FGFOA Boot Camp – Day 2Intermediate Government
Accounting
Presented by
Lynda M. Dennis, PhD, CPA, CGFO
Overview Review of Day 1
Basic governmental accounting & reporting concepts
Investments Fixed assets & depreciation Long-term liabilities Fund equity Financial reporting entityFinancial reporting Grant accounting
Review of Day 1Governmental Accounting
& Financial Reporting
Activities of Government
Governmental General Public safety
Business-type Transportation – air, land, sea Utilities Economic development
Fiduciary Agency Pension & investment trusts
Categories & Types of Funds
Governmental fundsGeneral FundSpecial revenue fundsCapital projects fundsDebt service fundsPermanent funds
Categories & Types of Funds
Proprietary funds Enterprise fundsInternal service funds
Fiduciary funds Agency fundsInvestment trust fundsPrivate-purpose trust fundsPension & OPEB trust funds
Measurement FocusWHAT is measured?
Economic resources measurement focusMeasure inflows & outflows of economic
resources Current (i.e. financial ) & noncurrent (i.e.
economic) Capital assets & long-term debt
Focuses on operational accountabilityWhether management efficiently uses
resources in providing services
Measurement FocusWHAT is measured?
Current financial resources measurement focus
Measure inflows & outflows of current financial resources
Cash & other liquid assetsPayables from cash & other liquid assets
Focuses on fiscal accountabilityWhether managers have met budgetary &
other legal financial requirements
Basis of AccountingWHEN are elements recognized?
Modified accrual basis of accountingRevenues recognized when measurable &
availableExpenditures recognized when incurred
Expected to be liquidated with current financial resources
Accrual basis of accountingRevenues recognized when earnedExpenses recognized when incurred
Investments
Investments
Securities/other assets acquired primarily for obtaining income/profit Safe & prudent
Investment policy dictates types & duration of investments Adopted by governing body Should also have
Periodic review of policy Periodic investment/portfolio reports
Investments
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
Problem Poster Children Orange County, California Florida Local Government Investment Pool US financial crisis
Valuation of Investments
Methodology depends on type of investment GASB Statement No. 72 effective FYE 9/30/16
Valuation methods Fair value Price that would be received to sell an asset or paid to transfer a liability
In an orderly transaction Between market participants At the measurement date Changes in FV = investment income
Valuation of Investments
Methodology depends on type of investment GASB Statement No. 72 effective FYE 9/30/16
Valuation methods Amortized cost
Historical cost + amortization of discount/premium Amortization = investment income Sales prior to maturity = gain/loss
Historical cost Principal dollars invested in security, contract, pool
Valuation of Investments
Fair value investments All debt & equity securities Open-end mutual funds Participating interest earning investment
contracts External investment pools
Valuation of Investments
Amortized cost investments Participating interest earning investment
contracts & certain money markets with remaining maturity at purchase of one year or less
Commercial paper Banker acceptances US Treasury, agency, & instrumentality securities
Valuation of Investments
Historical cost investments Non participating interest earning investment
contracts Nonnegotiable CDs Repurchase agreements
2a7-like eternal investment pools - NAV @ $1 Not SEC registered but acts as if it is NAV not at $1 use FV
Repurchase Agreements
Government transfers excess cash to broker-dealer/financial institution to earn additional investment income Broker-dealer/financial institution provides securities as
collateral to government & agrees to repay cash & interest in exchange for same securities at later date
Most considered nonparticipating interest earning investment contracts Valued at historical cost
Repurchase Agreements
Types of repurchase agreements Overnight repurchase agreement
Fixed interest rate Mature next day
Term repurchase agreement Fixed maturity date & interest rate
Open repurchase agreement No defined maturity date Either party may terminate daily Interest rate set daily
Reverse Repurchase Agreements
Master repurchase agreementDocuments transactions & ownership
interests
Reverse Repurchase Agreements
Opposite of repurchase agreement Government is seller-borrower who transfers specific securities to
broker-dealer/financial institution in return for cash Government agrees to repay cash & interest in exchange for return of
same securities at later date Done to address temporary cash needs without having to liquidate
investments Collateral securities remain on government’s balance sheet
Some risk exposure Interest rates shift & securities must be liquidated at loss to return cash
to broker/dealer
Internal & External Investment Pools
Internal investment pool Commingles funds of reporting entity Value 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)
Fixed Assets & Depreciation
Long-lived assets used by activities reported in governmental funds Includes
Infrastructure Intangible assets
NOT capital assets that are specifically associated with activities reported in proprietary & fiduciary funds
General Capital Assets
Land Buildings Improvements Other than Buildings Machinery and Equipment Construction Work in Progress Infrastructure (e.g., roads, streets, bridges)
Networks = assets providing particular type of service Subsystems of networks = all assets making up similar
portion/segment of network Intangible assets
Classifications of General Capital Assets
Capitalizing Assets
Record at historical cost or estimated historical cost Additions & improvements extending life = capitalize
No threshold specified by GAAP GFOA recommends $5,000 May have different levels for different types of assets
Follow the cost principle (subject to materiality threshold) Invoice cost or historical cost All other necessary & reasonable costs
to place asset into use Excluding forgone cash discounts &
financing charges
Assigning Costs to General Capital Assets
Record donated assets at fair value on date of gift (changes to acquisition value with GASB No. 72)
Use lower of book value or fair value if received from another fund
Not recorded at fund level for governmental funds
Assigning Costs to General Capital Assets
General capital assets are: Capitalized as governmental activities
accounts in the GWSDepreciated in the GWSDebited to expenditures in the
appropriate governmental fund
Accounting for General Capital Assets
Depreciation Accounting & Reporting
Recorded in GWS & certain fund level statements Depreciation not recorded on inexhaustible assets Depreciate over estimated useful life
No specific method required by GAAP Composite depreciation
Annual rate – dissimilar assets Group depreciation
Annual rate – similar assets Straight line most common method
Depreciation Accounting & Reporting
Option for infrastructure - modified approach Asset management system
Up-to-date inventory Condition assessments & summary using scale Annual estimate of cost to maintain at adopted level
Documentation of condition level Complete condition assessment at least every 3 years Disclose results of 3 most recent complete condition assessments
If don’t meet, change to depreciation in next FY
Capital Projects Funds
Involve long-lived assetsBuildings, roads & bridges, etc.
Usually Involve a construction project Have in-depth construction estimate & timelineRequire long-range planning & significant
financingProject-life rather than annual focus
Capital Projects Funds
Project authorization/preconstruction phase Usually included in multiyear CIP several years
before start of projectUsually requires long-term financing
Voter approval required for general obligation (property tax-supported) bonds or special sales taxes for capital projects
Apply for & obtain other LT financing &/or grants
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
“Matching” of depreciation to all related costs of an asset
Additions/betterments vs. replacements/ maintenance Capitalize costs of additions & betterments Don't capitalize replacements & maintenance
expenditures Replacements that are partly additions or
betterments Capitalize as appropriate Remove cost of old asset
Requires judgment to determine whether an asset has been enhanced
Costs Incurred After Acquisition
Long-term bonds AVT-supported bonds (GOBs) Revenue-supported bonds (PIRBs)
Long-term loans/mortgages Governmental grants (federal or state) Transfers from other funds Gifts from individuals/organizations
Typical Financing Sourcesfor General Capital Assets
Capital leases Certificates of participation (COPs) Special development districts
Tax increment financing Transportation development districts Etc.
Typical Financing Sourcesfor General Capital Assets
Accounting for Acquisition of Capital Assets
General Fund purchased office equipment for the Mayor’s office & paid $50,000 cash General Fund:
Expenditures – Capital Outlay 50,000
Cash 50,000
Governmental Activities:
Equipment 50,000
Cash 50,000
Government-wide & fund level (proprietary & fiduciary)
Remove original cost of assets being disposed
Only part is disposed
Remove pro-rata share of cost & related accumulated depreciation
Governmental fund level
Record proceeds received as revenue
Disposition of General Capital Assets
Accounting for the Disposition of General Capital Assets
Machine sold for $500. Originally purchased for $8,000 using GF revenues. It was fully depreciated.
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
Assume a building with an original cost of $100,000 (from tax-supported bonds) is demolished; cost of demolition was $5,000. It was fully depreciated.
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
Accounting for the Disposition of General Capital Assets
Approval is obtained for a federal grant as partial funding for a city’s office building project.
Capital Projects Fund:*Due from Federal Government 100,000Revenues
100,000
Governmental Activities:Due from Federal Government 100,000Program Revenues—Public Works—
Capital Grants and Contributions100,000
* In reality, grant would be recorded as revenue when received.
Accounting for Capital Projects
Will obtain interim financing, (to complete architectural & engineering design). Assume $50,000 was borrowed from the General Fund, to be repaid later from bond proceeds.
Capital Projects Fund: Cash 50,000Interfund Loans Payable—Current 50,000
Governmental Activities:No entry needed.
Accounting for Capital Projects
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 5,000,000Due 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
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
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
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 100,000Cash 1,900,000
Governmental Activities:Same entry.
CPF - Illustrative Transactions
Upon final inspection, the City incurred $75,000 of additional costs for interior rework. Work was done 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
Accounting for GeneralLong-Term Liabilities
& Debt Service
Bonds
Compensated Absences
Capital Leases
Year-end Accruals
Liability Basics
Current Obligations expected to be paid/liquidated in current fiscal
period Year-end accruals
Noncurrent Not expected to be paid/liquidated within current fiscal period
Bonds Capital leases Pensions & OPEB Compensated absences, claims & judgments
Debt & 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
General 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
Examples of General Long-term Liabilities
Bonds Payable& Debt Service
Bonds Payable
Issued for short-term purposes Examples
Tax/bond/grant anticipation notes Record as current liabilities
Issued for long-term purposes Example
Construction projects “Pay as you use”
Governmental funds record other financing use
Bond BasicsTypes of Bonds
Term All principal due in full at end of specified term Sinking funds often used to obtain better rates, etc.
Serial Bonds mature serially over entire term of the bonds Level debt service vs. level principal
Conduit debt obligation Government issues debt for third party (not part of reporting entity)
Not obligated to repay = do not record, notes only
Bond BasicsTypes of Bonds
Demand Government issued bonds with a put option
Bondholder can require government to pay principal & accrued interest Government must usually repay within 1-30 days = CURRENT
LIABILITY Exceptions to recording as current liability relate to take-out
agreements & related term Examples
Auction rate securities Commercial paper
Cash received from investors for interest accrued from date of bonds issue date Government-wide level
Usually recorded as credit to Accrued Interest Payable or Interest Expense
Fund levelMight be recorded as a revenue of DSFIn reality - usually recorded as credit to Accrued
Interest Payable or Interest Expense
Accrued Interest on Bonds Sold
Interest received by investors on most bonds issued by SLGs is exempt from federal (& some state) income taxes Investors willing to accept a lower interest rate
on these bonds (i.e. net of tax rate)
Governments formerly could issue bonds at a low tax-exempt rate, invest the proceeds in high yield taxable securities, then use the resulting arbitrage spread for capital/operating purposesKnown as ARBITRAGE
Arbitrage Rebates
Federal law & IRS regulations require arbitrage earnings, subject to certain exemptions, be paid to the IRS as arbitrage rebates Five year analysisVery technical field of expertise
Arbitrage Rebates
Financial resources set aside for principal &/or interest on general LT 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 Exception = interest & principal generally
recognized in period legally due FYE exception
Budgetary accounting typically used Serial bonds
Amount budgeted for revenues/IFTs usually amount needed that fiscal year for matured principal & interest
Accounting Debt Service
Term bonds (or deferred serial bonds) Additional revenues/IFTs usually budgeted to
meet sinking fund requirements as well as amount needed for current year interest
Sinking fund investments reported at fair value Changes in fair value reported as a component
of investment earnings
Accounting for Debt Service
Accounting for Debt Service
Bonds are issued on 1/2/09 & pay interest of $100,000 semiannually on 1/1 and 7/1. The fiscal year ends on 12/31/09.
Q: What amount of expenditures would be recognized in fiscal 2009?A:Only the 7/1/09 interest payment, or
$100,000, would be recognized as an expenditure of 2009.
B:Alternatively, both the 7/1/0 & 1/1/10 payments would be recognized as 2009 expenditures.
A city issued $100,000 of 6% serial general obligation (G.O.) bonds on Dec. 1, 2008. Interest on GOBs of $3,000 is due 6/1/09 & 12/1/09, & in decreasing amounts every 6/1 & 12/1 for the next 19 years. First principal maturity of $5,000 is due 6/1/09.
DSF or CPFCash 100,000
Other financing sources 100,000
Governmental Activities:Cash 100,000 Serial Bonds Payable 100,000
Illustrative Transactions— Serial Bond DSF
FY 2009 approved budget requires GF to transfer $11,000 to DSF for debt service (principal repayment of $5,000 & 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 Fund
Other financing uses 11,000
Due to DSF/Cash 11,000
Illustrative Transactions— Serial Bond DSF
On May 28, 2009, the transfer from GF was received.
Debt Service Fund:Cash 3,000 Due from General Fund
3,000
General FundDue to DSF 3,000
Cash 3,000
(Note: 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)
Illustrative Transactions— Serial Bond DSF
The June 1, 2008, interest payment was made on schedule
Debt Service Fund:
Expenditures—Bond Interest 3,000
Cash 3,000
Illustrative Transactions— Serial Bond DSF
Remaining $8,000 transfer was received from GF 11/29/09. On 12/1, City paid interest & principal maturing that date.
Debt Service Fund: Dr. Cr.Cash 8,000
Due From General Fund 8,000
Expenditures—Bond Principal 5,000
Expenditures—Bond Interest 3,000
Cash 8,000
General Fund:
Due to DSF 8,000
Cash 8,000
Illustrative Transactions— Serial Bond DSF
Adjusting entry on December 31, 2009:
Governmental Activities: Dr. Cr.
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.
Illustrative Transactions— Serial Bond DSF
Bond Refundings
Bond Refundings
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 early call date
Requires original bond indenture to have a call provision Bond holders usually receive a premium for an early call
Deferred gain = deferred inflow/deferred loss – deferred outflow
Bond Refundings
May do by issuing new debt Why do it this way?
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 & future earnings to repay old debt at early call date (& between then & now)
Advance Refundings
Legal or in-substance defeasance Old liability is removed from governmental activities In-substance
Proceeds placed in irrevocable trust & liability removed
Legal defeasance Debt legally satisfied based on debt instrument even
though not repaid
JEs similar to those for regular refundings
$100,000 of previously issued bonds are refunded with new $100,000 bonds with lower interest payments
When refunding (new) bonds are issued:
Debt Service Fund:
Cash (restricted) 100,000Other 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
Assuming old bonds are retired/defeased shortly after issue of refunding bonds:
Debt Service Fund: Dr. Cr.
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
Other Long-term Liabilities
Capital Leases
Governmental assets – fund level statements At inception
“Proceeds” = other financing sources “Expenditure” = NPV of future MLP/fair value
Payments made “Debt service” = expenditure
Governmental assets – government-wide statements At inception
“Proceeds” = LTD “Leased assets” = NPV of future MLP/fair value
Payments made “Debt service” = expenditure
Proprietary fund = same as private sector lease accounting
Follow GASB No. 62 criteria to determine if capital/operating lease
Record capital assets in GWS at present value of minimum lease payments or fair value, if lower
Record expenditure in governmental fund using asset & making payments
GASB current project will require all assets leased for more than 12 months to be accounted for as an intangible lease asset with a corresponding capital lease obligation.
Accounting for Capital Leases
Compensated Absences
Liability for unused sick/vacation time Accrue as earned if
Employee 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
Year-end Accruals
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
Unbilled Utility Revenues
Revenue & 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)
Fund Equity
Governmental Funds
Proprietary Funds
Fiduciary Funds
Fund Equity
Assets + deferred outflows – liabilities – deferred inflows = fund equity
Governmental fund level Fund balance
Nonspendable, restricted, committed, assigned, unassigned Proprietary & fiduciary fund level
Net position Net investment in capital assets, restricted, unrestricted
Government-wide – ALL activities Net position
Net investment in capital assets, restricted, unrestricted
Governmental Fund Equity
Categories based on relatively strength of control constraints
Nonspendable Fund Balance
Restricted Fund Balance
Committed Fund Balance
Assigned Fund Balance
Unassigned Fund Balance
Governmental Fund Balance
Nonspendable Can not be spent because EITHER
Not in spendable form Not expected to be converted to cash
Inventories Prepaids
Other LT loans & notes receivable Property acquired for resale Some exceptions Legally/contractually required to be maintained
intact Permanent fund corpus
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
Recording Transactions Exercise
The Financial Reporting Entity
Consists of the primary government and all component units for which the primary government is financially accountable
Component units are reported by Discrete (separate column) presentation
Separate column for major CUs Blended presentation
CU’s financial information included with appropriate fund columns of the PG
The Financial Reporting Entity
The Financial Reporting Entity
Primary government
Statute
Separately elected governing body
Special purpose governments
Separately elected governing body
Ultimately accountable to its electorate
Legally separate
Fiscally independent
Examples of Primary Governments
A state governmentGeneral purpose local government
City, town, parish, etc.Special purpose government
Separately elected governing bodyLegally separateFiscally independent of other state/local
governmentsExamples
School districts, special districts, etc.
The Financial Reporting Entity
Component Units
Financial accountability
Appoint voting majority of board
Modify/approve rate/fee changes or budget
Remove appointed governing body members at
will
The Financial Reporting Entity
Component Units
Financial accountability
Veto, overrule or modify other types of decisions
Appoint, hire, reassign or dismiss management
Create financial benefit or burden
The Financial Reporting Entity
Component Units Imposition of will
Ability to access CU resources Assumed obligation to finance deficits/provide
financial support Obligated in some manner for CU debts
CU provides financial benefit or is financial burden
Omission is misleading to financial statement users
Component UnitsCertain Tax Exempt Organizations
Relationship & significance Meet all three tests re: economic resources
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 Museums Hospitals
Examples of Component Units
Component Unit Issues
Different FS format 501 (c) (3) entities CUs with GTAs & BTAs
Differing fiscal year ends FYE within PG FY CU FYE 1st quarter of PG FY
Inter-agency transactions Role in MD&A - focus is PG
Reporting Entity Exercise
Financial Reporting
Government-wide Statements
Fund level Statements
Reconciling Items
Financial Reporting
Management responsibility GPFS required
Minimum acceptable “Liftable”
General Purpose External Financial Reports
Management’s discussion and analysis
Government-wide Fund financialfinancial statements statements
Notes to the financial statements
Required supplementary information (other than MD&A)
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
Government Wide Statements
Demonstrate OPERATIONAL accountability Results of operations Financial condition
Medium & LT effects of current & past decisions Service levels from existing revenues Effects of current-period operations on future service
needs Financial position & financial condition
Economic resources & full accrual
Government Wide Statements
Basic financial statements MD&A Statement of Net Position Statement of Activities Footnotes RSI
Pensions OPEB Infrastructure (modified approach) Budget to actual Investment trusts
Government Wide Statements
Required columns PG governmental activities PG business activities Total for PG Component units
Optional column for total reporting entity
Statement of Net Position
Similar to balance sheet Net position format encouraged
Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position
Balance sheet format allowed Assets + Deferred Outflows = Liabilities +
Deferred Inflows + Net Position Ordered as to relative liquidity
Separate amounts for due in more than one year Minimize internal balances
Not for CUs
Statement of Net Position
Similar to balance sheet Net position
Net investment in capital assets Net of accumulated depreciation & OS debt
Unspent proceeds – unspent & OS debt = restricted net position
Restricted net position Legal constraints
Unrestricted net position No designations on face
Statement of Activities
Similar to income statement Government purpose = services
Net expense/revenue column Three categories of expenses
Governmental activities At least at same level as fund statements
Business-type activities Different identifiable activities
Component units
Statement of Activities
Program revenues - columns Charges for services Operating grants & contributions Capital grants & contributions
Full accrual accounting = related capital assets reported on statement of net position
Statement of Activities
General revenues – bottom All others
Other Contributions to endowments & permanent
funds Special & extraordinary items Transfers
Fund Level Statements
Fund financial statements:Presented for major funds & nonmajor funds in
the aggregateTwo governmental fund financial statementsThree proprietary fund financial statementsTwo fiduciary fund financial statements
Fund Level Statements
Fund level financial statements: Short-term focus - financial accountability Reported based on type of fund
Governmental funds - modified accrual Proprietary funds - essentially same as for-
profit entities Information on fund level financial statements
must be reconciled to information reported in GWS
Major Funds
Applies only to governmental & enterprise funds Always general fund Never internal service fund
Meet both criteria 10% same element for fund category or type 5% same element for all fund type combined
Any other selected by government
City of Example
Calculation of Major Funds
Expenditures Major
Fund
Assets & Deferred Outflows
Liabilities & Deferred Inflows 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
Governmental Fund Statements
Financial resources & modified accrual Two statements
Balance Sheet Statement of Revenues, Expenditures & Changes in Fund
Balance Columns
Major funds & aggregate non major funds Reconciliation to GWS required
Proprietary Fund Statements
Economic resources & full accrual Three statements
Balance Sheet or Statement of Net Position Classified format Three categories of net assets
Statement of Revenues, Expenses & Changes in Net Position Statement of Cash Flows
Columns Major funds & aggregate non major funds
Reconciliation to GWS not usually needed
Fiduciary Fund Statements
Economic resources & full accrual Two statements
Statement of Fiduciary Net Position Statement of Changes in Fiduciary Net
Position One column for each fund type
No total columns Agency funds – external parties only
Budget to Actual Comparisons
Minimum presentation Three columns for each governmental fund reported
Original budget Final budget Actual
Variance column is OPTIONAL Title should be objective vs. subjective
Budget to Actual Comparisons
Budget basis Reconcile differences to Statement of
Revenues, Expenditures & Changes in Fund BalanceFace or in notes to RSI (or notes in
BFS) Disclose expenditures exceeding budget
for individual funds
What MD&A Isn’t
The auditor’s responsibility Replacement for transmittal letter Made up only of graphics Focused on entire reporting entity
PG only Place to put just about anything Boilerplate discussion & technical jargon
What MD&A Is
Management’s responsibility Discussion of the financial statements Analysis of financial position and results
of operations SIGNIFICANT changes
MD&ABudget Variance Analysis
An analysis of significant variations Original & final budget Final budget & actual results
Only General Fund (or equivalent) required Explain why variances occurred
MD&A-Expectations
Description of currently known (to management) facts, decisions, or conditions Through date of report 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, & other
changes in net position)
Examples of 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
Exploring Real World Financial Statements
Accounting for Grants
Cost Principles
Reporting
OMB REFORMS IMPLEMENTATION GUIDANCE
• Reason for changes• Super circular issued 12/26/13• Uniform guidance issued 12/19/14
• Effective 12/26/14• NFPs & IHEs have one-year grace period for procurement
standards• If opt for this, existing documented procurement policies
need to specify the entity continues to comply with A-110 for one additional year beginning post 12/26/14
• Codified within 2 CFR Part 200• Federal department & agency acceptance & implementation
• HHS most differences with Uniform Guidance• Most impacted
• Deferral of effective date for purchasing policies
AREAS OF REFORMS
• Administrative requirements• Common Rule• A-102• A-110• A-89
• Cost principles• A-21• A-87• A-122• Hospitals under DHHS (45 CFR Part 75, Appendix E)
• These retained until changed in the near future• Single Audit requirements• www.ecfr.gov
• Part 200• Subpart A-F• AppendicesV-XI
REFORMS - ADMINISTRATIVE
• Funding notices• 60 day notice required
• Agencies may change but no less than 30 days
• Standard format
REFORMS - ADMINISTRATIVE
• Pre-award consideration of proposal’s merit & each applicant’s financial risk• Disclosure of conflict of interest & relevant criminal
violations• Agencies to impose specific conditions where necessary
to mitigate potential risks of waste, fraud & abuse• Pass through entities specifically required to consider as
well
REFORMS - ADMINISTRATIVE
• Pre-award consideration of proposal’s merit & each applicant’s financial risk• Agency may use risk based approach to evaluate applicant
risk considering• Financial stability• Quality of management systems & ability to meet management
standards• History of performance• Reports & findings from Single Audits• Applicant ability to effectively implement statutory, regulatory,
or other imposed requirements
REFORMS - ADMINISTRATIVE
• In addition to previous requirements, Financial Management System MUST include • Effective IC over & accountability for all funds,
property & other assets• Comparison of expenditures with budget for each
award• Written procedures
• To implement cash management requirements• For determining allowability of costs in accordance
with cost principles
REFORMS - ADMINISTRATIVE
• Use of COSO internal control framework – best practice• Must have system of IC
• Specific certifications required by recipient management as part of application
REFORMS - COST PRINCIPLES
• Does not apply to fixed amount awards
• New guidance for indirect costs– De minimus 10% of Modified Total Direct Cost (MTDC)
– Pass through entities required to provide indirect cost rate to subrecipients
– Existing negotiated rates remain effective until re-negotiated
• Supplies increased to $5,000
• Budgeting for contingencies for certain awards
• Documentation of cost accounting practices
REFORMS - COST PRINCIPLES
• Salaries & benefits charged to awards– Personnel activity reports not explicitly required
– Focus is on – IC & procedures that account for all work performed
– Accurate personal compensation between federal & nonfederal projects
– May be required if entity records do not meet documentation standards
REFORMS - COST PRINCIPLES
• Salaries & benefits charged to awards– Must be based on records that accurately reflect work
performed
• Supported by IC system
• Incorporated into entity records• Nonexempt employee time records MUST indicate total hours worked
each day
• Reasonably reflect total activity performed
– Allocation based on budget estimates only not acceptable
– Time records for exempt employees
REFORMS – COST PRINCIPLES
• All purchase types must comply with entity’s procurement standards
• Purchase complies with entity’s documented & in place policies
• Purchase is necessary
• Open competition
• Conflict of interest policy
• Proper documentation for purchase
REFORMS - COST PRINCIPLES
• Procurement methods• Micro purchases < $3,000 ($2,000 for construction
& subject to Davis Bacon)• To extent practicable must distribute among qualified suppliers
• Small purchases < $150,000• Small & informal procurement methods
• Need quotes (price &/or rate) from “adequate” number qualified sources• Entity written policy to define “adequate”
• Sealed bids > $150,000• Only SLGs & tribes required to advertise & open
bids publicly
• Preferred for construction projects
REFORMS - COST PRINCIPLES
• Procurement methods• Competitive proposals > $150,000
• More than one source
• Written method of evaluation & selection needed
• Preferred for fixed fee or cost reimbursement
• Award MUST go to “most advantageous” proposal
• Sole source must meet at least one of the criteria• Single source availability
• Public emergency
• Written request made & approved by grantor
• Competition determined to be inadequate
REFORMS - COST PRINCIPLES
• Procurement methods• Profit MUST be negotiated as separate element of price
when there is no cost competition• Noncompetitive purchases – all levels, special
circumstances• More focus on performance vs. compliance
• Formal contract administration & project management procedures should be adopted & modified for• Collection of performance data that ties contractor
performance to contract/PO requirements• Links between performance management activities &
performance reporting required for efficiency purposes• Establishment of performance metrics & corrective action
procedures
REFORMS – MONITORING & REPORTING
• Recipient responsible for monitoring compliance & performance expectations
• Federal entity required to use OMB approved data elements• Recipient must submit reports (annually – quarterly)
• Annual reports due within 90 days
• Quarterly reports due with 30 days
• Performance reports MUST contain• Comparison of accomplishments to objectives
• Reason goals not met
• Other information as appropriate
REFORMS – MONITORING & REPORTING
• Construction performance reports only when necessary above
• Inspections
• Certification of percentage of completion
• Recipient MUST notify grantor – as soon as a condition is known
• Problems, delays, adverse conditions materially impacting performance & objectives
• Favorable developments
REFORMS – SINGLE AUDIT
• SEFA• Required to include total amount to
subrecipients • Each program
• Noncash assistance etc. in SEFA• Notes required to state whether entity
elected to use 10% de minimis cost rate
REFORMS – SINGLE AUDIT
• Auditee required to request peer review report in RFP• FAC to make reporting packages available to public• Follow up & corrective action – auditee
• Summary schedule of prior findings to include FS related findings
• Describe reasons for any recurring finding
• Management decisions may be based on FS findings
Allowable costs
Necessary & reasonable for efficient performance of the federal award
Employee compensation, cost materials, depreciation, etc.
Special/unusual costs require advanced understanding with awarding/cognizant agency
Unallowable costs
Alcoholic beverages, bad debt expense, CEO salary (some exceptions)
Allowable Costs in Federal Grants
Questioned 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.
Accounting for Grants
Cost Concepts
Cost and Cost Concepts
Cost object Any item/purpose for which costs need to be
measured Grant, program, division, etc.
Direct cost Can be clearly identified with/directly related to a
single cost object Economically feasible manner
Indirect cost Cannot be clearly identified with/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
Cost Allocation
NOT cost assignment Direct costs
Allocation criteria Cause and effect
Most preferred Benefits received Equity Ability to bear
Least preferred
Cause & Effect
AKA causal criterion Identification of activity causing costs to be
incurred Difficult for indirect costs Statistical relationships vs. assumed
relationship Best to use
Benefits Received
AKA beneficial relationship Identification of users of outputs from activity Costs allocated among users proportional to
benefit Direct costs – proxy for benefits
Equity
Use when cost allocation used for reimbursement Grants
Reasonable/fair means of establishing reimbursement basis Fairness not an operational criterion
Ability to Bear
Cost allocation in proportion to some user attribute Attribute presumed to support charging costs
to user Commercial vs. residential customers
Least preferred
Allocation Methods
Stand-alone Relative sales value (direct cost) Physical units
Stand Alone Allocation Method
Closest to “ability to bear” Allocates indirect costs to each final cost
objective Proportional to SAC to independently
accomplish one objective
Stand Alone Allocation Method
Disadvantages Allocation can change - SAC does not SAC changes, total basis changes SAC may not exist Assumes indirect costs functionally related to
SAC
Stand-Alone Method
Activity A: 500 X 750,000 = $375,000 1,000
Activity B: 400 X 750,000 = $300,000 1,000Activity C: 100 X 750,000 = $75,000 1,000
Problems: An allocation of indirect costs can change Stand-alone costs may not exist
Relative Sales Value Method(Direct Cost Method)
Close to “ability to bear” & “cause & effect” Improvement over stand alone
Sales value/direct cost as allocation basis
Relative Sales Value Method(Direct Cost Method)
Assumes indirect costs incurred in same proportion & for same reason as direct costs (OMB “simplified method”) No change to expense for each objective
compared to total direct costs Increases total reported for each objective
Direct Cost Method
Cost Total Relative Indirect Allocated TotalObjective 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
Physical Units Allocation Method
Consistent with “cause & effect” 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
Cost DeterminationAllocation Steps
1. Reason(s) for cost information
2. Cost objects or purposes
3. Types of relevant costs
4. Assign direct costs to cost objects
5. Select allocation base(s) or cost drivers
6. Allocate indirect costs
7. Ensure appropriateness
Single Stage Allocation
LaborLabor Hours Cost Driver
Rent
A
BLabor Hours Cost Driver
CCost Assignment
Allocation (Based on Labor Hours)
Two Stage Allocation
PurposeNatural Expense
Labor
Space Rent
Equipment Rental
Labor Hours
Cost Driver
Labor Hours
Cost Driver
Data
Processing Computer Time Cost Driver
Cost Assignment
Stage 1 Allocation (Based on Labor Hours)
Stage 2 Allocation (Based on Computer Time)
A
C
B(1)
(2)
Activity Based Costing
ABC Flow Diagram
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
Cost Allocation Exercise