Cash and Investments. Agenda. Common Financial Reporting Issues for Texas Local Governments

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1 Common Financial Reporting Issues for Texas Local Governments Presented by: Jackie Gonzalez Agenda Common issues: Basic Financial Statements Common issues: Notes to the Basic Financial Statements Common issues: Management s Discussion and Analysis Questions 2 Cash and Investments Common Basic Financial Statements Issue: Reporting negative cash in financial statements If negative cash results from unallocated pooled cash, reclassify negative cash to a due to other funds If cash is negative due to checks issued in excess of available cash, reclassify from an asset to a liability 4 1

2 Cash and Investments Internal Balances Issue: Restrictions are not properly segregated on the balance sheet or statement of net position GASB 62, para. 31, states that current assets should exclude cash and claims to cash that are restricted as to withdrawal, use or are designated for long term uses (i.e. acquisition or construction of noncurrent assets, liquidation of long term debt, etc.) 5 Due to/from or transfers in/out do not properly zero Referring to transactions between the primary government and discretely presented component unit as interfund (i.e. transfers) Identify and reclassify interfund amounts Amounts should be referred to as revenue (i.e. Contributions) and expenditure 6 Fund Balance Net Position Fund Balance does not properly rollforward Reporting deficit assigned, committed or restricted fund balance Entries should not be posted to fund balance throughout the year unless the entry is to reclassify amounts from one fund balance classification to another Deficit amounts should only be reported as unassigned 7 Issue: Improperly calculating Net Investment in Capital Assets Capital Assets, net Bond Premiums, net + Deferred Loss of Refunding, net Bonds, Notes, Mortgages Payable (not including accrued interest or accretion) + Unspent Bond Proceeds Net Investment in Capital Assets Note: Do not include debt issuance costs in calculation 8 2

3 Net Position Net Position Improperly reporting Permanent Funds If the government has permanent funds, the restricted component of net position should be segregated between expendable and nonexpendable Improperly reporting other Restrictions Restrictions should be carried forward from Balance Sheet, adjusted for differences in accounting measurement and focus 9 10 Other Financing Sources/Uses Improperly presenting debt issuance and related amounts Amounts related to debt issuance should be separated by the face value of debt, premiums, discounts, payments to bond escrow agents. Issuance costs should be reported as an expenditure (and an expense on government wide statements, per GASB 65) 11 Common Notes to the Basic Financial Statements 3

4 Long Term Debt Disclosure Long Term Debt disclosures are often incomplete and/or do not agree to the face of the financial statements. With regards to debt refundings, disclosures are often incomplete 13 Long Term Debt Disclosure Disclose (usually in a rollforward format) Changes in long term liabilities (amounts should agree to amounts reported on the Statement of Revenue, Expenditures and Changes in Fund Balance) Include all long term debt, such as bonds, notes, loans, and leases payable, and other long term liabilities, such as compensated absences and claims and judgments Divide between governmental activities and businesstype activities 14 Long Term Debt Disclosure Response continued: Disclose Portions of debt that are due within one year The fund that will be used to liquidate other types of long term liabilities (i.e. compensated absences) Interest, separately stating the amount capitalized and the amount expensed Principal and interest to maturity for each year for five subsequent years and in five year increments thereafter; including interest rates and for variablerate debt the terms by which interest changes 15 Long Term Debt Disclosure Disclose (Refundings) General description of the refunding including: Difference between cash flows new debt and the old debt Economic gain or loss resulting from the refunding For advance refundings, the amount of that debt, if any, that is outstanding at the date of the financial statements 16 4

5 Since the issuance of GASB 54, there has been confusion as to what exactly should be disclosed as well as the level of detail that should be disclosed. The key is to be as detailed as possible. Following are the required disclosures for Fund Balance and Net Position as a result of GASB continued Committed Disclose the highest level of decision making authority (i.e. Board of Education, City Council) Disclose the formal action required to establish, modify and rescind a fund balance commitment (i.e. through resolution of the Board) 18 continued Assigned The body or official authorized to assign amounts to a specific purpose The policy established by the governing body pursuant to which the authorization to assign amounts to a specific purpose is given (i.e. as otherwise designated by the City Manager) 19 continued Disclose the policy regarding whether restricted or unrestricted amounts are considered to have been spent when an expenditure is incurred for purposes for which both restricted and unrestricted fund balances are available Disclose the policy regarding whether committed, assigned, or unassigned amounts are considered to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used 20 5

6 continued Other information Encumbrances should be reported within a restricted, committed or assigned category, not as a separate category Disclose any deficit in net position or fund balance If classifications of net position or fund balance have been aggregated on the face of the financial statements, disclose detailed information on each of the items (i.e. no other category) Issue: Infrequent actuarial valuations of the pension liability Incomplete disclosures Missing Required Supplementary Schedule Per GASB 67, Actuarial valuations of the total pension liability are required to be performed at least every two years, with more frequent valuations encouraged 23 Plan description Funding policy (including contribution requirements and amount of contributions for the current preceding two year) Calculation of Annual Pension Cost (APC) and Net Pension Asset/Obligation (NPA/NPO) 24 6

7 Annual Pension Cost (APC), Actual Contributions made, Percentage Contributed, and Net Pension Asset/Obligation (NPA/NPO) for the current year and preceding two year (usually presented in a table format) Funded status and funding progress Calculation of unfunded actuarial accrued liability (UAAL) Funded ratio Covered payroll UAAL as a % of covered payroll Actuarial methods and assumptions for the current year Actuarial cost method Amortization method Remaining amortization period Inflation rate Asset valuation method Investment return 27 Actuarial methods and assumptions Projected salary increase Cost of living adjustments Healthcare cost trend rate 28 7

8 RSI should include the following for the most recent 10 years: Actuarial Valuation Date Actuarial Valuation of Assets Actuarial Accrued Liability (AAL) Unfunded AAL (UAAL) Funded Ratio Covered Payroll UAAL as a % of Covered Payroll Common Management s Discussion and Analysis 29 Management s Discussion and Analysis The most common issue with the Management Discussion and Analysis is that information is presented and changes are quantified but are not adequately analyzed. Also, it often does not present enough information on major funds or future plans. 31 Management s Discussion and Analysis After quantifying data, explain why the changes occurred and the factors that drove the change, whether planned or unplanned Use charts, graphs and other illustrative tools to show further explain changes as well as current position of the government 32 8

9 Management s Discussion and Analysis Be sure to analyze the General Fund and each major fund separately Describe capital asset activity and capital projects planned for the near future Discuss future plans for the government and how those plans are budgeted Management s Discussion and Analysis In general, ensure that the users of the financials will be able to better understand the financial statements after having read the Management s Discussion and Analysis Resources Example CAFR: GFOA Checklists: Jackie Gonzalez, CPA Senior Manager Direct: Jackie.Gonzalez@Weaver.com Questions? 35 9