fgfoa boot camp – day 1 introduction to governmental accounting presented by lynda m. dennis, cpa,...
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FGFOA Boot Camp – Day 1Introduction toGovernmental Accounting
Presented by Lynda M. Dennis, CPA, CGFO,
PhDUniversity of Central Florida
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
Accounting Differences
Basis of accounting = WHEN to measure Accrual basis of accounting
Revenues recognized when earned
Expenses recognized when incurred
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
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
General & Special Revenue Funds
Revenue issues Property taxes
Levy Collection Revenue recognition
Sales & income taxes Grants Donations
General & Special Revenue Funds
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
Some Typical Transactions
Assets Inventory
Purchase (financial resources)Expenditures – Supplies, etc.
Cash/AP Consumption (economic resources)
Inventory – Supplies, etc.Cash/AP
Some Typical Transactions
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
Some Typical Transactions
Assets Property, plant & equipment
Modified accrualExpenditures – Capital Outlay
Cash/AP Full accrual
Property, Plant & EquipmentCash/AP
Depreciation ExpenseAccumulated Depreciation
Some Typical Transactions
Liabilities Unearned revenues Accruals
Year end Compensated absences
Interfund debt Long term debt
Types Accounting
Liabilities payable from restricted assets
Some Typical Transactions
Liabilities Unearned revenues or deferred inflows
Modified accrual – not availableCash
Unearned/Deferred Revenue Full accrual – earnings process not
completeCash
Unearned/Deferred Revenue
Some Typical Transactions
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
Some Typical Transactions
Liabilities Long term debt - types
General obligation bonds Aka “full faith and credit”
Revenue bonds Mortgages Loans Other
Litigation Compensated absences
Some Typical Transactions
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
Some Typical Transactions
Liabilities Liabilities payable from restricted
assetsLiabilities Payable from Restricted
Cash Restricted Cash
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
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
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
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
Some Typical Transactions
Expenditures = governmental funds Operating
ExpendituresCash/AP
Debt serviceExpenditures – Debt Service PrincipalExpenditures – Debt Service Interest
Cash/AP Capital outlay
Expenditures – Capital OutlayCash/AP
Some Typical Transactions
Expenses = proprietary funds Operating
ExpensesCash/AP
Debt serviceExpenses – InterestLTD Outstanding (principal)
Cash/AP Depreciation
Depreciation ExpenseAccumulated Depreciation
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 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
Some Typical Transactions
Other sources & uses Issuance of debt
Modified accrualCashBond issue costs
Other Financing Sources – Debt Proceeds Full accrual
CashDeferred Bond Issue Costs
LTD Payable
Some Typical Transactions
Other sources & uses Interfund transfers
Transferring fundOther Financing Uses – IFT Out
Cash Receiving fund
CashOther Financing Sources – IFT
In
Some Typical Transactions
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
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
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
Role of the Budget Budget process
Preparation Estimate revenues Prepare agency budgets Prepare preliminary budget Executive balancing of budget Prepare Executive budget
Role of the Budget Budget process
Approval Public hearings Changes Tentative millage Final adoption
Role of the Budget Budget process
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
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