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Darcy Spilchen, CA, CFP, CMA
Partner – Parker Quine LLP in Yorkton
17 years experience in audits.
Audit team leader and fieldwork supervisor
on the audits of 15 towns, 5 villages, 1 city.
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Steve Brown, B.Admin, CGA
Senior Financial Analyst, Municipal Affairs
Currently assisting in the implementation of
PS 3150.
Experience in both commercial and
government accounting environments.
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To understand and interpret financial
statement information.
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To perform basic analytical analysis on
financial statement information.
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To better understand municipal budgeting in
the new environment.
1. Financial Statement Introduction
2. Financial Statement Analytical Review
3. Municipal Budgeting discussion
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Handout #1 – Sample Municipal Financial
Statements
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Handout #2 – Municipal Budgeting Session
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Introduction
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A review of the current financial statements
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Basic analytical review of the statements
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Issues going forward in 2010 and beyond
 Why?
▫ Accountability
▫ A lot can be learned about a municipality from
financial statement review :
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what it’s priorities are;
how well it plans for the future;
how well it manages its resources;
and what kind of resources it has.
 Demonstrates how public funds are used in a
municipality.
 1990’s and before - little or no national
accounting standards.
 Public Sector Accounting Board (PSAB) of
Canadian Institute of Chartered Accountants
(CICA) was established to issue standards on
accounting and financial reporting.
 Saskatchewan municipalities have been required
to prepare financial statements in accordance
with PSAB standards since 2002.
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Current format is prescribed by the PSAB.
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Collaborative effort involving Municipal
Affairs, municipal auditors and
Saskatchewan’s municipal associations.
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Significant changes were required to the
financial statements due to the new
accounting requirements in 2009.
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New accounting standards prescribed by
PSAB in 2009:
 Adoption of full accrual accounting.
 Tangible Capital Asset Reporting.
 A municipal financial reporting framework that is
similar to other levels of government in Canada.
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New PSAB reporting model has emphasis on:
 Annual surplus or deficit.
 Overall financial health of the municipality .
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A key measure in the new statements on the
financial health of the municipality is the net
financial assets or net debt.
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Page 5, Handout #1
Financial Assets
- Financial Liabilities
= Net financial assets
+ Non Financial Assets
= Accumulated Surplus
Accumulated Surplus
$ 711,715
$ 1,017,972
Unappropriated Surplus
Appropriated Surplus
Net Investment in
Tangible Capital Assets
Total Accumulated Surplus: $11,165,820
$ 9,436,133
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Accumulated Surplus is one aspect of the new
financial statements.
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Other aspects of the financial statement that
have changed include:
 Tangible Capital Asset Schedules
 Functional Segment Disclosure
 Accountability reports – Management ‘s
Responsibility
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Page 2, Handout #1
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Demonstrates to financial statement users
that municipal management is responsible
for the financial statements.
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Signed by an elected and administrative
official.
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Not the Auditor’s Report
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Page 3, Handout #1
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Provides the auditor’s opinion on the financial
statements attached to the auditors report.
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Four types of audit opinions:
 Unqualified
 Qualified
 Adverse Report
 Disclaimer of Opinion
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Page 3, Handout #1
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Section 1 – identifies what is being reported on,
what is management’s responsibility, and the
auditor’s responsibility.
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Section 2 – describes the auditor’s procedures with
regards to the financial statements.
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Section 3 – identifies the auditor’s opinion on the
financial statement.
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An example of an adverse audit opinion (3):
 The audit opinion states:
“ In our opinion, because the Municipality did not
record the net value of tangible capital assets and
any impairment or related amortization as
explained in the preceding paragraph, these
financial statements do not present fairly the
financial position of the Municipality as at
December 31, 2009, and the results of its operations
and its cash flow for the year then ended in
accordance with GAAP.”
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Page 5
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Purpose of Statement: to present the
financial position of the municipality on a
specific date.
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Presents the resources controlled by a
municipality.
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Page 5
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Sections of the statement are:
 Section 1 – Total Financial Assets
 Section 2 – Total Liabilities
 Section 3 – Net Financial Assets
 Section 4 – Total Non-Financial Assets
 Section 5 – Accumulated Surplus
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As part of the workshop, we will look at a
handful of financial ratios and indicators.
We will look at the balance sheet, income
statement, and the notes and schedules.
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Financial ratios are used to evaluate an
organization’s financial health, useful in
determining financial trends, and help inform
key users of the financial statements.
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Page 4
For the Statement of Financial Position, we
will look at the following financial ratios and
indicators:
1.
2.
3.
4.
5.
Change in Net Financial Assets
Cash and Liquid Investments Change
Assets to Liabilities Ratio
Municipal Debt Limit
Long Term Debt per Capita
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Page 4, Point A
Calculation – Previous year’s net financial
asset balance less current year’s balance.
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Purpose – identifies how revenues matched
against expenditures for the defined period.
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In 2009, the municipality purchased an
extensive amount of capital assets.
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Page 4, Point B
Calculation – Previous year’s cash & temp inv.
asset balance less current year’s balance.
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Purpose – shows how the cash position has
changed year over year
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In 2009, the municipality had a decrease of
$1,205,633 in cash assets.
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Page 4, Point C
Calculation – Total assets owned by a
municipality divided by total liabilities.
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Purpose – shows the extent to which a
municipality is financed by debt.
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In 2009, the ratio increased from 2.78 to 3.15.
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Page 4, Point D
Calculation – Total debt outstanding divided
by the municipal debt limit.
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Purpose – Indicates the municipality’s
borrowing limits.
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Some debt is allowed to exceed a prescribed
limit.
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Page 4, Point E
Calculation – Total debt outstanding divided
by population of a municipality.
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Purpose – Develop a trend on how much debt
the municipality is carrying.
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From 2008 to 2009, the debt per person has
decreased from $2,334 to $2,266.
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Page 7 in Handout
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Purpose of Statement: To present the
financial activity for a defined fiscal period.
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Similar to a profit and loss statement in a
commercial operation.
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Expenses are presented by
functional/program area in a municipality.
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Page 7
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Areas of the statement are:
 Section 1 – Municipal Operating Revenues
 Section 2 – Operating Expenses (Incl.
Amortization)
 Section 3 – Municipal Capital Revenues
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Page 7
Some of the financial indicators on the
Statement of Operations are:
 Long Term Debt Flexibility
 Level of Capital Investment
 Municipal Reserve Size
 Municipal Administration
 Third Party Transfers
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Page 6, Point F
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Calculation – Long Term Debt repayments
divided by total municipal operating
revenues.
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Purpose – shows how much flexibility a
municipality has to respond to operational
changes.
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Food for thought,
 If 24% of a municipality’s existing cash flow was
going to debt repayment, how much room will the
municipality have to react to a 3% increase in
operational expenses?
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Page 6, Point G
Calculation – tangible capital asset
acquisitions divided by total revenues.
Purpose – shows what percentage of
revenues have gone into municipal
infrastructure.
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Page 6, Point H
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Calculation – Appropriated Reserves divided
by total annual operating revenues.
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Purpose – shows the percentage of annual
operating revenues that are in municipal
reserves.
Reserves play in a key role in long term
financial plans.
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Page 6, Point I
Calculation – General government expenses
divided total operating expenses.
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Purpose – shows the percentage the
municipality spends on administration
related expenses.
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Caution when comparing to other
municipalities due to allocating differences.
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Page 6, Point J
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A financial indicator suggested by PSAB.
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Calculation – Third party transfers received divided by
total operating revenues.
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Could be done with other third party transfers such as
inter-municipal agreements, capital transfers, and other
outside revenue sources.
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Purpose – shows how much the municipality receives in
third party revenue.
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Wherever possible, management should
identify trends, ratios and variances in their
operations.
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The analysis is part of a municipality’s
municipal controls to ensure municipal
objectives are achieved.
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A common form of analysis is budget to
actual comparisons, or variance analysis.
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Page 8 & 9
Explain to council not only where the budget
variances occurred, but why?
There could be a number of reasons for
variances, which is why they should be
investigated. Some examples are:
 Custom work is higher due to higher volumes.
 Water revenues are up because rates increased after the
budget was set.
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Page 11
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Purpose: Reconcile the annual surplus/(deficit) back
to the change in net financial assets or debt.
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Useful to reconcile accrual surplus back to the cash
surplus.
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For 2009 provides the most relevant comparison of
actual vs. budget since some of the 2009 budgets
were not prepared on the accrual basis.
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Page 11
Sections included in Statement 3 are:
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Section 1 – Accrual surplus/(deficit) from Statement 2.
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Section 2 – Net change in tangible capital asset
transactions.
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Section 3 – Net change in other non-financial assets.
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Section 4 – Increase or decrease in Net Financial Assets.
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If we tie Sections 1 through 3 together, we
arrive at Section 4.
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Actual to budget comparison was favorable
because ($879K) was less than ($1,401K) in
section 4.
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Net difference between budget and 2009
actuals was $521,947.
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Page 10
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Reconciles the change in net financial asset
back to actual cash change.
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Adding the numbers identified on Page 12:
 $879,710 + ($779,519) = $(100,191)
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Debt transactions and reserve transfers are
not revenues nor expenditures.
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Reserve transfers are internal allocations:
 only relevant for internal reporting (cash basis)
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Debt transactions are offsetting:
 $1 million loan adds to the assets and to the
liabilities
 only relevant for internal reporting (cash basis)
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Page 13
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Purpose: Provides the breakdown of how
cash balances change from one year to the
next.
Broken down by sections:
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 Section 1 – Operating changes
 Section 2 – Capital changes
 Section 3 – Investing changes
 Section 4 - Financing changes
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Purpose: Provides further details to the
numbers presented in the financial
statements.
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The workshop handout will look at notes such
as consolidation, land for resale, and
government transfers.
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Page 15, Financial statement handout
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Municipality and controlled entities are
consolidated in a municipality’s financial
statements.
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Consolidation is intended to show the financial
statement users all the resources under direct or
indirect control by the municipality.
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Page 15
Control over organizations is deemed where:
 A municipality has the ability to directly control the
organization’s activities through the board of
directors, key personnel appointments, or approve
budgetary documents.
 There also may be deemed control if the municipality
has responsibility for debts and losses of the
organization.
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Page 15 (d)
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Revenue should be recognized in the year it
was earned or authorized, regardless of
receipt.
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Some municipalities are recognizing the
revenue on a proportionate basis to which
the project being funded is finished.
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PSAB is still working on providing better
flexibility in this section.
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A number of exposure drafts have been
provided to replace the existing government
transfers section.
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The latest exposure draft from PSAB on this
standard closed September 15, 2010.
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Page 17
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Provides a summary of the details found in a
municipality’s TCA policy.
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Items such as asset useful lives, capitalization
of interest, and amortization methods are
found in the notes.
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Page 17
Identifies the key program or service delivery
areas in the municipality.
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Describes what each function or program
area represents.
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Revenues and Expenses are presented
around functional/program areas.
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Page 19
Breakdown between tax title property and
other land for resale.
Land for resale includes only costs directly
related to achieve sale to 3rd party.
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Page 19
Money that has been received but not spent
or earned by the municipality.
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Project reports from contractors, municipal
employees, and other stakeholders can
identify the progress of capital projects.
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This item ties to the discussion on
government transfers.
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Page 21, Financial statement handout
Not a new note, carried over from 2002.
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This note recognizes the reserve established
for decommissioning a landfill at the end of
it’s useful life.
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Outside assistance might be required to
develop the long term financial plan for the
landfill reserve.
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Page 21
A note change for 2009.
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Identifies the municipality’s debt limit which
is defined as it’s own source revenue.
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Saskatchewan Municipal Board is the
regulatory body over long term borrowing in
Saskatchewan.
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Page 23
Details taxes and unconditional revenues
received by the municipality.
These revenues are generally not tied to a
particular function or program area in a
municipality.
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Page 25 - 33
Revenue segmentation by functional area is a
requirement of PSAB. (Section 2700)
Details the municipal fees, grants and other
revenues by functional area while
segregating operating and capital revenues in
each category.
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Page 35 - 39
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Not significantly different from 2002
statement.
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Expenses organized by functional area.
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Amortization now recorded in replace of
capital expenditures.
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Page 35, Point K
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Calculation – Allowance for uncollectables
divided by total operating revenues.
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Purpose – To measure how much revenue is
lost to bad debt every year.
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Page 41 & 43
Purpose: Summarizes revenues and expenses
for each function for 2009 & 2008.
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Taxes and Unconditional revenues are left
unallocated at the bottom of the schedule.
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All other revenues and expenses are allocated
by functional areas.
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Page 45
Purpose: Show TCA values by asset type.
(Roads, Buildings, Equipment)
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Schedule setup to show:
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 Section 1 - Asset cost at the top of the schedule
 Section 2 - Accumulated Amortization
 Section 3 - Net Book Value
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Page 44, Point I
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Calculation – Net Book Value of TCA divided
by Book Value of TCA.
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Purpose – The older the assets are, the lower
the percentage is. If the assets are newer,
less amortization will be taken on them,
hence the percentage will be higher.
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Page 47
Purpose: Separates the TCA assets by
functional area as opposed to asset type.
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Overall format is the same as Schedule 6.
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Useful for identifying areas in a municipality
with a significant asset base.
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Accumulated Surplus
$ 711,715
$ 1,017,972
Unappropriated Surplus
Appropriated Surplus
Net Investment in
Tangible Capital Assets
$ 9,436,133
Total Accumulated Surplus: $11,165,820
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Page 49
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Ending surplus or deficits are closed off to
accumulated surplus at the end of every fiscal
period.
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Three areas to the statement:
 Section 1 - Unappropriated Surplus
 Section 2 – Appropriated Surplus
 Section 3 – Net Investment in TCA
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Financial information evaluation can assist
with achieving municipal objectives.
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The most relevant approach to financial
analysis is to look at year over year anlaysis.
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Financial information can be presented using
different mediums or avenues going forward.
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Regulations will be updated in the near future.
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Options will be available to those who wish to look
at amortization more closely.
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Moving towards asset management - pilots
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Auditors have indicated there should be less time
and effort spent on the 2010 audit than the 2009
audit.
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Auditor Issues:
 Not expecting any changes of significance on the
2010 financial statements template.
 Change in the auditing profession as existing
Canadian auditing standards are to be replaced
with international auditing standards that will be
adopted as new Canadian Auditing Standards
(CASs)
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New CASs may mean auditors will have
additional and or different questions of you, and
may require additional and or different file
documentation
Administrators can do little to prepare for this.
The expectation is that this extra time required
will be less than the additional time need to
complete the 2009 audit
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Time will be needed to adapt and learn the new
accounting standards, it won’t happen
overnight.
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Financial analysis can be used to assist in
managing municipal operations.
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Documents and support will be available on the
Sasktca.ca website until March 2011.