By
Andrew Laflin, CPA
Assurance & Advisory Manager, CliftonLarsonAllen
cliftonlarsonallen.com
©2013 CliftonLarsonAllen LLP
©2013 CliftonLarsonAllen LLP
Accounting Complexities
Facing Local Governments II
• This session will provide answers to a series of questions
that present complex and often overlooked accounting and
financial reporting issues. Examples include
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©2013 CliftonLarsonAllen LLP
Learning Objectives
Prepaid expenses
Debt related transactions
Operating lease with scheduled rent increase
Impairment of capital assets
Termination benefits
Intangible assets: website development
• Your knowledge of old TV comedy sitcoms from the 70s,
80s, and early 90s will also be tested
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• On September 1, 2013, Somers #201 Fire District paid a
$30,000 premium relating to a commercial auto insurance
policy on its fire trucks. The premium was to cover the
months of September, October, and November. The
District’s Finance Director, John Ritter, questioned whether
or not to expense the full $30,000 on September 1st, or
record an expenditure for $10k and a prepaid asset for
$20k at 9/30/13 within the District’s general fund. How
should Mr. Ritter account for this payment? And would the
accounting treatment be different if this was a proprietary
fund?
©2013 CliftonLarsonAllen LLP
Question #1
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• GASB Cod. Sec. 1600.127b: expenditures by governmental
funds for insurance or similar services that extend over
more than one reporting period are not required to be
allocated, but may be accounted for as expenditures in the
period paid
• If the interperiod allocation method is used, a prepaid
expenditure is reported in the asset section of the
governmental fund balance sheet.
• Under GASBS 54: fund balances resulting from prepaid
amounts must be reported as nonspendable
©2013 CliftonLarsonAllen LLP
Answer #1
4
• In proprietary funds and in government-wide
financial statements, interperiod allocation is
required for significant prepaid expenses
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Answer #1, Continued
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• On March 10, 2013, the City of Urkel issued $7,500,000 of
general obligation bonds to finance the construction of a
new recreation center. Debt issuance costs were $60,000,
and the bonds were issued at a discount of $282,000. The
bond discount and $44,000 of underwriters’ fees, bond
insurance, and rating agency fees were deducted from the
bond proceeds. A month later, the City paid the remaining
$16,000 of issuance costs upon receiving an invoice from
bond counsel. The initial debt service payment is due on
11/10/13, which includes $150,000 of interest.
©2013 CliftonLarsonAllen LLP
Question #2
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• Within the debt service fund on the governmental
fund financial statements, the City recorded
$7,174,000 ($7,500,000 minus 282,000 minus
$44,000) as an other financing source. The remaining
$16,000 of issuance costs was recorded as an
expenditure when paid. Furthermore, since the debt
service payment was to be made within 60 days after
year end, the City recorded accrued interest of
$125,000 relating to the period 3/10/13 to 9/30/13.
Did Urkel record this correctly?
©2013 CliftonLarsonAllen LLP
Question #2, continued
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• GASB 34, para 87 requires bond issuance costs to be
reported as expenditures, not as other financing uses or
netted against bond proceeds, on the closing date
• GASB 34, para 88, as amended by GASB 37, para 16,
requires issuance discounts and premiums related to
general long term debt to be reported as separate
financing sources and uses
©2013 CliftonLarsonAllen LLP
Answer #2
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• GASBI No. 6, para 13 states that a government may report
a liability and expenditure for debt service on general longterm debt before it is due for payment only if:
©2013 CliftonLarsonAllen LLP
Answer #2, continued
– “Dedicated” financial resources have been accumulated in a debt
service fund AND
– The debt service is due and payable within one to several days
after year end but no more than one month after year end
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• Travolta County rents a portion of its County-owned
community center to Sweathogs Yoga Group. As an
inducement to agree to a five year lease, the County
offered Sweathogs a rent holiday for the first year.
Annual rent for years 2 through 5 is $10,000 per
year, payable on January 1st of each year. How
should Travolta County recognize rent from this
operating lease each year? Does it make a
difference if this revenue is getting reported to a
governmental fund or enterprise fund?
©2013 CliftonLarsonAllen LLP
Question #3
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• GASBS No. 13, Accounting for Operating Leases with
Scheduled Rent Increases, as amended by GASBS No. 62,
applies to all governmental fund types, that is, to
governmental, proprietary, and trust funds. It allows revenue
from operating leases with scheduled rent increases to be
recognized in the same way as for regular operating leases if
the payment schedule in the lease is “systematic and
rational”
©2013 CliftonLarsonAllen LLP
Answer #3
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• Systematic and rational means that the scheduled
rent increases are intended to cover factors such as
the following:
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Answer #3, continued
– Cost increases due to inflation.
– Property value appreciation due to appreciation in the general
real estate market or in the specific property as it matures.
– The property's availability for use.
• If these criteria are met, revenue is recognized each
year equal to the year's payment required by the
lease
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• GASBS No. 13, para 6: “Sometimes an operating lease with
scheduled rent increases contains payment requirements in a
particular year or years that are artificially low when viewed
in the context of earlier or later payment requirements. This
situation may take place, for example, when a lessor provides
a rent reduction or “rent holiday” that constitutes a financing
arrangement between the lessor and the lessee. As another
example, a lessor may provide a lessee reduced rents as an
inducement to enter into the lease.”
©2013 CliftonLarsonAllen LLP
Answer #3, continued
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• “…In these cases, the operating lease transactions
should be measured using either of the following
methods.
©2013 CliftonLarsonAllen LLP
Answer #3, continued
– The operating lease transactions may be measured on a
straight-line basis over the lease term.
– The operating lease transactions may be measured based
on the estimated fair value of the rental. The implicit
financing by the lessor of the lessee's cash flow should be
accounted for using the interest method. That is, interest
should be calculated for each period so that it results in a
constant rate of interest over the lease term on the
period's outstanding accrued lease receivable or payable.”
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• Governmental funds should apply this recognition
criterion on the modified accrual basis of accounting
and proprietary funds and trust funds should apply
the recognition criteria on the accrual basis
©2013 CliftonLarsonAllen LLP
Answer #3, continued
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• Rose County purchased land and constructed a warehouse
that served as a storage facility for utility parts and supplies,
as well as several utility trucks. Construction was completed,
and the building became operational on 4/1/04 at a total cost
of $1,700,000, which included $200,000 cost to acquire the
land. The building is being depreciated on a straight line basis
over 40 years. Then, in the beginning of June of 2013, a
tropical storm caused damage to the roof of the building,
along with additional flood damage. Total restoration costs
totaled $260,000. 20% of those costs were related to
demolition and mold removal, and the remaining 80% were
related to rebuilding walls and roof.
©2013 CliftonLarsonAllen LLP
Question #4
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• In addition, four utility trucks were parked in the
driveway of the warehouse (not parked inside the
warehouse). A large tree branch snapped and fell onto
the vehicles, severely denting each hood. The trucks
could not be safely driven until the hoods were
replaced. The total repair estimate according to the
body shop was $44,000. The County has a commercial
insurance policy that will cover the damage, less a
$5,000 deductible for each vehicle. The cost to replace
all of the trucks would be $225,000. The trucks were
purchased brand new in June of 2011 for $260,000,
and are being depreciated over 7 years.
©2013 CliftonLarsonAllen LLP
Question #4, continued
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• The County also carried commercial insurance
coverage on the building, but it did not include a
flood policy. Insurance recoveries totaled $200,000.
The Accounting Manager, Sophia Petrillo, is trying to
figure out how much impairment loss, if any, should
be recorded at 9/30/13, and she’s calling us for help!
©2013 CliftonLarsonAllen LLP
Question #4, continued
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• GASBS 42, Accounting and Financial Reporting for
Impairment of Capital Assets and Insurance
Recoveries
• Impairment Tests
©2013 CliftonLarsonAllen LLP
Answer #4
– Magnitude Test
– Unexpected Nature Test
• Measuring Impairment
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Restoration Cost Approach
Service Units Approach
Deflated Depreciated Replacement Cost Approach
Lower of Carrying Amount or Fair Value
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Calculating Building Impairment Loss Using the Restoration Cost Approach
Historical Cost (4/1/04)
$1,500,000
Less: A/D (thru 6/1/13)
(343,750)
Net Book Value
©2013 CliftonLarsonAllen LLP
Answer #4, continued
1,156,250
Total Repair Cost
260,000
Restoration Cost
208,000
Deflated Restoration Cost
168,972
Restoration Cost Ratio
11.2648%
Impairment Loss
130,249
Insurance Recovery
200,000
Net Gain
$69,751
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©2013 CliftonLarsonAllen LLP
Answer #4, continued
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Answer #4, continued
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Calculating Vehicle Impairment Loss Using the Restoration Cost Approach
Historical Cost (6/1/11)
Less: Accumulated Depreciation
Carrying Amount
©2013 CliftonLarsonAllen LLP
Answer #4, continued
$260,000
74,286
185,714
Restoration Cost (current dollars)
44,000
Replacement Cost (current dollars)
225,000
Restoration Cost Ratio
19.556%
Impairment Loss
$36,318
Insurance Recovery
(24,000)
Net Loss
$12,318
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• In the governmental fund f/s, report the restoration
costs as expenditures and insurance recoveries as
other financing sources
• In proprietary fund and government-wide f/s,
impairment gains/losses should be reported as
program expense (or non-operating revenue in
enterprise fund operating statements), or report as
special item or extraordinary item if the definition
under GASBS 34 is met
©2013 CliftonLarsonAllen LLP
Answer #4, continued
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• The GASB Comprehensive Implementation Guide—2012-2013,
Question Z.42.12, suggests two ways in which a government
may recognize the effect of the impairment in its capital asset
accounts. First, governments may increase accumulated
depreciation by the amount of the impairment loss. This has
the effect of reporting the loss as if additional years of the
asset's life had been used up. Second, governments may
reduce both the historical cost of the asset and accumulated
depreciation proportionately so that the decrease in the net
carrying value of the asset equals the impairment loss. Using
this method treats the impairment as if a portion of the asset
has been disposed of
©2013 CliftonLarsonAllen LLP
Answer #4, continued
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• The City of Balki decided to utilize a management company
to operate its municipal golf course, called Bartokomous
Golf & Country Club. The management company, whose
owner was a former sheepherder, had a solid reputation
for improving both playing conditions and participation
rate at the courses it manages. There were 15 City
employees that worked at the golf course. The City Council
approved a plan to terminate the positions as of November
1st, 2013, at which time the golf course management
company would take over operations. The termination
plan was communicated to these employees on April 1st,
2013. There are two components to the plan.
©2013 CliftonLarsonAllen LLP
Question #5
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1. Each terminated golf course employee will receive a
termination benefit in the form of a single cash
payment equal to three times their final monthly
salary. This cost for all 15 employees was
calculated at $135,000. The payment would be
made regardless of when the employee terminated
employment.
©2013 CliftonLarsonAllen LLP
Question #5, continued
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2. The City needs to retain at least a portion of the
workforce until November 1st in order to continue
operating the course until that time. So as an
incentive, each terminated employee that renders
service until October 31 will receive an additional
one-time cash payment of $2,000. Any employee
that leaves voluntarily before October 31 will not be
eligible to receive any portion of the $2k benefit. The
City anticipates that maintenance staff will take
advantage of this incentive, while all others will leave
early. 10 of the 15 employees were maintenance
employees.
©2013 CliftonLarsonAllen LLP
Question #5, continued
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• The City’s Finance Director, Larry Appleton, is
confused about how to record these payroll
transactions. He feels he should simply record them
when paid but is seeking our advice. Larry also
wondered what the accounting treatment would be
if he sold the course (i.e. land, buildings, inventory,
etc.) to the management company.
©2013 CliftonLarsonAllen LLP
Question #5, continued
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• GASBS 47, para. 13: recognize a liability and expense
for the portion of the involuntary termination
benefit that does not have a future service
requirement when the plan is communicated to
employees (April 1st)
• Recognize the entire liability on that date
©2013 CliftonLarsonAllen LLP
Answer #5
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• GASBS 47, para. 15: recognize a liability and expense
for the portion of the involuntary termination
benefit that has a future service requirement ratably
over the period from April 1 (communication date)
to October 31 (the end of the required future service
period).
©2013 CliftonLarsonAllen LLP
Answer #5, continued
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• GASBS 47, para. 16: In governmental fund
statements, liabilities and expenditures should be
recognized to the extent the liabilities are normally
expected to be liquidated with expendable available
financial resources
©2013 CliftonLarsonAllen LLP
Answer #5, continued
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• If selling the golf course and eliminating the golf
course fund altogether:
©2013 CliftonLarsonAllen LLP
Answer #5, continued
– Extraordinary items: material transactions or other events
that are both unusual in nature and infrequent in
occurrence
– Special items: significant transactions or other events
within control of management that are either unusual in
nature or infrequent in occurrence
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• Recognize termination benefits resulting from the
cessation of golf operations as a special item?
• Examples of special items, provided by the GASB
Comprehensive Implementation Guide—2012-2013,
Question 7.43.3, include sales of certain general
governmental capital assets, special termination
benefits resulting from workforce reductions due to
the sale of utility operations, early-retirement
benefits offered to all employees, and significant
forgiveness of debt
©2013 CliftonLarsonAllen LLP
Answer #5, continued
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• Sell the golf course…how to record the disposition
and elimination of the golf course fund?
• GASBS 69, Government Combinations and Disposals
of Government Operations, para 51: “A disposing
government should recognize a gain or loss on the
disposal of operations, if applicable. Gains or losses
on the disposal of operations should be reported as
a special item in the period in which the disposal
occurs, based on either the effective transfer date of
a transfer of operations, or the date of sale for
operations that are sold”
©2013 CliftonLarsonAllen LLP
Answer #5, continued
35
• Pendant County hired an employee to join the
County’s IT staff. This employee, J Peterman, was a
web designer for a previous employer. Part of J
Peterman’s role at the County was to improve its
existing website. Upon hire, a 2 year plan was
developed to add new features and functionality to a
number of different sites within the County’s
website. The project is to take place in stages with
different projected completion dates, based on
different links within the website (utilities,
recreation, etc.).
©2013 CliftonLarsonAllen LLP
Question #6
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• The Director of Finance, Mr. Lippman, wondered if
any of these costs over this two year period should
be capitalized and, if so, what should be capitalized
and what should be expensed.
©2013 CliftonLarsonAllen LLP
Question #6, continued
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• GASB Implementation Guide 2012-13, Question
Z.51.2: Websites should be considered computer
software. If the website meets the description of
internally generated computer software, the outlays
associated with its development should be
accounted for based on the guidance in paragraphs
10–15 of Statement 51
©2013 CliftonLarsonAllen LLP
Answer #6
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• Costs associated with modifying computer software
already in use should be capitalized if the
modification results in one or more of the following:
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Answer #6, continued
– An increase in functionality of the software
– An increase in efficiency of the software
– An extension of the estimated useful life of the software
• Any modifications outside of these three situations
are considered maintenance, and the related costs
should be expensed as incurred
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• Developing and installing internally generated
computer software consists of three stages:
©2013 CliftonLarsonAllen LLP
Answer #6, continued
– Preliminary Project Stage
– Application Development Stage
– Post-implementation/Operation Stage
• Costs related to activities in the application
development stage should be capitalized; costs in
preliminary project and postimplementation/operation stage should be expensed
as incurred
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• GASB Comprehensive Implementation Guide 2012-13, Question
Z.51.13 lists common preliminary project stage activities:
©2013 CliftonLarsonAllen LLP
Answer #6, continued
– Making decisions to allocate resources between alternative projects at
a given point in time.
– Determining the performance/user needs for the computer software
project.
– Determining the systems requirements for the software project and
whether the technology needed to achieve those requirements exists.
– Exploring alternative methods of achieving the required
performance—for example, by evaluating whether internal
development of the computer software would be more beneficial
than modifying commercially available software.
– Choosing a vendor if commercially available software will be acquired.
– Selecting a consultant to help develop or install the software
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• GASB Comprehensive Implementation Guide 201213, Question Z.51.12 asks if a government
developing an ERP system with multiple modules
should apply the guidance of GASBS 51 to each
individual module within the system or to the ERP
system as a whole.
• Answer: Since each module will have its own
development cycle, particularly as it relates to
application development-stage and postimplementation/operation-stage activities, guidance
should be applied for each individual module.
©2013 CliftonLarsonAllen LLP
Answer #6, continued
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• Could interest capitalization requirements apply to this
project…YES
• GASB Comprehensive Implementation Guide 2012-13,
Question Z.51.11: Paragraph 8(a) of GASBS 62 states
that the interest capitalization requirements apply to
assets that are constructed or otherwise produced for
a government's own use. Internally generated
intangible assets meet this description. Therefore, the
interest capitalization requirements should be applied,
as appropriate, for internally generated intangible
assets of business-type activities and enterprise funds
©2013 CliftonLarsonAllen LLP
Answer #6
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Andrew Laflin
Manager - Assurance & Advisory Services
andrew.laflin@cliftonlarsonallen.com
813-384-2711
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