4/24/2018. MASBO Conference. Audit Trends and Changes. Presented by Jim Eichten, CPA Single Audit Update

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1 MASBO Conference Audit Trends and Changes Presented by Jim Eichten, CPA Single Audit Update 1

2 Single Audit Update U.S. Office of Management and Budget (OMB) issued Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Audits Supersedes All or Parts of Eight Circulars Consolidates Federal Cost Principles, Administrative Principles, and Audit Requirements Super or Omni Circular Single Audit Update Effective Dates New administrative and cost principle requirements were effective for all new awards made after December 26, 2014, and additional funding to existing awards made after that date New procurements requirements are effective beginning July 1, 2018 (Fiscal 2019). A three year grace period was allowed for these requirements. Must document in writing which procurement standards you will be following beginning July 1,

3 Single Audit Update Procurement: States will follow the same policies and procedures they use for procurements from nonfederal funds (i.e., state procurement statutes). Other non federal entities will follow the five procurement methods outlined in the Uniform Guidance including small purchase procedures which are subject to the Simplified Acquisition Threshold, micro purchases, sealed bids, competitive proposals, and noncompetitive proposals. All auditees must have determined the impact on their procurement procedures, in particular those relating to procurement card programs. 5 Procurement Single Audit Update 3

4 Procurement Single Audit Update Micro purchases $3,500 aggregate ($3,000 prior to 10/1/15) There does not need to be quotations Equitable distribution among qualified vendors Small purchases Simple and informal procurement methods Not more than the simplified acquisition threshold currently $150,000 Price and rate quotations must be obtained from adequate number of qualified sources Conflicts with MN Bid Laws must follow more restrictive Procurement Single Audit Update Sealed bids Above simplified threshold greater than $150,000 Preferred for construction projects Must be publicly advertised Competitive proposals Above simplified threshold currently $150,000 More than one source for proposal Usually used for fixed fee or cost reimbursement A written method of evaluation and selection Award must go to most advantageous proposal 4

5 Procurement Single Audit Update Sole source must meet at least one of the criteria Single source availability Public emergency Written request has been made and approved by federal or pass through entity Competition is determined to be inadequate Must have conflict of interest policy Written documented procurement procedures which reflect applicable State and local laws, provided they conform to applicable Federal law. Must disclose in writing any potential conflict of interest to the federal awarding agency or pass through entity Legal Compliance Update Summary of Significant Changes to Minnesota Legal Compliance Audit Guides 5

6 Legal Compliance Manual MN Statute Bond Issues Within the exemptions of public sale for bonds, term financial adviser changed to municipal adviser. MN Statute 123B.52 Bids related to contract duration for standard requirement price contracts not to exceed two years with an option on the part of the school district to renew an additional two years. Food service contracts may be renewed annually but not for more than four years. MN Statute Claims and Disbursements including: Elimination of the check declaration Language changes to the requirements for electronic fund transfer policy. MN Statute Miscellaneous Provisions Reporting OPEB trust investment return information to the Office of the State Auditor. Manual for Activity Fund Accounting Summary of Significant Audit Impact from March 2017 MAFA Manual 6

7 Student Activity Manual Check requests must be prepared, and approved by a student representative, the advisor and the building principal (or his/her designee). For elementary student activity accounts, the student representative approval is not required. Approval is evidenced by signatures. All checks require two signatures. Checks must not be pre signed and payee and amount must be filled in prior to signatures. All check requests must be accompanied with appropriate supporting documentation in order for a check to be prepared. Investments at Fair Value GASB #72 GASB 72 defines an investment and requires all investments to be measured at fair value Effective June 30,

8 Investments at Fair Value GASB #72 Investments Reported at Fair Value Investments held in Common Stock and Mutual Funds Considered an investment for financial reporting purposes Valued at Fair Value per GASB #72 Use Market Approach o Typically Level 1 technique as they are typically actively traded Investments held in Bonds Considered an investment for financial reporting purposes Valued at fair value per GASB #72 Fair value determined using Level 1, 2, or 3 techniques Municipal bonds, corporate bonds, and mortgage backed securities Use Market Approach for Bonds o Typically Level 2 technique o Typically not Level 1 technique unless exact investment on sale o Relies on securities relationship to other benchmark quoted securities Investments at Fair Value GASB #72 Investments Reported at Fair Value Investments held in Money Market Mutual Fund Considered an investment for financial reporting purposes Valued at fair value per GASB #72 Use Market Approach o Typically Level 1 technique as they are typically actively traded o Typically $1 per share 8

9 Investments at Fair Value GASB #72 Investments Reported at Fair Value Investments in participating interest earning investment contracts with a remaining maturity of one year or more from the time of purchase Commercial paper Negotiable Certificates of Deposit Repurchase agreements Disclose underlying security Guaranteed Investment Contracts (GIC s) Banker s acceptance s Considered an investment for financial reporting purposes Fair Value based measurement per GASB 72 Fair value determined using Market Approach using Level 1, 2, or 3 techniques Level 1 Quoted prices in active markets Level 2 Inputs other than quoted prices that are observable compared and / or similar to the investment Fair value determined using Income Approach o Detail of expected cash flows of investment GASB #74 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (OPEB) 9

10 GASB Statement #74 OPEB Trusts Effective Date Year ended June 30, 2017 Statement includes OPEB Plans administered through trusts that are Irrevocable Trusts Financial information is included within the annual financial statements of the school district Expands footnote disclosures requirements Adds additional Required Supplementary Information (RSI) Includes clarification that payments from an OPEB Trust in selfinsured plans must be based on actual claims not insurance charged GASB #75 Accounting and Financial Reporting for Postemployment Benefit Plans Other Than Pensions (OPEB) 10

11 GASB Statement #75 OPEB Plans Effective Date Year ended June 30, 2018 Replaces GASB Statement #45 and #57 Statement includes all OPEB Liabilities Currently reported on a funding liability basis Extends the approach used in GASB #68 to OPEB plans Total Liability less the amount of OPEB plan fiduciary net position Established revised standards for recognizing and measuring OPEB Outlines methods and assumptions required to be used in the calculations of the benefits and projected liabilities Confirmed the use of Implicit Rate Subsidy GASB Statement #75 OPEB Plans OPEB includes: Postemployment health care benefits (medical, dental, etc.) Other forms of postemployment benefits (death, life, insurance, disability, long term care) Unused sick leave converted to health care benefit payments Actuary calculations will need to be updated or determined using the provisions of this standard Based on actuarial valuation obtained at least biannually dated no more than 30 months prior to the fiscal year end of the school Net OPEB Liabilities and related deferred inflows and outflows of resources are now presented on the Statement of Net Position No significant changes to accounting for OPEB in fund based financial statements Significant new disclosures regarding methodologies for determining Net OPEB Liabilities Adds additional Required Supplementary Information (RSI) 11

12 GASB Statement #75 OPEB Plans Alternative measurement method may be applied if fewer than 100 employees (active and inactive) are provided benefits through plan as of the beginning of the measurement period Generally, same simplifications to assumptions can be used as were permitted by Statement 45 Recognize most changes in liability for the current reporting period as OPEB expense immediately, except: Changes in total OPEB liability: Differences between expected and actual experience with regard to economic and demographic factors in the measurement of the total OPEB liability Changes of assumptions in the measurement of the total OPEB liability (mortality, terminations, disabilities, inflation) For OPEB administered through trust in which specified criteria are met: Difference between projected and actual earnings on OPEB plan investments Employer contributions GASB Statement #75 OPEB Plans Notes and RSI Similar to those required for pensions Disclosure of effect on net OPEB liability of a discount rate +/ 1 percent Disclosure of effect on net OPEB liability of a healthcare cost trend rate +/ 1 percent Single and agent employers: 10 year RSI schedules for changes in the net OPEB liability, ratios, and actuarially determined contributions (statutorily or contractually determined contributions, if no actuarially determined contribution is calculated) Cost sharing employers: 10 year RSI schedules of proportions and ratios, and statutorily or contractually determined contributions 12

13 GASB #77 Tax Abatement Disclosures GASB Statement 77, requires disclosures about a government s tax abatement agreements. Requires disclosure of information about revenues that governments forgo Effective for year ended June 30, 2017 GASB #77 Tax Abatement Disclosures Definition and Scope does not include all transactions that reduce tax revenues Emphasis is on the substance of the arrangement meeting the definition of a tax abatement Would apply only to arrangements meeting this definition: A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. 13

14 GASB #84 Fiduciary Activities Fiduciary Activities The GASB issued Statement #84 to clarify when a government has a fiduciary responsibility and is required to present fiduciary fund financial statements Existing standards require reporting of fiduciary responsibilities but do not define what they are; use of private purpose trust funds and agency funds is inconsistent; business type activities are uncertain about how to report fiduciary activities Effective for Year Ended June 30,

15 Fiduciary Activities An activity is a fiduciary activity of a government if: (1) the government controls the assets of the activity, (2) those assets are not derived solely from the government s own source revenue, and (3) one of the following is met: The assets are administered through a trust agreement or equivalent arrangement in which the government itself is not a beneficiary The assets are to be used for the benefit of individuals that are not required to be residents or recipients of the government s good and services as a condition of being a beneficiary The assets are to be used for the benefit of organizations or other governments that are neither part of the financial reporting entity nor recipients of the government s goods or services The assets result from a pass through grant for which the government does not have administrative or direct financial involvement in the program Fiduciary Activities Reporting Fiduciary Activities New Definitions for pension trust funds, investment trust funds, and private purpose trust funds Custodial funds would report fiduciary activities for which there is no trust or equivalent arrangement Reporting for OPEB Trusts clarified 15

16 GASB #87 Leases GASB Statement #87 on Leases improves existing standards on lease accounting and financial reporting Effective for the year ended June 30, 2021 Leases Prior Lessee Classification of Leases includes two primary classification of leases A. Capital leases (meet one of four criteria) 1. Transfer of ownership at conclusion 2. Bargain purchase option 3. Lease term 75% of economic life of asset 4. PV of future minimum lease payments 90% of FMV B. Operating leases (all other leases) 16

17 Leases Definition of a Lease A contract that conveys control of the right to use another entity s nonfinancial asset (the underlying asset) as specified by the contract for a period of time in an exchange or exchange like transaction. Control requires both of the following: 1) the right to obtain the present service capacity from use of the underlying asset, and 2) the right to determine the nature and manner of use of the underlying asset Control applied to the right to use lease asset (a capital asset) specified in the contract Control criteria NOT limited to contracts that convey substantially all of the present service capacity from use of the underlying asset Right to use lease assets include rights to use underlying assets for portions of time, such as certain days each week or certain hours each day Leases Unified Reporting Model for Leases No classification of leases into operating/capital or other categories Underlying assumption that leases are financings Exceptions (lessors and lessees) Short term leases (12 months or less) Leases that transfer ownership and do not contain termination options Leases of assets that are investments 17

18 Leases Additional Guidance: Lease Start and End Dates Reassessment of Lease Term Short Term Lease Exception Lessee Initial Reporting, Subsequent Reporting, Recognition and Measurement, and Recognition of Leased Assets, and Disclosures Lessor Initial Reporting, Subsequent Reporting, Recognition and Measurement, and Recognition of Leased Asset, and Disclosures 18