Governmental Accounting and Auditing Update

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Governmental Accounting and Auditing Update

• Association of Government Accountants
• Sharon R. Russell, CPA
• November 2006

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OVERVIEW

• GASB Update Statements 42-48
• AICPA Standards Update SAS Nos. 102-112

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GASB 42- CAPITAL ASSET IMPAIRMENT AND INSURANCE
RECOVERIESEFFECTIVE FOR PERIODS BEGINNING AFTER
12/31/04
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IMPAIRMENT

• When service utility has declined significantly
  and unexpectedly
• Events or changes are not normal and ordinary

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TWO SITUATIONS

• Impaired assets that will no longer be used
• Impaired assets that will continue to be used

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MEASUREMENT ASSETS THAT WILL NO LONGER BE USED

• Report at lower of carrying value or fair value
• Write off and dispose

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ASSETS THAT WILL CONTINUE TO BE USED

• Impaired assets should be reported at their
  value-in-use
• Reflects the diminished service utility
• Focus of GASB No. 42

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INDICATORS OF IMPAIRMENT

• Physical Damage
• Enactment or approval of laws or regulations or
  other changes in environmental factors
• Technological Changes or other evidence of
  obsolescence
• Change in manner or expected duration of use
• Construction Stoppage

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IMPAIRMENT TEST

• Two Factors BOTH must be present
• Magnitude of decline in service utility is
  significant
• Decline in service utility is unexpected (i.e.,
  not part of assets normal life cycle)
• Impairment should be considered permanent rather
  than temporary

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MEASUREMENT METHODS

• Restoration Cost
• Service Units
• Deflated Depreciated Replacement Cost

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RESTORATION COST APPROACH

• Generally used for physical damage

12
RESTORATION COST APPROACH

• Amount of impairment is derived from the
  estimated costs to restore the utility of the
  capital asset
• Convert to historical cost either by restating
  the estimated restoration cost using an
  appropriate cost index or by applying a ratio of
  estimated restoration cost over estimated
  replacement cost to the carrying value of the
  capital asset

13
SERVICE UNITS APPROACH

• This method used for impairments resulting from
  enactment of laws, regulations or changes in
  environmental factors or technological
  development or obsolescence

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SERVICE UNITS APPROACH

• Amount of impairment is determined by evaluating
  the service provided by the capital asset
  either maximum estimated service units or total
  estimated service units throughout the life of
  the capital asset both before and after

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DEFLATED DEPRECIATON REPLACEMENT COST APPROACH

• Replicates the historical cost of the service
  produced. A current cost for asset replacement
  at the current level of service is estimated and
  then depreciated to reflect asset is not new and
  then is deflated to convert to historical cost
  dollars
• Used when assets impaired due to change in manner
  or duration of use

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REPORTING IMPAIRMENT LOSSES

• Only affects GW and Proprietary Funds
• Loss (or gain) should be reported as program or
  operating expense, special item, or extraordinary
  item (in accordance with GASB 34 and APB 30)
• Debit - Program or Operating Expense Credit
  Capital Asset

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DISCLOSURES

• If impairment loss not apparent on face of
  financial statements, must disclose in notes
• General description of impaired asset
• The amount
• Financial statement classification of the
  impairment loss
• For impaired capital assets idle at year end must
  disclose the carrying amount

18
INSURANCE RECOVERIES

• In governmental funds, report restoration or
  replacement of capital asset separately from
  associated insurance recovery which is reported
  as an other financing source or extraordinary
  item whichever is more appropriate
• (To qualify as extraordinary item must be both
  unusual and infrequent)

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INSURANCE RECOVERIES

• For government-wide statements or proprietary
  funds, restoration or replacement of an impaired
  capital asset should be reported as a separate
  transaction from the impairment loss and
  associated insurance recovery
• Report loss net of insurance recovery if both
  occur in same year

20
INSURANCE RECOVERIES

• If loss and recovery occur in separate years, the
  recovery should be reported as a program revenue,
  nonoperating revenue or extraordinary item as
  appropriate
• Only recognize when realized or realizable
• (realizable if insurer has admitted or
  acknowledged coverage).

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GASB 43 FINANCIAL REPORTING FOR POSTEMPLOYMENT
BENEFIT PLANS OTHER THAN PENSION PLANS (standards
for the Plan)
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GASB 45 ACCOUNTING AND FINANCIAL REPORTING BY
EMPLOYERS FOR POSTEMPLOYMENT BENEFITS OTHER THAN
PENSION (Standards for employers)
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EFFECTIVE DATES

• Based on GASB 34 Implementation Dates
• GASB 43 (Plan)
• Phase 1 - FYE 09/30/07
• Phase 2 FYE 09/30/08
• Phase 3 - FYE 09/30/09
• GASB 45 (Employers)
• Phase 1 FYE 09/30/08
• Phase 2 FYE 09/30/09
• Phase 3 FYE 09/30/10

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WHAT IS OPEB?

• Postemployment healthcare benefits
• Other types of postemployment benefits such as
  life insurance (if provided separately from
  pension plan)

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SUBSTANCE OF OPEB

• Postemployment benefits (both pensions and OPEB)
  are part of the compensation for services
  rendered by employees that is, they are part of
  an exchange transaction

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OBJECTIVES OF OPEB STANDARDS

• Recognize OPEB cost (expense) systematically over
  periods approximating employees years of service
• Provide relevant information about
• Actuarial accrued liabilities for promised
  benefits associated with past service
• The annual cost of OPEB, and
• Progress made in funding the plan

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OBJECTIVES

• Report the estimated costs of the benefits
  (payable in future years) as expense each year
  during the years that employees are providing
  services (as employees earn the benefit)
• Provides better information on total cost of
  services being provided to the citizens

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OBJECTIVES

• Provide better information about the unfunded
  actuarial accrued liabilities (the difference
  between a governments total obligation for OPEB
  and any assets that it has accumulated for
  financing the benefits) and the changes in the
  funded status of the benefits over time

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OBJECTIVES

• Clarifies whether the amount a government has
  paid or contributed for OPEB during the report
  year has covered its annual OPEB cost.
• Generally, the more of its annual OPEB cost that
  a government chooses to defer the higher its a)
  unfunded actuarial accrued liability and b) the
  cash flow demands on the government and its tax
  or rate payers in future years

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GOVERNMENTWIDE AND PROPRIETARY FUNDS

• Employers will report OPEB expense in an amount
  equal to the annual OPEB cost for the period
  (generally based on actuarial study) regardless
  of the amount actually paid
• Cumulative difference between amounts expensed
  and contributions actually made would create a
  liability (or asset) called Net OPEB obligation

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GOVERNMENTAL FUNDS

• Employers will recognize as OPEB expenditures the
  amount contributed to the plan or expected to be
  liquidated with expendable available financial
  resources

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ACTUARIAL VALUATION REQUIREMENTS

• Must be at least biennially for plans with 200
  members
• Must be at least triennial for plans with less
  than 200 members
• May use alternative measurement method for single
  employer plans with less than 100 members

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OPEB EMPLOYERS IMPLEMENTATION

• Apply GASB 45 prospectively all governments
  will start with a 0 financial statement
  liability
• Each year will accumulate a liability called the
  net OPEB obligation if the actual OPEB
  contributions are less than the OPEB annual cost
  (actuarially determined)

34
OPEB EMPLOYERS IMPLEMENTATION

• Net OPEB Obligation will increase rapidly if the
  government uses a pay-as-you go or if the actual
  premiums paid are less than cost

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GASB STATEMENT NO. 46 NET ASSETS RESTRICTED BY
ENABLING LEGISLATIONEffective Periods Beginning
after June 15, 2005
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RESTRICTED NET ASSETS

• GASB 34 required that net assets be reported as
  restricted
• When constraints placed on net assets are imposed
  by law through constitutional provisions or
  enabling legislation
• Externally imposed by creditors, grantors,
  contributors, or laws or regulations of other
  governments

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PURPOSE

• Confusion arose over the requirement that the
  restriction be legally enforceable
• Purpose of GASB 46 is to clarify the meaning of
  the phrase legally enforceable

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LEGALLY ENFORCEABLE

• Restriction that one party external to a
  government citizens, public interest groups, or
  the judiciary can compel a government to honor

39
CHANGE IN CIRCUMSTANCES

• If the government passes new legislation which
  REPLACES the original enabling legislation and
  establishes new restrictions for resources raised
  by the original legislation , then all the
  resources accumulated under the new enabling
  legislation are restricted for the NEW purpose

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CHANGES IN CIRCUMSTANCES

• If the new enabling legislation does not replace
  the original, then judgment must be exercised
  regarding whether to report accumulated balances
  under the original enabling legislation as
  restricted for the original purpose, restricted
  for the new purpose or unrestricted

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DISCLOSURE

• Government must disclose the portion of total net
  assets that is restricted by enabling legislation

42
GASB 47 ACCOUNTING FOR TERMINATION BENEFITS
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EFFECTIVE DATE

• Depends
• If affects employers obligations for OPEB under
  defined benefit plan, effective simultaneously
  with GASB 45
• For all other termination benefits (including
  those affecting defined benefit pension benefits)
  effective for periods beginning after June 15,
  2005

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TERMINATION BENEFITS

• Incentives for early termination such as
• Cash payments, enhancements to defined benefit
  pension or other OPEB formulas, healthcare
  coverage when none ordinarily would be provided,
  career counseling, outplacement services, etc.
• Does NOT include OPEB, unemployment compensation,
  or compensated absences

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TWO TYPES OF TERMINATIONS

• Voluntary recognize in accrual basis financial
  statements when the offer is accepted and the
  amount can be estimated
• Example - early retirement incentives
• Involuntary recognize when a termination plan
  has been approved by those with the authority to
  commit the government to the plan, the plan has
  been communicated to the employees, and the
  amount can be estimated
• Example severance benefits

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DISCLOSURES

• Description of termination benefit arrangement
• Cost of termination benefits
• Significant methods and assumptions used to
  determine the liabilities
• If termination benefits are not recognized
  because they are not estimable, that fact should
  be disclosed.

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GASB 48 SALES AND PLEDGES OF RECEIVABLES AND
FUTURE REVENUES AND INTRA-ENTITY TRANSFERS OF
ASSETS AND FUTURE REVENUES
48
SALES PLEDGES OF RECEIVABLES

• Issued September 2006
• Effective for financial statements for periods
  beginning after 12/15/2006
• Deferral provisions may be applied prospectively
• Other changes should be treated as prior period
  adjustments

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APPLIES WHEN

• Governments exchange an interest in their
  expected cash flows from collecting specific
  receivables or specific future revenues for
  immediate cash payments
• Usually a single lump sum
• Example Sale of Rights to Tobacco Settlement
  Money

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HOW TO REPORT

• Report as a collateralized borrowing unless meets
  criteria for a sale
• Criteria is based on a governments continuing
  involvement

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CONTINUING INVOLVEMENT

• Report as a sale if the selling/pledging
  governments (the transferor) continuing
  involvement is effectively terminated

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CONTINUING INVOLVEMENTTERMINATED (For
Receivables) IF ALL THE FOLLOWING IS MET

• Transferee's ability to subsequently sell or
  pledge the receivables is not significantly
  limited by constraints imposed by the transferor
  government
• Transferor does not have the option or ability to
  unilaterally substitute for or reacquire specific
  accounts

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CONTINUING INVOLVEMENTTERMINATED (For
Receivables) IF ALL IS MET

• The sale agreement is not cancelable by either
  party
• The receivables and the cash resulting from their
  collections have been isolated from the
  transferor government
• Transferee has separate legal standing
• Banking arrangements eliminate access by the
  transferor and its CPUs
• Provisions in transfer agreement protect
  transferee from claims of the transferor's
  creditors

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CONTINUING INVOLVEMENT TERMINATED (For Future
Revenues) IF ALL OF THE FOLLOWING ARE MET

• Transferor government does not maintain an active
  involvement in future generation of revenues
• For example
• Does not provide the good or service
• Does not levy or assess the tax, fee or charge
• Does not submit application for grant or
  contributions
• Is not required to meet grant or performance
  provisions to qualify for the revenue

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CONTINUING INVOLVEMENT TERMINATED (For Future
Revenues) IF ALL OF THE FOLLOWING ARE MET

• Transferees ability to subsequently sell or
  pledge the future cash flows is not significantly
  limited by the transferor
• Cash resulting from collections is isolated from
  transferor government
• Contract, agreement, or other arrangement between
  original resource provider (e.g., grantor
  organization) and the transferor does not
  prohibit the transfer or assignment of those
  resources
• The sale agreement is not cancelable by either
  party

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ACCOUNTING TREATMENT SALES OF RECEIVABLES

• Transferor
• Remove receivable at its carrying value
• GW statements recognize difference between
  proceeds received and carrying value of
  receivables as gain or loss in period of sale
• Fund Level recognize difference between
  proceeds received and receivables sold as revenue
• Transferee should recognize the receivables
  acquired at the purchase price

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ACCOUNTING TREATMENT SALE OF FUTURE REVENUE

• Transferor
• Report proceeds as deferred revenue or revenue in
  both GW and fund level statements
• If transaction is with party outside of the
  financial reporting entity, revenue should be
  deferred if the future revenue sold was not
  recognized previously because the revenue
  recognition event had not occurred (for example
  tobacco settlement revenues)
• Transferee
• Recognize receivables and revenues when
  recognition criteria is met

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AICPA AUDITING STANDARDS UPDATE
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OVERVIEW

• SAS 102 Defining Professional Standards
  (Effective immediately)
• SAS 112 Communicating Internal Control Matters
  (effective for periods ending on or after
  12/31/2006)

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SAS No. 102 and SAE No. 13

• Defines terminology to describe degree of
  responsibility to auditor
• UnconditionalMust or Is required
• Presumptively mandatoryShould
• ExplanatoryDescriptive guidance rather than
  imperative
• Applies to existing standards

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SAS No. 103Audit Documentation
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Audit Documentation Basics

• In sufficient detail for an experienced auditor
  without connection to the audit to understand
• Work performed
• Results of that work
• Evidence obtained
• Conclusions reached
• Accounting records agree or reconcile with the
  financial statements or other information.

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Audit Documentation Basics

• An experienced auditor is one who knows enough,
  including understanding of
• Audit process
• SASs and legal/regulatory requirements
• The entitys business environment
• Auditing and financial reporting issues relevant
  to the entitys industry.

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Audit Documentation Basics

• Oral explanations are not sufficient support for
  work performed or conclusions reached

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More Documentation Guidance

• What should be in or out
• Electronic media
• Abstracts and copies
• Significant findings and issues
• Superseded drafts and notes
• Prior versions

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More Documentation Guidance

• Identify preparer and reviewer
• Who performed the audit work
• The date such work was completed
• Who reviewed specific documentation
• The date and extent of such review
• Document specific items tested

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New Dates to Remember

• Field work
• No earlier than when sufficient evidence exists
  to support the opinion
• Audit files assembled
• Within 60 days after report release
• Retention
• Minimum 5 years after report release

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Communication of Internal Control Matters
Identified in an Audit
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Communicating Internal Controls

• New definitions
• New thresholds
• New reporting time frame

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SIGNIFICANT DEFICIENCY

• A deficiency in internal control, or combination
  of deficiencies, that adversely affects the
  entitys ability to initiate, authorize, record,
  process, or report financial data reliably in
  accordance with generally accepted accounting
  principles such that there is more than a remote
  likelihood that a misstatement of the entitys
  financial statements that is more than
  inconsequential will not be prevented or
  detected.

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MATERIAL WEAKNESS

• A significant deficiency, or combination of
  significant deficiencies, that results in more
  than a remote likelihood that a material
  misstatement of the financial statements will not
  be prevented or detected.

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Definitions

• A control deficiency with more than a remote
  likelihood that a misstatement
• inconsequential significant deficiency
• Is material material weakness

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Effect of the Difference
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Reporting considerations

• In writing to management and those charged with
  governance
• Communication in writing, best made by report
  release date, but not later than 60 days after
  audit report issued
• Other issuesmaterial audit adjustments, prior
  year uncorrected

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RESULT

• More control deficiencies being reported as
  significant deficiencies or material weaknesses
• Many experts seem to think this standard will
  mean that if the auditor finds a material
  adjustment and the auditee makes the adjustment,
  the auditor will still be required to report a
  material weakness

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QUESTIONS