GAAP Update and More. What are the latest and greatest accounting standards from GASB! What do you do to prepare for your audit!

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1 GAAP Update and More What are the latest and greatest accounting standards from GASB! What do you do to prepare for your audit!

2 On the Agenda Common Audit Findings Guidance GAAP (GASB Update) The Highway Accountant s Guide to governmental accounting standards? Preparing for an audit

3 Common Audit Findings Auditing Standard #112, now 115 Trend has been more findings Audit Adjustments Capital Asset Records Inventory Debt Service Levy

4 Audit Adjustments A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements of the financial statements on a timely basis. Statement on Auditing Standards (SAS) No. 112 states that one control deficiency that shall be regarded as at least a significant deficiency is identification by the auditor of a material misstatement in the financial statements that was not initially identified by the entity s internal controls, even if management subsequently corrects the misstatement.

5 Audit Adjustments During our audit, we identified several material adjustments in the Road and Bridge Special Revenue Fund. An adjustment was made in the amount of $612,252 to recognize state-aid highway allotments and National Forest aid. Advances of highway allotment funds received in previous years were reduced by an audit adjustment of $723,760 to its current balance. Revenues not available during the recognition period were deferred through an audit adjustment of $672,242. During our audit, we identified material adjustments in the Road and Bridge Special Revenue Fund. Receivables were increased by $373,458 for state-aid highway project allotments. At the fund level, revenue was offset by deferred revenue of $490,303 for receivables not available during the revenue recognition period. During our audit, we identified a material adjustment in the Road and Bridge Special Revenue Fund. At the fund level, revenues for state-aid allotments were decreased by $282,955 due to a reduction in receivables of $29,494 and an increase in deferred revenue of $253,461 for receivables not available during the revenue recognition period. During our audit, we identified material adjustments in the Road and Bridge Special Revenue Fund. Receivables were increased by $783,998, revenues were increased by $425,182, and expenses were decreased by $358,816 to properly reflect Road and Bridge projects activity. At the fund level, the additional revenue was offset by deferred revenue of $63,615 for receivables not available during the revenue recognition period. Contracts payable for construction expenses were increased by $570,959. An adjustment was made to the Human Services Special Revenue Fund to recognize $56,343 in additional receivables and revenue for MMIS billings. An adjustment was made to the County Homes Special Revenue Fund to recognize $40,995 in additional payables and expenditures for federal community development block grant funds passed through to subrecipients.

6 Capital Asset Records A physical inventory of the County s capital assets has not been performed in several years, and several items of road and bridge equipment do not have tags properly identifying them as County property. We recommend the County Board review and update its capital asset policies and procedures and the means of enforcement in order to strengthen internal control over capital assets. Written policies and procedures should, at a minimum, address the following guidelines to be consistent with generally accepted accounting principles. The County s administration should establish an ongoing system for identifying acquisitions and disposals of capital assets that meets the County s capitalization policy. Information on the County s system should be communicated to department heads who should be held responsible for the accuracy of additions, deletions, and changes in capital assets. An authorizing signature of a department head or designee should be required for any change in the capital asset records. Transfers of capital assets between departments should be evidenced by authorizing signatures from both departments involved. Additions, deletions, and changes to capital assets should be reported to a County official given the responsibility and authority to maintain and summarize the information on a timely basis throughout the year. Supporting documentation should accompany capital asset change forms. Invoices should support the additions to capital assets. Bills of sale, trade-in evidence, or auction summaries should support deletions of capital assets. All capital asset documentation should be filed in an orderly fashion by department, transaction type, or capital asset number for ease of access to the information. This measure will also assist the County with insurance-related activities. To maintain adequate accountability, assets should be tagged as County property with a specific identifying number, and the County should conduct a periodic physical inventory of capital assets and adjust its records accordingly.

7 Inventory The Road and Bridge inventory at MN County is on a perpetual inventory system. Inventory purchases are entered to the inventory system from vendor invoices, and usage slips are used to enter usage into the system. However, the perpetual inventory system has not been updated on a monthly basis. At the time of our audit, MN County was five months behind in updating the perpetual inventory system. Access to inventory is generally limited to two garage mechanics who are in charge of inventory distribution. However, inventory is not locked up; and sometimes access to inventory is uncontrolled when the garage mechanics are not present. We recommend the County update the perpetual inventory system on a monthly basis for purchases and usage to better control management of inventory stock. Access to inventory should be limited, if possible. When one person is in charge of issuing inventory, usage is more likely to be recorded, and the perpetual inventory system will be more accurate.

8 Debt Service Levy The amount of gross tax levied by the County for the Road Bond Debt Service Fund for 2007 was $653,240. The amount of scheduled principal retirement and interest payments that should have been covered by the levy for 2007 was $628,179. The debt levy is $6,348 less than an amount to satisfy the 105 percent requirement of Minn. Stat , subd. 1. Minn. Stat , subd. 1, requires counties issuing general obligation debt to levy an ad valorem tax on all taxable property in the county for each year of the term of the obligations. The tax levies for all years, together with other revenues pledged for the payment of the obligations, must produce at least five percent in excess of the amount needed to meet, when due, the principal and interest payments on the obligations. We recommend that the County levy 105 percent to satisfy the requirement of Minn. Stat , subd. 1.

9 The auditor said we should report WHAT!!! WHERE IS THAT CRAZY AUDITOR?!?! Remind them: Don t shoot the messenger. It s GAAP

10 GASBS 35 Basic Financial Statements and Management's Discussion and Analysis for Public Colleges and Universities No Impact

11 GASBS 36 Recipient Reporting for Certain Shared Nonexchange Revenues Issued to clarify GASBS 33 Matched provider/recipient financial reporting Currently effective Has impact on accounting and reporting of State Aid Highway Allotments.

12 GASBS 37 Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments: Omnibus List of items. Fixed or clarified items in GASB 34 Effective with 34 Very minor impact

13 GASBS 38 Certain Financial Statement Note Disclosures Disclosure in the notes General Disclosure Principle Summary of Significant Accounting Policies Violations of Finance-related Legal or Contractual Provisions Debt and Lease Obligations Short-term Debt Disaggregation of Receivable and Payable Balances Interfund Balances and Transfers Effective with 34 May have to provide info to county

14 GASBS 39 Determining Whether Certain Organizations Are Component Units Currently effective Fund-raising organizations amends Statement 14 to add specific criteria for those legally separate, taxexempt fund-raising organizations that are misleading to exclude No impact on highways Statement No. 39 of the Governmental Accounting Standards Board Determining Whether Certain Organizations Are Component Units an amendment of GASB Statement No. 14

15 GASBS 40 Deposit and Investment Risk Disclosures Note Disclosures for deposits and investments Investment risks Credit risk Custodial credit Concentrations of credit Interest rate risk Foreign currency risk Deposit risks Custodial credit risk Foreign currency risk Currently effective No impact on highway accountants

16 GASBS 41 Budgetary Comparison Schedules Perspective Differences Reporting unusual budget perspectives Multi-fund budget Currently effective No Minnesota County impact

17 GASBS 42 Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries Statement established accounting and financial reporting standards for impairment of capital assets. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. The Statement also clarifies and establishes accounting requirements for insurance recoveries. Currently effective Impact if capital assets impaired or if receiving insurance recovery

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19 GASBS 43 Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Refers to accounting and reporting for plan assets GASB 43 will apply if decide to advance fund plan and set up trust agreement refers to plan assets Currently effective Only an impact if contributing to trust

20 GASBS 44 Economic Condition Reporting: The Statistical Section an amendment of NCGA Statement 1 First guidance on statistical information since NCGA Statement 1 (1979) Only applicable if preparing a comprehensive annual financial report (CAFR) About 10 counties Currently effective May have to provide some information to County for statistical tables

21 GASBS 45 Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions Refers to accounting and financial reporting for OPEB plans at the local government level Everyone providing OPEB needs to be concerned about GASB 45 employer reporting Minor impact at highway level

22 GASBS 46 Net Assets Restricted by Enabling Legislation an amendment of GASB Statement No. 34 Difficulty interpreting the requirement that those restrictions be "legally enforceable". Party external to a government (such as citizens, public interest groups, or the judiciary) can compel a government to honor. Generally, determined by professional judgment. Currently effective Possible note disclosure

23 GASBS 47 Accounting for Termination Benefits The early retirement incentive accounting standard Voluntary Involuntary Include Early-retirement incentives Severance benefits Other termination-related benefits Situations where providing benefits in exchange for early termination of services Currently effective Minor impact if county is providing termination benefits

24 GASBS 48 Sales and Pledges of Receivables and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues Government receives proceeds in exchange for the rights to future cash flows from: Receivables: Delinquent property taxes Mortgages Student loans Future Revenues Not likely to impact Currently effective Not expected to occur with most counties

25 GASBS 49 Accounting and Financial Reporting for Pollution Remediation Obligations Pollution REMEDIATION Obligations Excludes prevention or control obligations Excludes asset retirement obligations including landfills (Statement 18) Excludes fines, penalties, toxic torts, product or process safety outlays (NCGA Statement 4) Currently effective Maybe some impact, but not common

26 Obligating Events a. Compelled to take remediation action because of pollutioncaused imminent endangerment b. Violate pollution-prevention permit for example, RCRA permit c. Named, or evidence indicates govt. will be named, as responsible party or PRP for remediation (or cost sharing) d. Named, or evidence indicates govt. will be named, in lawsuit to participate in remediation Excludes lawsuits having no merit e. Govt. commences, or legally obligates self to commence Limited to portion legally required to complete

27 GASBS 50 Pension Disclosures-an amendment of GASB Statements No. 25 and No. 27 Goal is to conform the pension disclosures with the OPEB disclosures Notes to financial statements would disclose the funded status of the plan as of the most recent actuarial valuation date. Defined benefit pension plans also would disclose actuarial methods and significant assumptions used in the most recent actuarial valuation in notes to financial statements instead of in notes to RSI. Currently Effective Note disclosure

28 GASBS 51 Accounting and Financial Reporting for Intangible Assets An intangible asset is an asset that possesses all of the following characteristics: Lack of physical substance Nonfinancial nature Initial useful life extending beyond a single reporting period Effective for year ending December 31, 2010 Phase 1 and 2 governments apply retroactive Some impact Account for as capital assets

29 Common Types of Intangible Assets Right-of-way easements Other types of easements Patents, copyrights, trademarks Land use rights Water rights Licenses and permits Computer software Purchased or licensed Internally generated

30 GASBS 52 Land and Other Real Estate Held as Investments by Endowments Establish financial reporting standards for land and other real estate held as investments by endowments Endowments include: Permanent and term endowments Principal generally maintained in perpetuity or for a stated period of time or until the occurrence of an event Permanent funds No impact

31 GASBS 53 Accounting and Financial Reporting for Derivative Instruments Not likely to impact highway

32 GASBS 54 Fund Balance Reporting and Governmental Fund Type Definitions New presentation hierarchy based primarily on spending constraints placed upon use of resources versus availability for appropriation New fund balance presentation classifications: Non-spendable Inventory, long-term receivables Restricted Statement 34/46 definition Committed Formal action of governing body Assigned Similar to designations expressing intent Unassigned

33 What Do You Need to Know About Statement 54? Governmental Fund Type Definitions Special revenue fund used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Capital projects fund used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets. 33

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36 The Latest From GASB GASBS 55 The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments GASBS 56 Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards

37 What Do You Need to Know About Statements 55 and 56? Accounting and financial reporting guidance currently found in the AICPA s Statements on Auditing Standards brought into the GASB literature as is. Statement 55 GAAP Hierarchy First step in the potential reexamination of current multi-level hierarchy Statement 56 AICPA Omnibus Related party transactions, subsequent events, and going concern considerations 37

38 Bridging the GAAP Preparing for an audit Guidance Revenues/Receivables Avoiding the pitfalls eupdates

39 Preparing for the Audit Records in order Trial balance/financial statements Supporting documentation Worksheets/schedules Audit preparation checklist Be available for questions

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45 Guidance-Calculating Revenues/Receivables

46 Guidance-Calculating Revenues/Receivables

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48 Avoiding the Pitfalls Items included in weekly State Auditor s e- updates. Sign up at: =eupdate

49 Pitfall Examples

50 Questions? Tom Karlson