presented by diane reichard, cpa, cgma, cgfo, cpfo

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



Capital Construction Company completed the building & tendered its final bill of $2,000,000.

Capital Projects Fund: Construction Expenditures 2,000,000


Governmental Activities:Construction Work in Progress 2,000,000



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


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.


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


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.


The June 1, 2008, interest payment was made on schedule

Debt Service Fund: Expenditures—Bond Interest3,000

Cash 3,000


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


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.


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