Governmental Accounting for Beginners: How and Where to Start November 20, 2019

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Learning Objectives

•List the types of governmental funds •Define component units and give examples •Identify financial statements required for fund accounting and government‐wide reporting •Identify GASB standards effective in the near future

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Background on Differences

Who Writes S&L Government GAAP?

•Governmental Accounting Standards Board • Since 1984

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Who Follows GASB GAAP?

State and Local Governments Public Corporations

Other organizations are governmental if they have one or more of the following characteristics: • Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization's governing body by officials of one or more state or local governments •The potential for unilateral dissolution by a government with the net position reverting to a government; •Or the power to enact and enforce a tax levy. Organizations are presumed to be governmental if they have the ability to issue directly debt that pays interest exempt from federal taxation. • Rebuttable presumption if it’s the only characteristic 5

Hierarchy of GAAP

Category A •GASB Statements Category B •GASB Technical Bulletins, GASB Implementation Guides, and literature of the AICPA specifically cleared by GASB Nonauthoritative •GASB Concept Statements, FASB Literature, FASAB Literature, IASB Literature, AICPA Literature Not Cleared by GASB

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Conceptual Framework

•Focus on needs of citizens and elected representatives

Why Is It Different Than Commercial GAAP

Organizational purposes

Processes of generating revenues

Stakeholders

Budgetary obligations

Propensity for longevity

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Organizational Purpose

•Enhance or maintain the well‐being of citizens • Financial return on investment is not a primary goal

Sources of Revenue

•Taxes are principal source of revenue • Nonexchange transactions

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Relationship with Stakeholders

•Amount of taxes paid does not directly correlate with level of services received

•Cost of services information

Role of the Budget

•Budget has legal significance • Legally authorize the raising of public resources and constrain the purposes for which public resources may be spent

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Potential for Longevity

Ongoing power to tax and ongoing need for public services

Example: Only half of new employer firms last 5 years and one‐third last 10 years or more • https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf, accessed on July 1, 2016 The number of general purpose governments remains steady— 38,910 in 2012 versus 38,463 in 1957 • http://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk, accessed on February 9, 2016

Result of Differences

• The view that capital assets are primarily used to provide services to citizens rather than to contribute to future cash flows • The measurement and recognition of certain types of revenues (for example, taxes and grants) • The use of fund accounting and budgetary reporting to meet public accountability needs • The use of accountability notions rather than equity control to define the financial reporting entity • The view that governments and their pension and retiree healthcare plans generally are ongoing entities with the ability to take a career‐long view of the employment exchange.

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Key Questions FS Answer

• Did the government’s ability to provide services improve or decline from the previous year? • Were the government’s current‐year taxes and other sources of resources sufficient to cover the cost of current‐year services? Was part of the burden of paying for current services shifted to taxpayers in future years, or is the government exhausting its reserves or rainy day funds? • How did the government finance its activities and meet its cash requirements? Does the government have the capacity to meet future financial obligations? • What are the government’s spending priorities? What sources of resources support the various programs?

Key Questions FS Answer, Cont’d

• Has the government obtained and used resources in accordance with its adopted budget and other legal requirements? • What resources currently are available for future expenditures and to what extent are resources limited to specified uses? Does the government have the capacity to meet future service obligations? • Has the government provided its services in an efficient and effective manner? • Does the government have sufficient resources and flexibility to weather the drop in revenues that accompanies economic downturns and still meet its core commitments?

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Basics of Financial Reporting

Concept Statement 1 ‐ Objectives

Comparing actual financial results with the legally 1 adopted budget

2 Assessing financial condition and results of operations

Assisting in determining compliance with finance‐related 3 laws, rules, and regulations

4 Assisting in evaluating efficiency and effectiveness

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Elements of FS

•Concepts Statement No. 4, Elements of Financial Statements, defines the items that are reported in governmental financial statements

•GASB’s definitions of the elements of financial statements reflect the unique characteristics of government

Financial Position ‐ Assets

•Assets are resources with present service capacity that the government presently controls.

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Definition

Present Service Capacity

•The present service capacity of a resource that is an asset is its existing capability to enable the government to provide services, which in turn enables the government to fulfill its mission.

Control

• Control of an asset is the ability of the government to utilize the resource’s present service capacity and to determine the nature and manner of use of the present service capacity embodied in the resource.

Financial Position Elements ‐ Liabilities

•Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid.

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Definitions

Obligation

•An obligation is a social, legal, or moral requirement, such as a duty, contract, or promise that compels one to follow or avoid a particular course of action

Present Obligation

•The event that created the liability has taken place. This distinguishes the item from a commitment that may become a liability in the future when the event giving rise to the liability occurs.

Financial Position Element ‐ Deferreds

A deferred outflow of resources is a consumption of net position by the government that is applicable to a future reporting period.

A deferred inflow of resources is an acquisition of net position by the government that is applicable to a future reporting period.

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Fun Fact

Recognition of deferred outflows of resources and deferred inflows of resources should be limited to those instances identified by the GASB in authoritative pronouncements

Financial Position –Net Position

•Net position is the residual of all other elements presented in a statement of financial position.

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Resource Flows

An outflow of resources is a consumption of net position by the government that is applicable to the reporting period.

An inflow of resources is an acquisition of net position by the government that is applicable to the reporting period.

Key Definitions

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General‐purpose governments

•General‐purpose governments are governmental entities that provide a range of services, such as states, cities, counties, towns, and villages.

Special‐purpose governments •Special‐purpose governments are legally separate entities that perform only one activity or only a few activities. • Cemetery districts, levee districts, assessment districts, drainage districts, school districts, utilities, hospitals or other health care organizations, public benefit corporations and authorities, public employee retirement systems, public colleges and universities, public transportation systems, airports, governmental external investment pools, and public entity risk pools.

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Financial Reporting Entity ‐ Defined

• A primary government, organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity’s FS to be misleading or incomplete. • The nucleus of a financial reporting entity usually is a primary government. • A governmental organization other than a primary government (such as a CU, a JV, a jointly governed organization, or other stand‐alone government) serves as the nucleus for its own reporting entity when it issues separate FS.

Financial Reporting Entity

•The concept underlying the definition of the financial reporting entity is that elected officials are accountable to their constituents for their actions.

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Primary Government

•A state government or general purpose local government.

•A special‐purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments.

Fiscally Independent •A special‐purpose government is fiscally independent if it has the authority to do all three of the following: • Determine its budget without another government's having the authority to approve and modify that budget • Levy taxes or set rates or charges without approval by another government • Issue bonded debt without approval by another government

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Component Units

• Legally separate organizations for which the elected officials of the primary government are financially accountable.

• A component unit can be another organization for which the nature and significance of its relationship with a primary government is such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete.

Qualifications to be Component Unit

•A primary government is financially accountable if it appoints a voting majority of the organization's governing body and • it is able to impose its will on that organization or • there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.

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Qualifications to be Component Unit •The primary government is financially accountable if an organization is fiscally dependent upon it and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government regardless of whether the organization has a separately elected governing board, a governing board appointed by a higher level of government, or a jointly appointed board.

Qualifications to be Component Unit

• A legally separate, tax‐exempt organization should be reported as a component unit if all of the following criteria are met: • The economic resources received or held by the separate organization are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents. • The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the economic resources received or held by the separate organization. • The economic resources received or held by an individual organization that the specific primary government, or its component units, is entitled to, or has the ability to otherwise access, are significant to that primary government.

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Appendix C GASB 61

*Note: A potential component unit for which a primary government is financially accountable may be fiscally dependent on and have a financial benefit or burden relationship with another government. An organization should be included as a component unit of only one reporting entity. Professional judgment should be used to determine the most appropriate reporting entity (¶21b and ¶34–¶38). A PCU = Potential component unit primary government that appoints a voting majority of the governing board of a CU = Component unit component unit of another government should make the disclosures required by PG = Primary government ¶68 for related organizations. JV = Joint venture

CU vs Investment

•If a governmental entity owns a majority of the equity interest in a legally separate organization (for example, through acquisition of its voting stock), the governmental entity's intent for owning the equity interest should determine presentation. • If the governmental entity's intent is to directly enhance its ability to provide governmental services, report as a CU

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Presentation

Discretely Blended Presented

Blending Criteria

•The component unit's governing body is substantively the same as the governing body of the primary government, and • there is a financial benefit or burden relationship between the component unit and the primary government or • management of the primary government has operational responsibility for the component unit.

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Blending Criteria

• The component unit provides services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefits the primary government even though it does not provide services directly to it.

• The component unit's total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government.

Blending Criteria

•The component unit is organized as a not‐for‐profit corporation in which the primary government is the sole corporate member as identified in the component unit's articles of incorporation or by‐ laws.

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Discrete Presentation

•Component units are included in the financial reporting entity by discrete presentation if they do not meet the criteria for blending.

Fiscal Year Ends

•A primary government and its component units may have the same or different fiscal year‐ends.

•If there are different fiscal year‐ends, the financial reporting entity reports using the primary government's fiscal year and incorporates financial statements for the component units' fiscal years ending during the reporting entity's fiscal year.

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Financial Reporting Requirements

Minimum Required Financial Presentation

Management Discussion & Analysis (RSI)

Basic Financial Statements • Government‐wide Financials • Fund Financials •Notes to FS Required Supplementary Information (RSI)

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Special‐Purpose Governments • Special‐purpose governments that are engaged in only governmental activities (such as some library districts) or that are engaged in both governmental and business‐ type activities (such as some school districts) generally should be reported in the same manner as general purpose governments.

• Special‐purpose governments engaged only in business‐ type activities (such as utilities) should present the financial statements required for enterprise funds, including MD&A and other RSI

MD&A

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MD&A

• Objective and easily readable analysis of the government's financial activities • Comparisons of the current year to the prior year based on the government‐wide information • Analysis of the government's overall financial position and results of operations • to assist users in assessing whether that financial position has improved or deteriorated as a result of the year's activities

MD&A Cont’d •Provide an analysis of significant changes that occur in funds and significant budget variances •Describe capital asset and long‐term debt activity during the year •Conclude with a description of currently known facts, decisions, or conditions that are expected to have a significant effect on financial position or results of operations

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Basic Financial Statements

Fund Financial Statements

•A fund is a fiscal and accounting entity with a self‐ balancing set of accounts that the government establishes for accountability purposes in accordance with statutes, laws, regulations, restrictions, or specific purposes.

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Number of Funds

•There is no specific number of funds that a government should use. •NCGA Statement 1 states that a government “should establish and maintain those funds required by law and sound financial administration” and that “only the minimum number of funds consistent with legal and operating requirements should be established.”

Types of Funds

Governmental Proprietary Fiduciary

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Governmental Funds

•Governmental fund reporting focuses primarily on the sources, uses, and balances of current financial resources and often has a budgetary orientation.

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Governmental Fund Types

Special Capital General Revenue Projects Fund Funds Funds

Debt Permanent Service Funds Funds

Major Fund Focus

•Fund statements should present the financial information of each major fund in a separate column. • Nonmajor funds should be aggregated and displayed in a single column

•General Fund is always a major fund.

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Major Fund Calculation

Must meet both: •At least 10% of assets, liabilities, revenues or expenditures of total governmental funds, and •At least 5% of the aggregate governmental and enterprise funds.

Major Fund Cont’d

•In addition to funds that meet the major fund criteria, any other governmental that the government's officials believe is particularly important to financial statement users (for example, because of public interest or consistency) may be reported as a major fund.

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Recognition & Measurement

•Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting

Current Financial Resources Measurement Focus

•Focuses on financial position

•Only the current assets and current liabilities are included on the statement of net position

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Modified Accrual Basis of Accounting

•Focuses on resource flows • Revenues are recognized as they become measurable and available to finance expenditures in the current period • Expenditures recorded when the fund liability is incurred

More Traditional

•Used by Proprietary & Fiduciary Funds • Economic Resources Measurement Focus • Full Accrual Basis of Accounting

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Expenditures

• The governmental funds balance sheet does not report general capital assets or general long‐term liabilities

• Reports as financial resource inflows and outflows the disposition and acquisition of general capital assets, the issuance and repayment of general long‐term debt, and the maturation of nondebt general long‐term liabilities, such as compensated absences and claims and judgments.

Required FS

•The financial statements required for governmental funds are: • Balance sheet • Statement of revenues, expenditures, and changes in fund balances

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Balance Sheet

•Uses a balance‐sheet format • Assets, plus deferred outflows of resources equal liabilities, plus deferred inflows of resources, plus fund balances

•Using a net position format is not an alternative

Fund Balances

•Fund balances should be segregated into • Nonspendable • Restricted • Committed • Assigned • Unassigned amounts

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Policy

•A government's accounting policy regarding which resources are considered to be spent first for expenditures for which more than one resource classification is available, determines the fund balance classifications for financial reporting purposes.

No Policy

•If a government does not establish a policy for its use of fund balance amounts, expenditures should be applied against restricted resources first, then committed, assigned, and unassigned, respectively, as applicable.

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Statement of Revenues, Expenditures, & Changes in Fund Balances

Revenues (detailed) Expenditures (detailed) Excess (deficiency) of revenues over expenditures Other financing sources and uses, including transfers (detailed) Special and extraordinary items (detailed) Net change in fund balances Fund balances—beginning of period Fund balances—end of period

Other Financing Sources and Uses

• Proceeds of long‐term debt • Issuance premium or discount • Certain payments to escrow agents for bond refundings • Transfers • Sales of capital assets

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Special & Extraordinary Items •Special items should be within the control of management and are required to be only unusual in nature or infrequent in occurrence but not both. • Special items are to be reported before extraordinary items. •Extraordinary items are not required to be within the control of management but are required to be both unusual in nature and infrequent in occurrence.

Definitions

Unusual Nature

•The underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the government, taking into account the environment in which the government operates.

Infrequent in Occurrence

•The underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the government operates. 76

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Proprietary Funds

Internal Enterprise Service Funds Funds

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Enterprise Funds

• Enterprise funds may be used to report any activity for which a fee is charged to external users for goods or services. Required to be reported as enterprise funds: •The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity. (Debt that is secured in part by a portion of its own proceeds should be considered as payable “solely” from the revenues of the activity.) •Laws or regulations require that the activity's costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues. •The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs.

Focus

• The focus of proprietary fund financial statements is on major funds. • Report information about the economic resources for each major enterprise fund, all nonmajor enterprise funds in the aggregate, and in total for all enterprise funds. • Report the combined total for all internal service funds in a separate column to the right of the total enterprise funds column.

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Major Fund Calculation

Must meet both: •At least 10% of assets, liabilities, revenues or expenditures of total proprietary funds, and •At least 5% of the aggregate governmental and enterprise funds.

Major Fund Cont’d

•In addition to funds that meet the major fund criteria, any other enterprise fund that the government's officials believe is particularly important to financial statement users (for example, because of public interest or consistency) may be reported as a major fund.

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Required FS

•Required financial statements for proprietary funds are: • Statement of net position or balance sheet • Statement of revenues, expenses, and changes in fund net position or fund equity • Statement of cash flows

Reporting

•Proprietary fund statements use: • the economic resources measurement focus • the accrual basis of accounting

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Flows Statement

•Revenues should be reported by major source •Distinguish between operating and nonoperating revenues and expenses •Nonoperating revenues and expenses should be reported after operating income.

Flows Statement Cont’d

•Revenues from capital contributions and additions to the principal of permanent and term endowments, special and extraordinary items, and transfers should be reported separately, after nonoperating revenues and expenses.

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What is Operating? •Governments should establish a policy that defines operating revenues and expenses that is appropriate to the nature of the activity being reported, disclose it in the summary of significant accounting policies, and use it consistently from period to period. •Consideration how transactions would be categorized for purposes of preparing a statement of cash flows

Revenues, Expenses, & Changes in Fund Net Position

Operating revenues (detailed) Total operating revenues Operating expenses (detailed) Total operating expenses Operating income (loss) Nonoperating revenues and expenses (detailed) Income before other revenues, expenses, gains, losses, and transfers Capital contributions, additions to permanent and term endowments, special and extraordinary items (detailed),andtransfers Increase (decrease) in net position Net position—beginning of period

Net position—end of period 88

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Financial Position

•Governments may use either a:

net position format balance sheet format

• assets less liabilities • assets equal liabilities equal net position plus net position

Components of Net Position

•Net investment in capital assets •Restricted (distinguishing between major categories of restrictions) •Unrestricted

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Cash Flow Statement

•Present a statement of cash flows for proprietary funds based on the provisions •Must use direct method of presenting cash flows from operating activities • Including a reconciliation of operating cash flows to operating income

Classifications

•Classify cash receipts and payments according to whether they stem from operating, noncapital financing, capital and related financing, or investing activities.

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Non‐Cash Activity

•The statement also requires the reporting of information about all investing, capital, and financing activities during a period that affect recognized assets or liabilities but do not result in cash receipts or cash payments in the period.

Fiduciary Funds

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Fiduciary Funds

Pension & OPEB

Investment Trust Funds

Private‐Purpose Trust Funds

Agency Funds •GASB 84 amends to Custodial Funds

Presentation

The fiduciary fund financial statements should aggregate and display fiduciary funds by fund type.

Provide a separate column for each fund type

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Presentation

•Fiduciary fund financial statements should include information about all fiduciary funds of the primary government, as well as component units that are fiduciary in nature.

Required Financial Statements

•Required FS for fiduciary funds: • the statement of fiduciary net position • the statement of changes in fiduciary net position

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Accounting

•Financial statements of fiduciary funds should be reported using the: • economic resources measurement focus; and • the accrual basis of accounting

Statement of Fiduciary Net Position

•The statement of fiduciary net position should include information about the assets, deferred outflows, liabilities, deferred inflows and net position for each fiduciary fund type.

•Component of Net Position not broken out.

100

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Presentation

•The statement of fiduciary net position should use a net position format (assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources equal net position). •Using a balance‐sheet format is not an alternative.

101

Statement of Changes in Net Position

•The statement of changes in fiduciary net position should include information about the: • additions to • deductions from • net increase (or decrease) for the year in net position

102

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GASB 84

•GASB 84, Fiduciary Activities • Issued: January 2017 • Effective: For reporting periods beginning after December 15, 2018 •Improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes

103

Fiduciary Fund Types

Pension (and Investment Trust OPEB) Trust Funds Funds

Private‐Purpose Custodial Funds Trust Funds

104

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Criteria

•The focus of the criteria generally is on: • whether a government is controlling the assets of the fiduciary activity; and • the beneficiaries with whom a fiduciary relationship exists •Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities.

105

106

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Financial Statements

•Governments with activities meeting the criteria should present • a statement of fiduciary net position • a statement of changes in fiduciary net position

•Exception: a BTA that normally expects to hold custodial assets for three months or less

107

Reporting

•A fiduciary component unit, when reported in the fiduciary fund financial statements of a primary government, should combine its information with its component units that are fiduciary component units and aggregate that combined information with the primary government’s fiduciary funds

108

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Interfund Activity

109

Inter Fund Activity

•Interfund activity within and among the three fund categories (governmental, proprietary, and fiduciary) should be classified and reported

110

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Reciprocal Interfund Activity

Internal counterpart to exchange and exchange‐like transactions

Interfund Loans Interfund Services Provided & Used

•amounts provided with a •sales and purchases of goods and requirement for repayment. services between funds for a price Interfund loans should be approximating their external reported as interfund receivables exchange value. Interfund services in lender funds and interfund provided and used should be payables in borrower funds. reported as revenues in seller funds and expenditures or expenses in purchaser funds.

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Nonreciprocal Interfund Activity

Internal counterpart to nonexchange transactions Interfund Transfers Interfund Reimbursements

•Flows of assets (such as cash or •Repayments from the funds goods) without equivalent flows of responsible for particular assets in return and without a expenditures or expenses to the requirement for repayment. funds that initially paid for them. • Includes payments in lieu of taxes • Reimbursements should not be that are not payments for, and are displayed in the financial not reasonably equivalent in value statements. to, services provided.

112

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Governmentwide Financial Statements

113

Government Wide Financial Statements

•Highly aggregated financial statements that present financial information for all assets (including capital assets), deferred outflows of resources, liabilities, deferred inflows of resources, and net position of a primary government and its component units, except for fiduciary funds.

114

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Government Wide Financial Statements

•The government‐wide financial statements use the economic resources measurement focus and accrual basis of accounting

115

Use of Government‐wide FS

•Designed to help users • assess the finances of the government in its entirety, including the year's operating results • determine whether the government's overall financial position improved or deteriorated • evaluate whether the government's current‐year revenues were sufficient to pay for current‐year services.

116

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Use of Government‐wide FS

• assess the cost of providing services to its citizenry • determine how the government finances its programs— through user fees and other program revenues versus general tax revenues • understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets • make better comparisons between governments.

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Activities •Governmental activities generally are financed through taxes, intergovernmental revenues, and other nonexchange revenues • Governmental funds and internal service funds

•Business‐type activities are financed in whole or in part by fees charged to external parties for goods or services • Enterprise funds

118

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Presentation of Government‐wide FS • Includes the primary government and its component units, except for fiduciary funds. • Uses separate rows and columns to distinguish between the total primary government (including its blended component units) and its discretely presented component units. • Uses separate rows and columns to distinguish between the primary government's governmental and business‐ type activities. • Presents total columns for the primary government.

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Government Wide Financial Statements

Governmental Business Type Activities Activities

Governmental Funds Enterprise Fund

Internal Service Fund

120

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Government Wide FS

•Excludes Fiduciary Funds

•Includes Component Units • Discretely Presented (separate column) • Blended (included with primary government)

121

Presentation of Net Position

• Governments are encouraged to present the statement of net position • assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position

• May use the traditional balance‐sheet format • assets plus deferred outflows of resources equals liabilities plus deferred inflows of resources, plus net position

122

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Statement of Net Position

•Reports all financial and capital resources, including infrastructure and intangible capital assets, except that certain capital assets need not be capitalized, such as certain collections of works of art.

123

Components of Net Position

• Net investment in capital assets • consists of capital assets, including restricted capital assets, reduced by accumulated depreciation and by any outstanding debt incurred to acquire, construct, or improve those assets (including any unamortized original issue discounts or premiums related to the debt • Restricted net position • consists of restricted assets and deferred outflows of resources reduced by liabilities and deferred inflows of resources related to those assets and deferred outflows of resources. • Unrestricted

124

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Statement of Activities

•Program Revenue Categories • Charges for Services • Operating Grants & Contributions • Capital Grants & Contributions

125

Statement of Activities

•Net (Expense) Revenue & Change in Net Position • Primary government governmental activities • Primary government business type activities • Component Units

126

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127

128

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129

130

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131

Reconciliation to Government Wide

•Governments should present summary reconciliations to the government‐wide financial statements on the governmental and proprietary (enterprise) fund financial statements or in accompanying schedules.

132

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Miscellaneous Rules

133

Prior Period Comparative

•Governments sometimes present partial or summarized (or partial and summarized) prior‐ period comparative financial information in their basic financial statements rather than making a complete prior‐period presentation at the level of detail required by GAAP.

134

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Prior Period Comparative Cont’d

•The nature of the prior‐period information should be described by the use of appropriate titles on the face of the financial statements and in a note to the financial statements.

•“for comparative purposes only” without further disclosure in the notes would not constitute the use of an appropriate title.

135

Example Note Disclosure

The basic financial statements include certain prior‐ year summarized comparative information in total but not at the level of detail required for a presentation in accordance with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the government's financial statements for the year ended June 30, 20PY, from which the summarized information was derived.

136

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CAFR

137

CAFR

•Comprehensive Annual Financial Report • Not required by GAAP • NCGA Statement 1 covers requirements

138

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GFOA

•Established the Certificate of Achievement for Excellence in Financial Reporting Program (CAFR Program) in 1945

•Goal: to encourage and assist state and local governments to go beyond the minimum requirements of GAAP to prepare • Evidence the spirit of transparency and full disclosure

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CAFR Cont’d

•Introductory section • Table of contents • Letter(s) of transmittal • Other material deemed appropriate by management.

140

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CAFR Cont’d

• Combining statements: • Present the nonmajor governmental and enterprise funds, internal service funds, and fiduciary funds of the primary government (including its blended component units), the nonmajor discretely presented component units, and the fund financial statements of individual component units if the information is not available in separately issued financial statements of the individual component units. • Individual fund statements, which should be presented when the primary government has only one nonmajor fund of a given fund type (unless presented in the combining statements) or if they are needed to present prior‐year and budgetary comparisons that are not presented in RSI. • Schedules, which should be used to demonstrate compliance with finance‐related legal and contractual provisions, present information spread throughout the statements that can be brought together and shown in greater detail, and present

greater detail for information reported in the statements. 141

141

CAFR Cont’d

•The Statistical Section • Requires a statistical section to present detailed information, typically in ten‐year trends, in five categories: • financial trends information • revenue capacity information • debt capacity information • demographic and economic information • operating information

142

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SI, RSI, OI •The three sections are required parts of a CAFR in addition to the basic financial statements, but governments are not required to prepare those sections if they do not present their basic financial statements within a CAFR.

•OI and SI that are “required” to accompany a CAFR remain OI and SI; that is, they do not become RSI when presented as part of a CAFR

143

Coming Down the Pike

144

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Background

•Recognition of Elements of Financial Statements – Preliminary Views • Project No. 3‐20 • Issued: September 2018 • Comments Due: February 15, 2019

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Recognition Concepts

•The measurement focus of a specific financial statement determines what items should be reported as elements of that financial statement. •The related basis of accounting determines when those items should be reported.

146

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Recognition Hierarchy

First: • definition of assets and liabilities

Second: • definition of deferred outflows and inflows of resources

Last: • definition of outflows and inflows of resources

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Recognition Frameworks

•Short‐term financial resources measurement focus • Replaces current financial resources measurement focus

•Economic resources measurement focus

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Short‐Term FRMF

•Reflects the amount of fund balance at period‐end that is available for spending in the next period •Recognized when an item meets the definition of an element and the measurement of the item sufficiently reflects the qualitative characteristics of information in financial reports

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Short‐Term FRMF

• Balances, outflows of resources, and inflows of resources from short‐term transactions and other events would be recognized as the underlying transaction or other event occurs.

• Balances, outflows of resources, and inflows of resources from long‐term transactions and other events would be recognized when payments are due.

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Short‐Term FRMF • Items that arise from short‐term transactions and other events would be those that normally are due to convert to or generate cash (or other financial assets) or require the use of cash (or other financial assets) entirely within one year from the inception of the transaction or other event. • Items that arise from long‐term transactions and other events would be those that normally are due to convert to or require the use of cash (or other financial assets) in periods that extend beyond one year from the inception of the transaction or other event.

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Preliminary Views – Financial Reporting Model

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Background

•Financial Reporting Model Improvements – Preliminary Views • Project No. 3‐25 • Issued: September 2018 • Comments Due: February 15, 2019

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Proposal –Governmental Funds

•Creates the short‐term financial resources measurement focus • Report elements of financial statements from a short‐ term perspective that would be consistent among governments. • Reflect the amount of fund balance at period‐end that is available for spending in the next period

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Proposal –Governmental Funds

• The recognition concepts for this measurement focus would be based on whether items arise from short‐term or long‐term transactions and other events. • Balances, outflows of resources, and inflows of resources from short‐term transactions and other events would be recognized as the underlying transaction or other event occurs. • Balances, outflows of resources, and inflows of resources from long‐term transactions and other events would be recognized when payments are due.

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Examples of Assets That Would Be Recognized

Cash and Accounts Property taxes investments receivable receivable

Notes and other long‐term Prepaid items Inventory receivables that have become due

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Examples of liabilities that would be recognized

Accounts payable and Accrued interest payable accrued payroll

Any unpaid balances due on Tax and revenue general obligation and other anticipation notes long‐term debt that became due during the period

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Proposal –Governmental Funds

•The resource flows statement would be presented using the current and noncurrent activity format.

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Examples of Outflows Recognized

Use of goods Salaries and wages Interest accruing (including Long‐term lending earned during the during the period inventories) and activities period on borrowings services

Payments related to other Principal long‐term transactions and payments on long‐ other events, such as term borrowings Capital outlays postemployment benefits that mature in the and compensated absences, period that mature in the period

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Examples of Inflows Recognized

Sales, income, Property taxes and other taxes Grants relating to levied for the relating to the the period period period

Repayments from Proceeds from Proceeds from lending activities long‐term sales of capital that matured borrowings assets during the period

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Updated Titles

•The balance sheet would be titled the “Short‐Term Financial Resources Balance Sheet”

•The resource flows statement would be titled the “Statement of Short‐Term Financial Resource Flows”

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Element Titles

deferred outflows of short‐term assets short‐term liabilities short‐term financial resources

deferred inflows of short‐term financial inflows of short‐term short‐term financial resources fund financial resources for resources balances current activities

outflows of short‐term net flows of short‐term financial resources for financial resources for current activities noncurrent activities

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Presentation

•“This financial statement presents a short‐term view of the governmental fund activities and reports items of a long‐term nature differently from how they are reported in the government‐ wide financial statements.” • Explanation would be included at the top of the governmental fund FS

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Proprietary Fund Financial Statements

•Continue to distinguish between operating and nonoperating revenues and expenses. •Operating revenues and expenses would be defined as revenues and expenses other than nonoperating revenues and expenses.

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Proprietary Fund Financial Statements

Nonoperating revenues and expenses include: • subsidies received and provided • revenues and expenses related to financing • resources from disposal of capital assets and inventory • investment income and expenses

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Presentation

•New subtotals • Operating income (loss) • Noncapital subsidies • Noncapital subsidies would be presented before reporting other nonoperating revenues and expenses.

•Defines subsidies

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Budgetary Comparison

•Required Supplementary Information

•Required to present specific budget variances between • final budget and actual amounts • original and final budget amounts

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Major Component Unit Information

•If it is not feasible to present major component unit FS in a separate column(s) in the reporting entity’s statement of net position and statement of activities, the FS of the major component units would be presented in the reporting entity’s basic GS as combining financial statements after the fund FS.

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Expenses by Natural Classification

•Schedule of natural classification of government‐ wide expenses by function or program for governmental activities and by different identifiable activity for business‐type activities • Only if entity presents a CAFR • Supplementary information

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Future Topics to Be Addressed

•Management’s discussion and analysis (MD&A) •Debt service fund presentations •Extraordinary and special items

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GASB Standards Effective in the Near Future

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GASB 83, Asset Retirement Obligations

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GASB 83

Certain Asset Retirement Obligations • Issued: November 2016 • Effective: For reporting periods beginning after June 15, 2018

•Establishes criteria for determining the timing and pattern of recognition of a liability for AROs other than landfills

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Definition

ARO

•An ARO is a legally enforceable liability associated with the retirement of a tangible capital asset

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Recognition

•Recognition occur when the liability is both incurred and reasonably estimable

•Incurred: • Based on the occurrence of external laws, regulations, contracts, or court judgments, together with the occurrence of an internal event

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Recognition Cont’d

•Reasonably Estimable • Based on the best estimate of the current value of outlays expected to be incurred (probability weighting of all potential outcomes) • If probability weighting is not feasible at reasonable cost, the most likely amount should be used.

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Journal Entry

•Recognize a liability and a deferred outflow of resources • Deferred outflow of resources equals corresponding liability upon initial measurement

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Subsequent Measurement

•Liability: • Adjust for the effects of inflation or deflation at least annually • Evaluate at least annually to determine whether significant changes impact the estimated asset retirement outlays • Remeasure when significant change occurs

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Subsequent Measurement

•Deferred Outflow • Expense in a systematic and rational manner over the estimated useful life of the tangible capital asset

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GASB 84, Fiduciary Activities

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GASB 84

Fiduciary Activities • Issued: January 2017 • Effective: For reporting periods beginning after December 15, 2018 •Improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes

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Fiduciary Fund Types

Pension (and other employee benefit) trust funds

Investment trust funds

Private‐purpose trust funds

Custodial funds

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Criteria

The focus of the criteria generally is on •whether a government is controlling the assets of the fiduciary activity and •the beneficiaries with whom a fiduciary relationship exists. •Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities.

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Fiduciary Component Unit (Pension) • A component unit criteria is a fiduciary activity if it is one of the following arrangements: • A pension plan that is administered through a trust that meets the criteria in paragraph 3 of Statement 67 • An OPEB plan that is administered through a trust that meets the criteria in paragraph 3 of Statement 74 • A circumstance in which assets from entities that are not part of the reporting entity are accumulated for pensions as described in paragraph 116 of Statement 73 • A circumstance in which assets from entities that are not part of the reporting entity are accumulated for OPEB as described in paragraph 59 of Statement 74.

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Fiduciary Component Unit (Non‐Pension)

•A component unit is a fiduciary activity if the assets have one or more of the following characteristics: • Administered through a trust agreement or equivalent arrangement in which the government itself is not a beneficiary, dedicated to providing benefits to recipients in accordance with the benefit terms AND legally protected from the creditors of the government

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Fiduciary Component Unit (Non‐Pension)

• The assets are for the benefit of individuals and the government does not have administrative involvement with the assets or direct financial involvement with the assets. • Assets are not derived from the government’s provision of goods or services to those individuals.

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Examples of Administrative Involvement

• Monitoring compliance with the requirements of the activity that are established by the government or by a resource provider that does not receive the direct benefits of the activity • Determining eligible expenditures that are established by the government or by a resource provider that does not receive the direct benefits of the activity • Has the ability to exercise discretion over how assets are allocated

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Example of Direct Financial Involvement

•Providing matching resources for the activities

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Fiduciary Component Unit (Non‐Pension)

•The assets are for the benefit of organizations or other governments that are not part of the financial reporting entity • Assets are not derived from the government’s provision of goods or services to those organizations or other governments

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Non Component Units (Pension)

• A pension plan that is administered through a trust that meets the criteria in paragraph 3 of Statement 67 • An OPEB plan that is administered through a trust that meets the criteria in paragraph 3 of Statement 74 • A circumstance in which assets from entities that are not part of the reporting entity are accumulated for pensions as described in paragraph 116 of Statement 73 • A circumstance in which assets from entities that are not part of the reporting entity are accumulated for OPEB as described in paragraph 59 of Statement 74

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Non Component Units (Non Pension)

•The assets associated with the activity are controlled by the government

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Control

• A government controls the assets of an activity if the government • holds the assets; or • has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended recipients • Restrictions from legal or other external restraints that stipulate the assets can be used only for a specific purpose do not negate a government’s control of the assets

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Non Component Units (Non Pension)

•The assets are not derived either: • Solely from the government’s own‐source revenues; or • From government‐mandated nonexchange transactions or voluntary nonexchange transactions with the exception of pass‐through grants for which the government does not have administrative involvement or direct financial involvement.

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Own Resources

•Own‐source revenues are revenues that are generated by a government itself • Includes exchange and exchange‐like revenues and investment earnings • Includes derived tax revenues and imposed nonexchange revenues

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Examples of Administrative Involvement

•Monitoring secondary recipients for compliance with program‐specific requirements •Determining eligible secondary recipients or projects, even if using grantor‐established criteria •Having the ability to exercise discretion in how the funds are allocated

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Non Component Units (Non Pension) • The assets associated have one or more of the following characteristics: • The assets are administered through a trust in which the government itself is not a beneficiary, dedicated to providing benefits to recipients in accordance with the benefit terms, AND legally protected from the creditors of the government. • The assets are for the benefit of individuals and the government does not have administrative involvement with the assets or direct financial involvement with the assets. • In addition, the assets are not derived from the government’s provision of goods or services to those individuals.

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Financial Statements

•Governments with activities meeting the criteria should present • a statement of fiduciary net position • a statement of changes in fiduciary net position

•a BTA that normally expects to hold Exception: custodial assets for three months or less

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Reporting

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GASB 88, Debt Disclosures

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GASB 88

Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements • Issued: April 2018 • Effective: For reporting periods beginning after June 15, 2018

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Background •Concerns about governments entering into debt arrangements that have the potential to introduce additional risks to a government’s credit profile. • Inconsistencies in disclosures in financial statements • Challenges to the ability to assess those risks without additional information • Concerns about the absence of disclosures regarding provisions of debt agreements that expose governments to financial risk, such as accelerated repayments when certain events occur

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Background Cont’d

•Confusion as to whether certain types of long‐term liabilities are regarded as debt and, therefore, subject to disclosure requirements for debt

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Definition

Debt

•For disclosure purposes ‐ debt is defined as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.

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NOT Debt

•For disclosure purposes ‐ debt does not include leases, except for contracts reported as a financed purchase of the underlying asset, or accounts payable.

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New Disclosures

• Amount of unused lines of credit • Assets pledged as collateral for debt • Terms specified in debt agreements related to significant • events of default with finance‐related consequences, • termination events with finance related consequences, and • subjective acceleration clauses

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Presentation

•In notes to financial statements, a government should separate information in debt disclosures regarding direct borrowings and direct placements of debt from other debt.

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Example

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Example

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Example

The County’s outstanding notes from direct borrowings related to business‐type activities of $70,400 are secured with collateral of an undeveloped lot zoned for commercial use. The outstanding notes from direct borrowings related to business‐type activities of $70,400 contain (1) a provision that in an event of default, the timing of repayment of outstanding amounts become immediately due if pledged revenues during the year are less than 120 percent of debt service coverage due in the following year and (2) a provision that if the County is unable to make payment, outstanding amounts are due immediately. The County’s outstanding notes from direct borrowings related to business‐type activities of $70,400 contain a subjective acceleration clause that allows the lender to accelerate payment of the entire principal amount to become immediately due if the lender determines that a material adverse change occurs.

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GASB 90, Majority Equity Interests

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GASB 90

Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61 • Issued August 2018

• Background: • Stakeholders requested that GASB clarify whether a government reporting a majority equity interest in a legally separate organization should apply the guidance for reporting component units in Statement 14, as amended, or the guidance for reporting investments in Statement 72

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Update

•Modifies previous guidance for reporting a government’s majority equity interest in a legally separate organization

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Definition

• An equity interest is a financial interest in a legally separate organization evidenced by the ownership of shares of the organization’s stock or by otherwise having an explicit, measurable right to the net resources of the organization that is usually based on an investment of financial or capital resources by a government. • An equity interest is explicit and measurable if the government has a present or future claim to the net resources of the entity and the method for measuring the government’s share of the entity’s net resources is determinable

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Legally Separate

•Reporting a Majority Equity Interest in a Legally Separate Organization • If a government’s holding of an equity interest meets the definition of an investment in GASB 72, the equity interest should be reported as an investment and measured using the equity method in accordance with GASB 62 • Should not be reported as a component unit of the government

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Exception

•If a special‐purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment or permanent fund holds a majority equity interest in a legally separate organization that meets the definition of an investment, that majority equity interest should be measured at fair value under GASB 72.

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Component Unit

•If a government’s holding of a majority equity interest in a legally separate organization does NOT meet the definition of an investment, the holding of the majority equity interest results in the government being financially accountable for the organization and, therefore, the government should report the legally separate organization as a component unit.

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Presentation

•A majority equity interest in an organization reported as a component unit also should be reported as an asset of the government or fund that holds the equity interest, measured using the equity method in accordance GASB 62. • If the component unit is blended, the asset and net position associated with the equity interest held by the government or fund should be eliminated in the blending process.

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Current Financial Resource Focus

•The asset representing the government’s equity interest should be limited to amounts appropriately reported under the current financial resources measurement focus.

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If a Government Acquires a 100% Equity Interest •If a government acquires a 100% equity interest in a legally separate organization that is reported as a component unit, the component unit should measure its assets, deferred outflows of resources, liabilities, and deferred inflows of resources in accordance with GASB 69, Government Combinations and Disposals of Government Operations, at the date on which the government acquires the 100% equity interest.

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Reporting

•The consideration provided should include the net resources exchanged to complete the acquisition of the 100% equity interest plus the balances of any equity interest asset and deferred outflow of resources recognized prior to the completion of the acquisition.

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Presentation

•The net position acquired should be equal to the net position of the component unit after measuring assets, deferred outflows of resources, liabilities, and deferred inflows of resources using GASB 69. •The flows statements of the component unit should include only those transactions that occurred subsequent to the acquisition of the 100% equity interest.

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Effective Date

•Effective for reporting periods beginning after December 15, 2018 • Earlier application is encouraged

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Resources

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Resources • GASB 34, Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments • GASB Concept Statement 4 • GASB Whitepaper, Why Governmental Accounting and Financial Reporting Is—and Should Be—Different • NCGAS 1 — Governmental Accounting and Financial Reporting Principles • AICPA State and Local Government A&A Guide

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Resources Cont’d •GASB 83, Certain Asset Retirement Obligations •GASB 84, Fiduciary Activities •GASB 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements •GASB 90, Majority Equity Interests, an amendment of GASB Statements No. 14 and No. 61 •Recognition of Elements of Financial Statements – Preliminary Views

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What Questions Do You Have? Melisa F. Galasso Chief Executive [email protected] www.galassolearningsolutions.com

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