GASB 34: Step-by-Step

1. GASB 34: Step-by-Step How to Get it Done Nearly Painlessly! Presented By: Christy White, CPA Partner, Nigro Nigro & White, PC (619) 270-8222 cwhite@nnwcpa.com

2. Our Goal Today • To learn how to: • Understand which conversion entries are applicable • Gather accurate data for the conversion entries • Review the GASB 34 reports for accuracy • Keep your boss and the auditors happy!

3. GASB 34 in a Nutshell • GASB 34 is the “not-so-new” financial reporting model for government agencies – in its 5th year • Requires “full accrual” government-wide financial statements (current and long-term assets and liabilities) • Fund statement accounting uses modified accrual (only current assets and liabilities) • Conversion entries are required to convert accounts from modified accrual to full accrual basis of accounting

4. GASB 34 in a Nutshell • Two major differences between modified and full accrual basis of accounting: • Capital assets and depreciation • Long term debt • Less common are revenue differences (e.g., long-term receivables) • The funds are consolidated into “government-wide financial statements” • Interfund transactions are eliminated (automatically in the SACS software)

5. GASB 34 in a Nutshell • The SACS software is a great tool to post the conversion entries to the fund statements and print out the government-wide statements • Find under Reports/Government Wide Reporting four tabs: • CNVRT Government-wide Conversion • ENTRY Conversion Entries • GSA Statement of Activities • GSNA Statement of Net Assets

7. GASB 34 Step-By-Step Preliminary Step – ensure the Supplemental Schedules of Assets and Debts are accurate (agrees to general ledger and depreciation schedules) • Step 1: Open government-wide conversion tab and ensure revenues are allocated by function • Step 2: Post conversion entries, BB001 – BB002 and CE001- CE022, as applicable • Review output for accuracy • Step 3: Balance the Beginning Net Asset Balance • Step 4: Finalize reports for the auditor • Step 5: Write MD&A (numbers must agree to reports in Step 4)

8. GASB 34 Step-By-StepStep 1: Government-wide Conversion (CNVRT) • Opening and saving this tab pulls in the SACS fund data and updates any subsequent changes (hint: open/save frequently) • 4 worksheets: • Fund consolidation – pulls in all of the SACS Fund statements plus beginning balance entries for fixed assets and LTD • Conversion Worksheet – tracks the entries made to the fund statements (info only), we recommend you do not post any adjustments directly here • Program Revenue Detail – allocates revenues to an expenditures function (for the Statement of Activities), ensure all revenues are allocated – look for red “Unbalanced – user adjustment required.” Correct by making a user adjustment to the most logical function • Program Revenue Summary – Info only, no actions on your part required • Save and close the CNVRT tab

14. GASB 34 Step-By-StepStep 2: Enter Conversion Entries • 5 worksheets – only the first 2 worksheets require data entry: • Detail – enter conversion entries (CE001-CE022) • Beginning Balances – enter beginning capital asset and LTD balances (BB001-BB002) • CE001 Data By Function – an important and extremely helpful tool to reconcile the general ledger expenditures to the “additions” to capital assets (CE001) • CE002 Data By Object – dubiously helpful as the Statement of Activity is presented by function and not by object • Summary – use to print out completed conversion entries (summaries #1 Detail)

16. Step 2: Enter Conversion EntriesUnderstanding the Detail CE001-CE022 The Purpose of Each CE: • CE001 – to record capital asset additions • CE002 – to reduce LTD for debt service payments • CE003 – to book new LTD • CE004 – to record donated assets • CE005 – to record the disposal of capital assets • CE006 – to recognize revenue deferred (seldom used) • CE007 – to reverse CE006 from prior year, thereby correcting the beginning net asset balance (seldom used) • CE008 – to accrue interest payable on LTD • CE009 – to adjust compensated absences payable for the change during the year • CE010 – to reverse CE008 from prior year, thereby correcting beginning net asset balance

17. Step 2: Enter Conversion EntriesUnderstanding the Detail CE001-CE022 The Purpose of Each CE: • CE011 - to capitalize work in progress from the prior year(s) • CE012 – to record current year depreciation expense • CE013 - to record the amortization of a LTD premium or discount • CE014 – adds internal service fund balance sheet to the Statement of Net Assets (automatic – no user adjustment) • CE015 – adds internal service fund net income/loss to government-wide stmts. • CE016 – to record internal service fund from outside the LEA • CE017 – to reclassify transfers to fiduciary funds as transactions with an external transaction (seldom used) • CE018 – to reclassify fiduciary fund due to/from balances as AR or AP (seldom used) • CE019 – to eliminate interfund transfers (automatic) • CE020 – to eliminate due to/from balances • CE021 – to record Other Post-Employment Benefit (OPEB) costs in excess of amounts paid during the year • CE022 – to accrue other long-term debt (such as retirement incentives and legal settlements paid over time)

18. More on Conversion Entries • The conversion entries consist of: • Extracted Data – from the system, based on account coding • User Adjustments – to add data not in the system or make corrections to extracted data • The Conversion Entry – sum of 1 and 2 above, the final entry • Corrections to data – if you have not closed the books you can correct the data, re-import to SACS and the extracted data will be updated when you open CNVRT • Otherwise the User Adjustment col. can be used for corrections

19. Sample Conversion Entries

20. Step 2: Enter Conversion EntriesCapital Assets and LTD – Two Major Conversion Entry Groups • The goal: to record the SACS supplemental schedules of capital assets (Form Assets) and debt (Form Debt) in the conversion entries and produce the Government-Wide Statement of Net Assets that match the supplemental forms • This assumes the supplemental schedules are correct, check accuracy by: • Agreeing beginning balances to prior year audit • Agreeing additions and deletions to general ledger activity • Ensuring depreciation schedules are updated with all additions and match the total assets in each category • In the end a three-way reconciliation is needed for capital assets between the Form Asset, Depreciation Schedule and Statement of Net Assets (SNA) • A two-way reconciliation between Form Debt and the SNA

21. Crosswalk of “Form Asset” to Related Conversion Entries Record the following Form Asset column data (as applicable) in each of these conversion entries: • Audited Balance – BB001 • Additions to Capital Assets – CE001, CE004, CE0011 • Decreases to Capital Assets – CE005, CE011 • Additions to Depreciation – CE012 • Decreases to Depreciation – CE004 If done correctly the Ending Balance column will match the Statement of Net Assets

22. Crosswalk of “Form Debt” to Related Conversion Entries Record the following Form Debt column data (as applicable) in each of these conversion entries: • Audited Balance – BB002 • Increases to Debt – CE003, CE009 (Compensated Absences), CE021 (OPEB debt) • Decreases to Debt – CE002, CE009 (Compensated Absences), CE021 (OPEB debt) If done correctly the Ending Balance column will match the Statement of Net Assets

23. If not, check each applicable conversion entry for accuracy The Statement of Net Assets Must Match the Supplemental Schedules of Asset and Debt

24. Other Conversion Entries Related to Debt • CE008 – accrue interest on bonds and COPs as of June 30 • Example: If $120,000 in an annual bond interest payment is paid on August 1, 2006, the accrual would be $110,000 for 11/12th of the year. • CE013 – if debt is issued at a premium or discount (difference between face value and issue price) the resulting asset/liability is amortized over the life of the debt instrument • Example: Year of issuance (debit Prepaid Expense, credit the liability) • Subsequent years (credit Prepaid, debit interest expense

25. Step 3: Balancing the Beginning Net Asset Balance • The Statement of Net Activities’ Beginning Net Asset Balance must match the ending net asset balance in the prior year audit report plus any restatements of beginning fund balance • If not, check that each beginning fund balance matches the prior year audit • Ensure any reversing conversion entries are made in CE007 and CE010

26. BeginningBalance Entries Must Agree to Prior Year Audited Financial Statements

27. Step 3: Balancing the Beginning Net Asset Balance, Continued • Two conversion entries (if made in the prior year) need to be “reversed” in order to balance beginning net assets • CE007 – use when revenues were accrued in the government-wide statements in the prior year (in CE006) and not in the fund statements • Example: mandated cost AR • CE010 - use when expenditures were accrued in the government-wide statements in the prior year (in CE008) and not in the fund statements • Example: bond interest AP

28. Step 3: Balancing the Beginning Net Asset Balance, Continued An example: 04-05 accrual of bond interest (for 11 months – paid 8/1/05) • Original CE008 in 04-05: • Debit: interest expense • Credit: AP • Reversing CE010 in 05-06: • Debit: beginning net asset • Credit: interest expense

29. Step 4: Finalize the Audit Reports • The Government-Wide Financial Statements include the: • Statement of Net Assets • GSNA Reconciliation (reconciles the total of all fund balances to the net asset balance) • Note: the reconciliation shows the impact of each conversion entry on fund balance (increasing or decreasing fund balance to obtain total net assets) • Statement of Activities • GSA Reconciliation (reconciles the change in fund balances to the change in net asset balances)

30. Step 4: Finalize the Audit Reports Complete the Statement of Net Assets The statement will say “unbalanced” until you: • Allocate long-term debt between amounts due within one year and amounts due in more than one year • Allocate net assets to the various categories: • Invested in capital assets, net of related debt (total capital assets, less accumulated depreciation, less debt related to the acquisition of the asset, plus any unspent bond or COP proceeds) • Restricted net assets (imposed by law or external parties): • Capital Projects (add all capital projects funds, less unspent bond or COP proceeds counted in #1 above) • Debt Service – Fund 51 fund balance • Educational programs – GF Restricted ending fund balance • Other purposes – a permanent fund (e.g. foundation) with no restrictions (expendable) on spending the principal and with restrictions spending the principal (nonexpendable) • Unrestricted – the difference between the total net assets less #1 and #2 above

31. Step 4: Finalize the Audit Reports GASB 34 Reports the Auditor Needs • All of the reports included in the Government-Wide Reporting section and the Determination of Major Funds (tip: give them the SACS data file electronically) • The MD&A that ties to the government-wide statements • Depreciation schedules that tie to the government-wide financial statements • Schedule of Assets and Debt that ties to the government-wide financial statements

36. Step 5: Management Discussion and Analysis Required supplementary information that “should provide an objective and easily readable analysis of the government’s financial activities based on currently known facts, decisions and conditions.” Include: • Current-year and prior year comparisons (discuss positive and negative aspects) • Report relevant information and avoid “boilerplate” discussion • A discussion of the basic of the financial statements, relationships to each other and differences in information provided (this can be a template!) • Condensed financial information (government-wide) – must tie to the financial statements! • An analysis of the government’s overall financial position • An analysis of individual funds • An analysis of budget to actual results • A description of capital asset and long-term debt activity • A description of currently known facts, decisions or conditions expected to have a significant effect on financial position or results of operations (e.g. state funding, declining enrollment, or contingent liabilities)

37. Role of the Auditor (or What My Auditor Can and Can’t Do for Me!) • Rules the auditor lives by: Government Audit Standards, Generally Accepted Audit Standards, K-12 Audit Guide, Single Audit • Independence must be both “in fact and appearance” • Auditor’s cannot perform management functions or make management decisions • Auditor may not audit their own work when the work is “material” to the financial statements

38. Role of the Auditor (or What My Auditor Can and Can’t Do for Me!) Three categories of non-audit services: 1. Services that would not impair independence, examples: providing technical advice, assisting on a committee or task force (advisory capacity only), addressing urgent problems, providing tools and methodologies, advising how to implement audit recommendations 2. Services that would impair independence unless safeguards are taken, examples: drafting financial statements (from management’s approved records), maintaining depreciation schedules (management must determine the depreciation method, rate and salvage value), advising on IT and HR decisions (but not the final decision)

39. Role of the Auditor (or What My Auditor Can and Can’t Do for Me!) Three categories of non-audit services (continued): • Services the do impair independence, examples: maintaining accounting records, posting transactions, determining account balances, installing accounting systems, recommending one person to be hired to a management position, internal audit services, sitting as a voting member on a committee

40. GASB 45 On the Horizon • GASB 45 will add an additional conversion entry • NNW’s GASB 45 Decision Guide (separate handout)

41. Supplemental Information • The following slides contain basic information related to the accounting for fixed (capital) assets

42. Basic Accounting For Fixed Assets: Definitions Land – not depreciable Site Improvements – improvements to make the land ready May be depreciable (e.g. parking lots) or not (e.g. grading) Buildings – include all costs (from architect fees & permits to construction costs) Capitalized interest requirements are not applicable to governmental funds

43. Basic Accounting For Fixed Assets: Definitions, cont Building Improvements – must extend the useful life or increase the value of the original building Coordination and communication with facilities and maintenance departments is essential Construction in Progress – capitalize but do not depreciate until put into service

44. Basic Accounting For Fixed Assets: Definitions, cont Personal Property (furniture, equipment and vehicles) Capitalize if ≥ capitalization threshold Consider aggregating and capitalizing items under the capitalization threshold if purchased with long-term debt

45. Basic Accounting For Fixed Assets: Capitalization Threshold ASBO recommends at least 80% of capital type assets (i.e. those with lives beyond 1 year) be capitalized, not to exceed $5,000 CDE recommends $5,000 and federal grants require a $5,000 threshold But, large districts might adopt higher levels and small districts lower levels (ASBO recommends $1,000) Exceptions might be made to reduce level to match assets with debt Codify in board policy

46. Basic Accounting For Fixed Assets: Data for Fixed Asset Record The following data is needed for the fixed asset record: Description and asset class Date of acquisition Historical cost or cost estimate Estimated useful life Salvage value, if any Depreciation method Account code

47. Basic Accounting For Fixed Assets: Depreciation Method Is anyone not using straight-line? Choose an averaging convention Half-year is the easiest Full-month or mid-month the most exact The depreciable cost is the total paid (including freight and costs to put into service) less salvage value When implementing GASB 34 calculate beginning accumulated depreciation Every year calculate current year and extend to ending accumulated depreciation

48. Basic Accounting For Fixed Assets: Tracking Additions Track all items (or groups of items) ≥ capitalization threshold in function code 8500 and object codes 6000-6599 Track items ≤ capitalization threshold as inventory in object codes 4400 (non-capitalized equipment) or 5600 (non-capitalized improvements) Tip: periodically review 6000-series account detail to ensure only capitalizable items are recorded -- at year-end a full reconciliation to the additions in the fixed asset ledger is required

49. Basic Accounting For Fixed Assets: Capitalized Major Maintenance Major maintenance that either increases the useful life of the asset or the value must be capitalized How do you distinguish between a repair and major maintenance? Consider the definitions used in the Public Contract Code Sections 22002 and 20115 Work with Maintenance and Facilities Departments to ensure costs are tracked by project and location

50. Basic Accounting For Fixed Assets: Retirement and Disposal A fully depreciated asset with no residual value is retired – no gain or loss is recognized If partially depreciated, a loss results If sold, a gain (loss) will result if the proceeds exceed (are less than) the asset’s book value If an asset is exchanged, take the old asset off the books and record the new asset at FMV (with any resulting loss), except: If a gain results, book the new asset at the value of the old Gains are only recognized to the extent cash is paid in the exchange