cash 11,000
  • OFSInterfund Transfers In 11,000
  • General Fund
  • Other financing uses 11,000
  • Due to DSF/Cash 11,000

121
Serial Bond DSF Transactions
  • On May 28, 2009, the transfer from General Fund
    was received.
  • Debt Service Fund
  • Cash
    3,000
    Due from General Fund 3,000
  • General Fund
  • Due to DSF 3,000
  • Cash 3,000
  • 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.

122
Serial Bond DSF Transactions
  • The June 1, 2008, interest payment was made on
    schedule
  • Debt Service Fund
  • ExpendituresBond Interest 3,000
  • Cash 3,000

123
Serial Bond DSF Transactions
  • Remaining 8,000 transfer was received from
    General Fund November 29, 2009. On December 1,
    the City paid principal and interest maturing
    that date.
  • Debt Service Fund
  • Cash 8,000
  • Due From General Fund 8,000
  • ExpendituresBond Principal 5,000
  • ExpendituresBond Interest 3,000
  • Cash 8,000
  • General Fund
  • Due to DSF 8,000
  • Cash 8,000

124
Serial Bond DSF Transactions
  • Adjusting entry on December 31, 2009.
  • Governmental Activities
  • ExpensesInterest 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.

125
Bond Refunding
  • Pay off existing debt before due date
  • Current refunding
  • Use cash available or bond proceeds to
    immediately retire bonds
  • Advance refunding
  • Establish irrevocable trust for money set aside
    to retire bonds at earliest call date
  • Requires original bond indenture to have a call
    provision
  • Bond holders usually receive a premium for an
    early call

126
Bond Refunding
  • Issue new debt
  • 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 and future earnings to repay old
    debt at earliest call date (between then and now)

127
Advance Refunding
  • Legal or in-substance defeasance
  • Old liability is removed from governmental
    activities
  • In-substance
  • Proceeds placed in irrevocable trust and
    liability removed
  • Legal defeasance
  • Debt legally satisfied based on debt instrument
    even though not repaid
  • JEs similar to those for regular refunding

128
Debt Refunding Transactions
  • 100,000 of previously issued bonds are refunded
    with new bonds with lower interest payments.
    Record the new bonds 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.

129
Debt Refunding Transactions
  • Assume old bonds are retired/ defeased shortly
    after issue of refunding bonds.
  • Debt Service Fund
  • Other Financing UsesRefunded Bonds 100,000
  • Cash 100,000
  • Note Report only the new issue as debt in
    governmental activities. Disclosures required if
    in-substance defeasance.

130
Capital Leases - Proprietary
  • Same as private sector lease accounting
  • Follow FASB criteria to determine if
    capital/operating lease
  • Record capital assets in GWS at present value of
    minimum lease payments or fair value, if lower

131
Capital Leases - Governmental
  • Fund level statements
  • At inception
  • Proceeds other financing sources
  • Expenditure NPV of future MLP/fair value
  • Payments made
  • Debt service expenditure
  • Government-wide statements
  • At inception
  • Proceeds LTD
  • Leased assets NPV of future MLP/fair value
  • Payments made
  • Debt service expenditure

132
Compensated Absences
  • Liability for unused sick/vacation time
  • Accrue as earned if
  • Employees 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

133
Year-end Accrual Transactions
  • Modified accrual (payable from current financial
    resources)
  • Expenditures
  • Accrued Expenditures
  • Full accrual
  • Expenses
  • Accrued Expenditures

134
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

135
Unbilled Utility Revenues
  • Revenue and 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

136
Fund Equity Net Position
  • Assets liabilities Net Position
  • Governmental fund level
  • Fund balance Nonspendable, restricted,
    unrestricted
  • Proprietary fiduciary fund level
  • Net position- Invested in capital assets net of
    related debt, restricted, unrestricted
  • Government-wide ALL activities
  • Net position- Invested in capital assets net of
    related debt, restricted, unrestricted

137
Governmental Fund Balance
  • Non spendable
  • Inventories, permanent fund corpus
  • Restricted
  • Committed
  • Assigned
  • Unassigned
  • Categories based on relative strength of control
    constraints

138
Governmental Fund Balance
  • Nonspendable - Can not be spent
  • Not expected to be converted to cash
  • Inventories
  • Prepaids
  • Other
  • LT loans and notes receivable
  • Property acquired for resale
  • Legally/contractually required to remain intact
  • Permanent fund corpus

139
Governmental Fund Balance
  • Restricted
  • 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

140
  • Recording Transactions Exercise
  • Compliance Exercise

141
Financial Reporting
  • Government-wide Statements
  • Fund level Statements
  • Reconciling Items

142
Financial Reporting
  • Management responsibility
  • GPFS required
  • Minimum acceptable
  • Liftable

143
General Purpose External Financial Reports
  • Managements discussion and analysis
  • Government-wide Fund financial
  • financial statements statements
  • Notes to the financial statements
  • Required supplementary information
  • (other than MDA)

144
Required Financial Statements
  • Government-wide financial statements
  • Accrual basis
  • Information about overall government
  • Internal service funds rolled up
  • Intragovernmental activities eliminated
  • Fiduciary funds excluded
  • Activities
  • Governmental
  • Business type

145
Government Wide Statements
  • Demonstrate results of operations and OPERATIONAL
    accountability
  • Medium and long-term effects of current and past
    decisions
  • Service levels from existing revenues
  • Effects of current-period operations on future
    service needs
  • Financial position and condition
  • Economic resources and full accrual

146
Basic Financial Statements
  • MDA
  • Statement of Net Position
  • Statement of Activities
  • Footnotes
  • RSI
  • Pensions
  • OPEB
  • Infrastructure (modified approach)
  • Budget to actual
  • Investment trusts

147
Government Wide Statements
  • Required columns
  • PG governmental activities
  • PG business activities
  • Total for PG
  • Component units
  • Optional column for total reporting entity

148
Statement of Net Position
  • Similar to balance sheet
  • Net position format encouraged
  • Assets Liabilities Net Position
  • Balance sheet format allowed
  • Assets Liabilities Net Position
  • Ordered as to relative liquidity
  • Separate amounts due in more than one year
  • Minimize internal balances
  • Not for CUs

149
Net Position
  • Invested in capital assets net of related debt
  • Net of accumulated depreciation and debt
    outstanding (OS)
  • Unspent proceeds unspent and OS debt
    restricted
  • Restricted net assets
  • Legal constraints
  • Unrestricted net assets
  • No designations on face

150
Statement of Activities
  • Similar to income statement
  • Government purpose services
  • Net expense/revenue column
  • Three categories of expenses
  • Governmental activities
  • At same level as fund statements
  • Business-type activities
  • Different identifiable activities
  • Component units

151
Statement of Activities
  • Program revenues columns
  • Charges for services
  • Operating grants and contributions
  • Capital grants and contributions
  • Full accrual accounting - capital assets reported
    on statement of net position
  • General revenues at the bottom
  • Contributions
  • Special and extraordinary items
  • Transfers

152
Major Funds
  • Applies only to governmental and enterprise funds
  • Always general fund
  • Never internal service fund
  • Meet both criteria
  • 10 of fund category or type
  • 5 of all fund type combined
  • Any other selected by government

153
City of Example City of Example City of Example City of Example City of Example City of Example
Calculation of Major Funds Calculation of Major Funds Calculation of Major Funds Calculation of Major Funds Calculation of Major Funds Calculation of Major Funds
        Expenditures Major
Fund Assets Liabilities Revenues Expenses Fund
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 0 500,000 495,000  
Capital Projects 5,000,000 500,000 10,000,000 5,500,000 Yes
Total Governmental 6,055,000 760,000 22,000,000 17,295,000  
           
Water Fund 10,000,000 7,000,000 5,000,000 4,500,000 Yes
Golf Fund 50,000,000 49,000,000 20,000,000 20,000,000 Yes
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  
154
Governmental Fund Statements
  • Financial resources modified accrual
  • Two statements
  • Balance Sheet
  • Statement of Revenues, Expenditures Changes in
    Fund Balance
  • Columns
  • Major funds and aggregate non major funds
  • Reconciliation to GWS required

155
Proprietary Fund Statements
  • Economic resources full accrual
  • Three statements
  • Balance Sheet or Statement of Net Position
  • Statement of Revenues, Expenses Changes in Net
    Position
  • Statement of Cash Flows
  • Columns
  • Major funds aggregate non major funds
  • Reconciliation to GWS not needed

156
Fiduciary Fund Statements
  • Economic resources full accrual
  • Two statements
  • Statement of Net Position
  • Statement of Changes in Net Position
  • One column for each fund type
  • No total columns
  • Agency funds external parties only

157
Budget to Actual Comparisons
  • Minimum presentation
  • Three columns for each governmental fund reported
  • Original budget
  • Final budget
  • Actual
  • Variance column is OPTIONAL
  • Reconcile differences to Statement of R E
  • In notes - Disclose expenditures gtbudget for
    individual funds

158
What MDA Isnt
  • The auditors responsibility
  • Replacement for transmittal letter
  • Made up only of graphics
  • Focus on entire reporting entity
  • Place to put anything
  • Boilerplate discussion
  • Technical jargon

159
What MDA Is
  • Managements responsibility
  • Discussion of the financial statements
  • Focus on PG reporting entity only
  • Analysis of financial position and results of
    operations
  • Explanation of significant changes

160
MDA Budget Variance Analysis
  • An analysis of significant variations
  • Original and final budget
  • Final budget and actual results
  • Only General Fund (or equivalent) required
  • Explain why variances occurred

161
MDA-Expectations
  • Description of currently known facts, decisions,
    or conditions
  • Through date
  • 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, and
    changes in net position)

162
Currently Known Facts
  • Award 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

163
Exploring Real World Financial Statements Exercis
es Government Accounting Problems Fund Balance
Activity
164
Accounting for Grants
  • Cost Principles
  • Reporting
  • Cost Concepts

165
Expenditures on Federal Grants Must Meet the
Allowable Cost Guidelines in
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