FGFOA Boot Camp Day 1 Introduction to Governmental Accounting. Presented by Lynda M. Dennis, CPA, CGFO, PhD University of Central Florida

Transcription

1 FGFOA Boot Camp Day 1 Introduction to Governmental Accounting Presented by Lynda M. Dennis, CPA, CGFO, PhD University of Central Florida

2 The Government Environment

3 Key Differences Lack of profit motive Legal structure Resource providers Political process Non-revenue producing assets Public services Public goods

4 Objectives of Financial Reporting Compare actual & budget Assess financial condition & results of operations Determine compliance with laws, rules, & regs Evaluate efficiency & effectiveness

5 Financial Statement Users Taxpayers Citizens Oversight & legislative bodies Investors & creditors Management

6 Financial Reporting Objectives Information for decision making Financial reporting should be Understandable Reliable Relevant Timely Consistent Comparable

7 Accounting Differences Accounting equation Assets Deferred outflows Liabilities Deferred inflows Net position or fund balance Fund accounting Accountability Budgetary reporting Compliance

8 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

9 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

10 Accounting Differences Basis of accounting = WHEN to measure When transaction/event recognized Accrual Modified accrual Measurable and available Trust Funds Expendable or non expendable

11 Accounting Differences Basis of accounting = WHEN to measure Accrual basis of accounting Revenues recognized when earned Expenses recognized when incurred

12 Accounting Differences 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

13 Measurement Focus and Basis of Accounting Summary Measurement Focus Basis of Accounting Government-wide statements Governmental fund statements Proprietary fund statements Fiduciary fund statements Economic resources Current financial resources Economic resources Economic resources Accrual Modified accrual Accrual Accrual

14 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

15 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

16 GASB Required State & local governments General purpose Special purpose Some NFPs Libraries Hospitals Colleges & universities Public

17 Fund Accounting & the Financial Statements

18 Why Use Funds? Account separately for Resources Financial & economic Activities Accountability Compliance

19 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

20 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

21 Creating New Funds When New accounting standard Change in state constitution Grant required New activity Determine Desired level of Financial control Management

22 Fund Structure Governmental funds General operations Financial resources Proprietary funds Business type operations Economic resources

23 Fund Structure Fiduciary funds Trust agreement Agency relationship Resources held for others

24 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

25 Governmental Funds Types General Fund Special Revenue Funds Capital Projects Funds Debt Service Funds Permanent

26 General & Special Revenue Funds What goes where? General Fund Special Revenue Funds Restricted or committed funds Revenue recognition Modified accrual = measurable & available Uncollectibles

27 General & Special Revenue Funds Revenue issues Property taxes Levy Collection Revenue recognition Sales & income taxes Grants Donations

28 General & Special Revenue Funds Expenditure recognition Measurable Liability incurred Plan to liquidate from current resources Is it budgeted this year?

29 Debt Service Funds Purpose Restricted, committed, assigned Revenue recognition Expenditure recognition When due vs. before due Refundings What are they? Types

30 Debt Service Funds Advance refundings Definition Legal or in-substance defeasance Current refundings

31 Capital Project Funds Purpose Restricted, committed, assigned Revenue recognition Bond proceeds BANs Arbitrage Calculations Vs payments

32 Permanent Funds Legally restricted resources Earnings only Endowment type Support government s programs

33 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

34 Proprietary Funds Types Enterprise Fees charged External users Internal Service Reimbursement basis Primary government Component units Other governments

35 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

36 Enterprise Funds Debt Classification based on revenue stream G.O. debt Contributed capital Sources Accounting & political implications

37 Enterprise Funds Landfills Closure costs recognized during life Infrastructure Types Reporting & depreciation required

38 Internal Service Funds What are they? Cost-reimbursement basis Internal customers Measurement & basis of accounting Economic resources Full accrual

39 Internal Service Funds Duplication of costs Surpluses & deficits Risk management activities General Fund or ISF required Interfund premiums = quasi external

40 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

41 Fiduciary Funds Types Pension Trust Investment Trust External portion reported by sponsor Private Purpose Trust All other trust agreements Agency Individuals Private organizations Other governments

42 Fiduciary Funds Pension/OPEB Trust Funds To 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.

43 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

44 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

45 Fiduciary Funds Agency Funds Account for financial resources when government acts in an agency capacity Examples: tax agency funds and passthrough agency funds Accounting is simple: assets = liabilities No revenue & expense accounts used since there are no net assets

46 Fund Classification Exercises

47 Typical Government Transactions

48 Basic Transactions Assets Liabilities Revenues/gains Expenses/expenditures & losses Other sources & uses

49 Some Typical Transactions Assets Inventory Purchase & consumption method Prepaid expenses Property, plant & equipment Valuation & impairment Capitalization & depreciation Restricted assets

50 Some Typical Transactions Assets Inventory Purchase (financial resources) Expenditures Supplies, etc. Cash/AP Consumption (economic resources) Inventory Supplies, etc. Cash/AP

51 Some Typical Transactions Assets Prepaid expenses or deferred outflows Current financial resources Expenditures Cash/AP Non current financial resources Prepaid expenses Cash/AP

52 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)

53 Valuation of Capital Assets Purchased capital assets Historical cost Estimated cost if actual cost is unknown Donated assets Acquisition value Intangible assets Historical cost if purchased Different GAAP for self developed

54 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

55 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

56 Some Typical Transactions Assets Property, plant & equipment Modified accrual Expenditures Capital Outlay Cash/AP Full accrual Property, Plant & Equipment Cash/AP Depreciation Expense Accumulated Depreciation

57 Some Typical Transactions Liabilities Unearned revenues Accruals Year end Compensated absences Interfund debt Long term debt Types Accounting Liabilities payable from restricted assets

58 Some Typical Transactions Liabilities Unearned revenues or deferred inflows Modified accrual not available Cash Unearned/Deferred Revenue Full accrual earnings process not complete Cash Unearned/Deferred Revenue

59 Some Typical Transactions Liabilities Accruals Year end modified accrual (payable from current financial resources) Expenditures Accrued Expenditures Year end full accrual Expenses Accrued Expenditures

60 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

61 Some Typical Transactions Liabilities Long term debt - types General obligation bonds Aka full faith and credit Revenue bonds Mortgages Loans Other Litigation Compensated absences

62 Some Typical Transactions Liabilities Long term debt accounting Modified accrual Expenditures Debt Service Principal Expenditures Debt Service Interest Cash/AP Full accrual LT Debt Outstanding (principal) Interest Expense Cash/AP

63 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

64 Some Typical Transactions Liabilities Liabilities payable from restricted assets Liabilities Payable from Restricted Cash Restricted Cash

65 Some Typical Transactions 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

66 Some Typical Transactions 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

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 4-67

68 Some Typical Transactions Expenses/expenditures & losses Expenditures = governmental funds Operating Debt service Capital outlay Expenses = proprietary funds, GWS Operating Debt service Depreciation Losses Extraordinary Special items Other

69 Some Typical Transactions Expenditures = governmental funds Operating Expenditures Cash/AP Debt service Expenditures Debt Service Principal Expenditures Debt Service Interest Cash/AP Capital outlay Expenditures Capital Outlay Cash/AP

70 Some Typical Transactions Expenses = proprietary funds Operating Expenses Cash/AP Debt service Expenses Interest LTD Outstanding (principal) Cash/AP Depreciation Depreciation Expense Accumulated Depreciation

71 Some Typical Transactions 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 Other revenue Program revenue

72 Some Typical Transactions Other sources & uses Issuance of debt Interfund transfers Sale of assets Large amounts Insurance recoveries Vs. extraordinary item

73 Some Typical Transactions Other sources & uses Issuance of debt Modified accrual Cash Bond issue costs Other Financing Sources Debt Proceeds Full accrual Cash Deferred Bond Issue Costs LTD Payable

74 Some Typical Transactions Other sources & uses Interfund transfers Transferring fund Other Financing Uses IFT Out Cash Receiving fund Cash Other Financing Sources IFT In

75 Some Typical Transactions Other sources & uses Sale of assets (large amounts) Modified accrual Cash Other Financing Sources Proceeds, Asset Sale Full accrual Cash Accumulated Depreciation Gain/Loss on Sale of Asset Net Book Value of Asset Sold

76 Recording Transactions Exercises

77 The Financial Reporting Model

78 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

79 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

80 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

81 Financial Reporting & the CAFR

82 Comprehensive Annual Financial Report Encouraged by GASB NOT required GFOA guidelines Three sections Introductory Financial Statistical

83 Sections of the CAFR Introductory Cover, title page, table of contents Certificate, principal officials Organizational chart, transmittal

84 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

85 Financial Reporting GFOA Certificate Program Judges Two independent judges GFOA staff judges Certificate awarded for one year only

86 Exploring Real World Financial Statements

87 Budgeting

88 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

89 Types of Budget Formats Types Operating Capital Capital improvement plan Cash Timing

90 Role of the Budget Budget document Operations guide Communication device Financial plan Policy document

91 Role of the Budget Legal standing Legal level of control Administrative level of control Budgetary basis of accounting Versus GAAP Basis Timing Perspective Entity

92 Role of the Budget Budget process Preparation Approval Execution Evaluation

93 Role of the Budget Budget process Preparation Estimate revenues Prepare agency budgets Prepare preliminary budget Executive balancing of budget Prepare Executive budget

94 Role of the Budget Budget process Approval Public hearings Changes Tentative millage Final adoption

95 Role of the Budget Budget process Execution Appropriations Apportionments Changes Administrative & legal

96 Role of the Budget Execution Encumbrances Needed to determine available appropriations Budgetary tool to control spending Purchase commitments Lapse vs. re-appropriation

97 Role of the Budget Encumbrances Budget Purchase order Initial recording Changes Close out Invoice Purchase order Other Changes to budget

98 Encumbrances in Action Date Reference Vendor Description Appropriations Encumbrances Expenditures Available 1/1/ Budget 1,000,000 1,000,000 1/15/08 PO #100 Copper tubing 1, ,000 1/20/08 Inv 200 Acme Invoice for PO 100 (1,000) 1, ,000 1/21/08 Inv 250 Office Depot Office supplies ,900 1/31/08 PR Journal January payroll 100, ,900 2/1/08 PO #101 Home Depot PVC pipe 10, ,900 2/10/08 Inv 300 Home Depot Partial shipment (5,000) 5, ,900 2/20/08 Inv 350 Home Depot Shipped in full (4,500) 4, ,900 2/22/08 PO #101 Home Depot Close PO (500) 889,400 5/31/08 Budget cut (100,000) 789,400

99 Role of the Budget Evaluation Accountability Legal contract FS requirements General fund SRF with legally adopted annual budget Reported as RSI or BFS

100 Budgeting Exercise

101 Exploring Real World Budgets

102 Internal Control

103 Management & Internal Control Management is responsible for internal control including Fraud prevention, detection, & deterrence programs

104 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

105 COSO Internal Control Framework Five elements Permeate Operations Financial reporting Compliance

106 COSO Internal Control 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

107 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

108 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.

109 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

110 Control Activities Integration with risk assessment Selection & development of control activities Policies & procedures Information & technology

111 Information and Communication Financial reporting information Relevant & appropriate Internal control information Timely Internal communication Necessary to discharge IC responsibilities External communication Parties outside entity

112 Monitoring Ongoing & separate evaluations Determine if other IC elements continue to function Reporting deficiencies Timely identification & communication

113 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

114 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

115 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

116 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

117 Adapting the COSO Internal Control Framework to Governmental Organizations Areas of Concern & Risk Assessment Budget Constraints Preventive vs. Detective Controls

118 Areas of Concern Overstatement of revenues/increases in fund equity or net assets Fictitious revenues Improper revenue recognition Non exchange transactions

119 Areas of Concern Effect of noncompliance Financial statement classifications Fund level Government-wide Understatement of Expenses or expenditures Allowance accounts

120 Areas of Concern Overstatement of expenses or expenditures Fraudulent financial reporting Misappropriation of assets Understatement of revenues Fraudulent financial reporting Misappropriation of assets

121 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

122 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

123 Risk Assessment What could go wrong? Initiation Authorization Processing Recording Reporting

124 Significant Processes Routine transactions Non-routine processes Estimates Spreadsheets

125 Risk Assessment Examples Routine Transactions Payroll Cash disbursements Utility receipts

126 Risk Assessment Examples Non-Routine Transactions Sale of capital asset Issuance of bonds/ltd Purchase of capital asset

127 Risk Assessment Examples Year-End Transactions Accruals Analysis adjustments Investments Pension/OPEB liabilities Fund to GWS reconciliations

128 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

129 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

130 Internal Control & Budget Constraints Economic cycles Front line vs. back office More with less Public perceptions

131 Types of Controls Preventive Prevent a misstatement from being recorded Detective Detect & correct misstatement before FS issued

132 Examples of Preventive Controls Approval of POs by DoF Governing body approval for certain purchases Integrated subsidiary systems

133 Examples of Detective Controls Bank reconciliations Account analysis Internal audit

134 Internal Control Exercise