Transcript GASB sherrieble - Water Industry News

GASB 34
The New Financial Reporting Model
New York Society of Municipal Finance Officers
Colonie, New York
May 13, 2001
________________
Presented by
Kenneth G. Scherrieble, Valley River, Inc.
Allison Quinn, CPA,
BOLLAM, SHEEDY, TORANI & CO. LLP, CPAs
GASB Statement No. 34
“Basic Financial Statements –
and Management’s Discussion and Analysis –
for State and Local Governments”
What is it?
And why is it such a big deal?
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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What is GASB 34 ?

Sweeping revision of the current financial
reporting model (in place since 1979)

Adopted in June 1999, by the Governmental
Accounting Standards Board (GASB)
 Sets “Generally Accepted Accounting
Principles” (“GAAP”) financial reporting
rules for all state and local governments
 The highest level of standard setting of
governmental accounting principles
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Why Implement ?

Generally Accepted Accounting Principles
 GASB 34 is now the industry standard
for financial reporting
 Extensive “due process” (over 15 years)
before its adoption
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Why Implement ? - Continued

Support for New Model
 National Association of State Auditors,
Comptrollers, and Treasurers
 Credit rating agencies
 Public works officials
 Supported by some well-respected
finance professionals
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Why Implement ? - Continued
More understandable financial reports
More useful financial reports
To a wider range of users
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Why is “GAAP” Important ?

Maintaining citizen confidence in the
entity’s financial stewardship requires
credibility and integrity in accounting and
financial reporting systems

Following industry standards is an essential
foundation in gaining and sustaining this
trust
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Applies To ?

The general-purpose external financial reports of
- Public benefit corporations and authorities
- Bodies corporate and politic
- Public school districts
- Public hospitals and other health care
providers
- Public colleges and universities (GASB 35)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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How Soon ?
Phase in based on Total Annual Revenues
Required for
periods beginning
after
Total Annual Revenue
June 15,

$100 million +
2001

$10 million - $100 million
2002

$10 million or less
2003
In other words,
fiscal years
ending on
or after
June 30, 2002
June 30, 2003
June 30, 2004
For
Infrastructure
June 30, 2006*
June 30, 2007*
Not required **
Annual revenues does not include other financing sources and extraordinary gains
* Retroactive to 1980 as the minimum
** Entity’s are encouraged, but not required to report general government
infrastructure assets retroactively
Component unit is to implement no later than its primary government
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Basic Financial Statements

Management’s Discussion and Analysis (MD&A)

Two distinct financial statements
-
Government-wide (major change)
Fund (similar to current model)

Notes to the financial statements (for both)

Required Supplemental Information (RSI)
Three elements to RSI:
-
Management’s Discussion and Analysis
Budgetary comparison reporting
Infrastructure condition data (new)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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MD&A

Precedes and introduces the basic financial
statements

Is part of RSI

May be the most sensitive and subjective, and
therefore, the most difficult aspect of GASB 34

Use of charts, tables, and graphs is encouraged
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Should provide a brief, objective, and
easily readable analysis of
the entity’s financial activities
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Minimum requirements:

A brief discussion of the basic financial
statements, including the relationships of
the statements to each other, and significant
differences in the information they provide

Condensed financial information derived
from government-wide financial statements
comparing the current year to prior year
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Minimum requirements:

An analysis of the government’s overall financial
position and results of operations to assist users in
assessing whether financial position has improved
or deteriorated as a result of the year’s operations

An analysis of balances and transactions of
individual funds addressing reasons for significant
changes in these balances and amounts
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Minimum requirements:

An analysis of significant variations
between
 Original and final budget amounts and
 Final budget amounts and actual budget
results for the general fund (or its
equivalent)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Minimum requirements:

A description of significant
Capital asset activity
 Long-term debt activity during the year
 Including a discussion of commitments made for capital
expenditures
 Changes in credit ratings, and
 Debt limitations that may affect the financing of
planned facilities or services

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A - Continued
Minimum requirements:

A discussion by governments that use the
modified approach to report some or all of their
infrastructure assets

A description of currently known facts, decisions,
or conditions that are expected to have a
significant effect on financial position (net assets)
or results of operations (revenues, expenses, and
other changes in net assets)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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M D & A Example
See pages 1 through 9 of Examples
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements

Consolidated financial statements for all of the
entity’s operations

Basic financial statements – statement of net assets
and statement of activities

Full accrual basis of accounting

Not presented on fund basis
 Two Major Activities
 Governmental
 Business-type
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements Continued

Net Asset focus:
 Assets – Liabilities = Net Assets

Excludes interfund transactions and
fiduciary funds
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Statement of Net Assets

One column each for:
Governmental Activities, including all fixed
assets and long-term debt Business-Type
Activities, including all enterprise funds
 Internal service funds are split between the two
based on volume
 Trust and Agency funds presented separately

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Categories of Net Assets

There are three parts:
 Invested in Capital Assets, net of related debt
 Restricted, externally imposed by law through
constitutional provisions, etc., not by reporting
entity (Differs from reserved)
 Unrestricted, essentially spendable, but cannot be
designated or reserved
(Not the same as undesignated, and
designations are forbidden)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Statement of Activities

Format is radical departure

Net cost format (expenses precede revenues)

No comparison with prior year or budget required

Level of detail:
Governmental activities by function
 Business–type activities by segment

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Statement of Activities - Continued

Program revenues can be hard to allocate

There may be a scramble by departments to
generate revenues to offset their expenses

Enterprise fees may be easier to adjust, now
that net profits are prominently displayed
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Reporting Depreciation Expense

Depreciation (other than on infrastructure)
Function-specific capital assets by function
 Ratably allocable capital assets by function
 Otherwise as part of “general government” or in
separate “unallocated depreciation” line


Depreciation on infrastructure
Normally in function associated with acquisition and
maintenance
 Alternatively in separate line

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Reporting Interest Expense

Reported by function only if direct
connection

Otherwise report as separate “unallocated
interest” line
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Identifying Program Revenues

Amounts received from those who purchase, use,
or directly benefit from a program

Grants and contributions restricted to one or more
specific programs
 Amount

must be specified for multi-purpose grants
Earnings on investments that are legally restricted
for a specific program
Endowments and permanent funds
 Invested grant proceeds

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Presentation of Program Revenues

Charges for services separate from grants and
contributions

Operating grants and contributions separate from
capital grants and contributions

A grant or contribution that may be used for either
operating or capital purposes should be treated as
an operating grant or contribution
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Special Items

Definition
Significant items within the control of
management
 Unusual in nature or infrequent in occurrence


Treat in the same manner as, but separately
from, extraordinary items
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
Transfers

Single category

Elimination of distinction between
operating transfers and residual equity
transfers

Consistent with move from capital
maintenance to net assets focus
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Government-Wide Financial Statements
See pages 10 through 13 of Examples
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Meet
stewardship and accountability concerns
Presented
on fund basis
Similar
to current model
 Modified accrual for governmental funds
 Full accrual for proprietary funds
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements - Continued
Balance Sheet versus Statement of Net Assets

Significant – but not obvious – differences
between these two financial statements

Detailed reconciliation between the two
statements required
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements - Continued


Still combined, presenting only:
 General fund (always a major fund)
 Major funds – separate column for each
 All other funds in single column (regardless
of fund type)
 No fixed assets or long-term debt account
groups
Focus on major individual funds rather than
combined fund type
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Determining Major Funds


Criteria (apply to any and all)
 Total Assets
 Total Liabilities
 Total Revenues
 Total Expenses/Expenditures
If any one of the above equals 10% of category
total and 5% of Government-Wide total – it is a
Major Fund (10% test – governmental funds; 5% governmental funds + enterprise funds)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Optional Major Funds

Any fund “…the government’s officials
believe is particularly important…” can be a
major fund

No limit on the number of funds

No definition of “officials”
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Determining Major Funds
See page 14 of Examples
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
The Reconciliations

Reconcile the change in Net Assets With the
Excess of Revenues Over Expenditures

Reconcile Fund Balance with Net Assets

Part of the basic financial statements, not
the notes
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements –
Governmental
Basic Financial Statements

Balance sheet

Statement of revenues, expenditures, and
changes in fund balances

Budgetary comparison (if not presented as
RSI)
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements Proprietary
Basic Financial Statements

Statement of net assets/balance sheet

Statement of revenues, expenses, and
changes in fund net assets/fund equity

Statement of cash flows
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements Proprietary
Basic Financial Statements - Continued

Major funds separate column

All other enterprise funds in single column

All internal service funds in separate
column – they can not be major funds
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Use of Enterprise Funds

Permitted only for activities “for which a fee is
charged to external users for goods or services”

Issued debt backed solely by fees or charges

Required by policy or by law to cover all costs,
including depreciation
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Use of Internal Service Funds

Available for any activity that provides goods or
services to other funds, departments, or agencies
of the primary government and its component
units, or to other governments, on a costreimbursement basis

May only be used if the reporting government is
the predominate participant

Minority participant, then fund becomes enterprise
fund
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Inter-Fund Activity

Inter-fund loans now must be recorded in
borrower funds
 No more GLTDAG

Inter-fund reimbursements “should not be
displayed in the financial statements”
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Inter-Fund Eliminations

Now required at government-wide level

Must eliminate inter-fund profits
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Fiduciary Funds


Fiduciary funds never major funds
Presentation by fund type
Employee benefit trust funds
 Investment and private purpose trust funds
 Agency funds


Basic financial statements
Statement of net assets
 Statement of changes in net assets (not used for
agency funds)

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
Agency Funds Defined

“…used to report resources held… in a
purely custodial capacity”

Funds used to collect developer fees or
other charges levied by the entity are not
agency funds
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Fund Financial Statements
See pages 15 through 23 of Examples for basic
financial statements
See page 18 for reconciliation
See pages 24 through 26 for conversion worksheets
for Fund Statements
to Government-Wide Statements
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements

Summary of significant accounting policies

Capital assets

Long-term debt and other long-term
liabilities
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Summary of Significant Accounting Policies

Description of government-wide statements

No fiduciary funds or fiduciary component units
Policy for eliminating internal activity in the
statement of activities
 Capitalization policy and estimated useful
lives of capital assets
 Description of modified approach for
infrastructure assets (if applicable)

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Summary of Significant Accounting
Policies
- Continued
Types of transactions in program revenues
and policy for allocating indirect expenses
 Definition of operating and nonoperating
revenues in proprietary funds
 Policy assumption on use of restricted
versus unrestricted resources

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Capital Assets

Assets associated to governmental activities
to be reported separately from those
associated with business-type activities

Assets being depreciated to be reported
separately from those not being depreciated
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Balances and Changes by
Capital Asset Class

Beginning-of-year balances, with accumulated
depreciation presented separately from historical
cost

Capital acquisitions

Sales or other dispositions

End-of-year balances, with accumulated
depreciation presented separately from historical
cost
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Depreciation

Current-period depreciation expense, with
disclosure of the amounts charged to each
of the functions in the statement of activities
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
Long-term Debt and
Other Long-Term Liabilities

Separate governmental and business-type activities

Required disclosure
Beginning and end-of-year balances
 Increases and decrease (separately presented)
 The portions of each item that are due within one year of
the statement date
 Governmental funds typically used to liquidate other
long-term liabilities in prior years

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Notes to the Financial Statements
See pages 27 through 29 of Examples for
Capital Assets and Long-Term Liabilities
samples
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Budgetary Comparison Schedules

2nd component of RSI

Comparison of “budget-to-actual” results
for the governmental funds no longer
required as part of the “basic” financial
statement
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Budgetary Comparison Schedules
- Continued
 Schedules
present
Original budget as adopted
 Final amended budgets
 Actual inflow, outflows, and balances

Stated on budgetary basis
 Budget basis can still differ from GAAP basis

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Budgetary Comparison Schedules
- Continued
See pages 30 through 32 of Examples
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Capital Assets and
Infrastructure Reporting

3rd component of RSI

Two schedules
Report of condition of assets
 Annual estimate of maintenance and
preservation costs compared to actual
expenses

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Capital Assets

Definition


Tangible or intangible assets that are used in
operations and that have initial useful lives
extending beyond a single reporting period
Examples

Land and improvements to land, easements,
buildings and building improvements,
vehicles, machinery and equipment, works of
art and historical treasures.
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Capital Assets - continued
Determine Capitalization Thresholds
 Capitalization Thresholds can be different
for:

Different types of assets
 Existing assets
 Newly acquired assets

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Capital Assets - continued
Buildings and Equipment must be
Depreciated.
 May use historical cost or deflate current
replacement cost.
 Determine useful life.
 Select depreciation method.
 Do not depreciate inexhaustible assets.

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Infrastructure

Definition


Long-lived capital assets that normally are
stationary in nature and normally can be
preserved for a significantly greater number of
years than most capital assets
Examples

Roads, bridges, tunnels, drainage systems, water
and sewer systems, dams and lighting systems
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Infrastructure - Continued


Determining Value
 Actual historical cost
 Reasonable estimates for historical cost
Depreciating assets - Two options
per “Network” or “Subsystem”
 Traditional - Straight-line over estimated useful
life
 Modified Approach - No depreciation if
maintenance standards are met
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Infrastructure: Modified Approach

Standards (per paragraph 23)
 Maintain up-to-date inventory
 Use objective condition measurement scale
 Set condition standards
 Estimate annual costs to achieve this standard
 Perform ongoing condition assessment (at least every 3 years)

Disclosure
 Actual condition (per scale) compared with standard (show
results of last 3 assessments)
 Amount actually spent on maintenance for the last 5 years
compared with estimate
 Determining the method used is a major accounting policy
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Capital Assets and Infrastructure
Reporting Net Asset Surprises

If the entity constructed a capital asset which will
be maintained by another - do not record it on
your books

But if entity issued debt to finance that asset, the
debt must be recorded on your books

The infrastructure paid for is not required to be
recorded for four years

Net Assets will be understated, and may be a
negative amount
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Does The Entity Look Better or Worse?

The answer is in the eye of the beholder

The new format gives people a better picture of
where the money went, since long-term
transactions and all the money spent on
infrastructure will now be captured

The financial statements are more complete

But the amounts are much larger, and further away
from cash basis, which most people understand
better
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Does The Entity Look Better or Worse?
- Continued

New government-wide statements may focus
people – including council – on the big picture,
and keep them out of the detail

Even at fund level, only major funds are presented

Pushes people to look at more than cash balances
and their favorite fund
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Does The Entity Look Better or Worse?
- Continued
Governmental Unrestricted Net Assets
differs from General Fund Balance
 Statement of Activities focuses on net costs
 This may force increases in fees and
charges
 Will it change the budget approach?

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Impact on Entity Financial Picture

Government-Wide Level:
Depends on the unique circumstances of the
entity
 Including infrastructure may increase equity,
 But including long-term debt and other
liabilities may decrease equity

Fund level: Little affect
 Based on the handful of entities that have
prepared sample statements:


Not better or worse - just different
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Other Changes

No Account Groups (GFAAG and GLTDAG)

Depreciation for governmental activities

Longer and more complicated notes to meet
disclosure requirements

The BIG one: Recording infrastructure as capital
assets - and expensing them through depreciation
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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So What’s the Big Deal?

Basic statements will be longer and more
complex

More difficult to prepare and audit – especially
during conversion

Directly translates into increased costs, both
initially and ongoing for:
Staff resources
 Audit and fees
 Engineering/appraisal services for infrastructure

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Is the Effort Worth it?

New Model goals
Improve financial reporting
 Enhance awareness of fiscal issues facing state and
local governments
 Recognize the importance of adequately maintaining
infrastructure


Unclear if it will achieve these goals


Will it be easier or harder to understand the entity’s
fiscal picture?
But very clear it will be expensive to make these
changes
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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How Much Will it Cost?

The short answer - it depends . . . .
Operational size and complexity
 Financial staff resources
 Age of infrastructure
 Information availability


Issues (both initial and ongoing)
Preparing additional statements
 Developing and maintaining infrastructure data
 Auditing the results

© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Summary

GASB 34 is a major change in financial reporting
for state and local governments

While there are concerns (especially with
infrastructure reporting), there is wide-spread
agreement for implementation because of the
importance of preparing audited financial
statements in accordance with “GAAP”

Successful implementation will require careful
planning, staff training and allocating necessary
resources
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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Questions ?
Allison M. Quinn, CPA
Kenneth G. Scherrieble
BOLLAM, SHEEDY,
TORANI & CO. LLP, CPAs
VALLEY RIVER, INC
26 Computer Drive West
Albany, New York 12205
1-800-724-6700
29 Firemens Way
Poughkeepsie, New York 12603
1-845-452-6013
[email protected]
[email protected]
© 2001 BOLLAM, SHEEDY, TORANI & CO. LLP, CPAS
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