Hot Topics in School District
Accounting and Auditing



Dennis P. Kotzan,
CPA, CFF
Kimberly A. Dorchak,
CPA, CGFM
Brenda A. Pawlowski,
CPA, CFE
GASB Statement No. 45
Accounting and Financial
Reporting by Employers for
Postemployment Benefits Other
than Pensions
GASB 45
Background and Objectives
What is GASB 45?

It is an accounting standard issued by
the Government Accounting Standards
Board that applies to non-pension
post-employment benefits.
This
standard requires the recognition of
benefit costs that will be paid in the
future for current retirees and for
active employees when they retire.
GASB 45
Background and Objectives
Who must comply with GASB 45?


All public employers that follow GASB
accounting standards and that offer
post-employment benefits to retired
employees are subject to GASB 45
This affects:







State governments
Cities and towns
Counties
Boards of Education
Public utilities
Water districts
And others
GASB 45
Background and Objectives
What benefits are covered by GASB 45?

GASB 45 applies to non-pension benefits
provided to retirees, including:







Medical
Dental
Pharmacy
Vision
Hearing
Life Insurance
Long Term Care Insurance
GASB 45
How does GASB 45 impact us?

Financial reporting before GASB 45:


This year’s financial statements reflect this year’s
premium for retirees receiving benefits this year
Financial reporting after GASB 45:

In addition to the above, this year’s financial
statements cover
 Value of postemployment benefits earned by
active employees for this year’s service
 Amortization of post-employment benefits
earned by current retirees for service done in
previous years
 Amortization of post-employment benefits
earned by active employees for service done
in previous years
GASB 45
Why did GASB create GASB 45?
Post-employment benefits are part of
compensation and need to be
recognized as a cost when benefits
are earned, not when the benefits
are paid
 Consistent with accounting theory
 Consistent treatment with pension
benefits

GASB 45
How was the valuation done?
Organization qualified for the
simplified approach to GASB 45,
(known as the Alternative
Measurement Method or AMM)
 Used an online self-help tool created
by Milliman to perform the valuation
(GASBhelp.com)
 Saved about 70% of the cost of a full
actuarial valuation

GASB 45
Key Elements of GASB 45 Reporting

Two key elements of GASB 45
financial reporting:


Annual Required Contribution (ARC)
Unfunded Actuarial Accrued Liability
(UAAL)
GASB 45
Annual Required Contribution (ARC)

Components of ARC:



Value of postemployment benefits by
active employees for this year’s service
Amortization of postemployment benefits
earned by active employees and current
retirees for service done in previous
years
Required to compute and report it, not to
fund it (though funding affects the size
of the ARC)
GASB 45
Our ARC
ARC for fiscal year 2009: $66,430
 Compare to current cost for current
year’s premium for current retirees:

GASB 45
What gets done with the ARC?
Reported as a balance sheet item on
the organization’s financial
statements
 Amount reported is the difference of
the ARC over the amount actually
contributed to cover the affected
benefits
 Amount accumulates over time, each
year adding the next year’s ARC
reduced by the next year’s
contributions

GASB 45
Unfunded Actuarial Accrued Liability (UAAL)

Components of UAAL:



Value of postemployment benefits
earned by active employees for this
year’s service
Value of postemployment benefits
earned by active employees and current
retirees for service done in previous
years
Required to compute and report it, not to
fund it (though funding affects the size
of the UAAL)
GASB 45
Our UAAL
UAAL as of 12/31/09: $668,107
 Contributions:
$0
 Net UAAL:
$668,107

GASB 45
What happens if we don’t recognize our
GASB 45 liability?
Qualified audit opinions
 Affect on bond ratings and borrowing
rates


Rating agencies are considering GASB
reporting and management as part of
their evaluation of government entities
with respect to credit-worthiness
GASB 45
How do we manage the liability?

Funding or not?


Funding approach affects the discount rate
which affects the size of the ARC and UAAL
Funding allows investment earnings to cover
some of the future costs (as opposed to paying
them out of future budgets)
Revise benefit plan designs
 Change retiree contributions toward the
cost of their benefits
 Change eligibility for retiree benefits for
current actives and/or new hires

GASB Statement No. 54
Fund Balance Reporting and
Governmental Fund Type Definitions
GASB 54
Effective Dates and Application
Statement released in March 2009
 Effective for periods beginning after
June 15, 2010
 Applies to Governmental Funds only
 Does not impact Proprietary and
Fiduciary Funds
 Does not impact Government-wide
statements

GASB 54
Background and Objectives
Why did we need GASB 54?

The standards defining the current fund
balance classifications and governmental
fund type definitions were deemed vague
resulting in considerable variation in how
governments report this information.
These inconsistencies led to reduced
comparability.
GASB 54
Background and Objectives
What are the objectives of GASB 54?


To improve the usefulness and
comparability of governmental fund
balance information by reporting fund
balance in more meaningful components
To clarify and update the definitions of
the types of governmental funds
eliminating points of confusion that have
diminished consistency in practice.
Current Fund Balance Categories

Reserved

Unreserved – designated

Unreserved - undesignated
GASB 54
New Fund Balance Categories

Nonspendable

Restricted

Committed

Assigned

Unassigned
GASB 54
Nonspendable Fund Balance
Generally corresponds to our current
classification of “reserved fund
balance”
 Amounts that literally cannot be
spent either because of their physical
form or because of legal or
contractual requirements that
prevent them from being spent.

GASB 54
Nonspendable Fund Balance

Nonspendable because of physical
form include assets that are not
expected to be converted into cash in
the near term



Inventory and prepaid expenditures
Long-term receivables
Property acquired for resale
GASB 54
Nonspendable Fund Balance

Nonspendable because of legal or
contractual restrictions

The corpus or principal included in a
permanent fund – resources that must
legally be maintained intact
GASB 54
Restricted Fund Balance

Amounts are spendable but must be
used as directed by an external party
or by a constitutional provision or
enabling legislation

External parties include creditors
(through debt covenants/bond
indentures), grantors, donors, other
governmental units.
GASB 54
Restricted Fund Balance
Like nonspendable, restricted fund
balance generally corresponds to our
current classification of “reserved
fund balance”
 The key to Restricted Fund Balance is
“EXTERNAL” party (i.e. not school
board).

GASB 54
Committed Fund Balance
Amounts can only be used as
specified by the “formal action of the
government’s highest level of
decision-making authority”.
 School board resolution would
commit fund balance

GASB 54
Committed Fund Balance


Amounts reported as committed can be
redeployed for other purposes by using the
same formal process that created the
commitment – i.e. a school board
resolution to change or remove the
commitment
To commit funds as of June 30th, a formal
board action should be approved prior to
year-end, however, the exact dollar
amount can be determined at a later date.
GASB 54
Committed Fund Balance
Generally corresponds to our current
classification of “unreserveddesignated fund balance”
 Committed funds, like restricted and
nonspendable, are excluded from
fund balance when determining
compliance with Section 688 of the
school code (8% limit on fund
balance prior to raising taxes)

GASB 54
Assigned Fund Balance
Amounts that the government
intends to use for a specific purpose
 Intent does NOT require formal
action by the school board
 Likewise, redeploying assigned
resources does NOT require formal
action by the school board

GASB 54
Assigned Fund Balance

Resources can be assigned by a governing
body or another body or person to whom
the governing body gives the authority to
do so




Finance committee
Business manager
Superintendent
Under the current classifications, these
amounts were generally considered
“unreserved – undesignated”.
GASB 54
Assigned Fund Balance

Resources accounted for in a
governmental fund other than the
general fund are assumed to be, at a
minimum, intended for the purpose
of that fund and therefore, the
minimum fund balance classification
would be “assigned” (except for a
deficit fund balance which would be
“unassigned”)
GASB 54
Unassigned Fund Balance
The residual fund balance category
for the General Fund
 Resources are available for any
purpose
 Reporting positive unassigned
balances is permitted in the General
Fund only

GASB 54
Unassigned Fund Balance
For governmental funds other than
the general fund, the unassigned
fund balance category is only used to
report a deficit fund balance
 No fund should ever report a
negative amount in the restricted,
committed or assigned fund balance
categories

GASB 54
Encumbrances
Contrary to Pre-GASB 54 reporting,
encumbrances should not be
reported separately within the fund
balance categories
 Encumbrances should be classified as
either committed or assigned as
appropriate per the definitions of
those categories

GASB 54
Encumbrances
While encumbrances will no longer be
reported separately on the financial
statements, governments may
continue to employ encumbrance
accounting internally
 Significant encumbrances should be
disclosed in the notes to the financial
statements along with other
significant commitments.

GASB 54
Fund Balance Questions

Anticipated PSERS increase is
currently recorded as “unreserveddesignated fund balance”. Under
GASB 54 how would we record if:


Board formally approves specific funds
be used for this purpose?
Business Manager makes the decision to
use specific funds for this purpose?
GASB 54
Fund Balance Answers
Board formally approves funds for
PSERS increase? Committed
 Business Manager makes the decision
to use funds for PSERS increase?
Assigned

GASB 54
Fund Balance Questions

Debt Service is maintained in your
General Fund and recorded as
“Reserved for Debt Service”. Under
GASB 54 how would we record if:


Debt covenants dictate that funds must
be set aside to service debt?
Finance committee establishes certain
funds to be used for debt service?
GASB 54
Fund Balance Answers
Debt covenants dictate that funds
must be set aside to service the
debt? Restricted
 Finance committee establishes
certain funds to be used for debt
service? Assigned

GASB 54
Example Fund Balance Classification
Current Classification (Pre GASB 54)
(10)
General
Fund
(22)
Capital
Reserve
(30)
Capital
Project
(40)
Debt
Service
Fund Balance
Reserved for:
Inventory
Encumbrances
Unreserved-Designated (PSERS)
Unreserved-Undesignated
50,000
9,581
600,000
1,848,467
4,131,786
392,300
2,768,447
GASB 54
Example Fund Balance Classification
New Classification per GASB 54
(10)
General
Fund
(22)
Capital
Reserve
(39)
Capital
Project
(40)
Debt
Service
Fund Balance
Nonspendable
Inventory
50,000
Restricted:
Capital reserve purposes
4,131,786
Construction project
392,300
Debt service
Committed:
PSERS Increases
2,768,447
600,000
Assigned:
Encumbrances
Unassigned
9,581
1,848,467
GASB 54
Account Code Changes
0810
 0820
 0830
 0840
 0850


–
–
–
–
–
Nonspendable fund balance
Restricted fund balance
Committed fund balance
Assigned fund balance
Unassigned fund balance
Note that 0840 and 0850 are considered
when determining compliance with Section
688 of the school code (8% limit on fund
balance prior to raising taxes)
GASB 54
Required Note Disclosures
Highest level of decision-making
authority and the formal action
required to establish, modify or
rescind a commitment of fund
balance
 The bodies or persons having the
authority to assign resources, as well
as the policy, resolution or other
legislation that delegates such
authority

GASB 54
Required Note Disclosures
Policy regarding the order in which
resources will be spent when
resources for a specific purpose are
available in more than one fund
balance classification
 The required detail of the
nonspendable, restricted, committed
and assigned fund balance amounts,
if not fully displayed on the face of
the balance sheet

GASB 54
New Fund Balance Categories
A helpful mnemonic:
Nobody Really Cares About Us
Nonspendable
Restricted
Committed
Assigned
Unassigned
GASB 54
Governmental Fund Type Definitions
GASB Statement 54 states:
“The general fund should be used to account for
and report all financial resources not accounted
for and reported in another fund.”
“Special revenue funds are used to account for and
report the proceeds of specific revenue sources
that are restricted or committed for specific
purposes other than debt service and capital
projects.”
GASB 54
Special Revenue Funds
Note that debt service expenditures
cannot be made from special revenue
funds.
 Note that capital expenditures cannot
be made from special revenue funds.

GASB 54
Special Revenue Funds
GASB Statement 54 further states:
“One or more specific restricted or
committed revenue sources should be the
foundation for each special revenue fund
and comprise a substantial portion of the
fund’s inflows on an ongoing basis.”
GASB 54
Special Revenue Funds
Special Revenue funds must have a
dedicated revenue stream
 Transfers from other funds are NOT
considered revenue
 Specific revenue source should
comprise a substantial portion of the
fund.

GASB 54
Athletic Fund
Many districts currently report their
Athletics Fund as a special revenue
fund (Fund 29)
 Under GASB 54, in most cases, the
Athletic Fund will no longer meet the
definition of a special revenue fund.

GASB 54
Athletic Fund
Most Athletic Funds are not selfsustaining and are largely funded by
General Fund transfers
 Consequently, beginning with the
2010-11 year, many districts’ Athletic
Fund information will be reported in
the General Fund



Revenue code 6710 for Admissions
Expenditures coded to 3250 series
GASB 54
Athletic Fund



You are permitted to continue reporting the
Athletic Fund separately for internal
purposes
Regardless of the internal reporting
method, in most cases the Athletic Fund
will need to be combined with the General
Fund for budgeting purposes, on the AFR
and the financial statements in the audit
report
A board resolution is NOT required to
dissolve the Athletic Fund
GASB 54
Capital Projects Funds
GASB 54 broadens the usage of
capital project funds
 Instead of using a capital project
fund to account for “major capital
facilities”, GASB 54 states that
capital projects funds can be used to
account for capital outlays in general

GASB 54
What about Capital Reserve Funds?
Capital Reserve Funds should be
reclassified as Capital Project Funds
beginning in 2010-11 fiscal year
 Current Fund 21 (per School Code
690) and Fund 22 (Municipal Code
1431) should be reclassified to
Capital Project Funds 31 and 32,
respectively, under GASB 54

GASB 54
Capital Projects Funds
Your current Capital Project Fund –
Fund 30 will become Fund 39 with
the implementation of GASB 54
 Fund 31, 32 and 39 are expected to
be separate columns on AFR
 On audited financial statements,
Funds 31, 32 and 39 will be
aggregated and reported as one
major capital project fund

GASB 54
Debt Service Fund
GASB 54 makes clear the existing
requirement that debt service funds
must be used whenever legally
mandated or when financial
resources are being accumulated to
pay off principal and interest
maturing in future years
 Debt Service fund remains Fund 40

GASB 54
Fund Dimension Changes
Capital Reserve (21) – Eliminated
 Capital Reserve (22) – Eliminated
 New: Capital Project (31)



Funds established pursuant to sections
690 and 1850.1 of PA School Code –
Former Capital Reserve Fund 21
New: Capital Project (32)

Funds established pursuant to section
1431 of Municipal Code – Former Capital
Reserve Fund 22
GASB 54
Fund Dimension Changes

New: Capital Project (39)


Former Fund 30 used primarily for major
construction projects funded with debt
Athletics Fund (29)

Fund 29 will still exist, however, most
schools will be required to combine into
Fund 10. Although, Fund 29 may
continue to be used for internal reporting
purposes.
GASB 54
Required Note Disclosures

The purpose of each special revenue
fund, identifying which revenues and
other resources are reported in each
special revenue fund
Internal Controls, Fraud Prevention and
Other Hot Button Areas
Improvements in financial reporting
 Improvements in internal controls
 Compliance issues
 Other issues

Improvements in Financial Reporting

Reconciliation of bank accounts


Ensures revenues and expenditures are
recorded
Differences could indicate a payroll or
other error, requiring a change to a filed
report
Improvements in Financial Reporting

Material audit adjustments




Recording all grants receivable at year
end
Recording all liabilities at year end
Balancing interfunds and transfers
Ensuring supporting documentation for
balance sheet items agree to ledger
Improvements in Financial Reporting

Use of funding source dimensions – federal
source codes





AFR reporting – federal expenditures reported
separately
Social security and retirement subsidy
reimbursements
Recording of grants receivable at year end
Accurate reporting on quarterly reports and final
completion reports
Auditor testing of expenditures charged to major
federal program(s)
Improvements in Financial Reporting

Not recording purchase orders as
expenditures in year of issue, but in year
invoice is received

Software vendor gave district 3 choices for rolling
forward open P.O.’s at year end
 Roll them into the new year as open P.O.’s for
old year
 Roll them into the new year as P.O.’s for new
year
 Record them as expenditures in the year
closing – NO!
Improvements in Financial Reporting

Decrease reliance on spreadsheets to
improve efficiency

Some track cash on manual or Excel
spreadsheets



Some track smaller funds on spreadsheets or not
at all (Debt Service, Capital Reserve, Athletics)



Enter batches of checks or each check
Enter deposits at end of month
Provide the auditor with investment
statements to derive a TB
Provide the auditor with a spreadsheet in
lieu of a TB
Weigh the time it takes for manual vs automated
Improve Internal Controls

Segregation of duties and crosstraining


Reduce instances of error or fraud
Coverage for illness, injury, etc.


Often staff limitations
Business manager by default
Improve Internal Controls

Controls over disbursements - limit
how much one person does





Facsimile signatures
Mailing checks
Reconciling accounts
Use of an imprest account
Monitor old outstanding checks


Escheat
Reissue
Improve Internal Controls

Reconciliation of Tax Collectors






Tax collectors are required to use the DCED-approved
monthly report
Required to reconcile by Jan. 15th
District should monitor amounts received during
collection period
Delays in remittances could indicate a problem
Be cautious of changes in collectors’ behavior
 Taxpayers tend to pay same time each year
 Comparison of monthly collections by year
Monitor new collectors
 Overwhelmed
 Confused
 County training?
Compliance Issues

Purchases >
$4,000


Government pricing
Quotes

Purchases >
$10,000


Government pricing
Bids
Compliance Issues



Recording only ½ retirement to federal
programs
Reporting federal wages for social security
subsidy reimbursement
Problem areas





Federal source codes not used
Federal expenditures reclassified at year end
Business manager not aware of requirement
Potential to under-spend grant
Inaccurate reports filed
Compliance Issues

Tracking payments to vendors for
Form 1099-MISC reporting (Athletic
Fund)

More likely to occur when:



Accounting is not centralized
Fund not maintained in G/L software
Always try to avoid IRS issues!
Other Issues

Student Activities



Need a good “gate keeper”
Avoid booster groups, parent groups, elementary
accounts
Proper documentation for checks written



Original invoice
Proper approval - student and advisor
Proper control over receipts



Ticket counts
Tracking of sales for candy, subs, etc.
2 people counting cash and signing off
Other Issues

ARRA funding




Auditor required to test all ARRA money spent
(basically)
ARRA grant follows other federal requirements
(Title I, IDEA-B, etc.)
Caution on IDEA-B MOE expenditures
 Special Ed costs only
 50% of IDEA-B additional spent
Compliance Supplement for auditors to use is still
in draft form
 1512 report will need audited in some fashion
 Controls over ARRA monies evaluated
 Increase audit costs? Apply to ARRA?
Other Issues

Antifraud Program


Control environment - basic building block for an
organization
 Organizational style
 Ethical values
 Trustworthiness of an organization
Working Antifraud Program
 Establish a “Tone at the Top”
o

Portray a reputation of integrity
Deal fairly with employees
o
Discourage unethical behavior
Other Issues

Working Antifraud Program (continued)

Adopt and distribute a formal program
o
o
o
o
o
Outline internal controls
Provide guidelines for reporting fraud or
suspected fraud, including steps to
investigate
Develop a Code of Conduct
Post the Code and Program prominently
Advise current and new employees of both
and provide a copy of each
Other Issues

Working Antifraud Program (continued)

Adopt and distribute a formal program
o
Establish a Fraud (Whistle-Blower) Hotline



Available for employees to report
suspicions of fraud or misconduct
Demonstrate the district’s serious intent to
prevent and detect fraud
Internal hotline (or external)
- Superintendent
- PA Department of Education
- PA Ethics Commission
- PA Auditor General
Questions?
Contact Information
www.kotzancpa.com
dkotzan@kotzancpa.com
kdorchak@kotzancpa.com
bpawlowski@kotzancpa.com