The Great Imbalance

1
The Great Imbalance

• Understanding GASB 34 Statement of Net Assets
  Balance Sheet

2
Two Statements With Different Focuses

• Statement of Net Assets
• Entity as a whole
• Two columns and a total (Primary Government)
• Full Accrual with elimination of interfund
  balances
• Residual balances of ISF allocated to appropriate
  Column
• Equity divided by nature of underlying assets
• Capital, net of related debt
• Restricted
• Unrestricted

3
Two Statements With Different Focuses

• Fund Statements
• All major funds part of the FS
• Non major Funds shown in aggregate only
• Individual Internal Service Funds not part of the
  major funds (reported by fund type)
• Individual Fiduciary Funds not part of major
  funds (reported by fund type)
• Component Units, if any not part of the FS
• No interfund eliminations
• Enterprise Funds still same Basis and Name

4
Users of the Financial Statements

• Investors and rating agencies Stat Section
• Focus on historical sustained revenue growth
• Strong financial reserves
• Moderate debt levels and coverage
• Council
• Budget RSI
• Budget
• Statement of Activities is the starting point for
  performance measures

5
Users of the Financial Statements

• Citizens
• MDA and General Fund
• Auditors
• Everything
• Opinion units materiality

6
Enterprise Funds

• Enterprise Funds still Statement of Net Assets
• Prepared on same basis as the entity-wide
• Should be very few reconciling differences
  between the entity-wide and fund statements
• Internal Service Funds

7
Governmental Funds

• Balance Sheet not Net Assets
• Major Funds Individually presented
• Non-major shown in the aggregate
• Modified Accrual Basis of Accounting
• Based on Current Funds Flows
• Fund Balance Reservations reflect liquidity
  constraints not restrictions to purpose

8
Statement Common Audit Reporting Deficiencies

• Net Asset Classifications
• Deferred Charges
• Unspent Proceeds
• Negative Unrestricted Net Assets
• Reserves do not Represent Restricted Net Assets
• Designations

9
Statement Common Audit Reporting Deficiencies

• Receivables Same Amount on Both Statements
• Allowances More Meaningful
• Long-Term Liabilities

10
The Dominance of Capital Assets

• Capital Assets will be the dominant asset
  category in the governmental activities column
  for most states, cities and many counties
• Carrollton TX, 93 of all Net Assets are Capital
  related.
• State of Pennsylvania, 94 of all Net Assets are
  Capital related
• Orange County, CA, 78 of all Net Assets are
  Capital related.

11
Uniqueness of Infrastructure

• Infrastructure will be the dominant asset
  category for most states, cities and many
  counties
• Carrollton TX, CV of Infrastructure is 200
  million or 83 of all Fixed Assets.
• State of Pennsylvania, CV of Infrastructure is
  13.6 billion or 81 of all Fixed Assets
• Orange County, CA, CV of Infrastructure is 833
  million or 60 of Fixed Assets

12
Nature of Infrastructure

• No salvage value
• No ability to resell
• Typically generates no direct revenue but
  requires significant resources to maintain
• Often replaced a node at a time
• Size, magnitude and existence of Public Works
  records make creation and maintenance of detailed
  accounting records impractical

13
Nature of Infrastructure

• For majority of governments infrastructure is
• An estimate
• Incomplete
• Pre 1980 assets
• Capitalize only major systems
• Four additional years for retroactive restatement
  of infrastructure

14
Fixed Asset Implications

• Magnitude of Fixed Assets can create a large Net
  Asset balance regardless of the financial health
  of the entity.
• Relatively small percentage changes in
  Infrastructure can create a relatively large
  change in Net Assets.
• Total Net Assets comparability between even
  similar governments will be extremely difficult
  if not downright deceiving.

15
Capital Asset Audit Issues

• Lack of Comparability
• Estimated Cost vs. Actual Cost
• All Infrastructure vs. Post 1989
• Future Replacement Costs Can Now Be Analyzed
• Healthy Net Assets vs. Hidden Maintenance Costs
• County Issues Negative Unrestricted Net Assets
• Retirements Not Consistently Recorded

16
Categories of Net Assets

• Three Categories of Net Assets
• Invested in Capital Assets-Net of Related Debt
• Restricted
• Unrestricted
• Invested in Capital Assets-Net of Related Debt
• All capital debt is not in this category if you
  do not continue to own the related asset.
• Unexpended proceeds on capital debt is in the
  restricted categories

17
Calculating Net Asset Categories

• Financial statement categories should be
  consistent with the Net Asset Categories
• Detail in Financial Statements should be
  consistent with the Net Asset calculation
• Restricted balances for the GA column are not
  nearly as well defined as for the BTA column.
• There may be inconsistencies between columns and
  asset liabilities vs. Net Asset category.

18
Net Asset Categories

• Unrestricted Net Assets is a general indicator of
  financial strength flexibility.
• It is not an indicator of liquidity.
• While negative Unrestricted Net Assets is
  generally bad, there are exceptions. An analysis
  of unrestricted could improve understanding.

19
Analyzing Unrestricted Net Assets

• An entitys Unrestricted Net Assets are 0.
• UNA consists of 10 million each of assets and
  liabilities.
• Would your opinion of UNA change if
• Assets were all cash and investments?
• Assets were all short term receivables?
• Assets were mostly long term receivables?
• Liabilities were all trade payables?
• Liabilities were all long-term in nature (OPEB,
  landfill, compensated absences, long term bonds
  etc)?

20
Net Asset Audit Issues

• Residual of Transactions
• Most Common GASB 34 Required Adjustments
• Fund Balance Short Term Liquidity vs. Net
  Assets (Long Term Prospects)
• Comp. Absences, OPEB, Net Pension Obligation, W/C
  Health Internal Service Funds
• Importance of MDA

21
Analyzing Financial Health

• Financial Position vs. Financial Condition
• Statement of Net Assets and Balance Sheet focus
  on Financial Position.
• Even with this narrower focus, understanding the
  composition of Net Assets and Fund Balance is
  critical to understanding FP.
• Remember, the real wealth of a government is not
  on any balance sheet or Statement of Net
  Assets-it is our ability to tax and generate
  revenue and the overall health and direction of
  our economy (Financial Condition).

22
Financial Health Audit Concerns

• Pre GASB 34
• Liquidity and Fund Balance Reserves
• GFOA Minimum Fund Balance
• Post GASB 34
• Full Accrual Effect OPEB, Risk Funds, NPO,
  Comp. Absences
• No GFOA Minimums
• Unrestricted can be misleading
• Bottom Line
• Tax Capacity
• Debt Capacity

23
Fund Statements

• Governmental Funds Fund Balances are a key
  indicator of short term financial position and
  are most closely tied to the budget.
• Understanding the flow between funds and the
  distinction between Reserves and Designations is
  critical to understanding the funds.
• Remember the choice of major funds can both
  illuminate or conceal.
• Transactions and balances between funds can also
  illuminate or conceal.

24
Warning Signs in the Fund Statements

• Large number of inter-fund balances
• GASB 34 repaid within a reasonable period is
  vague and subject to interpretation
• No distinction between due to/from and
  advances-GASB 34 never uses the terms
• Large receivables in the General Fund
• Funds whose only source of money is transfers
• Small overall cash investment balances

25
Warning Signs (continued)

• Short term (cash flow) borrowings
• Large subsidies between operations

26
Fund Statements Common Audit Concerns

• Magic of Fund Accounting, Subsidies Transfers
• Collectibility of Due To/Due Froms
• Disclosing Purpose of Significant Nonrecurring
  Transfers
• Collapsing Funds into the General Fund

27
For the Future

• Entity-Wide will include increasingly more
  accruals that will require future swag
  predictions
• Entity-Wide will have increasing volatility as
  estimates have to be adjusted from year to year.
• Increasing need for third party experts
  (actuaries, landfill engineers, infrastructure
  engineers etc.)
• Understanding the entitys underlying cash flows
  (near term vs. long term) will be critical.

28
For the Future (continued)

• Upcoming GASB Statement on the effect of enabling
  legislation on Net Asset categories.
• Ongoing GASB project on Fund Balance disclosures.