Presented by Diane Reichard, CPA, CGMA, CGFO,
CPFO
Agenda
Review Government Fund Accounting
Various Accounting Issues◦Investments◦Fixed assets and depreciation◦Long-term liabilities◦Fund equity
Financial Reporting Grant Accounting
Taxpayers
Citizens
Oversight & legislative
bodies
Investors & creditors
Management
Self-balancing set of accounts
◦Cash and financial resources
◦Liabilities
◦Residual equity/balances
◦Changes in net assets
At least one = General fund
More funds = more
complexities Minimum number of funds
◦Sound financial management
◦Meet legal requirements
◦Based on accounting objectives
New accounting standard
Change in state constitution
Grant required
New activity
Level of financial control
Management
Governmental funds◦General operations◦Financial resources
Proprietary funds◦Business type operations◦Economic resources
Fiduciary funds◦Trust agreement◦Agency relationship◦Resources held for others
Governmental funds◦General◦Public Safety
Proprietary funds◦Economic Environment - Utilities
◦Transportation – air, land, sea Fiduciary funds
◦Agency◦Pension Trust
General Fund
Special Revenue Funds
Debt Service Funds
Capital Projects Funds
Permanent
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
Enterprise◦Fees charged to external users
◦Operating net income
Internal Service◦Reimbursement from: Primary government users
Component units
Other governments
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
Agency
Investment Trust
Private-Purpose Trust
Pension and OPEB Trust
Full accrual accounting
Economic resources
measurement focus
◦Capital assets & long-term
liabilities ARE recorded
“Additions ” and “Deductions”
◦Not “revenues” or “expenses”
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
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
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
WHEN to measure
◦When transaction/event recognized
◦Accrual
◦Modified accrual
Measurable and available
◦Trust Funds
Expendable or non expendable
WHEN to measure
◦Revenues recognized when
earned
◦Expenses recognized when
incurred
WHEN to measure
◦Revenues recognized when measurable
& available
60 day criteria
◦Expenditures recognized when incurred
Expected to be liquidated with current
financial resources
Measurement Focus
Basis of Accounting
Government-wide statements
Economic resources
Accrual
Governmental fund statements
Current financial resources
Modified accrual
Proprietary fund statements
Economic resources
Accrual
Fiduciary fund statements
Economic resources
Accrual
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
Operations guide
Communication device
Financial plan
Policy document
Legal standing
◦Legal level of control
◦Administrative level of control
Budgetary basis of accounting
Timing
Perspective
Entity
Preparation
Approval
Execution
Evaluation
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
Fraud prevention
Detection
Deterrence programs
A process effected by an entity’s 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
Control environment
Risk assessment
Control activities
Information and communication
Monitoring
Fund Classification Exercise
Fund Exercise – Part IIBudget Exercise
Internal Control Exercise
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 - CU’s financial
information included with appropriate fund columns of the PG
The Financial Reporting Entity
Statute Separately elected governing body Special purpose governments
◦Legally separate elected governing
body
◦Ultimately accountable to its
electorate
◦Fiscally independent
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.
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
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
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
Governmental component units◦ Dependent special districts◦ Port authorities◦ Universities◦ Hospitals
Not-for-profit component units◦ Volunteer fire departments◦ Libraries and Museums◦ Hospitals
Component Unit Examples
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 MD&A - focus is PG
Florida law◦Florida Statutes 218.415 and 280
◦Allowable securities
◦Security maturity
◦Credit quality
Bank deposits ◦FDIC insurance
◦Collateralization
42
Investment Policy Basics
State/local laws
Scope
Risks
Objectives
Standards of Care
Investment Committee
43
Financial Institutions
Safekeeping
Internal controls
Investment instruments
Investment limitations
Reporting
Policy approval
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
44
Fund type◦General
◦Enterprise
◦Trust funds
Exclusions - Debt service reserve funds
Adopted by governing body◦Periodic review of policy
◦Periodic investment reports45
Safety of principal◦Security type
◦Bank deposits
◦Local government pools Liquidity
◦Money market funds, bank, pools Yield
◦Market influenced
◦Watch credit risk46
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
47
Source of security investments Primary /regional dealers
◦Capital strength, references, audited financial statements
Banks◦Capital, assets, management, credit rating
48
List allowable investments◦ Define terms◦ Credit criteria (Moody’s, S&P)◦ Maturity restrictions - may vary by fund
◦ Security list
49
Treasuries Agencies Money market funds Repurchase agreements Securities lending
Callable/puttable securities
Commercial paper Mutual funds Bank deposits CDs
Diversification◦Maturity
◦Credit
◦Issuer
Competitive bids for securities◦Bloomberg
Fund type◦Strategy may differ based on purpose of fund
50
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
51
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
52
Separate record keeping/transaction
Custodial safekeeping Written confirmations Procedures for transactions
◦Criteria for selection◦Who to call◦Required forms◦Competitive bids◦Transfer funds
53
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
54
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 conditionwww.fitchibca.com
www.moodys.com
www.standardandpoors.com
55
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
56
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
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
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
Fair value◦Price willing buyer would pay seller in arm’s 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
All debt and equity securities Open-end mutual funds Participating interest earning
investment contracts External investment pools
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
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
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
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
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
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)
Assets Liabilities Revenues - gains Expenses/expenditures - losses
Other sources and uses
Inventory Accounts Receivable Prepaid expenses Property, plant and
equipment◦ Valuation and impairment◦ Capitalization and depreciation
Restricted assets
Purchase (financial resources)Expenditures – Supplies, etc.
Cash/AP
Consumption (economic resources)
Inventory – Supplies, etc. Cash/AP
Current financial resourcesExpenditures
Cash/AP
Non current financial resourcesPrepaid expenses
Cash/AP
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
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
Capitalized as governmental activities accounts in the GWS
Depreciated in the GWS Debited to expenditures in the appropriate governmental fund
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
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
Capital assets are depreciated over their estimated useful lives◦Exceptions
Land Construction in progress Certain collections Infrastructure reported using the
modified approach
Straight line is the most commonDepreciate at an annual rate over the estimated useful life◦Composite – for dissimilar assets
◦Group – for similar assetsReport depreciation expense in GWS◦Disclose depreciation expense charged to functions in notes
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
Additions/improvements vs. replacements/maintenance◦ 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
Costs Incurred After Acquisition
General Fund paid $50,000 cash for office equipment for the Mayor’s office.
General Fund: Expenditures – Capital Outlay50,000
Cash 50,000
Governmental Activities: Equipment 50,000 Cash 50,000
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
Disposition of Capital Assets
Sold fully depreciated machine for $500. Originally purchased for $8,000 using GF revenues.
General Fund:Cash 500 Revenues—Misc. (or OFS) 500
Governmental Activities:Cash 500Accumulated Depreciation 8,000 Equipment 8,000 Gain on Sale of Equipment 500
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 5,000Accumulated Depreciation 100,000
Buildings 100,000 Cash 5,000
Disposition of Capital Assets
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
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
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
Capital Asset Financing Sources
Capital leases Certificates of participation
(COPs) Special development districts
◦ Tax increment financing
◦ Transportation development districts
Capital Asset Financing Sources(continued)
Nondepreciable until complete Contract accounting applies
◦ Retainage accounts
Interest costs incurred during construction◦ NOT capitalized for governmental
assets
◦ IS capitalized for business-type assets
Federal grant approval is obtained as partial funding for a city’s office building project.
Capital Projects Fund:*Due from Federal Government 100,000
Revenues 100,000
Governmental Activities:Due from Federal Government 100,000
Program Revenues—Public Works— Capital Grants and Contributions 100,000
* In reality, grant would be recorded as revenue when received.
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.
Accounting for Capital Projects - Grant
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 Payable—Current 50,000
Governmental Activities:No entry needed.
Accounting for Capital Projects - Interfund
The $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.
Accounting for Capital Projects - Interfund
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 Sources—Bond 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
Accounting for Capital Projects - Bond
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
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.
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
Accounting for Capital Projects
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.
Capital Projects Fund Transaction
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.
Accounting for Capital Projects
Modified accrualExpenditures – Capital Outlay
Cash/AP
Full accrualProperty, Plant & Equipment
Cash/APDepreciation Expense
Accumulated Depreciation
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
Long-term Liabilities
Unearned revenues Accruals
◦ Year end◦ Compensated absences
Interfund debt Long term debt
◦ Types◦ Accounting
Liabilities paid from restricted assets
Modified accrual – not available
Full accrual – earnings process not complete
Cash Unearned/Deferred Revenue
General long-term liabilities◦Bonds, notes, compensated absences, etc.
General obligation bonds◦Aka “full faith and credit”
Revenue bondsMortgages/LoansLitigation
Reported in GWS but not in fund financial statements
Modified accrualExpenditures – Debt Service
PrincipalExpenditures – Debt Service Interest
Cash/AP
Full accrualLT Debt Outstanding (principal)Interest Expense
Cash/AP
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
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
Reporting Long-term Liabilities
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
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
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
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
Accrued Interest - Bonds Sold
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
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
Arbitrage Rebates
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
Debt Service Funds
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
Accounting 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.
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 CPFCash 100,000
Other financing sources 100,000
Governmental Activities:Cash 100,000 Serial Bonds Payable 100,000
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
OFS—Interfund Transfers In 11,000
General FundOther financing uses 11,000
Due to DSF/Cash 11,000
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 FundDue to DSF 3,000
Cash3,000
* 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.
Serial Bond DSF Transactions
The June 1, 2008, interest payment was made on schedule
Debt Service Fund: Expenditures—Bond Interest3,000
Cash 3,000
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
Expenditures—Bond Principal 5,000 Expenditures—Bond Interest 3,000
Cash 8,000General Fund:Due to DSF 8,000
Cash 8,000
Serial Bond DSF Transactions
Adjusting entry on December 31, 2009.
Governmental Activities: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.
Serial Bond DSF Transactions
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
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)
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
$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.
Debt Refunding Transactions
Assume old bonds are retired/ defeased shortly after issue of refunding bonds.
Debt Service Fund:
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.
Debt Refunding Transactions
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
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
Liability for unused sick/vacation time
Accrue as earned if: ◦ Employee’s 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
Modified accrual (payable from current financial resources)
Expenditures Accrued Expenditures
Full accrualExpenses
Accrued Expenditures
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
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”
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
Non spendable◦ Inventories, permanent fund
corpus Restricted Committed Assigned UnassignedCategories based on relative
strength of control constraints
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
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
Recording Transactions Exercise
Compliance Exercise
Government-wide Statements
Fund level StatementsReconciling Items
Management responsibility GPFS required
◦ Minimum acceptable
◦ “Liftable”
Management’s discussion and analysis
Government-wide Fund financial
financial statements statements
Notes to the financial statements
Required supplementary information (other than MD&A)
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
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
MD&A Statement of Net Position Statement of Activities Footnotes RSI
◦Pensions◦OPEB◦ Infrastructure (modified
approach) ◦Budget to actual◦ Investment trusts
Required columns◦ PG governmental activities
◦ PG business activities
◦ Total for PG
◦ Component units
Optional column for total reporting entity
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
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
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
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
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
City of Example
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
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
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
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
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
>budget for individual funds
The auditor’s responsibility Replacement for transmittal
letter Made up only of graphics Focus on entire reporting entity Place to put anything Boilerplate discussion Technical jargon
Management’s responsibility Discussion of the financial
statements Focus on PG reporting entity
only Analysis of financial position and
results of operations Explanation of significant
changes
An analysis of significant variations◦ Original and final budget
◦ Final budget and actual results Only General Fund (or equivalent)
required
Explain why variances occurred
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)
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
Cost PrinciplesReporting
Cost Concepts
OMB Circular A-21 Educational institutions
OMB Circular A-87 State & local governments
OMB Circular A-122 Not-for-profit organizations
Expenditures on Federal Grants Must Meet the Allowable Cost Guidelines in:
Allowable costs Necessary and reasonable for efficient
performance of the federal awardEmployee compensation, cost of materials,
depreciation, etc.Special/unusual costs require advanced
understanding with awarding/cognizant agency
Unallowable costs Alcoholic beverages, bad debt expense,
CEO salary (some exceptions)
Federal Grants-Allowable Costs
Unallowable
Costs
Certain costs are specifically unallowable under the general and special award conditions or agency instructions. (They may include, but are not limited to, pre-grant and post-grant costs and costs in excess of the approved grant budget, either by category or in total.)
Undocumented
Costs
These costs are charged to the grant, for example, to demonstrate their relationship to the grant or the amounts involved, but they lack adequate detailed documentation.
Unapproved
Costs
These costs are not provided for in the approved grant budget, or they require the awarding agency's approval because of the grant or contract provisions or applicable cost principles, but no evidence of such approval can be found.
Unreasonable
Costs
These are costs incurred that may not be consistent with the actions that a prudent person would take in the circumstances, or in-kind contributions to which unreasonably high valuations have been assigned.
Four parts
General
Pre-Award Requirements
Post-Award Requirements
After-Award Requirements
Small awardso Federal awarding agencies permitted
to make exceptions & to apply less restrictive requirements without prior OMB approval
•Award-by-award basis
•A-110 vs. statute – statute governs
Financial management system
Property standards
Procurement standards - lowest & best
Reports and records
Termination and enforcement
Appendix A of Circular •EEO
•Anti-kickback
•Davis-Bacon
•Contract Work Hours & Safety Standards Act
•Clean Air Act
•Anti-lobbying
•Others
•Facility and administrative costs
•Common/joint objectives
•Depreciation, G&A expenses, libraries, etc.
•Selected items
•Certificate of F&A costs
•Certification of charges
•Federal Cost Accounting Standards•Cost estimates for proposals consistent with accumulating & reporting costs
•Costs allocated only once
•Accounting for unallowable costs
•Time periods for cost accounting periods
•Disclosure statement must be prepared and submitted
•Allocation methods provided in circular
•Single rate
•Multiple rates
•Negotiated lump-sum
•Predetermined or negotiated fixed rates
•Carry-forward provisions
•Simplified method (small institutions)
•Attachment D – Public assistance cost allocations for programs administered by agency
•Attachment E - Indirect cost rates•Simplified method - IDC benefit
functions to approximate same degree•Multiple allocation base method - IDC
benefit functions in varying degrees•Special indirect cost rates - Single rate
not appropriate (location, support required)
Cost object ◦ Any item/purpose for which costs
must be measured Grant, program, division, etc.
Direct cost ◦ Can be clearly identified with or
directly related to a single cost object Economically feasible manner
Indirect cost ◦ Cannot be clearly identified with or
directly related to a single cost object
Common cost◦ Related to two or more cost objects
Cost objects could be achieved separately Occupancy costs – multiple use facility
Joint cost ◦ Related to two or more cost objects
Cost objects can not be achieved separately
Annual meeting costs, certain publications/brochures
Cost and Cost Concepts
Direct Cost - NO cost assignment Allocation criteria
◦ Cause and effect (most preferred)◦ Benefits received◦ Equity◦ Ability to bear (least preferred)
Allocation Methods◦ Stand-alone◦ Relative sales value (direct cost) ◦ Physical units
AKA causal criterion Identify activity causing costs to
be incurred Difficult for indirect costs Statistical relationships vs.
assumed relationship Direct Cost Allocation Method Physical Units Cost Allocation
Method
AKA beneficial relationship Identify users of outputs from
activity Costs allocated among users
proportional to benefit Direct costs – proxy for benefits
Use when cost allocation is necessary for grant reimbursement
Reasonable/fair means of establishing reimbursement basis◦ Fairness is not an operational
criterion
Cost allocation in proportion to some user attribute
◦ Attribute supports charging costs to user
◦ Commercial vs. residential customers
Stand Alone Cost Allocation Method
Direct Cost Allocation Method ◦ Improvement over stand alone
method
Allocates indirect costs to each final cost objective
Proportional method independently accomplish one objective
Disadvantages◦ Allocation can change - SAC does not◦ SAC changes, total basis changes◦ SAC may not exist◦ Assumes indirect costs functionally
related to SAC
Activity A: 500 X 750,000 = $375,000 1,000
Activity B: 400 X 750,000 = $300,000 1,000
Activity C: 100 X 750,000 = $75,000 1,000
Problems: An allocation of indirect costs can change Stand-alone costs may not exist
Sales value/direct cost used as basis for allocation
Assumes indirect costs incurred in same proportion and for same reason as direct costs
◦ OMB calls the “simplified method”◦ No change to expense for each objective
compared to total direct costs◦ Increases total reported for each
objective
Cost Total Relative Indirect Allocated Total
Objective Direct Share Costs Costs Costs Costs
Activity A: 2,500,000 2,500 x 750,000 =$625,000 3,125,000 3,000
Activity B: 300,000 300 x 750,000 = 75,000 375,000 3,000
Activity C: 200,000 200 x 750,000 = 50,000 250,000 3,000 $3,000,000 $750,000 $3,750,000
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
1. Reason(s) for cost information2. Cost objects or purposes3. Types of relevant costs4. Assign direct costs to cost objects5. Select allocation base(s) or cost drivers6. Allocate indirect costs7. Ensure appropriateness
Labor Labor Hours Cost Driver
Rent
A
BLabor Hours Cost Driver
CCost Assignment
Allocation (Based on Labor Hours)
PurposeNatural Expense
Labor
Space Rent
Equipment Rental
Labor Hours
Cost Driver
Labor Hours Cost Driver
Data Processing Computer Time
Cost DriverCost AssignmentStage 1 Allocation (Based on Labor Hours)Stage 2 Allocation (Based on Computer Time)
A
C
B(1)
(2)
Labor
$1,600k Facilitator $1,000k
EquipRent $400k
Contracting $200k
Material $600k
Storage $400k
Resources
Stage 1 Cost Drivers
Activity Cost Pools
Stage 2 Cost Drivers
Cost Objectives
Deliver $1,800k
Contract $450k
Setup $700k
Process $1,250k
Basic $1,973k
Enhanced $2,227k
.2 .3
.3
.25
.25
.6
.75
.25
.4
.7 .167 .833