Transcript ACCOUNTING & FINANCIAL REPORTING CGFO REVIEW

FGFOA Boot Camp – Day 1
Introduction to
Governmental Accounting
Presented by
Thomas D. Kelley, CPA, MBA
The Government
Environment
Key Differences
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Lack of profit motive
Legal structure
Resource providers
Political process
Non-revenue producing assets
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Public services
Public goods
Objectives of
Financial Reporting
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Compare actual & budget
Assess financial condition & results
of operations
Determine compliance with laws,
rules, & regs
Evaluate efficiency & effectiveness
Financial Statement Users
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Taxpayers
Citizens
Oversight & legislative bodies
Investors & creditors
Management
Financial Reporting
Objectives
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Information for decision making
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Financial reporting should be
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Understandable
Reliable
Relevant
Timely
Consistent
Comparable
Accounting Differences
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Fund accounting
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Accountability
Budgetary reporting
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Compliance
Accounting Differences
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Measurement focus = WHAT is measured
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Economic resources
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Improvement/diminishment in economic position
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Measure inflows & outflows of economic resources
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Current & noncurrent
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Capital assets & long-term debt
Focuses on operational accountability
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Whether management efficiently uses resources in
providing services
Accounting Differences
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Measurement focus = WHAT is measured
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Current financial resources
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Increases/decreases in spendable resources
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Measure inflows & outflows of current financial
resources
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Cash & other liquid assets
Payables from cash & other liquid assets
Focuses on fiscal accountability
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Whether managers have met budgetary & other legal
financial requirements
Accounting Differences
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Basis of accounting = WHEN to measure
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When transaction/event recognized
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Accrual
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Modified accrual
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Measurable and available
Trust Funds
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Expendable or non expendable
Accounting Differences
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Basis of accounting = WHEN to
measure
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Accrual basis of accounting
Revenues recognized when earned
 Expenses recognized when incurred
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Accounting Differences
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Basis of accounting = WHEN to
measure
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Modified accrual basis of accounting
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Revenues recognized when measurable &
available
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60 day criteria
Expenditures recognized when incurred
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Expected to be liquidated with current
financial resources
Measurement Focus and Basis
of Accounting Summary
Measurement
Focus
Basis of
Accounting
Economic
resources
Accrual
Current financial
resources
Modified accrual
Proprietary fund
statements
Economic
resources
Accrual
Fiduciary fund
statements
Economic
resources
Accrual
Government-wide
statements
Governmental fund
statements
What is GAAP & Who is
GASB?
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GAAP = generally accepted
accounting principles
GASB
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Established 1984
Establish standards for SLGs
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Financial accounting
Financial reporting
Statutory requirement to use GAAP
How GASB Works
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Mission of GASB
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Establish/improve standards
To provide useful information
GASAC
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Consults with GASB
GASB budget and fund raising
25+ representative members
GASB Required
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State & local governments
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Some NFPs
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General purpose
Special purpose
Libraries
Hospitals
Colleges & universities
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Public
Fund Accounting & the
Financial Statements
Why Use Funds?
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Account separately for
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Resources
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Financial & economic
Activities
Accountability
Compliance
What is a Fund?
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Fiscal & accounting entity
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Self-balancing set of accounts
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Cash & financial resources
Liabilities & residual equity/balances
Changes
Segregated for purpose of
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Specific activities
Attaining certain objectives
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In accordance with regs, restrictions,
limitations
How Many Funds?
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Depends on
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Minimum number of funds concept
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Capability of accounting system
Accounting/legal requirements
Sound financial management
Meet legal/accounting objectives
More funds = more complexities
At least one = General fund
Creating New Funds
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When
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New accounting standard
Change in state constitution
Grant required
New activity
Determine
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Desired level of
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Financial control
Management
Fund Structure
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Governmental funds
General operations
 Financial resources
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Proprietary funds
Business type operations
 Economic resources
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Fund Structure
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Fiduciary funds
Trust agreement
 Agency relationship
 Resources held for others
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Governmental Funds
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Financial resources measurement
focus
Modified accrual basis of accounting
Account for expenditures of financial
resources (not expenses)
Capital assets & long-term liabilities
are NOT recorded in governmental
funds
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Both recorded as expenditures
Governmental Funds
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Types
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General Fund
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Special Revenue Funds
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Capital Projects Funds
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Debt Service Funds
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Permanent
General & Special Revenue
Funds
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What goes where?
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General Fund
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Special Revenue Funds
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Restricted or committed funds
Revenue recognition
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Modified accrual = measurable & available
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Uncollectibles
General & Special Revenue
Funds
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Revenue issues
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Property taxes
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Levy
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Collection
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Revenue recognition
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Sales & income taxes
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Grants
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Donations
General & Special Revenue
Funds
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Expenditure recognition
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Measurable
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Liability incurred
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Plan to liquidate from current resources
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Is it budgeted this year?
Debt Service Funds
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Purpose
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Revenue recognition
Expenditure recognition
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Restricted, committed, assigned
When due vs. before due
Refundings
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What are they?
Types
Debt Service Funds
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Advance refundings
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Definition
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Legal or in-substance
defeasance
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Current refundings
Capital Project Funds
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Purpose
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Restricted, committed, assigned
Revenue recognition
Bond proceeds
BANs
Arbitrage
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Calculations Vs payments
Permanent Funds
Legally restricted resources
 Earnings only
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Endowment type
Support government’s
programs
Proprietary Funds
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Economic resources measurement
focus
Full accrual basis of accounting
Account for expenses of economic
resources
Capital assets & long-term liabilities
ARE recorded in proprietary funds
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Depreciation expense on capital assets
recorded
Proprietary Funds
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Types
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Enterprise
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Fees charged
External users
Internal Service
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Reimbursement basis
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Primary government
Component units
Other governments
Enterprise Funds
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When to use
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Intend to recover total cost from user
fees
Want to know if fund profitable or not
Restricted assets
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When required/used
Enterprise Funds
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Debt
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Classification based on revenue
stream
G.O. debt
Contributed capital
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Sources
Accounting & political implications
Enterprise Funds
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Infrastructure
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Types
Reporting & depreciation required
Internal Service Funds
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What are they?
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Cost-reimbursement basis
Internal customers
Measurement & basis of
accounting
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Economic resources
Full accrual
Internal Service Funds
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Duplication of costs
Surpluses & deficits
Risk management activities
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General Fund or ISF required
Interfund premiums = quasi external
Fiduciary Funds
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Full accrual accounting
Economic resources measurement
focus
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Capital assets & long-term liabilities ARE
recorded
“Additions” to net assets
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Not “revenues”
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Other people’s money
“Deductions” from net assets
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Not “expenses”
Fiduciary Funds
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Types
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Pension Trust
Investment Trust
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External portion reported by sponsor
Private Purpose Trust
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All other trust agreements
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Individuals
Private organizations
Other governments
Agency
Fiduciary Funds
Pension/OPEB Trust Funds
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To account for financial resources
where government (or other
designated trustee) acts in trustee
capacity for its employees
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Retirement benefits
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Pensions
Other post-employment benefits
 Insurance, etc.
Fiduciary Funds
Investment Trust Funds
 Account for external investment pools
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Assets held for other (external)
governments, along with funds of
sponsoring government
Accounts for assets, liabilities, net
assets, & changes in net assets related
to equity of external participants
Fiduciary Funds
Private-purpose Trust Funds
 To account for financial resources
(expendable/nonexpendable)
when government acts in trustee
capacity for
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Private individuals
Organizations
Other governments
Fiduciary Funds
Agency Funds
 Account for financial resources when
government acts in an agency capacity
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Examples: tax agency funds and passthrough agency funds
Accounting is simple: assets =
liabilities
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No revenue & expense accounts used
since there are no net assets
Fund Classification
Exercises
Typical Government
Transactions
Basic Transactions
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Assets
Liabilities
Revenues/gains
Expenses/expenditures & losses
Other sources & uses
Some Typical Transactions
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Assets
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Inventory
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Prepaid expenses
Property, plant & equipment
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Purchase & consumption method
Valuation & impairment
Capitalization & depreciation
Restricted assets
Some Typical Transactions
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Assets
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Inventory
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Purchase (financial resources)
Expenditures – Supplies, etc.
Cash/AP
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Consumption (economic resources)
Inventory – Supplies, etc.
Cash/AP
Some Typical Transactions
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Assets
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Prepaid expenses
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Current financial resources
Expenditures
Cash/AP
Non current financial resources
Prepaid expenses
Cash/AP
Reporting Capital Assets
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Distinguish general capital assets from
proprietary & fiduciary capital assets
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General capital assets
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Proprietary capital assets
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Report only in Governmental Activities Column of
GWS
Report in both GWS & fund FS
Fiduciary capital assets
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Reported only in statement of fiduciary net assets
(fund level FS)
Valuation of Capital Assets
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Purchased capital assets
Historical cost
 Estimated cost if actual cost is unknown
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Donated assets
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Estimated fair value at time of gift
Intangible assets
Historical cost if purchased
 Different GAAP for self developed
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Depreciation of Capital
Assets
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Capital assets are depreciated over
their estimated useful lives
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Exceptions
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Land
Construction in progress
Certain collections
Infrastructure reported using the modified
approach
Depreciation of Capital
Assets
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May elect to use the “modified
approach” for certain infrastructure
assets instead of depreciation
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Must meet certain requirements to use
Report depreciation expense for
general capital assets only in GWS
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Disclose depreciation expense charged
to functions in notes
Some Typical Transactions
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Assets
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Property, plant & equipment
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Modified accrual
Expenditures – Capital Outlay
Cash/AP
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Full accrual
Property, Plant & Equipment
Cash/AP
Depreciation Expense
Accumulated Depreciation
Some Typical Transactions
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Liabilities
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Unearned revenues
Accruals
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Interfund debt
Long term debt
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Year end
Compensated absences
Types
Accounting
Liabilities payable from restricted assets
Some Typical Transactions
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Liabilities
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Unearned revenues
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Modified accrual – not available
Cash
Unearned/Deferred Revenue
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Full accrual – earnings process not complete
Cash
Unearned/Deferred Revenue
Some Typical Transactions
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Liabilities
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Accruals
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Year end – modified accrual (payable from
current financial resources)
Expenditures
Accrued Expenditures
Year end – full accrual
Expenses
Accrued Expenditures
Reporting Long-term Liabilities
Distinguish general long-term
liabilities from fund long-term
liabilities
 General long-term liabilities
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Bonds, notes, compensated absences,
etc.
Reported in GWS but not in fund
financial statements
Some Typical Transactions
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Liabilities
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Long term debt - types
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General obligation bonds
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Aka “full faith and credit”
Revenue bonds
Mortgages
Loans
Other
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Litigation
Compensated absences
Some Typical Transactions
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Liabilities
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Long term debt – accounting
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Modified accrual
Expenditures – Debt Service Principal
Expenditures – Debt Service Interest
Cash/AP
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Full accrual
LT Debt Outstanding (principal)
Interest Expense
Cash/AP
Reporting Long-term Liabilities
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Long-term liabilities repaid from
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Proprietary funds
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Reported in proprietary fund statements &
in GWS
Fiduciary funds
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Reported only in fiduciary fund level
statements
Some Typical Transactions
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Liabilities
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Liabilities payable from restricted
assets
Liabilities Payable from Restricted Cash
Restricted Cash
Some Typical Transactions
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Fund equity until 6/14/11
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Nomenclature
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Fund balance – governmental funds
Net assets – all others
Designations
Reserves
Restricted
Unrestricted
Some Typical Transactions
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Fund equity 6/15/11 & beyond
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Non spendable
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Inventories, LT loans, permanent fund corpus
etc.
Restricted
Committed
Assigned
Unassigned
Some Typical Transactions
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Revenues & gains
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Exchange
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Modified accrual
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Full accrual
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Earnings process complete
Non exchange (external events)
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Measurable & available
Government gives/receives value without directly
receiving/giving equal value in exchange
Type/class defines revenue recognition criteria
Gain
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Full accrual concept only
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Proceeds less carrying value
Classes of Nonexchange
Transactions
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Derived tax revenues
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Imposed nonexchange revenues
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Property taxes & fines and penalties
Government-mandated nonexchange
transactions
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Income & sales taxes
Services funded by higher level government
Voluntary nonexchange transactions

Grants/entitlements from higher level
government & certain private donations
4-68
Some Typical Transactions
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Expenses/expenditures & losses
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Expenditures = governmental funds
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Expenses = proprietary funds, GWS
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Operating
Debt service
Capital outlay
Operating
Debt service
Depreciation
Losses

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Extraordinary
Special items
Other
Some Typical Transactions

Expenditures = governmental funds

Operating
Expenditures
Cash/AP

Debt service
Expenditures – Debt Service Principal
Expenditures – Debt Service Interest
Cash/AP

Capital outlay
Expenditures – Capital Outlay
Cash/AP
Some Typical Transactions

Expenses = proprietary funds

Operating
Expenses
Cash/AP

Debt service
Expenses – Interest
LTD Outstanding (principal)
Cash/AP

Depreciation
Depreciation Expense
Accumulated Depreciation
Some Typical Transactions

Losses = proceeds less carrying value

Extraordinary

Underlying event = unusual AND infrequent


Special items

Underlying event = unusual OR infrequent AND
within control of management

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Other revenue
Other revenue
Other

Program revenue
Some Typical Transactions

Other sources & uses



Issuance of debt
Interfund transfers
Sale of assets


Large amounts
Insurance recoveries

Vs. extraordinary item
Some Typical Transactions

Other sources & uses

Issuance of debt

Modified accrual
Cash
Bond issue costs
Other Financing Sources – Debt Proceeds

Full accrual
Cash
Deferred Bond Issue Costs
LTD Payable
Some Typical Transactions

Other sources & uses

Interfund transfers


Transferring fund
Other Financing Uses – IFT Out
Cash
Receiving fund
Cash
Other Financing Sources – IFT In
Some Typical Transactions

Other sources & uses

Sale of assets (large amounts)


Modified accrual
Cash
Other Financing Sources – Proceeds, Asset Sale
Full accrual
Cash
Accumulated Depreciation
Gain/Loss on Sale of Asset
Net Book Value of Asset Sold
Recording Transactions
Exercises
Budgeting
Role of the Budget

Public process = “representation”

Legal contract



May not be prepared


For all funds – statutory requirements
On GAAP basis


Estimated revenues
Appropriations
Role of encumbrances
Should be tied to strategic plan
Types of Budget Formats

Types
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
Operating
Capital
Capital improvement plan
Cash
Timing
Role of the Budget

Budget document
 Operations guide
 Communication device
 Financial plan
 Policy document
Role of the Budget

Legal standing



Legal level of control
Administrative level of control
Budgetary basis of accounting

Versus GAAP




Basis
Timing
Perspective
Entity
Role of the Budget

Budget process




Preparation
Approval
Execution
Evaluation
Role of the Budget

Budget process

Preparation





Estimate revenues
Prepare agency budgets
Prepare preliminary budget
Executive balancing of budget
Prepare Executive budget
Role of the Budget

Budget process

Approval




Public hearings
Changes
Tentative millage
Final adoption
Role of the Budget

Budget process

Execution

Appropriations


Apportionments
Changes

Administrative & legal
Role of the Budget

Execution

Encumbrances




Needed to determine available
appropriations
Budgetary tool to control spending
Purchase commitments
Lapse vs. re-appropriation
Role of the Budget

Encumbrances


Budget
Purchase order




Invoice



Initial recording
Changes
Close out
Purchase order
Other
Changes to budget
Encumbrances in Action
Date
Reference
Vendor
Description
Appropriations
Encumbrances
Expenditures
1,000,000
Available
1/1/08
2008 Budget
1/15/08
PO #100
1/20/08
Inv 200
Acme
Invoice for PO 100
1/21/08
Inv 250
Office Depot
1/31/08
PR Journal
2/1/08
PO #101
Home Depot
PVC pipe
10,000
2/10/08
Inv 300
Home Depot
Partial shipment
(5,000)
5,000
888,900
2/20/08
Inv 350
Home Depot
Shipped in full
(4,500)
4,500
888,900
2/22/08
PO #101
Home Depot
Close PO
5/31/08
Budget cut
Copper tubing
1,000,000
1,000
(1,000)
999,000
1,000
999,000
Office supplies
100
998,900
January payroll
100,000
898,900
(500)
(100,000)
888,900
889,400
789,400
Role of the Budget

Evaluation

Accountability


FS requirements



Legal contract
General fund
SRF with legally adopted annual budget
Reported as

RSI or BFS
Budgeting Exercise
Internal Control
Management &
Internal Control

Management is
responsible for internal
control including

Fraud prevention,
detection, & deterrence
programs
Internal Control

Over financial reporting

A process effected by an entity’s board of
directors, management & other personnel,
designed to provide reasonable assurance
regarding the achievement of objectives
in the following categories



Effectiveness & efficiency of operations
Reliability of financial reporting
Compliance with applicable laws & regulations
Control Environment

Integrity & ethical values



Board of directors (governing body)


Formal code of conduct
Effective whistleblower policy
Understand & exercise oversight
responsibility
 Financial reporting
 Internal control
Management’s philosophy & operating
style

Provides support for achieving effective IC
Risk Assessment

Financial reporting objectives


Financial reporting risks


Specified by management
Basis for determining how to
manage risks
Fraud risk

Explicitly considered when
assessing RMM due to fraud
Control Activities




Integration with risk assessment
Selection & development of
control activities
Policies & procedures
Information & technology
Information and
Communication

Financial reporting information


Internal control information


Timely
Internal communication


Relevant & appropriate
Necessary to discharge IC
responsibilities
External communication

Parties outside entity
Monitoring

Ongoing & separate
evaluations


Determine if other IC elements
continue to function
Reporting deficiencies

Timely identification &
communication
The Government
Control Environment




Cost-benefit considerations
Diminishing benefits related to
internal controls
Governing body & management
focus more on operations than
control environment
Lack of administrative and/or
accounting staff to perform
control activities
Mitigating Management
Override Potential





Corporate culture of integrity & ethical
values
Hiring qualified accounting personnel
Effective internal audit function
A qualified governing body and/or
audit committee willing to assume
responsibility to prevent/detect
management override
An effective whistleblower program
Mitigating Missing &
Ineffective Controls

Increase management involvement in
monitoring




Reviewing detail transaction reports
Reviewing selected transactions
Performing periodic counts of assets
typically subject to misappropriation
Review reconciliations prepared by staff
having incompatible duties
Areas of Concern
Overstatement of
revenues/increases in fund
equity or net assets
 Fictitious revenues
 Improper revenue recognition


Non exchange transactions
Areas of Concern


Effect of noncompliance
Financial statement classifications



Fund level
Government-wide
Understatement of


Expenses or expenditures
Allowance accounts
Areas of Concern

Overstatement of expenses or
expenditures
Fraudulent financial reporting
 Misappropriation of assets


Understatement of revenues
Fraudulent financial reporting
 Misappropriation of assets

Risk Assessment

Consider

Size & complexity of government


Number of personnel


Segregation of duties
Experience & expertise of personnel


Management override
Financially literate governing body or
audit committee can compensate
Extent technology used
Risk Assessment Examples
Year-End Transactions





Accruals
Analysis adjustments
Investments
Pension/OPEB liabilities
Fund to GWS
reconciliations
Risk Assessment
IT Concerns




Improper segregation of duties
Lack of qualified staff in IT
function
System access granted to a
number of individuals
System administration is sole
responsibility of one individual
The Financial Reporting
Model
Government Wide
Statements

Basic financial statements





MD&A
Statement of Net Assets
Statement of Activities
Footnotes
RSI



Pensions
OPEB
Budget to actual
Fund Statements

Demonstrate FINANCIAL accountability



Major funds & aggregated non major funds


Largest/most important funds
Governmental funds


Results of operations
Financial position
Financial resources & modified accrual
Proprietary & fiduciary funds

Economic resources & full accrual
Financial Reporting &
the CAFR
Comprehensive Annual
Financial Report

Encouraged by GASB



NOT required
GFOA guidelines
Three sections



Introductory
Financial
Statistical
Sections of the CAFR

Introductory
Cover, title page, table of
contents
 Certificate, principal officials
 Organizational chart, transmittal

Sections of the CAFR

Financial




GPFS (including notes)
Combining & individual fund FS
Schedules
Statistical


Usually outside scope of audit
Must follow GASB #44 if presented
Financial Reporting

GFOA Certificate Program


Judges

Two independent judges

GFOA staff judges
Certificate awarded for one year only
Exploring Real World
Financial Statements