The New Blue Book

1. The New Blue Book Presented by: Anne A. Fritz, Director of Finance City of St. Petersburg FL

2. Agenda • Using the new Blue Book as a guide • Overview • Elements of financial statements • Entity wide financial statements • Fund Financial Statements • Proprietary Funds

3. Accounting, Financial Reporting and the Financial Statement Audit: An Overview • Accounting • Assembling relevant data on all transactions and events • Governments must analyze the economic substance of events and transactions • Classifying all various components of a transaction or event • Recording the identified transaction • Thus is the process of assembling, analyzing, classifying and recording data relevant to transactions • Is the primary the responsibility of management

4. Accounting, Financial Reporting and the Financial Statement Audit: An Overview • Financial Reporting • The process of taking the information thus assembled, analyzed, classified, and recorded and providing it in usable form to those who need it • Interim financial reporting • Special purpose external financial reporting • General purpose financial reporting • Display • Disclosure • Supporting Information

5. Supporting information • Is information designed to provide operational, economic, or historical context for the financial statements themselves or for notes to the financial statements • Sometimes mandated by GASB (required supplementary information - RSI), or otherwise is supplementary information (SI) (SI is optional) • Includes more detailed information than the financial statements

6. (7) Elements of financial statements • Assets: resources with present service capacity that the government presently controls • Control refers to a government’s ability • To utilize a resource’s present service capacity; and • To determine the nature and manner of its use • Does not have to be absolute • Normally results from legal ownership • Control must result from a past event (tax levy) rather than an inherent power (ability to tax)

7. Elements of financial statements, continued • Liabilities: present obligations to sacrifice resources that the government has little or no discretion to avoid • Avoidability is crucial – an obligation that can be avoided is not a liability. • Normally an obligation will be deemed unavoidable because it is legally enforceable: • Either pursuant to a contract (payables); or • As a result of third-party legislation (environmental regulations)

8. Elements of financial statements, continued • Legal enforceability is not essential to liability recognition • An obligation may need to be recognized as a constructive (inferred) liability if “social, moral, or economic consequences leave the government little or no discretion to avoid the sacrifice of resources” • Commitments from liabilities • A liability must involve an external party

9. Elements of financial statements, continued • Inflow of resources: an acquisition of net position by the government that is applicable to the reporting period • Acquisition involves either • New resources coming under the government’s control (occurrence of a taxable sale); or • Resources already under the government’s control becoming newly available (meeting eligibility requirements for a grant that provided cash in advance) • Either way, acquisition will always result in either a net increase in assets or a net decrease in liabilities

10. Elements of financial statements, continued • Outflow of resources: consumption of net position by the government that is applicable to a reporting period • Consumption may involve either • Using up an existing resource (cash); or • Using up a resource as it is acquired (employee labor) • Either way, the result of consumption will always by a net decrease in assets or a net increase in liabilities

11. Elements of financial statements, continued • Deferred inflow of resources: acquisition of net position by the government that is applicable to a future reporting period • A given item that meets the definition of inflow of resources, but relates to a future period, is a deferred inflow of resources (property taxes levied in the current year to finance the subsequent year’s budget) • Don’t confuse with liabilities – example: grant received prior to meeting eligibility requirements does not meet the definition of deferred inflow because • It involves no acquisition of resources resulting in either a net increase in assets or a net decrease in liabilities (the asset cash received) from the grantor is counterbalances by a related liability to the grantor); and • It also meets the definition of liability because it represents a present obligation to sacrifice resources that the government has little or no discretion to avoid

12. Elements of financial statements, continued • Deferred outflow of resources: consumption of net position by the government that is applicable to a future reporting period • A given item that meets the definition of outflow of resources, but relates to a future period, is a deferred outflow of resources (resources provided to a grantee before the grantee has met related time requirements, but after all other eligibility criteria have been met) • Don’t confuse with assets – example: prepaid rent does not meet the definition of a deferred outflow of resources because: • It involves no consumption of resources that results in either a net decrease in assets or a net increase in liabilities (the asset prepaid rent simply replaces the asset cash) • It does meet the definition of an asset because it represents access to present service capacity that is under the control of the government

13. Elements of financial statements, continued • Net position: the residual of all other elements presented in a statement of financial position • The difference between assets + deferred outflows of resources, on the one hand, and liabilities + deferred inflows of resources, on the other, constitutes the net position

14. Essential accounting data characteristics • Understandability • Reliability • Relevance • Timeliness • Consistency • Comparability

15. GAAFR Government-Wide Financial Reporting

16. General Rules • Government-wide financial reporting requires • Data reported in governmental funds using current financial resources measurement focus (modified accrual) be converted to economic resources measurement focus (full accrual accounting) • Redundancy resulting from interfund activity be eliminated

17. Converting the Data • Most accounting systems for local governments are organized around funds • Series of steps from “budget-based” accounting to modified accrual and accrual • Budget to modified accrual • Modified accrual to accrual

18. Balance Sheet vs. Statement of Net Assets • Two types of differences • Governmental funds report only those assets and liabilities that are considered relevant to flows and balances of current financial resources. (modified accrual) The government-wide statement of net assets report all assets and liabilities (accrual)

19. What does that include? • Capital Assets of general government • Deferred charges for debt issuance costs • Inventories and prepaid assets (if not otherwise reported) • Long-term debt • Liability for accrued interest • Liabilities for certain accrued obligations not recognized in governmental funds • Eliminate liability for earned but unavailable deferred revenue

20. Second Difference? • Internal service funds (proprietary) are to be included as part of the governmental activities whenever they primarily serve governmental funds (which is usually the case) • Assets & liabilities of internal service funds • Proprietary fund combining and individual fund statements will include the internal service funds.

21. Converting Governmental Fund Operating Statements to Government-wide Statement of Activities

22. Five Types of Differences • #1: Accrual accounting: include only transactions that net assets where modified accrual (governmental funds) include transactions that impact net current financial resources but do not affect total net assets i.e. capital outlays, debt service principal payments

23. Five Types of Differences • #2: Proceeds from sale of capital assets are reflected in their entirety in governmental fund operating statements. Only the gain or loss on the sale is reflected in government-wide statements

24. Five Types of Differences • #3: Governmental funds do not report “gains” and “losses” but difference in sale are reported as revenue or expenditures. Government-wide statement of activities report these activities as gains or losses

25. Five Types of Differences • #4: Regarding transactions that occur in one year and the financial impact results in a following period (unavailable revenue or certain accrued liabilities) Government-wide statements report transactions in the year the event occurred where governmental funds defer recognition

26. Five Types of Differences • #5: Internal service funds activities typically are included as governmental activities in government-wide statements (even though they are properly classified as proprietary funds)

27. Governmental Data Adjustments • Eliminate expenditures that represent the acquisition of capital assets • Eliminate expenditures for debt service principal payments • Eliminate other financing sources/uses and expenditures associated with debt issuance. • Include donations of capital assets • Restate sales of capital assets & fund assets on an accrual basis • Eliminate revenues and expenditures related to prior periods. • Make all regular accrual adjustments • Include the activities of internal service funds

28. What was the second requirement? • Eliminate the interfund activity ! • Four Ways for Primary Government to interact creating “interfund activity” • One fund loans money to another • One fund furnishes goods or services to another • One fund furnishes resources to another with no expectation of repayment (interfund transfer) • One fund reimburse another for cost incurred on its behalf (interfund reimbursement)

29. Statement of Net Assets • Elimination of Interfund Payables and Receivables • Two Step Process • Consolidation by activities • General fund to special revenue • Enterprise fund to enterprise fund • Interactivity consolidation • Because government activities and business like activities are reported separately, the receivables/payables will also be reported separately. How? Chapter 10

30. Government-wide Statement of Activities Consolidation Interfund loans services provided and used reimbursements transfers While all four types of interfund activity affect the statement of positions, not all of them are consolidated

31. Government-wide Statement of Activities Consolidation • Interfund loans: Taken care of in statement of net assets • Interfund services provided & used: NOT ELIMINATED • Objective of government-wide statements is to provide information on the net cost of each government function and revenues and expenses related to interfund services constitute an essential component of any such cost calculation services between functions Therefore, GAAP requires that these NOT be eliminated.

32. Government-wide Statement of Activities Consolidation • Interfund reimbursements: If the government handles reimbursements the same as “interfund services” (revenues/expenses), then elimination of entries must be done. If reimbursements are done by reallocating expense (reducing expense in one fund, increasing it in another) then no entry

33. Government-wide Statement of Activities Consolidation • Interfund transfers: Must be eliminated • Two step approach • Elimination between the same activities (i.e.general fund & special revenue) • Interfund between government and business- type activities will be shown but there should be nothing in total column for primary government (should net to $0)

34. Government-wide Statement of Activities Consolidation • What about internal service funds? • Internal service funds (theoretically) are suppose to be “break even” operations • What if they didn’t break even? • Allocate the profit or loss to the EXPENSES of the activity that benefited from the services • Technique called the “look-back” approach

35. Government-wide Statement of Activities Consolidation • Net profit: Functions paid more for services than they needed • Reduce expenses by % (i.e. general fund received 65% of service, then general fund expenses are reduced by 65% of net profit) • Net loss: Function didn’t pay enough for services • Increase expenses by %

36. Government-wide Statement of Activities Consolidation • BE CAREFUL !!!! • Based on the assumption that internal service funds are included with government activities, net profit (loss) within government activities works fine • What happens when % of services are provided to the business-type activities?

37. Government-wide Statement of Activities Consolidation • Increasing (or decreasing) expenses of business-type activities creates a receivable and payable !

38. One More Thing ! (regarding internal service fund allocation of profit or loss) • Interest Expense: • Should be reported as its own expense in government activities. • Therefore, do not consider interest expense in the net profit (loss) calculation when allocating expenses back to the funds • i.e. subtract out interest expense from other expenses THEN determine if there is profit (loss)

39. GAAFR Financial Statements

40. What is the Basic Structure of the Financial Statementsl? • “Basic financial statements” • Government-wide financial statements • Fund financial statements • Governmental funds (tax-supported activities) • Proprietary funds (business-type activities) • Fiduciary funds (not available for programs) • Notes to the financial statements • Required supplementary information (RSI)

41. Governmental Model

42. RSI • Management’s discussion and analysis (MD&A) • Other RSI (as needed) • Budgetary comparisons • Infrastructure data (modified approach) • Pension trend data • Claims development trend data

43. Basic Financial Statements • Government-wide statements (2) • Fund statements • Governmental fund statements (2 or 3) • Proprietary fund statements (3) • Fiduciary fund statements (2) • Notes to the financial statements

44. CAFR • Introductory Section of CAFR • Financial Section of CAFR • Basic financial statement and RSI • Combining and individual fund presentations • Statistical section of CAFR

45. What are the Entity-Wide Statements? • Two Government-wide basic financial statements • Statement of net assets • Statement of activities

46. What is the Statement of Net Assets? • Reports all assets and liabilities • Both financial assets and capital assets (including infrastructure) • Both current and long-term liabilities • Presentation options • Order of relative liquidity • Current versus long-term (i.e., “classified”) • Difference = “net assets”

47. How are Net Assets Reported? • Presentation based on accessibility of underlying assets • Net investment in capital assets • Restricted • Unrestricted

48. Components of Net Assets

49. What is the Statement of Activities? • All changes in government-wide net assets • Focus on expenses rather than expenditures • Order of presentation • Service focus rather than revenue focus • Expenses (cost of services) precede revenues • Net cost format demonstrates degree to which an activity is self-financing

50. Structure of Statement of Activities • Start: Expenses by function • Less: Program revenues (directly related fees, charges and grants) • Result: Net expenses by function • Add: General revenues and other changes • Result: Increase/decrease in net assets