Jacqueline L. Reck , PhD, CPA Interim Associate Dean College of Business November 13, 2012

1. The Financial Reporting Modelpresented at the 2012 School of Governmental Finance Beginner Boot Camp Jacqueline L. Reck, PhD, CPA Interim Associate Dean College of Business November 13, 2012

2. Plan of Action • Content of a government annual report • Look at illustrations from a complete annual report • Go through the different financial statements • Questions during or at the end of the presentation

3. GASB – Annual Report (CAFR) • Introductory section • Financial section • Auditor’s report • MD&A • Basic financial statements and related notes • Required supplementary information • Supplementary information (such as combining statements) • Statistical section

4. MD&A • Required supplementary material (not boilerplate) • GASB specifically defines what must be included • Discussion of basic financial statements • Condensed financial information comparing current and prior year • Analysis of overall financial position and results of operations • Analysis of balances and transactions • Description of significant capital asset and debt activity • Description of currently known facts, decisions or conditions that affect position or operations

5. Compare Financial Reports • Look at the basic financial statements from KForce prepared under FASB • Look at the basic financial statements from the City of Jacksonville • What are some immediate differences that you see?

6. Required Basic Financial Statements • Governmental Fund Statements • Balance Sheet • Statement of Revenues, Expenditures and Changes in Fund Balance Note: a major fund is a general fund, and any governmental fund or enterprise fund with 10% or more of total assets/liabilities/revenues/expenses (expenditures) of all governmental (enterprise) funds and 5% or more of the corresponding element when governmental and enterprise funds are combined.

7. Comparing Governmental Fund Statements to KForce • Take time to compare the City of Jacksonville Balance Sheet-Governmental Funds to the KforceBalance Sheet • Identify differences

8. Balance Sheet – Fund Balances • Reporting model format Assets(current) = Liabilities(current) + Fund Balances (2 categories) • Fund Balance Categories • Nonspendable- not expected to be converted to cash or cannot be converted • Spendable (4 types)

9. Balance Sheet – Fund Balances • Spendable • Restricted - externally imposed or imposed by law or enabling legislation • Committed - use of funds is constrained by formal action of highest level with decision-making authority • Assigned - government intent to use for a specific purpose • Unassigned - everything else, note only the General Fund can have a positive unassigned fund balance. Since a negative restricted, committed or assigned balance is not allowed, other funds may report a negative unassigned balance.

10. Comparing Operating Statements • Compare the City of Jacksonville Statement of Revenue, Expenditures and Changes in Fund Balance-Governmental Funds to the Kforce Income Statement • Identify differences

11. Statement of Revenues, Expenditures and Changes in Fund Balance • Reporting model format Revenue - Expenditures = Excess of Revenues Over (Under) Expenditures + Other Financing Sources (Uses) = Excess of Revenues & Other Sources Over (Under) Expenditures & Other Uses + Special Items/Extraordinary Items/Capital Contributions + Change in Fund Balances + Beginning Fund Balances = Ending Fund Balances

12. Statement of Revenues, Expenditures and Changes in Fund Balance • Revenues are reported by source • Expenditures are reported by function/program • Extraordinary items involve transactions that are both unusual and infrequent in nature (same as for-profit definition) • Special items are either unusual or infrequent in nature and under management control

13. Required Basic Financial Statements • Proprietary Fund Statements • Statement of Net Position • Statement of Revenues, Expenses and Changes in Fund Net Position • Statement of Cash Flows • Examples are provided for the City of Jacksonville

14. Statement of Revenues, Expenses and Changes in Net Position • GASB requires division into operating and nonoperating sections • Operating revenue/expenses are to be tied to the fund’s main purpose • Management call on some items, such as grants • Used in statement of cash flow

15. Statement of Cash Flows • Direct approach is required by GASB • Instead of three primary components of cash flow there are four • Operating • Non-capital financing • Capital and related financing • Investing

16. Statement of Cash Flows • Operating activities - effect of transactions used to determine operating income • Cash from sale of goods and services • Cash from quasi-external operating transactions • All other cash transactions that don’t fit into another component area • Cash payments are the obverse of the above

17. Statement of Cash Flows • Direct method categories used for operating activities • cash receipts from customers • cash receipts from quasi-external transactions • other operating cash receipts • cash to employees for services • cash payments to other suppliers of goods and services • cash payments for quasi-external transactions • other operating cash payments

18. Statement of Cash Flows • Non-capital financing activities • Borrowing money to acquire, construct or improve non-capital assets • Repaying principal and interest related to non-capital borrowing • Look to transactions affecting the nonoperating section of the statement of revenues, expenses and changes in net assets

19. Statement of Cash Flows • Examples of non-capital financing • cash received or paid relative to non-capital grants or subsidies • cash received from or paid to other funds, such as transfers • cash received from taxes • proceeds and repayments related to non-capital debt issues and borrowings • payment of interest on non-capital debt

20. Statement of Cash Flows • Capital and related financing activities • Acquiring and disposing of capital assets • Any borrowing and repayments related to capital assets (including interest) • Capital financing activities are similar to non-capital, but involve capital assets NOTE: debt that is not clearly related to capital construction, acquisition or improvement should be considered non-capital debt

21. Statement of Cash Flows • Investing activities • Making and collecting on non-program loans • Acquiring and disposing of debt and equity investments (including interest and dividends) • Includes deposits or withdrawals from investment pools that an entity is not using as demand accounts

22. Statement of Cash Flows • Reconciliation of net cash flow from operating activities to cash is required • Noncash transactions should be shown in a schedule on the face of the financial statements or in the notes

23. Required Basic Financial Statements • Fiduciary Funds • Statement of Fiduciary Net Position • Statement of Changes in Fiduciary Net Position • Examples for Jacksonville are included • Each trust fund type must have its own column (agency, special-purpose, investment, pension) • Only funds held for those external to the government are reported on the fiduciary financial statements

24. Required Basic Financial Statements • Government-wide Financial Statements – include ONLY governmental and proprietary information (NOT fiduciary) • Statement of Net Position (reporting model same as in corporate accounting) • Statement of Activities (backward model) • Take some time to look at the Jacksonville statements – how are they different from the fund statements?

25. Statement of Net Position • Primary government columns include • Governmental activities • Includes governmental fund activity and generally internal service fund activity • Transactions between governmental funds are not reported (eliminated) • Business-type activities – enterprise fund activity • Total column – note internal receivables and payables between the two columns are netted • Component unit columns as appropriate

26. Statement of Net Position • Reporting model format Assets – Liabilities = Net Position • Net Position is reported in 3 categories • Net Investment in Capital Assets – net fixed assets less any related debt • Restricted – limits the availability of the assets • Restriction caused by external party or law • Separate into expendable and nonexpendable • Unrestricted – available net position

27. Statement of Net Position (cont’d) • Investments • Reported at fair value • Realized and unrealized gains/losses netted • Extensive note disclosures • Methods and assumptions for fair valuing if other than quoted market • Investment type • Risk disclosures – credit, custodial, concentration, interest rate

28. Statement of Net Position (cont’d) • Capital assets • Reconciliation required in the notes • Intangible assets – considered capital assets by GASB

29. Statement of Net Position (cont’d) • Capital assets (cont’d) • Impairment – Events that may lead to impairment • Decline in the market value of the asset • Significant change in the way the asset is used • Significant adverse change in the legal or business climate which could affect asset value • Costs significantly in excess of the amount originally expected to acquire or construct an asset

30. Statement of Net Position (cont’d) • Capital assets (cont’d) • Impairment - Apply recoverability test to determine if impairment has actually occurred • Estimate future net cash flows and the disposal amount • If the estimate is less than the carrying value an impairment has occurred

31. Statement of Net Position (cont’d) • Compensated absences (vacation and sick leave) • Becoming a huge problem for governments • Accrue as employees earn the rights to the vacation benefits • Right to receive compensation is related to services already rendered • Probable the employer will compensate with time or other means • Due not accrue if benefit can lapse • Accrue sick leave only if there is a termination payment

32. Statement of Activities • Reporting model format Expenses – Program Revenues = Net Expenses + General Revenues + Transfers/Special Items Extraordinary Items = Change in Net Position + Beginning = Ending Net Position

33. Statement of Activities • Both governmental and business-type activities are included • Component units are not included in primary government totals • Expenses are reported by function/program

34. Statement of Activities • Program revenues are to be identified in 3 categories • Charges for services (includes licenses, permits, fines and forfeits) • Operating grants and contributions • Capital grants and contributions • General revenues are • All tax revenues • Other revenues not specifically identified with a function/program • Should be identified by source

35. Reconciliations • GASB requires reconciliation of the fund financial statements to the government-wide financial statements • Balance Sheet to Statement of Net Position • Statement of Revenues, Expenditures and Changes in Fund Balance to Statement of Activities • See examples from Jacksonville

36. Required Supplementary Material • Budget and Actual Statement/Schedule (similar to a variance report) • Uses Statement of Revenues, Expenditures and Changes in Fund Balance format • Required to be prepared on the budgetary basis • Requires original and final budget • Requires actual revenues and expenditures/encumbrances

37. Statistical Section • Financial trends information – schedules are provided at the fund and government-wide levels • Revenue capacity information – schedules should focus on the government’s most significant own source revenues • Debt capacity information – schedules are provided to assist in assessing existing debt burden and ability to issue new debt • Demographic and economic information – assists in assessing the socioeconomic situation • Operating information – provides context for government operations

38. Resources • GASB Codification, issued annually • GASB Comprehensive Implementation Guide, issued annually • AICPA Audit and Accounting Guide – State and Local Governments • GFOA Blue Book

39. Conclusion • We have scratched the surface on financial reporting • Numerous note disclosures that are required • Financial reporting is much more complex than the reporting for entities under FASB

40. Questions!