Cash and Cash Equivalents and Investments
Theory, Client Process and Program
Fiscal Year Ended 12/31/2004
Received From LGS Staff:
Date Received:
Received By Management Designee:
Date Received:
Theory
Moneys held by the County are classified by State statute into two categories. Active moneys are
public moneys determined to be necessary to meet current demand upon the County treasury. Active
moneys must be maintained either as cash in the County treasury, in commercial accounts payable or
withdrawable on demand, including negotiable order of withdrawal (NOW) accounts, or in money
market deposit accounts.
Protection of the County's deposits is provided by the Federal Deposit Insurance Corporation, by
eligible securities pledged by the financial institution as security for repayment, by surety company
bonds deposited with the treasurer by the financial institution or by a single collateral pool
established by the financial institution to secure the repayment of all public moneys deposited with
the institution.
Moneys held by the County which are not considered active are classified as inactive. Inactive
monies may be deposited or invested in the following securities:
1. United States Treasury Notes, Bills, Bonds, or any other obligation or security issued by the
United States Treasury or any other obligation guaranteed as to principal and interest by the
United States;
2. Bonds, notes, debentures, or any other obligations or securities issued by any federal
government agency or instrumentality, including but not limited to, the Federal National
Mortgage Association, Federal Home Loan Bank, Federal Farm Credit Bank, Federal Home
Loan Mortgage Corporation, Government National Mortgage Association, and Student Loan
Marketing Association. All federal agency securities shall be direct issuances of federal
government agencies or instrumentalities;
3. Written repurchase agreements in the securities listed above provided that the market value
of the securities subject to the repurchase agreement must exceed the principal value of the
agreement by at least two percent and be marked to market daily, and that the term of the
agreement must not exceed thirty days;
4. Bonds and other obligations of the State of Ohio or its political subdivisions, provided that
such political subdivisions are located wholly or partly within the County;
5. Time certificates of deposit or savings or deposit accounts, including, but not limited to,
passbook accounts;
6. No-load money market mutual funds consisting exclusively of obligations described in
division (1) or (2) of this section and repurchase agreements secured by such obligations,
provided that investments in securities described in this division are made only through
eligible institutions;
7. The State Treasurer's investment pool (STAR Ohio);
8. Securities lending agreements in which the County lends securities and the eligible
institution agrees to exchange either securities described in division (1) or (2) of this section
or cash or both securities and cash, equal value for equal value;
9. High grade commercial paper in an amount not to exceed five percent of the County’s total
average portfolio; and,
10. Bankers acceptances for a period not to exceed 270 days and in an amount not to exceed ten
percent of the County’s total average portfolio.
Investments in stripped principal or interest obligations, reverse repurchase agreements and
derivatives are prohibited. The issuance of taxable notes for the purpose of arbitrage, the use of
leverage and short selling are also prohibited. An investment must mature within five years from the
date of purchase unless matched to a specific obligation or debt of the County, and must be
purchased with the expectation that it will be held to maturity. Investments may only be made
through specified dealers and institutions. Payment for investments may be made only upon delivery
of the securities representing the investments to the treasurer or qualified trustee or, if the securities
are not represented by a certificate, upon receipt of confirmation of transfer from the custodian.
For balance sheet presentation, all deposits and investments of the County must be categorized as
"cash and cash equivalents" or as "investments". Guidance for distinguishing between "cash and
cash equivalents" and "investments" is found in the Governmental Accounting Standards Board
Statement No. 9, "Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and
Governmental Entities that Use Proprietary Fund Accounting", and Section 2450 of the Codification.
In general, dollars that are part of a cash management pool that permits the deposit or withdrawal of
cash at any time without notice or penalty, and dollars that are represented by investments with a
maturity at the time of purchase by the County of three months or less, are considered to be cash and
cash equivalents. Only investments with a maturity of greater than three months at the time of
purchase and which were not purchased using cash from the pool are presented as "investments" on
the balance sheet.
FDIC Security Agreement
GASB Statement No. 3, ADeposits with Financial Institutions, Investments (including Repurchase
Agreements), and Reverse Repurchase Agreement,@ requires disclosures about collateral on deposits
with financial institutions. In applying Statement No. 3, the County should be aware of a provision
in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) that could
affect their rights to that collateral.
Under Statement No. 3, deposits and investments may fall under three different categories. The
County's deposits and investments are categorized as either (1) insured or registered, or securities are
held by the County or its agent in the County’s name, (2) uninsured and unregistered, with securities
held by the counterparty's trust department or agent in the County's name or (3) uninsured and
unregistered, with securities held by the counterparty, or by its trust department or agent but not in
the County's name.
Under Section 1823(e) of FIRREA, a security agreement, including a pledge of collateral for a
deposit, is not valid against the FDIC unless it satisfies four requirements:
1.
2.
3.
4.
It must be in writing.
It must be executed contemporaneously with the acquisition of the asset by the depository
institution.
It must be approved by the institution’s board of directors or loan committee, and that
approval must be reflected in the minutes of the board or committee.
It must be an official record of the depository institution since it was executed.
If these four requirements are not fulfilled, the FDIC may be able to void a perfected security interest
and leave the County with only the right to share with other creditors in the pro rata distribution of
the assets of a failed institution.
Under State statute, deposits greater than $100,000 are usually collateralized by a collateralized pool
or, in some instances, specifically pledged collateral. Under the guidelines of Statement No. 3, if the
deposits are collateralized by a pool, the deposits greater than $100,000 would be classified in
category 2, and the deposits collateralized by specifically pledged collateral would be classified in
category 1. Under the FIRREA, both the collateralized pool and the specifically pledged collateral
may be classified as category 3, if the four requirements are not fulfilled.
It is possible that the County is not in compliance with certain requirements of Section 1823(e), for
example, the provision that the security agreement be approved by the institution’s board of directors
or loan committee, and that the approval be reflected in the minutes of the board or committee. If the
section’s requirements are not complied with, the County should not report its deposits as being
collateralized; that is, they should be classified in category 3.
Accrued Interest and Distribution:
Interest earned on all deposits and investments but not received as of the balance sheet date will be
accrued and distributed to the governmental funds determined to receive such interest under the Ohio
Constitution and the Revised Code, and the enterprise funds, internal service and non-expendable
trust funds from which the investment principal was derived.
The county has accrued interest from the following sources:
1.
2.
3.
4.
5.
Certificates of Deposit
Star Ohio
Repurchase Agreements
U.S. Treasury Notes
U.S. Instrumentality Securities
GASB Statement No. 24 Information
In instances where another governmental unit may be spending funds on behalf of the County,
additional journal entries would be necessary to record any cash balance held on behalf of the
County. This occurs when the County has contracted with Lancaster City to maintain the activity of
a Community Corrections grant on the City’s records. The receipt and the expense of the grant
monies should be shown as a special revenue fund on the County’s books.
When this activity occurs, the County is required to receive confirmation from the City on the
amount of funds remaining at the City. This ending balance will be shown as “Cash with Fiscal
Agent” in the Community Corrections special revenue fund.
GASB Statement No. 31 - Accounting for Certain Investment and External Investment Pools:
GASB adopted Statement No. 31, AAccounting and Financial Reporting for Certain Investments and
for External Investment Pools@ in March, 1997. This Statement requires the recording of certain
investments at market on the financial statements and thereby recognizing the gain or loss within
each fiscal year. Provisions within this Statement are effective for financial statements with periods
beginning after June 15, 1997. The following is a summary of the Statement for your information.
Investments in interest-earning investment contracts, open-end mutual funds, debt securities, and
equity securities are to be valued at fair value that have remaining maturities at the time of purchase
greater than one year. Money market investments and participating interest-earning investment
contracts with a remaining maturity at the time of purchase of one year or less may be reported at
amortized cost. Fair value is the amount at which an investment could be exchanged in a current
transactions between willing parties, other than in a forced or liquidation sale.
Counties participating in a government- or non-government-sponsored external investment pool that
are not registered with the SEC should determine the fair value according to the face value per share
of the pool’s underlying portfolio. But if the pool is a 2a-7 pool, participants should determine the
fair value of their holdings according to the pool’s share price. An external investment pool is where
the monies of more than one legally separate entity is invested, on the participants’ behalf, in an
investment portfolio; of which one or more of the participants is not part of the sponsor’s reporting
entity.
Counties must report all investment income, including changes in the fair value of investments, as
revenue in their operating statement. Proprietary funds should apply FASB Statements No. 52
AForeign Currency Translations@ and No. 80, AAccounting for Futures Contracts,@ if applicable.
The change in fair value is the difference in the fair value of investments at the beginning of the year
and at the end of the year, taking into consideration investment purchases and sales. Therefore, this
amount includes both realized and unrealized gains and losses. The calculation of the change in fair
value can be done by using either the specific investment identification method or the aggregate
method.
If investment income is assigned to another fund for other than legal or contractual reasons (e.g.,
management decision) the income should be recognized in the fund that reports the investments.
The transfer of that income to the recipient fund should be reported as an operating transfer.
Disclosures in the financial statements should include:
1.
2.
3.
4.
5.
6.
The methods or significant assumptions used to estimate the fair value of investments, if that
fair value is based on other than quoted market prices.
The policy for determining which investments, if any, are reported at amortized cost.
For external investment pools that are not SEC-registered, a brief description of any
regulatory oversight for the pool and whether the fair value of the position in the pool is the
same as the value of the pool shares.
Any involuntary participation in an external investment pool.
If information cannot be obtained from a pool sponsor, the methods used and significant
assumptions made in determining the fair value and the reasons for making such estimates.
The amount of income from investments associated with one fund that is assigned to another
fund.
Client Process
The Fairfield County treasurer receipts are deposited in a central bank account. Monies for all funds
are maintained in this account or are temporarily used to purchase investments. Individual fund
integrity is maintained through the County's records.
Monies in bank accounts managed and invested by the treasurer will be considered a cash
management pool. At year end, all cash balances and all investments acquired with money from the
pool, regardless of maturity, will be reported as cash and cash equivalents. Each fund's interest in the
pool will be presented on the balance sheet in the account "equity in pooled cash and cash
equivalents".
Fairfield County has one main checking/repurchase agreement account with Community Bank and
several investments (governmental securities, STAROhio, CD’s) which are part of equity in pooled
cash and cash equivalents. The County also has several segregated accounts from various
departments. A list of all investments and bank accounts are shown on C-5. All of the bank
statements and investment information is provided to the County Auditor’s Office with the 12/31/04
questionaire. LGS is given all of the information needed to organize this section. LGS prepares a
summary of all the bank statements, investments, and County treasury information (cash position,
daily balances, …) and it is listed on C-5 (cash reconciliation) and C-3 (cash lead).
Unrecorded Cash and Interest items are also copied by the County Auditor’s Office for LGS use.
The County has a petty cash funds within the various departments. If material, they will be posted to
“Cash and Cash Equivalents”.
The County only invests in Star Ohio, repurchase agreements, and Federal Securities. All
investments are considered cash because they were purchased with the cash pool of funds. Due to
the implementation of GASB 31 in prior years, the Federal Securities will be booked at fair market
value which was calculated by Productive Portfolios. The Star OHIO and CD investments are posted
at cost.
Program for Cash
1.
Obtain a copy of the Cash Position report which will summarize each fund's "ending
balance" cash at 12/31/XX.
2.
Obtain a copy of the cash reconciliation from the County between the County Auditor and
Treasurer.
3.
Obtain copies of all 12/31/xx bank statements and reconciliations. Tie year end bank
balances to the balances shown on the cash reconciliation prepared as part of the County's
cash basis annual report.
4.
Obtain copies of all 12/31/xx outstanding investments. Tie year end investments to the
investments shown on the cash reconciliation prepared as part of the County's cash basis
annual report.
5.
The cut-off date for receipt and disbursement transactions is the balance sheet date. Cash
receipts are collected at all of the County buildings and turned into the treasurer's office.
Review the receipt forms for cash collections made prior to December 31 and entered into
the system after December 31. This search may be limited to ten to fifteen days. Interest on
depository accounts should be checked to determine that interest credited to the County's
bank account during December was receipted by the County during December. Any
collections made during December, but not entered into the system until January, will be
reflected as revenue and cash in the appropriate fund.
January 1, 2004 Reversing Entry
Debit: Revenue Account
Credit:
Equity in Pooled Cash and Cash Equivalents
December 31, 2004 Adjusting Entry
Debit: Equity in Pooled Cash and Cash Equivalents
Credit: Revenue account
6.
Determine the existence of petty cash and change funds on hand in various buildings as of
year end. Petty cash is used as a reconciling item on the County's annual report. For GAAP
purposes, petty cash will be reported as part of cash and cash equivalents in the general fund.
Verify that all change funds have been turned in prior to December 31. Any outstanding
change funds will be reported as part of cash and cash equivalents.
7.
Review fund cash balances for any funds with a negative balance. Those negative cash
balances will be reclassified as an "interfund payable." Generally, an interfund receivable
will be established in the general fund, the only fund not restricted from making such a loan.
The journal entries for this activity are discussed in the Interfund Activity section.
8.
Review investment activity during the year to determine if it is consistent with the policies
set forth by the County and the Ohio Revised Code. Note any significant deviations from
these policies for possible note disclosure.
9.
Schedule the collateralization of the County’s deposits and investments. If necessary,
confirm the FDIC coverage with the financial institutions.
10.
Compute the estimated interest earned from other funds that was posted to the general fund.
11.
Prepare a worksheet which will reconcile the cash basis fund balance on the County's books
to cash by fund at year end as it will be reported on the balance sheet.
Program for Deposits and Investments
1.
Prepare a detailed worksheet of deposits and investments held at 12/31. Include the
following information:
a.
b.
c.
d.
e.
f.
g.
h.
Description of the investment
Identification number, i.e., account, serial numbers
Purchase date
Maturity date
Term
Principal
Interest rate
Days invested during the balance sheet year
i.
j.
k.
Accrued Interest
Purpose (fund)
Market value
2.
Prepare a reconciliation between Statement 3 and Statement 9 definitions of cash and
investments.
3.
Calculate accrued interest receivable on all investment instruments at 12/31. Note, this
accrued interest represents the amount of interest earned during the reporting period, but
received in the following year.
Calculation: Principal x Interest x Days Invested in Balance Sheet Year
Rate
(360 or 365 days)
4.
Distribute to the applicable funds the accrued interest calculated in Step 3 according to the
County's distribution policy.
5.
The following journal entries should be made:
12/31 Modified accrual journal entry
Debit: Accrued Interest Receivable
Credit: Interest Revenue (if received within the available period)
Credit: Deferred Revenue (if received outside the available period)
12/31 Full Accrual journal entry
Debit: Deferred Revenue
Credit: Interest Revenue
6.
Example:
Assumptions:
1.
The county purchased on December 3 a $900,000, 6.02% certificate of
deposit from The National Bank that will mature January 7.
2.
The county purchased on November 19 a $500,000, 7.45% certificate of
deposit from City Savings & Loan that will mature January 21.
3.
All interest earned will be distributed to the general fund.
Calculations:
1.
$900,000 x 6.02% x 28/360 days = $4,200
2.
$500,000 x 7.45% x 42/360 days = $4,346
3.
Note, calculations are rounded to the nearest dollar.
Journal Entries:
1.
Accrued interest receivable $4,200
Interest Revenue
$4,200
To record interest earned at 12/31 on $900,000, 6.0% CD at maturing 1/7.
2.
Accrued Interest Receivable $4,346
Interest Revenue
$4,346
To record interest earned at 12/31 on $500,000, 7.45% CD maturing 1/21.
7.
Review disclosure requirements outlined in Statement No. 3 of the Governmental
Accounting Standards Board.
8.
Prepare a detailed worksheet of deposits and investments held by the County at 12/31.
9.
Example:
Deposits: All deposits are in a single financial institution and are carried at cost plus accrued
interest.
Description
Now #60125
S&L 114326
Carrying Amount
$100,000
2,410,000
Bank Balance Fund Description of Credit Risk
$100,000
Pool
Insured (FDIC)
2,620,000 Pension Collateral held by bank's
trust department in County's
name.
Investments. Investments are stated at cost net of unamortized premium or discount.
Market values include accrued interest only if carrying amounts do.
Description Carrying Amount
Repurchase
agreement
$47,000,000
U. S. Treasury
Note
1,518,000
10.
Market
Value
Fund Description of Credit Risk
$47,000,000
Pool Securities held by dealer.
1,550,000
Capital Held by dealer subject
Projects
to SIPC.
Review investments made during the year to determine if they are consistent with the policies
set forth by the County and the Ohio Revised Code. Note any significant deviations from
these policies.