The New Blue Book Presented by: Anne A. Fritz, Director of Finance City of St. Petersburg FL Agenda • Using the new Blue Book as a guide – Overview – Elements of financial statements – Entity wide financial statements – Fund Financial Statements – Proprietary Funds Accounting, Financial Reporting and the Financial Statement Audit: An Overview • Accounting – Assembling relevant data on all transactions and events – Governments must analyze the economic substance of events and transactions – Classifying all various components of a transaction or event – Recording the identified transaction – Thus is the process of assembling, analyzing, classifying and recording data relevant to transactions – Is the primary the responsibility of management Accounting, Financial Reporting and the Financial Statement Audit: An Overview • Financial Reporting – The process of taking the information thus assembled, analyzed, classified, and recorded and providing it in usable form to those who need it – Interim financial reporting – Special purpose external financial reporting – General purpose financial reporting • Display • Disclosure • Supporting Information Supporting information • Is information designed to provide operational, economic, or historical context for the financial statements themselves or for notes to the financial statements • Sometimes mandated by GASB (required supplementary information - RSI), or otherwise is supplementary information (SI) (SI is optional) • Includes more detailed information than the financial statements (7) Elements of financial statements • Assets: resources with present service capacity that the government presently controls – Control refers to a government’s ability • To utilize a resource’s present service capacity; and • To determine the nature and manner of its use – Does not have to be absolute • Normally results from legal ownership – Control must result from a past event (tax levy) rather than an inherent power (ability to tax) Elements of financial statements, continued • Liabilities: present obligations to sacrifice resources that the government has little or no discretion to avoid – Avoidability is crucial – an obligation that can be avoided is not a liability. – Normally an obligation will be deemed unavoidable because it is legally enforceable: • Either pursuant to a contract (payables); or • As a result of third-party legislation (environmental regulations) Elements of financial statements, continued • Legal enforceability is not essential to liability recognition • An obligation may need to be recognized as a constructive (inferred) liability if “social, moral, or economic consequences leave the government little or no discretion to avoid the sacrifice of resources” • Commitments from liabilities • A liability must involve an external party Elements of financial statements, continued • Inflow of resources: an acquisition of net position by the government that is applicable to the reporting period – Acquisition involves either • New resources coming under the government’s control (occurrence of a taxable sale); or • Resources already under the government’s control becoming newly available (meeting eligibility requirements for a grant that provided cash in advance) – Either way, acquisition will always result in either a net increase in assets or a net decrease in liabilities Elements of financial statements, continued • Outflow of resources: consumption of net position by the government that is applicable to a reporting period – Consumption may involve either • Using up an existing resource (cash); or • Using up a resource as it is acquired (employee labor) – Either way, the result of consumption will always by a net decrease in assets or a net increase in liabilities Elements of financial statements, continued • Deferred inflow of resources: acquisition of net position by the government that is applicable to a future reporting period – A given item that meets the definition of inflow of resources, but relates to a future period, is a deferred inflow of resources (property taxes levied in the current year to finance the subsequent year’s budget) – Don’t confuse with liabilities – example: grant received prior to meeting eligibility requirements does not meet the definition of deferred inflow because • It involves no acquisition of resources resulting in either a net increase in assets or a net decrease in liabilities (the asset cash received) from the grantor is counterbalances by a related liability to the grantor); and • It also meets the definition of liability because it represents a present obligation to sacrifice resources that the government has little or no discretion to avoid Elements of financial statements, continued • Deferred outflow of resources: consumption of net position by the government that is applicable to a future reporting period – A given item that meets the definition of outflow of resources, but relates to a future period, is a deferred outflow of resources (resources provided to a grantee before the grantee has met related time requirements, but after all other eligibility criteria have been met) – Don’t confuse with assets – example: prepaid rent does not meet the definition of a deferred outflow of resources because: • It involves no consumption of resources that results in either a net decrease in assets or a net increase in liabilities (the asset prepaid rent simply replaces the asset cash) • It does meet the definition of an asset because it represents access to present service capacity that is under the control of the government Elements of financial statements, continued • Net position: the residual of all other elements presented in a statement of financial position – The difference between assets + deferred outflows of resources, on the one hand, and liabilities + deferred inflows of resources, on the other, constitutes the net position Essential accounting data characteristics • • • • • • Understandability Reliability Relevance Timeliness Consistency Comparability GAAFR Government-Wide Financial Reporting General Rules • Government-wide financial reporting requires – Data reported in governmental funds using current financial resources measurement focus (modified accrual) be converted to economic resources measurement focus (full accrual accounting) – Redundancy resulting from interfund activity be eliminated Converting the Data • Most accounting systems for local governments are organized around funds • Series of steps from “budget-based” accounting to modified accrual and accrual – Budget to modified accrual – Modified accrual to accrual Balance Sheet vs. Statement of Net Assets • Two types of differences • Governmental funds report only those assets and liabilities that are considered relevant to flows and balances of current financial resources. (modified accrual) The government-wide statement of net assets report all assets and liabilities (accrual) • What does that include? – Capital Assets of general government – Deferred charges for debt issuance costs – Inventories and prepaid assets (if not otherwise reported) – Long-term debt – Liability for accrued interest – Liabilities for certain accrued obligations not recognized in governmental funds – Eliminate liability for earned but unavailable deferred revenue Second Difference? • Internal service funds (proprietary) are to be included as part of the governmental activities whenever they primarily serve governmental funds (which is usually the case) – Assets & liabilities of internal service funds • Proprietary fund combining and individual fund statements will include the internal service funds. Converting Governmental Fund Operating Statements to Government-wide Statement of Activities Five Types of Differences • #1: Accrual accounting: include only transactions that net assets where modified accrual (governmental funds) include transactions that impact net current financial resources but do not affect total net assets i.e. capital outlays, debt service principal payments Five Types of Differences • #2: Proceeds from sale of capital assets are reflected in their entirety in governmental fund operating statements. Only the gain or loss on the sale is reflected in governmentwide statements Five Types of Differences • #3: Governmental funds do not report “gains” and “losses” but difference in sale are reported as revenue or expenditures. Government-wide statement of activities report these activities as gains or losses Five Types of Differences • #4: Regarding transactions that occur in one year and the financial impact results in a following period (unavailable revenue or certain accrued liabilities) Government-wide statements report transactions in the year the event occurred where governmental funds defer recognition Five Types of Differences • #5: Internal service funds activities typically are included as governmental activities in government-wide statements (even though they are properly classified as proprietary funds) Governmental Data Adjustments • Eliminate expenditures that represent the acquisition of capital assets • Eliminate expenditures for debt service principal payments • Eliminate other financing sources/uses and expenditures associated with debt issuance. • Include donations of capital assets • Restate sales of capital assets & fund assets on an accrual basis • Eliminate revenues and expenditures related to prior periods. • Make all regular accrual adjustments • Include the activities of internal service funds What was the second requirement? • Eliminate the interfund activity ! • Four Ways for Primary Government to interact creating “interfund activity” – One fund loans money to another – One fund furnishes goods or services to another – One fund furnishes resources to another with no expectation of repayment (interfund transfer) – One fund reimburse another for cost incurred on its behalf (interfund reimbursement) Statement of Net Assets • Elimination of Interfund Payables and Receivables • Two Step Process • Consolidation by activities – General fund to special revenue – Enterprise fund to enterprise fund • Interactivity consolidation – Because government activities and business like activities are reported separately, the receivables/payables will also be reported separately. How? Chapter 10 Government-wide Statement of Activities Consolidation Interfund loans services provided and used reimbursements transfers While all four types of interfund activity affect the statement of positions, not all of them are consolidated Government-wide Statement of Activities Consolidation • Interfund loans: Taken care of in statement of net assets • Interfund services provided & used: NOT ELIMINATED – Objective of government-wide statements is to provide information on the net cost of each government function and revenues and expenses related to interfund services constitute an essential component of any such cost calculation services between functions Therefore, GAAP requires that these NOT be eliminated. Government-wide Statement of Activities Consolidation • Interfund reimbursements: If the government handles reimbursements the same as “interfund services” (revenues/expenses), then elimination of entries must be done. If reimbursements are done by reallocating expense (reducing expense in one fund, increasing it in another) then no entry Government-wide Statement of Activities Consolidation • Interfund transfers: Must be eliminated – Two step approach • Elimination between the same activities (i.e.general fund & special revenue) • Interfund between government and business- type activities will be shown but there should be nothing in total column for primary government (should net to $0) Government-wide Statement of Activities Consolidation • What about internal service funds? • Internal service funds (theoretically) are suppose to be “break even” operations • What if they didn’t break even? – Allocate the profit or loss to the EXPENSES of the activity that benefited from the services – Technique called the “look-back” approach Government-wide Statement of Activities Consolidation • Net profit: Functions paid more for services than they needed – Reduce expenses by % (i.e. general fund received 65% of service, then general fund expenses are reduced by 65% of net profit) • Net loss: Function didn’t pay enough for services – Increase expenses by % Government-wide Statement of Activities Consolidation • BE CAREFUL !!!! • Based on the assumption that internal service funds are included with government activities, net profit (loss) within government activities works fine • What happens when % of services are provided to the business-type activities? Government-wide Statement of Activities Consolidation • Increasing (or decreasing) expenses of business-type activities creates a receivable and payable ! One More Thing ! (regarding internal service fund allocation of profit or loss) • Interest Expense: – Should be reported as its own expense in government activities. – Therefore, do not consider interest expense in the net profit (loss) calculation when allocating expenses back to the funds – i.e. subtract out interest expense from other expenses THEN determine if there is profit (loss) GAAFR Financial Statements What is the Basic Structure of the Financial Statementsl? • “Basic financial statements” – Government-wide financial statements – Fund financial statements • Governmental funds (tax-supported activities) • Proprietary funds (business-type activities) • Fiduciary funds (not available for programs) – Notes to the financial statements • Required supplementary information (RSI) Governmental Model Management’s discussion and analysis RSI + GOVERNMENT-WIDE FINANCIAL STATEMENTS FUND FINANCIAL STATEMENTS Governmental Funds Proprietary funds Fiduciary funds Audited Basic Financial Statements NOTES TO THE FINANCIAL STATEMENTS + Other required supplementary information RSI RSI • Management’s discussion and analysis (MD&A) • Other RSI (as needed) – Budgetary comparisons – Infrastructure data (modified approach) – Pension trend data – Claims development trend data Basic Financial Statements • Government-wide statements (2) • Fund statements – Governmental fund statements (2 or 3) – Proprietary fund statements (3) – Fiduciary fund statements (2) • Notes to the financial statements CAFR • Introductory Section of CAFR • Financial Section of CAFR – Basic financial statement and RSI – Combining and individual fund presentations • Statistical section of CAFR What are the Entity-Wide Statements? • Two Government-wide basic financial statements – Statement of net assets – Statement of activities What is the Statement of Net Assets? • Reports all assets and liabilities – Both financial assets and capital assets (including infrastructure) – Both current and long-term liabilities • Presentation options – Order of relative liquidity – Current versus long-term (i.e., “classified”) • Difference = “net assets” How are Net Assets Reported? • Presentation based on accessibility of underlying assets – Net investment in capital assets – Restricted – Unrestricted Components of Net Assets CAPITAL-RELATED DEBT CAPITAL ASSETS RESTRICTED RESOURCES NET ASSETS INVESTED IN CAPITAL ASSETS NET OF RELATED DEBT LIABILITIES RELATED TO RESTRICTED RESOURCES RESTRICTED NET ASSETS OTHER LIABILITIES OTHER ASSETS UNRESTRICTED NET ASSETS What is the Statement of Activities? • All changes in government-wide net assets • Focus on expenses rather than expenditures • Order of presentation – Service focus rather than revenue focus – Expenses (cost of services) precede revenues • Net cost format demonstrates degree to which an activity is self-financing Structure of Statement of Activities • Start: Expenses by function • Less: Program revenues (directly related fees, charges and grants) • Result: Net expenses by function • Add: General revenues and other changes • Result: Increase/decrease in net assets Why Entity-Wide Statements? • Focus on the “big picture” (a government is more than the sum of its parts) • Demonstrate the total impact of the shortterm financing decisions reported in the governmental funds • Provide cost information (i.e. expenses), for activities reported in governmental funds How Wide is “Government-wide”? • Primary government (government as legally defined) • Component units (legally separate entities for which the primary government is financially accountable) • NOT fiduciary funds or fiduciary-type component units Why Two Types of Activities? • Governmental activities – Tax-supported – Program revenues not expected to cover expenses • Business-type activities – At last partially supported by fees and charges – Program revenues expected to cover all or a significant portion of program expenses • Division avoids inappropriate comparisons Negative Unrestricted Net Assets? • Accounting versus financing – Accounting - focus on when liability incurred – Financing - focus on when liability paid • Governments typically focus on financing – Resources raised when needed for payments • Deficit unrestricted net assets = commitment of future taxing power Does Surplus = Money to Spend? • Capital assets reported net of related debt – Capital assets cannot actually be used to pay off debt – Debt service must be paid from restricted and unrestricted net assets • Therefore, positive balance of unrestricted net assets does not necessarily = money to spend • Look to governmental fund statements for information on spendable resources How To Use Cost Information? • Distinguish direct costs from indirect costs • Distinguish avoidable costs from unavoidable costs • Depreciation is based upon historical cost rather than replacement cost – Care needed in making comparisons – “Funding” depreciation expense may not provide adequate resources for replacement – Rate setting must consider cash flows Why Are Some Items Shown Separately? • Need to avoid artificial fluctuations in trend data • “Extraordinary items” – Unusual in nature and – Infrequent in occurrence • “Special items” – Unusual in nature or infrequent in occurrence – Subject to management control What Are Govt. Fund Statements? • Governmental fund balance sheet • Governmental fund statement of revenues, expenditures and changes in fund balances • Budgetary comparison (optional as basic financial statement) What is the GF Balance Sheet? • Financial assets • Liabilities to be paid from available expendable resources • Difference = fund balance – Non spendable – Spendable • • • • Restricted Committed Assigned Unassigned (GF only) What Is the GF Operating Statement? • Statement of revenues, expenditures and changes in fund balances • Other financing sources and uses reported separately to avoid distorting trend data – Issuance of debt (including capital leases) – Sale of capital assets (if not “special item”) – Transfers – Refunding transactions What is the Budgetary Comparison? • Compare – Original budget to final amended budget – Final amended budget to actual (presented on the budgetary basis) • Options – Basic financial statement (GFOA recommended practice consistent with current practice) – Required supplementary information Why GF Financial Statements? • Most decisions in public sector made in context of operating budget – Focus on near-term inflows and outflows of spendable resources – Includes budgeted items not otherwise reported in operating statement (e.g., capital outlay) – Excludes from operating statement items not typically budgeted (e.g., the incurrence of liabilities payable in future years, depreciation) Deficit Unreserved Fund Balance? • Deficit = claims on current financial resources exceed the balances of those resources • Always to be taken seriously • Situations that may justify deficit: – Encumbered long-term contracts – Long-term borrowings from other funds Deficit of Revenues to Expenditures? • Deficit may indicate a fund is “living beyond its means” • Situations that may justify deficit: – “Budgeting” excess fund balance – Up-front contributions for capital projects – Debt-financed capital projects – Reimbursement grants – Planned operating subsidies Why Are the Numbers Different? • Difference between governmental funds and governmental activities in the governmentwide financial statements – Financial assets versus total assets – Liabilities that are due and payable versus total liabilities – Capital outlay versus depreciation – Debt issuance and principal repayment Why Are the Numbers Different? (cont.) – Immediate recognition versus deferral and amortization – Revenue when available versus revenue when earned – Internal service fund activities and balances What are Proprietary Statements? • Statement of net assets • Statement of revenues, expenses and changes in fund net assets • Statement of cash flows What is the PF Statement of Net Assets? • Essentially the same format as governmentwide statement of net assets • Current assets and liabilities separated from long-term assets and liabilities • Net assets classified based upon accessibility rather than source (unlike businesses) What is the PF Statement of Changes? • Operating items distinguished from nonoperating items – Demonstrates the degree to which a fund recovers the costs of the services it provides • Nonoperating items – Capital grants – Operating subsidies – Other What is the PF Statement of Cash Flows? • Positive or negative cash flow? Not evident from operating statement (unlike governmental funds) • What are the sources and uses of cash? – Operating activities – Noncapital financing activities – Capital and related financing activities – Investing activities Operating Income v. Operating Cash TRANSACTION EFFECT ON OPERATING INCOME EFFECT ON CASH FLOWS FROM OPERATING ACTIVITIES ADJUSTMENT THAT NEEDS TO BE MADE TO OPERATING INCOME IN RECONCILIATION SALES ON CREDIT (I.E., CREATION OF ACCOUNTS RECEIVABLE) INCREASE NONE SUBTRACT TO ARRIVE AT NET CASH FLOWS COLLECTION OF RECEIVABLES NONE INCREASE ADD TO ARRIVE AT NET CASH FLOWS Operating Income v. Operating Cash (cont.) TRANSACTION EFFECT ON OPERATING INCOME EFFECT ON CASH FLOWS FROM OPERATING ACTIVITIES ADJUSTMENT THAT NEEDS TO BE MADE TO OPERATING INCOME IN RECONCILIATION INCURRENCE OF PAYABLES AND OTHER OPERATING LIABILITIES DECREASE NONE ADD TO ARRIVE AT NET CASH FLOWS DECREASE SUBTRACT TO ARRIVE AT NET CASH FLOWS LIQUIDATION OF PAYABLES AND OTHER OPERATING LIABILITIES NONE Operating Income v. Operating Cash (cont.) TRANSACTION EFFECT ON OPERATING INCOME EFFECT ON CASH FLOWS FROM OPERATING ACTIVITIES ADJUSTMENT THAT NEEDS TO BE MADE TO OPERATING INCOME IN RECONCILIATION PURCHASE OF INVENTORIES NONE DECREASE SUBTRACT TO ARRIVE AT NET CASH FLOWS CONSUMPTION OF INVENTORIES DECREASE NONE ADD TO ARRIVE AT NET CASH FLOWS Operating Income v. Operating Cash (cont.) TRANSACTION EFFECT ON OPERATING INCOME EFFECT ON CASH FLOWS FROM OPERATING ACTIVITIES ADJUSTMENT THAT NEEDS TO BE MADE TO OPERATING INCOME IN RECONCILIATION DEPRECIATION EXPENSE DECREASE NONE ADD TO ARRIVE AT NET CASH FLOWS AMORTIZATION EXPENSE DECREASE NONE ADD TO ARRIVE AT NET CASH FLOWS ELEMENTS OF RECONCILIATION: START: OPERATING INCOME ADD BACK DEPRECIATION EXPENSE AND AMORTIZATION EXPENSE FINISH: NET CASH FLOWS FROM OPERATING ACTIVITIES Should An EF Always Support Itself? • Some enterprise funds designed to recover full cost • Other enterprise funds designed to recover only a portion of their cost (subsidy reflects perceived indirect benefit to general public) • Must distinguish between the two situations Surplus/Deficit in Internal Service Fund? • Role of internal service fund = allocation of cost • Ideally “break even” basis – Exception for “working capital” needs – Exception for replacement of capital assets • Substantial ongoing surplus/deficit may mean that charges are excessive or insufficient What are Fiduciary Funds? • Resources not available to support government programs – Pension funds – Investment pools – Private-purpose trusts – Agency funds (e.g., tax collections for other governments) What are Fiduciary Fund Statements? • Statement of fiduciary net assets • Statement of changes in fiduciary net assets Does Pension Surplus = Full Funding? • Accounting liabilities versus actuarial liabilities • Present value of pension benefits earned (actuarial accrued liability) is not an accounting liability and so is not reported • Therefore, positive net assets does not mean full funding OTHER REQUIREMENTS • REQUIRED SUPPLEMENTATY INFORMATION What is the Budgetary Comparison? • Contents – – – – Original budget Final amended budget Actual (reported using budgetary basis of accounting) Variance column (optional) • Option to report as basic financial statement or RSI (general fund and major special revenue funds) Are Budget Amendments Bad? • Budgeting based on estimates – Amendments are frequent • Meaning of significant differences between original and final amended budget – Usually, an appropriate response to unforeseen changes – May indicate weakness in budget process • Consult MD&A for analysis of difference What Do Variances Mean? • Governments focus on service rather than profit – Excess revenue not necessarily “favorable” – “Savings” achieved by a reduction in planned services not necessarily “favorable” • Neutral terminology recommended (e.g., “over” and “under”) to avoid misunderstandings What is the Schedule of Funding Progress? • Comparison over time of actuarial assets and liabilities related to pension plans • Ratio assets/liabilities = “funded ratio” • Use covered payroll as point of comparison • Not presented when “aggregate” method used to determine annual required contribution Unfunded Actuarial Accrued Liability UNFUNDED ACTUARIAL ACCRUED LIABILITY A/B = FUNDED RATIO A ACTUARIAL VALUE OF ASSETS ACCUMULATED FOR PENSION BENEFITS (VALUE OF ASSETS AVERAGED OVER TIME) ACTUARIAL ACCRUED LIABILITY B (PRESENT VALUE OF PENSION BENEFITS EARNED) What is the Schedule of Employer Contributions? • All acceptable actuarial funding methods lead to same point • Need to compare annual required contribution (ARC) and actual contributions over time • Full funding = pattern of 100% funding of ARC What is the Modified Approach? • Infrastructure normally depreciated like other capital assets • Option not to depreciate infrastructure if certain conditions met: – Up-to-date inventory of infrastructure – Regular condition assessments – Annual estimate of cost to maintain at level determined and disclosed by government – Document maintenance level What Needs to Be Reported for Modified Approach? • Results of 3 most recent condition assessments • Annual amount estimated to maintain at predetermined condition level (past 5 years) • Actual expense to maintain at predetermined condition level (past 5 years) Goal – Notes • The goal of this session is to familiarize you with note disclosures required by GAAP, and recommend resources that will enable you to meet those disclosure requirements. Notes – what’s the big deal? • Notes to the financial statements are management’s tool for clarifying and supporting information provided in the financial statements. Basic rules in note preparation • Include required disclosures • Include only what you need • Make sure that your disclosures are accurate (modify templates) • Make sure the information ties to financial statements and other applicable section • Check for changes in authoritative guidance • Remember – these are your notes Overview of note preparation • Obtain a template (you need a starting point) • Customize notes using your financial information and resources • Compare draft to checklist • Tic and tie • Consider comments from certificate programs Resources for preparing notes • 2012 GAAFR • Comprehensive Implementation Guide – 2004: see “Disclosures” in index • Governmental Accounting and Financial Reporting Standards (Codification or Original Pronouncements): see Notes to the Financial Statements in Topical Index Resources for preparing notes - continued • Web site for checklist: http://www.gfoa.org/forms/ New Blue Book • Other chapters overview – Notes to the Financial statements – Conversion and consolidation – Internal control – Audits • Illustrations • Examples and other resources • Web site Questions?