fgfoa boot camp – day 1 introduction to governmental accounting

FGFOA Boot Camp – Day 1Introduction toGovernmental Accounting

Presented by Lynda M. Dennis, CPA, CGFO,

PhD

The Government Environment

Key Differences

Lack of profit motive Legal structure Resource providers Political process Non-revenue producing assets

Public services Public goods

Objectives of Financial Reporting

Compare actual & budget Assess financial condition &

results of operations Determine compliance with

laws, rules, & regs Evaluate efficiency &

effectiveness

Financial Statement Users Taxpayers Citizens Oversight & legislative

bodies Investors & creditors Management

Financial Reporting Objectives

Information for decision making Financial reporting should be

Understandable Reliable Relevant Timely Consistent Comparable

Accounting Differences Accounting equation

Assets Deferred outflows Liabilities Deferred inflows Net position or fund balance

Fund accounting Accountability

Budgetary reporting Compliance

Accounting Differences Measurement focus = WHAT is

measured Economic resources

Improvement/diminishment in economic position

Measure inflows & outflows of economic resources

Current & noncurrent Capital assets & long-term debt

Focuses on operational accountability Whether management efficiently uses

resources in providing services

Accounting Differences Measurement focus = WHAT is

measured Current financial resources

Increases/decreases in spendable resources Measure inflows & outflows of current

financial resources Cash & other liquid assets Payables from cash & other liquid assets

Focuses on fiscal accountability Whether managers have met budgetary &

other legal financial requirements

Accounting Differences

Basis of accounting = WHEN to measure When transaction/event recognized Accrual Modified accrual

Measurable and available

Trust Funds Expendable or non expendable


Basis of accounting = WHEN to measure Accrual basis of accounting

Revenues recognized when earned

Expenses recognized when incurred


Basis of accounting = WHEN to measure Modified accrual basis of accounting

Revenues recognized when measurable & available

60 day criteria Expenditures recognized when incurred

Expected to be liquidated with current financial resources

Measurement Focus and Basis of Accounting Summary Measurement

Focus Basis of

Accounting

Government-wide statements

Economic resources

Accrual

Governmental fund statements

Current financial resources

Modified accrual

Proprietary fund statements

Economic resources

Accrual

Fiduciary fund statements

Economic resources

Accrual

What is GAAP & Who is GASB?

GAAP = generally accepted accounting principles

GASB Established 1984 Establish standards for SLGs

Financial accounting Financial reporting

Statutory requirement to use GAAP

How GASB Works Mission of GASB

Establish/improve standards To provide useful information

GASAC Consults with GASB GASB budget and fund raising 25+ representative members

GASB Required State & local governments

General purpose Special purpose

Some NFPs Libraries Hospitals

Colleges & universities Public

Fund Accounting & the Financial Statements

Why Use Funds? Account separately for

Resources Financial & economic

Activities Accountability Compliance

What is a Fund? Fiscal & accounting entity

Self-balancing set of accounts Cash & financial resources Liabilities & residual equity/balances Changes

Segregated for purpose of Specific activities Attaining certain objectives

In accordance with regs, restrictions, limitations

How Many Funds? Depends on

Capability of accounting system Accounting/legal requirements

Minimum number of funds concept Sound financial management Meet legal/accounting objectives

More funds = more complexities At least one = General fund

Creating New Funds When

New accounting standard Change in state constitution Grant required New activity

Determine Desired level of

Financial control Management

Fund Structure Governmental funds

General operations Financial resources

Proprietary funds Business type operations Economic resources

Fund Structure

Fiduciary funds Trust agreement Agency relationship Resources held for

others

Governmental Funds 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 Both recorded as expenditures

Governmental Funds

Types General Fund

Special Revenue Funds

Capital Projects Funds

Debt Service Funds

Permanent

General & Special Revenue Funds

What goes where? General Fund

Special Revenue Funds

Restricted or committed funds

Revenue recognition Modified accrual = measurable & available

Uncollectibles


Revenue issues Property taxes

Levy Collection Revenue recognition

Sales & income taxes Grants Donations


Expenditure recognition

Measurable

Liability incurred

Plan to liquidate from current resources

Is it budgeted this year?

Debt Service Funds Purpose

Restricted, committed, assigned Revenue recognition Expenditure recognition

When due vs. before due Refundings

What are they? Types

Debt Service Funds

Advance refundings

Definition

Legal or in-substance

defeasance

Current refundings

Capital Project Funds

Purpose Restricted, committed, assigned

Revenue recognition Bond proceeds BANs Arbitrage

Calculations Vs payments

Permanent Funds

Legally restricted resources

Earnings only Endowment type

Support government’s programs

Proprietary Funds 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 Depreciation expense on capital

assets recorded

Proprietary Funds

Types Enterprise

Fees charged External users

Internal Service Reimbursement basis

Primary government Component units Other governments

Enterprise Funds

When to use Intend to recover total cost from

user fees Want to know if fund profitable or

not Restricted assets

When required/used

Enterprise Funds

Debt Classification based on revenue

stream G.O. debt

Contributed capital Sources Accounting & political

implications

Enterprise Funds

Landfills Closure costs recognized during

life Infrastructure

Types Reporting & depreciation

required

Internal Service Funds

What are they? Cost-reimbursement basis Internal customers

Measurement & basis of accounting Economic resources Full accrual

Internal Service Funds

Duplication of costs Surpluses & deficits Risk management activities

General Fund or ISF required Interfund premiums = quasi

external

Fiduciary Funds Full accrual accounting Economic resources measurement

focus Capital assets & long-term liabilities ARE

recorded “Additions” to net assets

Not “revenues” Other people’s money

“Deductions” from net assets Not “expenses”

Fiduciary Funds Types

Pension Trust Investment Trust

External portion reported by sponsor Private Purpose Trust

All other trust agreements Individuals Private organizations Other governments

Agency

Fiduciary Funds

Pension/OPEB Trust FundsTo account for financial resources where government (or other designated trustee) acts in trustee capacity for its employees Retirement benefits

Pensions Other post-employment benefits

Insurance, etc.

Fiduciary Funds

Investment Trust Funds Account for external investment pools

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 Private individuals Organizations Other governments

Fiduciary Funds Agency Funds Account for financial resources when government acts in an agency capacity

Examples: tax agency funds and pass-through agency funds

Accounting is simple: assets = liabilities

No revenue & expense accounts used since there are no net assets

Fund Classification Exercises

Typical Government Transactions

Basic Transactions

Assets Liabilities Revenues/gains Expenses/expenditures &

losses Other sources & uses

Some Typical Transactions

Assets Inventory

Purchase & consumption method Prepaid expenses Property, plant & equipment

Valuation & impairment Capitalization & depreciation

Restricted assets


Assets Inventory

Purchase (financial resources)Expenditures – Supplies, etc.

Cash/AP Consumption (economic resources)

Inventory – Supplies, etc.Cash/AP


Assets Prepaid expenses or deferred

outflows Current financial resources

Expenditures Cash/AP

Non current financial resourcesPrepaid expenses

Cash/AP

Reporting Capital Assets

Distinguish general capital assets from proprietary & fiduciary capital assets

General capital assets Report only in Governmental Activities Column

of GWS Proprietary capital assets

Report in both GWS & fund FS Fiduciary capital assets

Reported only in statement of fiduciary net assets (fund level FS)

Valuation of Capital Assets

Purchased capital assets Historical cost Estimated cost if actual cost is unknown

Donated assets Estimated fair value at time of gift

Intangible assets Historical cost if purchased Different GAAP for self developed

Depreciation of Capital Assets

Capital assets are depreciated over their estimated useful lives Exceptions

Land Construction in progress Certain collections Infrastructure reported using the

modified approach

Depreciation of Capital Assets

May elect to use the “modified approach” for certain infrastructure assets instead of depreciation Must meet certain requirements to use

Report depreciation expense for general capital assets only in GWS Disclose depreciation expense charged to functions in notes


Assets Property, plant & equipment

Modified accrualExpenditures – Capital Outlay

Cash/AP Full accrual

Property, Plant & EquipmentCash/AP

Depreciation ExpenseAccumulated Depreciation


Liabilities Unearned revenues Accruals

Year end Compensated absences

Interfund debt Long term debt

Types Accounting

Liabilities payable from restricted assets


Liabilities Unearned revenues or deferred inflows

Modified accrual – not availableCash

Unearned/Deferred Revenue Full accrual – earnings process not

completeCash

Unearned/Deferred Revenue


Liabilities Accruals

Year end – modified accrual (payable from current financial resources)Expenditures

Accrued Expenditures Year end – full accrual

ExpensesAccrued Expenditures

Reporting Long-term Liabilities

Distinguish general long-term liabilities from fund long-term liabilities

General long-term liabilities Bonds, notes, compensated

absences, etc. Reported in GWS but not in fund

financial statements


Liabilities Long term debt - types

General obligation bonds Aka “full faith and credit”

Revenue bonds Mortgages Loans Other

Litigation Compensated absences


Liabilities Long term debt – accounting

Modified accrualExpenditures – Debt Service PrincipalExpenditures – Debt Service Interest

Cash/AP Full accrual

LT Debt Outstanding (principal)Interest Expense

Cash/AP

Reporting Long-term Liabilities

Long-term liabilities repaid from Proprietary funds

Reported in proprietary fund statements & in GWS

Fiduciary funds Reported only in fiduciary fund level

statements


Liabilities Liabilities payable from restricted

assetsLiabilities Payable from Restricted

Cash Restricted Cash


Fund equity Non spendable

Not in spendable form Inventories, LT loans

Must be maintained in perpetuity per contract, etc. Permanent fund corpus

Restricted Committed Assigned Unassigned


Revenues & gains Exchange

Modified accrual Measurable & available

Full accrual Earnings process complete

Non exchange (external events) Government gives/receives value without directly

receiving/giving equal value in exchange Type/class defines revenue recognition criteria

Gain Full accrual concept only

Proceeds less carrying value

4-67

Classes of Nonexchange Transactions

Derived tax revenues Income & sales taxes

Imposed nonexchange revenues Property taxes & fines and penalties

Government-mandated nonexchange transactions Services funded by higher level government

Voluntary nonexchange transactions Grants/entitlements from higher level

government & certain private donations


Expenses/expenditures & losses Expenditures = governmental funds

Operating Debt service Capital outlay

Expenses = proprietary funds, GWS Operating Debt service Depreciation

Losses Extraordinary Special items Other


Expenditures = governmental funds Operating

ExpendituresCash/AP

Debt serviceExpenditures – Debt Service PrincipalExpenditures – Debt Service Interest

Cash/AP Capital outlay

Expenditures – Capital OutlayCash/AP


Expenses = proprietary funds Operating

ExpensesCash/AP

Debt serviceExpenses – InterestLTD Outstanding (principal)

Cash/AP Depreciation

Depreciation ExpenseAccumulated Depreciation


Losses = proceeds less carrying value Extraordinary

Underlying event = unusual AND infrequent Other revenue

Special items Underlying event = unusual OR infrequent

AND within control of management 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


Other sources & uses Issuance of debt

Modified accrualCashBond issue costs

Other Financing Sources – Debt Proceeds Full accrual

CashDeferred Bond Issue Costs

LTD Payable


Other sources & uses Interfund transfers

Transferring fundOther Financing Uses – IFT Out

Cash Receiving fund

CashOther Financing Sources – IFT

In


Other sources & uses Sale of assets (large amounts)

Modified accrualCash

Other Financing Sources – Proceeds, Asset Sale

Full accrualCashAccumulated DepreciationGain/Loss on Sale of Asset

Net Book Value of Asset Sold

Recording Transactions

Exercises

Budgeting

Role of the Budget Public process =

“representation” Legal contract

Estimated revenues Appropriations

May not be prepared For all funds – statutory requirements On GAAP basis

Role of encumbrances Should be tied to strategic plan

Types of Budget Formats

Types 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


Preparation Estimate revenues Prepare agency budgets Prepare preliminary budget Executive balancing of budget Prepare Executive budget


Approval Public hearings Changes Tentative millage Final adoption


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

Initial recording Changes Close out

Invoice Purchase order Other

Changes to budget

Encumbrances in Action

Date Reference Vendor Description Appropriations Encumbrances Expenditures Available

1/1/08 2008 Budget 1,000,000 1,000,000

1/15/08 PO #100 Copper tubing 1,000 999,000

1/20/08 Inv 200 Acme Invoice for PO 100 (1,000) 1,000 999,000

1/21/08 Inv 250 Office Depot Office supplies 100 998,900

1/31/08 PR Journal January payroll 100,000 898,900

2/1/08 PO #101 Home Depot PVC pipe 10,000 888,900

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 (500) 889,400

5/31/08 Budget cut (100,000) 789,400

Role of the Budget

Evaluation Accountability

Legal contract FS requirements

General fund SRF with legally adopted annual

budget Reported as

RSI or BFS

Budgeting Exercise

Exploring Real World Budgets

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

COSO InternalControl Framework

Five elements Permeate

Operations Financial reporting Compliance

COSO InternalControl Framework

Control environment Tone at the top Bedrock on which all other elements based

Risk assessment Risk of material FS misstatement

Control activities Based on risk assessment Evaluate in light of cost-benefit

Information & communication What, who, how, when

Monitoring To determine IC continues to operate effectively

Control Environment Integrity & ethical values

Formal code of conduct Effective whistleblower policy

Board of directors (governing body) Understand & exercise oversight

responsibility Financial reporting Internal control

Management’s philosophy & operating style Provides support for achieving effective

IC

Control Environment Organizational structure

Structure & hierarchy support effectiveness of IC

Financial reporting competencies Financial reporting & related oversight

Authority & responsibility Appropriate to effect IC over financial

reporting Human resources

Policies & procedures Hiring, promotions, compensation, etc.

Risk Assessment Financial reporting objectives

Specified by management Financial reporting risks

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 Relevant & appropriate

Internal control information Timely

Internal communication 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

Mitigating Missing & Ineffective Controls

Hire qualified accounting personnel Financially literate governing body/audit

committee can be compensating control Use controls built into many

purchased software packages

Adapting the COSO Internal Control Framework to Governmental Organizations

Areas of Concern & Risk Assessment

Budget ConstraintsPreventive vs. Detective

Controls

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 of Material Misstatement

How & where financial statements may be susceptible to material misstatement due to error or fraud

Specific accounts Classes of transactions Financial statement presentation or

disclosures Financial statements as a whole

Fraud risks Financial statement misstatement Misappropriation of assets

Risk Assessment Consider

Size & complexity of government Management override

Number of personnel Segregation of duties

Experience & expertise of personnel

Financially literate governing body or audit committee can compensate

Extent technology used

Risk Assessment

What could go wrong? Initiation Authorization Processing Recording Reporting

Significant Processes

Routine transactions Non-routine processes Estimates Spreadsheets

Risk Assessment Examples Routine Transactions

Payroll Cash disbursements Utility receipts

Risk Assessment Examples Non-Routine Transactions

Sale of capital asset Issuance of bonds/LTD Purchase of capital

asset

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

Risk Assessment IT Concerns

Changes in operating environment New personnel

Key positions New IT systems

Operations or accounting Rapid growth

Systems & controls lag operations Reorganizations

Internal Control & Budget Constraints

Economic cycles Front line vs. back

office More with less Public perceptions

Types of Controls

Preventive Prevent a misstatement

from being recorded Detective

Detect & correct misstatement before FS issued

Examples of Preventive Controls

Approval of POs by DoF Governing body

approval for certain purchases

Integrated subsidiary systems

Examples of Detective Controls

Bank reconciliations Account analysis Internal audit

Internal Control Exercise

The Financial Reporting Model

Government Wide Statements

Basic financial statements Demonstrate operational accountability

MD&A Statement of Net Position Statement of Activities Fund level statements Footnotes RSI

Pensions OPEB Infrastructure (modified approach) Budget to actual Others

Government Wide Statements

Statement of Net Position Categories of net position

Restricted Net investment in capital assets Unrestricted

Statement of activities Starts with expenses Net expenses with program revenues

Charges for services Operating & capital grants

General revenues at bottom of statement All taxes – even dedicated for specific purposes –

considered general revenues

Fund Statements Demonstrate FINANCIAL accountability

Results of operations Financial position

Major funds & aggregated non major funds Largest/most important funds 10% & 5% test

Governmental or enterprise funds Governmental & enterprise funds

Always general fund Never internal service funds

Governmental funds 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

fgfoa boot camp – day 1 introduction to governmental accounting

Documents

liquid assetsfocuses

liquid assetspayables

fgfoa boot camp day

gasbgasb budget

availabletrust fundsexpendable

purpose ofspecif