Unique Accounting and Financial Reporting Issues in Governments

Carr, Riggs & Ingram Brian Barksdale and Jason Harpe

GFOAA Summer Conference August 21, 2014

YOU ARE UNIQUE !!

Well, at least your accounting and reporting requirements in governments are unique when compared to other types of entities

Congratulations!!

• Modified Accrual and Full Accrual

– measured similar to cash basis accounting – just throw in a few accruals like accounts receivable and accounts payable. Otherwise – most transactions are revenue or expense. FUND STATEMENTS!

– Full Accrual recognizes short term AND long term assets and liabilities – like fixed assets, debt and compensated absences. GOVERNMENT-WIDE STATEMENTS!

• Measurement Focus and Basis of Accounting

– Fund statements – emphasis on the measurement of current financial resources (revenues when measureable/available to pay current liabilities). No fixed assets and no long-term debt.

– Government-wide statements – emphasis on economic resources (revenues when earned and expenses when a liability is incurred, regardless of when the related cash flows take place.

• Government regulatory environment

– GASBs

– A-133 Single Audits

– Budget environment

What makes things unique

Debt issuance

• Fund Statements – FULL proceeds are

recorded on Fund Income statement. Avoid recording net proceeds – i.e. only the cash that was received.

– Principal payments, as well as interest, are expensed as debt service.

– Record premiums and discounts on Fund Income statement.

– Record debt issuance costs as administrative expenses.

– Almost never a Fund balance sheet liability.

• Government-wide statements – FULL proceeds are recorded on balance sheet as a

long term liability.

– Principal payments reduce the liability and are not expensed.

– Interest payments are expensed on a full-accrual basis.

– Premiums and discounts are recorded on the balance sheet as an asset or liability and are amortized over the life of the related debt.

– Issuance costs are fully expensed.

Debt issuance

Debt defeasance

• Means that bonds have been paid off or refinanced at different terms.

• Current refunding • Advance refunding (“in

substance defeasance”) • Gross proceeds are recorded

on the Fund statements from new bond issue that “pays off” old bond issue.

• There is a debt service expense on the Fund statements that reflects the “pay off” of the old bond issue.

• Related premiums or discounts of the old issue are expensed on the Government-wide statements.

• Disclosures are necessary that explain the defeasance along with any irrevocable trust details for advance refundings.

Compensated absences

• Represent a liability for earned and payable vacation and possibly sick leave that is due employees.

• Government-wide, full accrual differs significantly from Fund, modified accrual presentation.

• The ENTIRE liability is recorded on the Government-wide full accrual balance sheet.

• There is a “current” portion and a “long-term” portion of the ENTIRE liability recorded on the Government-wide full accrual balance sheet.

• The “current” portion of the ENTIRE liability should represent what the government expects to pay out in the upcoming 12 month period.

Compensated absences

• The “long-term” portion of the ENTIRE liability should represent the difference between the “current” portion and the ENTIRE liability. (Current – ENTIRE liability = Long Term)

• ONLY the portion that is due to separated/terminated employees at year end is recorded as a liability on the FUND statements.

• Generally, this is much lower and will almost always be a different amount than what is recorded on the Government-wide statements.

• REMEMBER – 3 different amounts!!

– Government-wide CURRENT

– Government-wide LONG-TERM

– Fund PAYBLE TO SEPARATED EMPLOYEES at year end

Pension and OPEB liabilities

• Record any Annual Required Contribution (ARC) payments due at year-end as a liability on the Government-wide statements. Consider Fund statement recording if liability will be current.

• ARC is the annual amount due the RSA for pensions or an OPEB trust for retirement benefits other than pensions that haven’t been paid by year end.

• Generally, RSA is always paid. OPEB ARCs haven’t been consistently paid - so, an amount is accrued on the government-wide statements for the OPEB ARC. The OPEB ARC payable usually won’t be paid in the short term by the government, so, usually no accrual for the OPEB ARC is made on the Fund statements

• Beginning in 2015, the UNFUNDED net pension liability will be recorded on the Government-wide statements. BIG NUMBER. The initial recording will be a credit to a long term liability and a debit to net position.

• Eventually, the UNFUNDED net OPEB liability will be recorded in a like manner. Exposure Draft has been issued on this pronouncement and a final GASB will most likely be issued in the upcoming year.

Pension and OPEB liabilities

Donated assets

• Mainly infrastructure donated by a developer.

• Land, roads, curbing, sewers, etc. from a new development within a government.

• Sometimes houses are donated to schools.

• Land can be donated from estates for parks.

• No transaction is recorded for donated assets in the Fund statements. (no capital outlay nor are there any proceeds) BUT, if asset is donated and being “held for sale”, the donated asset would be recorded at fair value at the date of donation as an asset of the fund and as revenue.

• A capital asset and corresponding miscellaneous revenue should be recorded in the Government-wide statements. (debit to land, infrastructure, etc. and credit to miscellaneous revenues)

• This will be a reconciling item between Fund statements and government wide statements.

Donated assets

• Many governments offer certain tax refunds, rebates or incentives for socio-economic reasons or economic development reasons.

• Taxes should be recorded net of any refund, rebate, or incentive.

• Taxes should be also be recorded net of any estimated uncollectible amounts.

Tax refunds, rebates, and incentives

• FUND BALANCE = UNSPENT REVENUES

• Non-spendable – Prepaid and inventory

amounts. Money has already been spent.

• Restricted – Government to government

restrictions. – Mainly revenues from grants.

• Committed – Self imposed constraint. – HAS TO HAVE FORMAL

DOCUMENTATION!! Ordinance, resolution, etc. HIGHEST ACTION by the governing body.

• Assigned – Management constraint. City

manager, CFO, CSFO, City Clerk, City Treasurer

• Unassigned – No constraints

• Remember – ONLY GENERAL FUND can have unassigned fund balance. All other funds have some restraint. UNLESS there is negative fund balance and then a non-general fund fund should have “negative” unassigned fund balance.

GASB 54 – Fund balance restraining categories

Purchase Orders

• Is a function of internal control. No “GASB” dictates Purchase Order procedures.

• IF purchase orders are used, the government may use encumbrance accounting (optional).

• Policies are usually set by management or governing body.

• Policies and procedures manual should describe Purchase Order procedures and dollar limitations on orders necessary for approval.

• Should be an internal control tool. Careful thought should be given to the requirements of Purchase Orders so as not to create “work around” of the Purchase Order System.

• Consider Purchase Order internal audits during the year for compliance within departments.

Major fund determination

• Four financial statement elements are used for the major fund measurement:

– Assets + deferred outflows of resources

– Liabilities + deferred inflows of resources

– Revenues

– Expenditures

• Two points of reference for judging proportionality are:

– Governmental funds in total

– Governmental funds and enterprise funds in total

• For ONE of the four groupings of financial statement elements identified, does an individual governmental fund report BOTH of the following:

– At least 10% of the total for governmental funds AND

– At least 5% of the combined total for governmental + enterprise funds?

• Major funds CAN be based on other QUALITATIVE factors!

– A government can elect to reflect a fund as major even if it doesn’t meet the quantitative factors above if the government officials believe separate presentation of the fund is particularly important to a financial statement users.

– An example might be a fund that bounces in and out of quantitative major presentation and a government decides to present it as major for consistency. (This happens to Capital Projects funds frequently.)

Major fund determination

Matching grant funds

• Most municipal grants function on a revenue matching basis.

• To receive certain grants, the government must come up with a percentage of the total grant award – usually 20%.

• The government that ultimately benefits from the total grant should recognize the total grant revenue from the matching granting agency (the other 80%) as revenue in the period when payments are made by any third party (State of Alabama on behalf of a municipality, etc.)

• The total grant expenditure should equal the 20% local government portion plus the 80% on-behalf payment.

• Remember to let the general ledger drive any budget differences.

• Carefully consider any reclassifications of expenditures to different general ledger expenditure accounts within a department to maintain budget integrity. Department heads may pressure this method of accounting.

• Make certain elected officials know of any general ledger accounting changes that affect their adopted budget.

• Don’t get caught between Department heads and management.

Budgeting

• Any fair value adjustments run through a government’s income statement (Fund and Government-wide).

• Unrealized adjustments usually arise from fair value adjustments – i.e. marking investments to market.

• Realized adjustments arise from actual investment sales or maturities.

• Record all realized earnings from investments through the income statements (gains, losses, interest, etc.)

• Don’t forget to record any management fees.

• Make sure to keep investments within prescribed policies – i.e. no investments in equities or derivatives.

• Make sure to obtain management’s (Mayor, Council, Board, etc.) approval before buying/purchasing or selling any investment.

Investments

Yellow Book and Single Audits

• “the Yellow Book”

• Involves 3 elements: 1. Financial statement audit

2. Internal controls over financial reporting (no audit opinion)

3. Compliance with laws, regs, etc. that could have a direct & material effect on the statements (no audit opinion)

• Single Audit

A. Required when expenditures of Federal $ exceeds $500K for the year.

B. Major program determination required

C. Involves 3 elements:

1. Financial statement audit

2. Compliance related to major programs.

3. Internal control over compliance related to major programs.

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Contact Information

Jason Harpe, CPA

Carr, Riggs, & Ingram

Phone: 205-949-8670

Email: jharpe@cricpa.com

Brian Barksdale

Carr, Riggs, & Ingram

Phone: 205-949-8601

Email: bbarksdale@cricpa.com