Audit Season Review

1. Presented By William Blend, CPA, CFE Audit Season Review

2. Audit Season Review • GASB Standards Implementation • Group Audit Standards

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6. Fiscal Year End 2013 Accounting Standards • GASB 60 – Accounting and Reporting for SCA’s • GASB 61 – The Financial Reporting Entity: Omnibus • GASB 62 – Codification of Pre-Nov. 30, 1989 FASB and AICPA Pronouncements • GASB 63 – Reporting Deferred Outflows, Inflows and Net Position • GASB 65 – Items Previously Classified as Assets and Liabilities

7. GASB 60

8. GASB Statement No. 60 Accounting and Financial Reporting for Service Concession Arrangements • A type of public-private or public-public partnership • Parties: Transferor, Operator, Customer/User • Benefits: • Leverage existing infrastructure for cash • Get facilities built, but transfer some of the risks • Provide services in a more efficient manner

9. Scope: What is an SCA? ALL of the following criteria must be met: • Government conveys to an operator the right and related obligation to provide services to the public through the use and operation of a capital asset (“facility”) in exchange for significant consideration • Operator collects and is compensated by fees from third parties

10. Scope: What is an SCA? ALL of the following criteria are met: • Government is entitled to significant residual interest in the service utility of the facility at the end of the arrangement • Government determines or has the ability to modify or approve: • What services the operator is required to provide • To whom the services will be provided • The prices or rates that will be charged

11. Examples of SCAs • An operator will design and build a facility and obtain the right to collect fees from third parties: construction of a municipal complex for the right to lease a portion of the facility to third parties. • Operator will provide significant consideration in exchange for the right to access an existing facility: operating a parking garage and collecting fees from third parties for its usage.

12. Examples of SCAs • The operator will design and build a facility (new tollway), finance the construction costs, provide the associated services, collect the associated fees, and convey the facility to the government at the end of the arrangement.

13. GASB Statement No. 60 Transferor Accounting: • If existing facility, continue to report as capital asset • If facility purchased or constructed, record: Capital Asset XX PV of Contract Obligations XX Deferred Inflow of Resources XX • Capital asset is subject to existing requirements for depreciation, impairment, and disclosures • No depreciation if operator must return facility in its original or enhanced condition

14. GASB Statement No. 60 Transferor Accounting: (Cont.) • Should recognize a liability for certain obligations to sacrifice financial resources if: • Obligation relates directly to the facility, or • Obligation relates to a commitment to maintain a minimum or specified level of service in the facility • Deferred inflow should be reduced and revenue recognized in a systematic and rational manner over the term of the SCA

15. GASB Statement No. 60 Governmental Operator Accounting: • Should report an intangible asset for the right to access the facility and collect third-party fees • Costs of improvements to the facility by the operator increase the intangible asset if they increase the capacity or efficiency of the facility • Intangible asset should be amortized and expense recognized in a systematic and rational manner over the term of the SCA

16. GASB Statement No. 60 Governmental Operator Accounting: (Cont.) • If information is known that indicates the facility is not in the specified condition, then a liability and, generally, an expense to restore the facility should be reported • Operators are not required to perform additional procedures to identify potential condition deficiencies beyond those performed as part of normal operations

17. GASB Statement No. 60 Accounting for Revenue Sharing Agreements: • Applicable when transferor and operator share the facility’s revenues • Golf courses, tennis facilities, pools, recreation facilities • Operator recognizes 100% of revenue earned and expenses incurred • Transferor recognizes only its share of the revenue • If risk of operations is transferred • If risk of operations is not transferred • Transferor still reports entire operation • If payments are periodic, recognize the present value

18. Note Disclosures • Both transferors and governmental operators should disclose the following: • Description of the SCA in effect and management's objectives; also, the status of the project during construction • Nature and amount of assets, liabilities, and deferred inflows of resources in the F/S • Nature and extent of rights retained by the transferor or granted to the governmental operator under the SCA

19. Note Disclosures • If applicable, disclosures should be made about guarantees and commitments, including identification, duration, and significant contract terms of the guarantees or commitments. • Disclosures for multiple SCAs may be provided individually or in the aggregate for those that involve similar facilities and risk.

21. GASB 61

22. GASB 61 The Financial Reporting Entity: Omnibus - an amendment of GASB Statements 14 and 34

23. Introduction • Omnibus means to address multiple issues within one document • Objective: To improve financial reporting for governmental entities and, specifically, to address issues that have arisen since GASB 14 and 34 • Include the organizations that should be included • Exclude the organizations that should not be included • Consistency with current conceptual framework

24. Scope and Applicability • Applies to the assessment of potential component units in determining what should be included in the govern-mental financial reporting entity, as well as the entity display and disclosures. • It applies to financial reporting by primary govern-ments and other stand-alone governments, separately issued financial statements of govern-mental component units, and nongovernmental component units when they are included in a governmental financial reporting entity.

25. Amendments to Inclusion Criterion • GASB 61 still includes the “financial accountability” criteria of GASB 14, which requires the following circumstances for a primary government to have financial accountability: • Appoints a voting majority and it is able to impose its will on the organization or there is a financial benefit/burden relationship • Fiscal dependency on the primary government • Fiscal dependency refers to organizations that must obtain the approval of another government for either: • Determining its budget • Establishing its rates, taxes, levies or changes, or • Issuing debt

26. Amendments to Inclusion Criterion • Now, in addition to fiscal dependency, a financial benefit or burden relationship that is other than temporary must be present. It is present if any one of these conditions exists: • Primary Government (PG) is legally entitled to, or can otherwise access, the organization’s resources • PG is legally obligated, or has otherwise assumed the obligation to finance the deficits of, or provide financial support to, the organization • PG is obligated in some manner for the debt of the organization

27. Amendments to the “Misleading to Exclude” Criterion • GASB 61 emphasizes the use of management’s professional judgment when considering the inclusion of potential component units. • The relationship between a PG and closely related organization will generally be financial in nature and often include financial benefit or burden relationships. • When an organization does not meet financial accountability criteria, management may still determine that inclusion is necessary to prevent the reporting entity’s financial statements from being misleading. • When evaluating a potential component unit, management should be considering if the organization is closely related to or financially integrated with the PG.

28. Amendments to the Criteria for Blending Component Units • Discrete presentation is the default method for inclusion of component units. Blending should occur only in specific, narrowly defined circumstances. Prior to GASB 61, this criterion consisted of “substantively the same governing body” and “services provided entirely/exclusively to the primary government.” • GASB 61 adds additional criteria for blending component units.

29. Amendments to the Criteria for Blending Component Units • Using just the “substantively the same governing body” rule, resulted in PG adding significant assets to their financial statements that it could not access, or significant debt for which it was not liable. • The two provisions added to the blending criteria of “substantively the same governing body” were as follows: • Either a financial benefit or burden requirement also exists between the PG and component unit, or • Management of the PG also has operational responsi-bility for the component unit.

30. Amendments to the Criteria for Blending Component Units • GASB 61 also added a third criterion for blending, which occurs when a component unit’s total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the PG.

31. Amendments to the Requirements for Reporting the Funds of a Blended Component Unit • GASB 61 clarifies that funds of a blended component unit assume all the characteristics of funds of the PG and are subject to the same fund reporting requirements. • The general fund of a blended component unit should continue to be reported as a special revenue fund of the PG. • For governments engaged only in business-type activities that use a single-column presentation, a component unit may be blended by consolidating its financial statement data within the single column of the PG and presenting condensed combining information in the notes to the financial statements.

32. Amendments to the Requirements for Reporting the Funds of a Blended Component Unit • Condensed combining information should include at a minimum: • Condensed statement of net assets • Condensed statement of revenues, expenses, and changes in net assets • Condensed statement of cash flows

33. Amendments to the Major Component Unit Requirements • Prior to GASB 61, there was inconsistency between PG in how it determined which component units are major. • GASB 61 clarifies that major component units should be those which are of greater interest to the financial statement user. Therefore, determination should be based on the nature and significance of relationship to the PG. This would include factors, such as: • Essential services provided to the citizenry • Significant transactions with the PG • Significant financial benefit or burden relationship with the PG

34. Amendments to the Major Component Unit Requirements • In addition, GASB 61 eliminates the requirement that the major component unit determination include consideration of each component unit’s significance relative to other component units. • Major component units should be presented either: • In a separate column in the statement of net assets and activities • In combining statements of major component units in the basic financial statement following the fund financial statements, or • In the notes to the financial statements in a condensed financial statement format. • Nonmajor component units should be aggregated in a single column. A combining schedule is not required but is allowed as supplementary information.

35. Amendments to the Requirements for Reporting Equity Interests of Component Units • When a government owns a majority of the equity interest of a legally separate organization and the intent is to directly enhance the government’s ability to provide governmental services, the organization should be reported as a component unit. • Prior to GASB 61, equity interests in discretely presented component units were reported as expense or outflow of resources for the acquisition, whereas equity interests in joint ventures were reported as assets.

36. Amendments to the Requirements for Reporting Equity Interests of Component Units • GASB 61 now requires that the equity interest in a discretely presented component unit be reported as an asset of the fund that has the equity interest • If the component unit is blended, the equity interest is eliminated in the blending process

37. Note Disclosures • GASB 61 clarifies how disclosure requirements for component units should be applied. • Note disclosures should include the following: • Brief description of the component units of the financial reporting entity and their relationship to the PG. • Discussion of the rationale for including each component unit in the financial reporting entity and whether it is discretely presented, blended, or in fiduciary funds. • Information about how the separate financial statements for the individual component units may be obtained.

38. Note Disclosures • GASB 61 also clarifies that component units may be disclosed together based on common character-istics, as long as each component unit is separately identified. (Example: multiple CRA funds) • Believe it or not, no new disclosures.

39. Amendments for Component Units and Related Organizations with Joint Venture Characteristics • GASB 61 provides reporting guidance for minority interests in component units and related organizations with joint venture characteristics. • For component units reported in a majority participant’s financial reporting entity, equity interests of the minority participants should be reported as “restricted net assets, nonexpendable.” • “Minority interest in a component unit” was also added to GASB 34’s paragraph describing expendable and non-expendable restricted net assets.

40. Effective Date and Transition • Effective for financial statements for periods beginning after June 15, 2012 (FL FY 6/30/13 or 9/30/13) • Earlier application is encouraged • The cumulative effect of applying this statement should be reported as a restatement of beginning equity for the current period with appropriate disclosure

41. GASB 62

42. GASB Statement No. 62 Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements • Incorporates pronouncements issued before November 30, 1989, by the following that do not contradict GASB Pronouncements • FASB Statements and Interpretations (SFAS 106) • Accounting Principle Board Opinions (APB) • AICPA Accounting Research Bulletins • Supersedes GASB 20

43. GASB Statement No. 62 • Capitalized interest • Proprietary Funds • Revenue recognition when right of return exists • Proprietary Funds • Defines classifications for a classified statement of position (balance sheet) • Over 500 paragraphs • Due to issuance of FASB Codification

44. GASB Statement No. 62 IMPLEMENTATION EFFECT • Eliminates the election for enterprise funds and business-type activities to apply post-November 30, 1989 FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements • Remember to remove the election note disclosure

45. Concepts Statement No. 4

46. Concept Statement No. 4 Background to GASB 63 and 65 • Issued in June 2007 • Establishes definitions for 7 elements that make up government financial statements: • Assets • Liabilities • Deferred outflow of resources • Deferred inflow of resources • Net position • Outflow of resources • Inflow of resources

47. GASB 63

48. For Proprietary Funds • Net approach is encouraged • Balance Sheet approach is allowed • For Governmental Funds • Balance Sheet approach still appropriate • Difference is still called Fund Balance

49. Definitions • Deferred outflows of resources • A consumption of net assets by the government that is applicable to a future reporting period • Has a positive effect on net position, similar to assets • Deferred inflows of resources • An acquisition of net assets by the government that is applicable to a future reporting period • Has a negative effect on net position, similar to liabilities • Net position • The residual of all elements presented in a statement of financial position

50. Statement of Net Position