7/13/2011
The Great GASB Conference
WV Department of Education
Office of School Finance
July 13, 2011
Presented by
Gregory S. Allison, CPA
UNC School of Government
Our Aggressive Agenda
• GASB Standards
– 47 (Termination Benefits)
– 54 (Fund balance/governmental fund types)
– 51 (Intangible assets)
51 (Intangible assets)
– 55 (GAAP hierarchy)
– 56 (Codification of AICPA guidance)
– 61 (Financial Reporting Entity Omnibus)
– 62 (Codification of FASB Guidance)
The Aggression Continues....
• Common accounting and financial reporting problems
• Ongoing challenges with SAS 112/115
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GASB Statement No. 47
Accounting for Termination Benefits
Accounting for Termination Benefits
GASB 47 – Termination Benefits
• Scope expanded to include all termination benefits (voluntary & involuntary)
• Common benefits: –
–
–
–
–
–
Enhancements to defined pension benefits
Cash payments at or following termination
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h
f ll i
i i
Additional OPEB coverage
Life insurance coverage
Certain COBRA benefits
Career counseling
GASB 47 ‐ Exclusions / Exceptions
• Unemployment compensation claims ‐ NCGA Statement 4
• Defined benefit pension benefits – GASB Statement 27 for measurement – still follow GASB 47 disclosure requirements
• OPEB – GASB Statement 45 for measurement – still follow GASB 47 disclosure requirements
• Immaterial items 2
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GASB 47 ‐ Termination Benefits vs. Postemployment Benefits
• May be difficult to distinguish between benefits provided in exchange for early termination of service and benefits in exchange for services rendered
• Professional judgment required
–
–
–
–
EEmployer’s intent
l
’ i t t
How employees view the benefits
Length of time for which benefits have been available
Benefit applies to termination before normal retirement age
GASB 47 ‐ Measurement of Termination Benefits
• Includes the direct benefits themselves
• Should include any fringe benefits related to the termination benefits
• Should include any changes in estimated costs Sh ld i l d
h
i
i
d
of other employee benefits (compensated absences) – if measurable
GASB 47 ‐ Recognition Requirements –
Accrual Basis
• Voluntary termination benefits (including COBRA benefits when age‐related & significant)
– Expense & liability recognized when:
• Employees accept offer
• Amounts can be estimated
– Liability measurement should be updated at end of each subsequent reporting period
• Incremental liability & expense should be measured
• May be positive or negative
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GASB 47 ‐ Recognition Requirements –
Accrual Basis
• Involuntary termination benefits
– Expense & liability recognized when:
• Plan of termination approved by those with authority to commit employer
• Plan communicated to employees
• Amounts can be estimated
– Liability
Liability measurement should be updated at end of each subsequent measurement should be updated at end of each subsequent
reporting period
• Incremental liability & expense should be measured
• May be positive or negative
– Involuntary termination – future service requirements ‐ liability & expense recognized ratably over future service period
GASB 47 ‐ Recognition Requirements –
Modified Accrual
• Liabilities and expenditures recognized to the extent liabilities are normally expected to be liquidated with expendable available resources
– GASB Interpretation 6
– Due and payable
GASB 47 ‐ Disclosure Requirements
• In period when employer becomes obligated for termination benefits or future periods in which employees are required to render services to receive involuntary termination benefits, then disclose:
– Description of termination benefit arrangements
• types of benefits provided
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fit
id d
• number of employees affected
• period of time over which benefits are expected to be provided
– Cost of termination benefits (if not apparent from the face of the statements)
– For defined benefit pensions and OPEB benefits – change in the related actuarial accrued liability
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GASB 47 ‐ Disclosure Requirements (Cont.)
• In all periods when termination benefit liabilities are reported:
– Significant methods (e.g., discounted present value) used to determine liabilities
value) used to determine liabilities
– Significant assumptions (e.g., discount rate, healthcare cost trend rate, etc.) used to determine liabilities
GASB 47 ‐ Effective Date (s)
• Termination benefits affecting an employer’s obligations for defined benefit OPEB ‐ phased implementation for employers based on GASB 34
–
–
–
–
Phase 1 – FY beginning after 12/15/06
Phase 2 –
Phase
2 FY beginning after 12/15/07
FY beginning after 12/15/07
Phase 3 – FY beginning after 12/15/08
Early implementation of GASB 45 requires early implementation of GASB 47
• All other termination benefits, including those affecting obligations for defined benefit pensions
– FY beginning after 6/15/05
GASB Statement No. 54
Fund Balance Reporting and p
g
Governmental Fund Type Definitions
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The New Fund Balance
• GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions
• Required implementation FY beginning after Required implementation FY beginning after
6/15/10
• Traditional three component model (reserved, unreserved‐designated, unreserved) replaced with five new components
New Components of Fund Balance
• Nonspendable
• Restricted
• Committed • Assigned
• Unassigned
Why Change?
• Traditional focus of fund balance components on resources available for appropriation
• New focus on two objectives
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– Indication of constraints of how resources can be spent
– Identification of the sources of those constraints
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Nonspendable Fund Balance
• Portion of fund balance/net resources not in spendable form or nonspendable for foreseeable future
– Inventories
– Prepayments
– Long‐term receivables
• Portion of fund balance/net resources required to remain intact
– Permanent fund principle Restricted Fund Balance
• Resources in a governmental fund subject to externally enforceable constraints on spending
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g
– Debt covenants
– Grantors
– Contributors
– Enabling legislation (e.g., taxes raised for a particular purpose) Committed Fund Balance
• Formal legal constraints placed by the governing board
– Formal action necessary to create OR rescind
• Constraints
Constraints have to be in place no later than have to be in place no later than
the end of the fiscal period
• Similar to a high level designation
• Ability to rescind differentiates committed from restricted net assets
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Assigned Fund Balance
• Reflects a government’s intended use of resources (i.e., earmarking – neither restricted or committed)
– Assignments may occur anytime before the issuance
of financial statements
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i l t t
t
• Assignment ability may be delegated by the board (commitments may not be)
– Less formal • Default category for governmental funds except general fund (unless those amounts are negative)
Unassigned Fund Balance
• Residual category for general fund • Reflects deficit fund balance for other governmental funds
• Impossible to report positive assigned fund ibl
ii
i df d
balance and negative unassigned fund balance
– Assigned amount has to be eliminated before negative unassigned may be reported
What about....??? • Encumbrances
– No longer separately identifiable on the face of the financial statements
– Still considered a component of either restricted, committed, or assigned
• Restricted and committed amounts indirectly included in the calculations of the respective resources
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What about...???(cont.)
• Appropriation for subsequent year’s projected budget shortfall
– Currently reflected as designated fund balance
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tl fl t d d i t d f d b l
– Now will be reflected as an assignment
• Formal action to create but no formal action to not use
• Limited to the projected deficit
What about...???(cont.)
• Stabilization amounts
– Formal establishment of “rainy day” or “contingency” funds to only be used in specified circumstances
– Categorized as restricted or committed • Circumstances are specific and non‐routine (e.g., “emergencies” would not qualify)
• Most commonly committed in NC
• Unassigned if not restricted or committed
Display Guidelines
• Nonspendable can be displayed in the aggregate or by the two categories
– Nonspendable in form
p
– Required to remain intact
• Restricted can be broken down by “major” restrictions or in the aggregate
• Committed and assigned may be reported by “major” limitations or in the aggregate
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Sample Balance Sheet Classifications
Nonspendable (any governmental funds)
Restricted for (any governmental funds)
Committed to (any governmental funds)
Assigned to (any governmental funds)
Unassigned (General Fund only, used for negative residuals of other governmental funds)
Fund Balance Note Disclosures
• Committed Fund Balance
– Government’s highest level of decision‐making authority
– Formal actions necessary to enact/modify/rescind
Formal actions necessary to enact/modify/rescind
• Assigned Fund Balance
– Body responsible for assigning amounts
– Policy that authorizes such assignments
Disclosures (cont.)
• Order in which government considers restricted versus unrestricted amounts to be spent when both are available
• Order in which committed, assigned, or Order in which committed assigned or
unassigned amounts are considered to be spent
• Any aggregate displays on B/S should be disaggregated in sufficient detail in notes
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Disclosures (continued)
• Stabilization arrangements/requirements
– Authority
– Additions process
– Use process
p
– Balance if not apparent on face of financials
• Minimum Fund Balance policies
– Describe the policy
– Brief description of action necessary to have enacted
Governmental Fund Type Definitions
• General Fund
– The General Fund should be used to account for and report all financial resources not accounted for and reported in another fund
p
• Language for the General Fund being used when another fund is not required dropped
• “All transactions” replaced with “all financial resources”
Governmental Fund Type Definitions (cont.)
• Special Revenue Fund
– Used to account for and report proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects
Must have 1 or more restricted or committed revenue
• Must have 1 or more restricted or committed revenue sources ‐ should be majority of resources – if specific resources no longer a majority – use General Fund
• Resources should be recorded as revenues in special revenue funds
• Should not include funds held in trust
• Disclose purposes of major special revenue funds and revenues and resources used in those funds
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Governmental Fund Type Definitions (cont.)
• Capital Projects Fund
– Used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays
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• Does not need to be major facilities (major equipment replacement is acceptable)
• Excludes proprietary fund capital outlays and capital assets held in trust for others
Governmental Fund Type Definitions (cont.)
• Debt Service Fund
– Used to account for and report financial resources ,
,
g
that are restricted, committed, or assigned to expenditure for principal and interest
• Used when legally required
• Used to accumulate resources for debt service payments in future years
Governmental Fund Type Definitions (cont.)
• Permanent Fund
– Used to account for and report resources that are restricted to the extent that only earnings, not p
principal, may be used for purposes that support p , y
p p
pp
the reporting government’s programs
• Do not include private purpose trust funds
• Endowments and cemetery perpetual care funds
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Implementation Issues
• Implementation should be done retroactively
• Reclassifications made by restating fund balance for all prior periods presented
• Fund balance information in the statistical section may reflect changes prospectively, though retroactive implementation is encouraged
GASB Statement No. 51
Accounting and Financial Reporting A
ti
d Fi
i lR
ti
for Intangible Assets
Accounting and Financial Reporting for Intangible Assets
• Guidance to identify, account for, and report intangible assets
• Official definition of intangible asset
Offi i l d fi i i
fi
ibl
– Lacks physical substance
– Nonfinancial in nature
– Initial useful life extending beyond a single reporting period
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Examples of Intangible Assets
•
•
•
•
•
•
Easements
Computer software
Water rights
Timber rights
Patents
Trademarks
General Overall Guidance
• Intangible assets should be classified as capital assets
– Assets that are explicitly excluded from the scope A t th t
li itl
l d df
th
of the standard, such as capital leases, should follow existing relevant authoritative guidance
General Overall Guidance (cont.)
• Intangible assets only reported in Statement of Net Assets if identifiable
• Specific approach for intangible assets that are internally generated (e g patents or
internally generated (e.g., patents or copyrights)
• Accounting and reporting for internally generated software
• Guidance for amortization of intangibles
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General Reporting Guidance
• Intangibles acquired or created primarily for obtaining profit should be reported as investments
• Intangibles must be “identifiable” or “separable” – it can be sold, rented, transferred, etc.
Internally Generated Intangibles
• Examples include patents, copyrights, and, most commonly, software
• Three criteria for such assets to be capitalized
– Objective and service capacity of asset has been Objective and service capacity of asset has been
determined
– Feasibility of project has been demonstrated
– Intention to continue and complete project has been demonstrated
Special Guidelines for Software
• Management must also authorize and commit funding for software project before outlays may be considered eligible for capitalization
– Thus, capitalization period begins with authorization and commitment to project
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– Capitalization period ends with substantial completion (i.e., software is ready for use)
• Activities in pre‐ and post‐capitalization phases should be expensed (i.e., training costs not capitalized)
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Overall Amortization Guidelines
• Useful life for amortization should equal service capacity expectation not to exceed length of contractual provisions • Intangibles with indefinite useful lives should Intangibles with indefinite useful lives should
not be amortized
– This may change, assuming an impairment has not occurred, if conditions convert a useful life to a definite period
Implementation Guide Clarifications for Intangibles
• Websites • Interest capitalization requirements, if applicable, do apply to intangible projects just like they do for tangible projects (for business‐
type activities only)
Implementation Guide Clarifications for Intangibles
• Purchased/licensed software that is not internally generated is an intangible
– Example...5 year licensing agreement
– Intangible asset offset by commitment of obligation to pay
• No amortization of an intangible with an indefinite useful life 16
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Implementation Provisions
• Provisions were effective for FYs that began after 6/15/09
• General retroactive implementation required
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i d
– Phase 1 and 2 governments required except for intangibles with indefinite useful lives and those that were internally generated
– Phase 3 governments optional
GASB Statement No. 55
The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments
GASB Statement No. 55 (cont.)
• Basically “copies” existing GAAP hierarchy standards from the AICPA’s Auditing Standards to the GASB standards as to allow for ease of
to the GASB standards as to allow for ease of access
• New statement would not establish new hierarchy or change existing hierarchy
• Effective upon issuance
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GAAP Hierarchy (a review)....
• GASB Statements and Interpretations
• GASB Technical Bulletins and AICPA audit guides and SOPs if cleared by GASB
• AICPA Practice Bulletins if cleared by GASB
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db G S
• Implementation Guides published by GASB staff, as well as other generally accepted practices (e.g., The Blue Book)
GASB Statement No. 56
Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards
Statements on Auditing Standards
GASB Statement No. 56 (cont.)
• Guidance is not new; basically “copies” guidance that currently exists in AICPA Auditing Standards, with some slight modifications, to GASB standards related to
– Related party transactions
– Subsequent events
– Going concern considerations
• Allows for standards related to preparation of financial statements to be in GASB literature
• Effective upon issuance
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The Financial Reporting Entity: Omnibus
Overview of GASB Statement No. 61, Component Units
• Primary government versus component units
• Component units, by definition, must be legally separate
• Blending versus discrete presentation
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di
i
• GASB Statement Nos. 14 and 61 provide accounting and financial reporting guidance
Imposition of Will ‐ PG has ability to….
• Remove appointed board members at will
• Approve/modify budget
• Approve/require changes affecting revenues
• Veto/override/modify governing board decisions
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Imposition of Will ‐ PG has ability to….(cont.)
• Appoint/hire/reassign/dismiss management
• Take other actions to impose will
Financial Benefit
Financial Burden
• Accessing resources without dissolution
• Obligated to finance deficits or provide support
• Obligated in some manner for the debt of the potential component unit
Financial Reporting
• Blending
• Discrete presentation
• Note disclosure
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Blending
• Required if….
– Boards are substantially the same and there is financial benefit/burden relationship or PG has operational responsibility of CU
p
p
y
– CU provides services almost exclusively to PG or provides benefits almost exclusively to PG
– CU’s debt is expected to be entirely or almost entirely by resources of the PG
Discrete Presentation
• Required for CU’s that cannot be blended
• Shown in columns to the right of the PG
• BFS reporting requirements
– Must show major CU’s in BFS
– CU’s as individual columns in BFS
– Columns with combining statements
GASB Statement No. 62
Codification of Accounting and Financial Reporting Guidance Contained in Pre‐November 30, 1989 ,
FASB and AICPA Pronouncements
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GASB Statement No. 62
• Incorporates into GASB literature certain accounting/financial reporting guidance issued on or before November 30 1989
issued on or before November 30, 1989
– FASB Statements and Interpretations
– Accounting Principles Board Opinions
– Accounting Research Bulletins of the AICPA
GASB Statement No. 62 (cont.)
• Supersedes GASB Statement No. 20 – Eliminates election provided in paragraph 7 for enterprise funds and business‐type activities to apply post‐11/30/89 FASB St t
Statements/Interpretations that do no conflict or t /I t
t ti
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fli t
contradict GASB guidance
• These entities may continue to apply, as other accounting literature, post‐11/30/89 FASB pronouncements that do not conflict with GASB
GASB Statement No. 62 (cont.)
• Codification includes all accounting standards within levels A through D of current GAAP hierarchy
• Codification simply reorganizes US GAAP pronouncements topically 22
7/13/2011
Purposes of New Codification and Implementation
• Reduce amount of time and effort required to research an accounting issue
• Improve usability of the literature (thus bili
f h li
(h
mitigating the risk of noncompliance)
• Enhances opportunity for real‐time updates
• Effective for FYs that begin after December 15, 2011
Common Accounting and Financial Reporting Problems
Financial Reporting Problems
Letter of Transmittal and Independent Auditor’s Report
• Date of the letter of transmittal should be no earlier that the date of the independent auditor’ss report
auditor
report
• Auditor’s opinion should opine on budgetary comparison information when presented as part of basic financial statements
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MD&A
• Scope of analysis should be comprehensive (and an actual analysis)
– Governmental and business‐type activities
– General fund and other major funds
j
– Budgetary variances (original, final, and actual)
• 3 years of condensed financial data if comparatives are presented
• Include appropriate discussions of capital asset and long‐term debt activity
Component Units
• Avoid blending component units that should be discretely presented
• Component unit data should be complete and consistent
Statement of Net Assets
• Calculate the net pension /OPEB obligation correctly (e.g., include all contributions)
• Pension or OPEB liabilities are long‐term, not i
O
li bili i
l
current
• Debt should be reported net of related premiums or discounts
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Statement of Net Assets (cont.)
• Invested in capital assets, net of related debt should be calculated correctly
– Unexpended bond proceeds (restricted)
– Bond issuance costs (not part of calculation)
Bond issuance costs (not part of calculation)
– Internal borrowings (not part of calculation)
– Intangible capital assets (part of calculation)
– Refunding bonds (part of calculation, assuming they are replacing capital related debt)
Statement of Activities
• Levied taxes versus “shared” taxes
• Significant revenues should be reported separately
l
• Refrain from using the term “capital outlay” in accrual‐based statements
Statement of Activities (cont.)
• Intergovernmental expenses should be reported within the appropriate functional category
• Only significant amounts should be reported as special items
– It is possible for special items to be reported at one level of reporting and not another (i.e., government‐wide versus fund level)
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Fund Financials
• All major funds should be reported properly
• Reconciliations to the government‐wide statement of activities should focus only on changes during the reporting period
Governmental Funds
• Certain accrued liabilities should only be reported in governmental funds “to the extent that the liabilities mature each period”
– Claims and judgments
– Compensated absences
– Termination benefits
– Landfill closure and postclosure care costs
– Pollution remediation obligations
– Operating leases with scheduled rent increases
Governmental Funds (cont.)
• New debt issuances (including refundings)
– Face value of debt as other financing source
– Premium reported as other financing source
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i
– Discount reported as other financing use
– Bond issuance costs reported as expenditures
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Governmental Funds (cont.)
• Other financing sources/uses
– Face value of long‐term debt at issuance
– Original issue premiums and discounts
– Payments to escrow from proceeds of refunding bonds
– Sales of capital asset and insurance recoveries (if not a special item)
– Transfers
– Debt service on demand bonds classified as fund liabilities
– Reclassification of demand bonds as fund liabilities
Proprietary Funds
• Balance sheet/statement of net assets must be reported in a classified format (contrast with option at government‐wide level)
• Provide detail on major categories of Provide detail on major categories of
restricted net assets
• Capital contributions should be reported consistently (between government‐wide and fund financials)
Proprietary Funds (cont.)
• “Cash flows from operating activities” is the residual category of the statement of cash flows
• Noncash events should be separately reported
– Capital asset contributions
– Changes in FMV of investments
– Inception of a capital lease agreement 27
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Fiduciary Funds
• Pension plans and OPEB plans need to be reported as separate funds
• Provide sufficient detail on investments for id
ffi i
d il
i
f
pension and OPEB plans
• Employers must report on‐behalf payments made directly to a pension or OPEB plan
Note Disclosures
• Adequately describe criteria used for identifying component units
• Disclose investment policies
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• Report changes in long‐term liabilities at gross rather than net amounts
Note Disclosures (cont.)
• Provide new pension disclosures as per GASB Statement No. 50, Pension Disclosures
– Current year’s data from the schedule of funding C
t
’ d t f
th
h d l f f di
progress
– Reference to the full schedule of funding progress
– Actuarial assumptions used
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Note Disclosures (cont.)
• Distinguish pension/OPEB cost from the annual required contribution (will occur when there is a net pension obligation)
• Required note disclosures for pollution remediation
• Required note disclosures for endowments
Required Supplementary Information
• Schedules of funding progress for pensions and OPEB should contain all required data dO
h ld
i ll
i dd
elements
– Both actuarial value of plan assets and the actuarial accrued liability (not just the net unfunded actuarial accrued liability)
SAS 112
• Issued by the AICPA • Statement on Auditing Standards No. 112, Communicating Internal Control Related Matters Identified in an Audit
Matters Identified in an Audit
• Had an immediate impact on governments nationally
• Smaller governments with limited staff profoundly affected
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Overview of SAS 112
• Establishes standards for auditors to evaluate internal control
• Effective for governments with fiscal years ff i f
i h fi l
ending on or after 12/15/06
• Auditors must identify any deficiencies they note
Types of Deficiencies
• Control deficiency
– Weakness in internal control that could be debilitating
• Significant deficiency
Significant deficiency
– More than a remote chance that a control deficiency will result in misstatement
• Material weakness
– More than a remote likelihood of misstatement
Statement on Auditing Standards No. 115
• Communicating Internal Control Related Matters Identified in an Audit
• Effective for periods ending on or after December 15 2009
December 15, 2009
• Supersedes SAS No. 112 of the same name and is designed to bring consistency to terminology used in audit sector
• Main changes relate to definitions of material weaknesses and significant deficiencies
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Types of Deficiencies
• Control deficiency
– Weakness in internal control
• Significant deficiency
– Less severe than a material weakness, yet Less severe than a material weakness yet
important enough to merit attention
• Material weakness
– More than a reasonable possibility that a material misstatement will not be prevented, detected, or corrected on a timely basis
Deficiencies that are Indicators of Material Weaknesses
• Identification of fraud (period)
• Restatement of previously issued financial statements to correct material misstatement
Identification of material misstatement that
• Identification of material misstatement that auditors perceive would not have been detected by entity’s internal control
• Ineffective oversight of financial reporting and internal controls by those charged with governance
Common Concerns of SAS 112/115
• Auditor prepared financial statements
– Single biggest concern for smaller governments – Further emphasizes the responsibility of management for the preparation of the external
management for the preparation of the external financial statements
– Very much a “grey” area related to auditor judgment on “assisting” versus “preparing”
– “Convenience” versus “necessity”
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Common Concerns (cont.)
• Auditor prepared statements (cont.)
– Outsourcing bookkeeping
– Outsourcing financial statement preparation
– Willingness of Governing Boards to accept noted Willingness of Governing Boards to accept noted
deficiencies
• Understanding the auditor’s perspective
• Perception of “competence” • “Cost” versus “benefit”
Common Concerns (cont.)
• The “Fine Line”
– Conversion of records
– Preparation of journal entries
• Other issues with SAS 112/115
– Role of the management letter
– Oversight agency perceptions and expectations
Purpose of SAS 112/115
• Establishes standards for auditors to evaluate i
internal control and identify and communicate l
l d id if
d
i
deficiencies they note
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