Catch My Drift? Basic Bookkeeping Practices

Catch My Drift? Basic Bookkeeping Practices April 11, 2013 Presented by: Amy Tynes, CPA Allen, Green &Williamson, LLP

Basic Bookkeeping PracticesObjective Taking a look at various account classifications to determine if financial information is properly reported and determining if the trial balances are ready to be audited.

Topics • Assets: • Cash • Accounts Receivable • Inventory • Prepaid Expenses • Capital Assets • Deferred Outflows

Topics • Liabilities: • Accounts Payable • Wages Payable and Payroll Liabilities • Compensated Absences • Post Employment Benefits • Deferred Inflows • Net Assets • Revenues and Expenses • Changes in Audit Process

Cash • The book balance per your bank reconciliation should agree to general ledger. • Any outstanding or reconciling items should be reviewed to ensure that they are in fact “transactions in transit”. • Checks written or deposits made after year-end, even though they are related to year being closed out, should not affect cash but should be accrued as a receivable or payable. • Need to ensure when transfers are processed between bank accounts, whether electronically or by check, that both sides (the deposit and the withdrawal) are recorded in the same period.

Cash • At year end, negative cash balances in funds should be moved to a “due to or interfund payable” account. With the corresponding “due from or interfund receivable” account in the fund that has the cash balance. • This is usually the general fund. • Need to verify what accounts are a part of the master bank account if there is more than one master bank. • Outstanding checks: • Need to review checks that are still outstanding at the end of the year to determine if any should be sent to Louisiana Unclaimed Property.

Cash • Louisiana Unclaimed Property: • The holding periods – the timeframe the item is held by the Agency before submitting to La. Unclaimed Property Division: • One year holding period – • Wages and payroll • Deposits held by utilities, proceeds of a class action lawsuit or refund ordered by the court • Two year holding period – • Rents, royalties and mineral proceeds • Three year holding period – • Gift certifications, dividends and stocks or other intangible ownership interest

Cash • Louisiana Unclaimed Property (cont.): • Five year holding period – • Checks, drafts or similar instruments • Money orders, cashier or certified checks • Bonds • Demand, savings or matured time deposits • Seven year holding period – • Express money orders or similar instruments • Fifteen year holding period – • Travelers checks

Cash • Louisiana Unclaimed Property (cont.): • Steps required after holding period – • If the items to the individual/company are in aggregate under $50- • No requirements necessary, money is submitted to La. Unclaimed Property. • If the items to the individual/company are in aggregate $50 or more- • The Agency is required to submit a letter to the individual/company notifying them of the outstanding item and they have 60 days to cash or deposit it or to contact the Agency to reissue the item. • These letters are to be maintained by the Agency. • If the letter comes back as undeliverable, then the Agency does not have to wait 60 days to submit to the state.

Cash • Louisiana Unclaimed Property (cont.): • If the items to the individual/company are in aggregate $50 or more (cont.)- • If the letter does not come back as undeliverable, then the Agency is required to wait 60 days. • Once the 60 day timeframe is completed and the item is still remaining outstanding, then the Agency is required to submit the monies to the state. • Items are required to be submitted based on the State’s fiscal year end June 30th.

Cash • Louisiana Unclaimed Property (cont.): • Items are required to be submitted based on the State’s fiscal year of June 30th. • For instance, if a vendor check has a holding period of 5 years, then the check would have to be outstanding prior to June 30, 2008 if it is to be submitted for the State’s FYE 6/30/2013. • For all holders, payment is due to the Louisiana Unclaimed Property Division by November 1st with the annual report. • Penalties and interest will be calculated if submitted after November 1st.

Cash • Louisiana Unclaimed Property (cont.): • The forms required to be submitted with your payment are UP-1 and UP-2. • These forms along with other information can be obtained at www.treasury.state.la.us/Home%20Pages/UnclaimedProperty.aspx

Accounts Receivable • Processes at year end: • Determine that all accounts receivables from prior year have been cleared out. • If accounts receivables remain from prior year, then need to determine if the receivable is still valid and collectible. • If it is determined the receivable is not valid, then receivable should be removed. • If it is determined the receivable is not either fully or partially collectible, then an allowance for doubtful accounts should be recorded. • If it is determined the receivable is collectible, but not within one year, this information should be provided to the auditor for note disclosure. • Ending balance should be supported with deposits slips, EFT notices, and/or request for reimbursements for unreimbursed expenses.

Accounts Receivable • Are all accounts receivables relating to outside sources? • Receivables from other funds, and not outside sources, need to be moved out of an accounts receivable account and into a “due from or interfund receivable” account. • Additionally, the fund that is paying another fund back should be reporting a “due to or interfund payable” rather than an accounts payable. • If the interfund receivables and payables are not going to be cleared out within the next year, then this information should be provided to the auditor for note disclosure purposes. • A reconciliation of which funds owe another fund should be prepared . The amount owed to other funds (due to) should agree to the amount due from other funds. • Funds that will not be paid back need to be recorded as a transfer in/out.

Inventory • Most of the School Board’s inventory is relating to purchased food and commodities. • Others may have a large amount of other supplies such office and maintenance supplies. • The Agency should establish policies and procedures on inventory. • At a minimum, year end inventory counts should be completed.

Inventory • A copy of the year end counts and the values should be provided to the Accounting Department to ensure balances on the general ledger agree with the year end counts. • Adjustments should be made to agree with year end balances. • The auditors should be notified when physical inventory is scheduled to be taken, so they can plan to observe, if necessary.

Inventory • Commodity inventory balances should agree to the “unearned revenue” (no longer considered as “deferred revenue”) reported from the U.S. Department of Agriculture. • Commodities are either sent to the Agency or the Processor throughout the fiscal year. • Commodities are usually reported as a revenue and an expense when received. • At year end, any commodity inventory on hand should be reported as inventory; the offset will be to food expense. Additionally, the Agency should record unearned revenueto agree to the commodity ending balance and offset the federal revenue reported.

Prepaid Expenses • Prepaid expenses are items that are paid in advance or cover a length of time that crosses reporting periods. • For instance, a service or maintenance agreement that begins in one fiscal year and ends in another fiscal year. • Full accrual basis of accounting: • Business-type activities or proprietary funds. • Proportionate amount of expense should be recognized in each benefitting period. • Prepaid expenses are still classified as an asset on the Balance Sheet and the Statement of Net Position because the prepayment did not result in a consumption of net position. (cash decreased and prepaid expense increased with not change in net position as a result of the transaction).

Prepaid Expenses • Modified accrual basis of accounting: • Recognition is based on the Agency’s policy. • If using the purchase method – • The Agency may recognize the entire amount of prepayment as an expenditure for the period the payment is made. • If using the consumption method – • The Agency will recognize a proportionate amount of expense in each benefitting period. • The Agency’s policy should be reflected in the notes to the financial statements.

Capital Assets • The Agency should have policies and procedures for capital assets: • Different capitalization thresholds are allowed to be established for various classifications of capital assets. • Software or intangible assets • Equipment • Buildings/buildings renovations and improvements • Useful lives should be established for each classification • The varying thresholds should be properly entered into the capital asset program.

Capital Assets • Policy and procedures (cont.): • Tagging process • Who is responsible? • When and how are items tagged? • Physical inventory • This should be taken at least annually. • Support should be maintained for the physical count. • Deletion process • Such as completion of deletion forms • Who approves deletions?

Capital Assets • Policy and procedures (cont.): • Additions • When are additions added to the system? • Who is responsible for adding the assets? • How is the information gathered and when is it provided to the person responsible? • The policy and procedures should be provided to the staff.

Capital Assets • Construction in progress: • A listing of all construction projects should be maintained by the Agency.

Capital Assets • Construction in progress (cont.): • All cost associated with the projects should be reviewed. • The costs that may be included in the costs of the project: • Architect and engineering fees • Contractors and subcontractors application of payments • The costs that are not included in the costs of the project: • Legal or recording fees • Interest incurred to acquire a capital asset that are accounted for as a part of governmental activities

Capital Assets • Construction in progress (cont.): • Improvements versus Repairs – • Any outlay that does no more than return a capital asset to its original condition, regardless of the amount, should be classified as repairs. • If the outlay increases the asset’s utility, then it should be capitalized. • If the outlay extends the total estimated useful life of the asset, then it should be capitalized. • If a project covers both repairs and improvements, then an appropriate portion of the cost should be assigned to each.

Capital Assets • Construction in progress (cont.): • Year end accruals– • Review the first application for payment submitted to the Agency to process in following fiscal year end to determine if an accrual is necessary: • Each application will show period of work covered; usually in the top left hand corner of the application for payment. • If work was performed before fiscal year end, then construction payable along with retainage payable should be recorded. • If prior year had a construction payable or retainage payable, make sure these have been reversed.

Capital Assets • Construction in progress (cont.): • Completed projects should be added to capital asset system. • Assessment of assets for impairments: • A significant, unexpected decline in the service utility of a capital asset. • Must be • Significant • Unexpected • Permanent • The government has burden of proof that a decline in service utility is merely temporary.

Capital Assets • Impairments (cont.)- • Some indicators of impairment: • Physical damage where action would be needed to restore lost service utility. • Changes in laws, regulations, or other environmental factors negatively impacting service utility • Technological developments • Change in the manner or duration of use of a capital asset that negatively impacts service utility • Stoppage of construction • Stoppage of development for internally generated intangible assets

Deferred Outflows of Resources • GASB 63– • For fiscal year ends after December 15, 2012. • Deferred outflow of resources is a consumption of net position by the government that is applicable to future reporting period. • Most common deferred outflow of resources for School Boards would result from the refunding of debt. • The difference between the reacquisition price and the net carrying amount of the old debt should be reported as a deferred outflow of resources. • This is recognized as a component of interest expense in a systematic and rational manner over the remaining life of the old debt or the life of the new debt, whichever is shorter.

Deferred Outflow of Resources • Even though prepaid expenses are related to a future period, they are still classified as an asset on the Statement of Net Position because the prepayment did not result in a consumption of net position. (cash decreased and prepaid expense increased with no change in net position as a result of the transaction). • GASB 63 is changing the financial statement format.

Deferred Outflows of Resources Before GASB 63 After GASB 63 • Statement of Net Assets: Assets (Liabilities) $ Net Assets • Statement of Net Position: Assets +Deferred Outflows (Liabilities) (Deferred Inflows) $Net Position Note: This format is for government-wide financial statements and for proprietary funds.

Deferred Outflows of Resources Before GASB 63 After GASB 63 • Balance Sheet Assets = Liabilities + Fund Balance • Balance Sheet Assets +Deferred Outflows = Liabilities +Deferred Inflows +Fund Balance Note: This format is for governmental funds.

Accounts Payable • Year end review of accounts payable: • Determine if all prior year accounts have been cleared out. • If accounts still remain, determine if the payable is still valid. • Determine if payables go to outside sources such as vendors. • If payable is for indirect costs, these payments need to moved to “due to or interfund accounts.”

Wages Payable and Payroll Liabilities • Wages payable and payroll liabilities seem to be one of the most difficult to test from auditor’s perspective. • Wages payable and payroll liabilities do not always get the attention they require. • This process is not just a year-end activity.

Wages Payableand Payroll Liabilities • Items to review throughout the year, before year end: • Are payroll liabilities clearing out when paid? • These need to be reviewed monthly • Ending balances need to reflect only the amounts still owed to outside sources. • Any outstanding balances need to be researched and cleaned up. • Are old/inactive funds still reflecting wages payable or payroll clearing account balances? • These need to be researched and cleaned up.

Wages Payableand Payroll Liabilities • Year end processes: • Review all summer payrolls for proper recording. • This includes the main summer runs for the 9 month employees as well as any extra items such as annual leave, stipends, subs, etc. • Are all amounts reported in wages payable? • These should not be reducing cash. • Most common on extra payroll runs.

Compensated Absences • Compensated absences procedures need to line up with policy. • What minimum years of experience is being accrued? • GASB No. 16 requires “compensated absences liabilities to be reported based on the probability of use or payment of certain balances.” • Probable means that the future event is likely to take place. • The Agency needs to determine what is the minimum years of experience for an employee to receive payment of these balances. Each Agency may differ from another. • This should be discussed in the compensated absences’ policy.

Deferred Inflows of Resources • Deferred inflow of resources is an acquisition of net position by the government that is applicable to a future reporting period. • Revenues and other governmental fund financial resources should be recognized in the accounting period in which they become both measurable and available. • When an asset is recorded in governmental fund financial statements but the revenue is not available, the government should report a deferred inflow of resources until such time as the revenue becomes available. • Most common example would be advances in which the only constraint for recognizing the revenue is time. The government has received an asset (cash) with no obligation (liability) other than waiting for the period of availability resulting in an acquisition of fund balance/net position.

Deferred Inflows of Resources • Grant funds received in advanced of meeting eligibility requirements would not be a deferred inflow of resources because the government has a liability that can only be satisfied by performing under the grant agreement or returning the grant advance. • Assets (cash) and liabilities (unearned revenue) increase with no increase in fund balance/net position as a result of the transaction. • Recognition of assets and revenues should not be delayed pending completion of purely routine requirements, such as the filing of claims for allowable costs under a reimbursement program or the filing of progress reports with the provider. The revenue is measurable and available.

Post Employment Benefits • There are two main types: • Pensions • Other post employment benefits such as Health Insurance • Pensions: • GASB 67 and GASB 68 • GASB 67 – • At Plan Level • Enhances note disclosure and RSI at plan level • Effective for periods beginning after June 15, 2013

Post Employment Benefits • Pensions (cont.): • GASB 68 – • At Employer Level • Requires governments providing defined benefit plans to recognize their long-term obligation for pensions benefits as a liability. • Enhances note disclosures and required supplemental information (RSI) • Effective for period beginning after June 15, 2014

Post Employment Benefits • OPEB: • Most plans are due for the actuarial valuation for fiscal year ended 2013. • Data file used by the actuary is required to be reviewed and tested by the auditors.

Fund Balance • Fund Balance is defined as the difference between governmental fund assets and deferred outflows of resources, and liabilities and deferred inflows of resources. • Policies should be established: • Should address the five different components: • Nonspendable – Not in spendable form • Restricted – Constraints that are externally enforceable • Committed – Highest level of decision-making authority places constraints. • Assigned – Constraint established by an approved individual to set aside resources for a particular purpose. • Unassigned – Only reported in general fund and does not meet definition of any above.

Fund Balance • Policy should be established (cont.): • Should address the order of the use of resources: • Restricted versus unrestricted • Committed versus assigned • Changes in classifications • Additions and deletions within the classifications, especially assigned and committed, should be maintained by the agency and provided to the auditors. • These changes are required to be reviewed by the auditor each year.

Revenues • Items to double check: • Classification of revenues – • Federal • State • Local • Federal revenues are properly reported. • These should have a CFDA Number. • Review award letters • Ad valorem taxes • Recording of pension withheld • Recording of 1% sheriff

Expenses • Ensuring proper reporting in accordance with LAUGH guide. • Refunding of bonds: • These should be reported on the books as bond proceeds and payment to escrow agent. • Capital lease payments: • These should be separated as to amounts for principal and amounts for interest. • The bond refunding and capital lease both should be recorded even if you did not physically receive the cash or expend the cash.

Expenses • At the government-wide level of financial statements: • Debt issuance costs except for any portion that is related to prepaid insurance will now be recognized as an expense in the period incurred. • Agencies that have deferred debt issuance cost, the implementation of GASB 65 is to be applied retroactively by restating financial statements, if practical, for all periods presented. If restatement is not practical, the cumulative effect of applying this Statement, if any, should be reported as a restatement of beginning net position or fund balance.

Changes in Audit Process • 2011 Yellow Book revision: • Changes regarding nonaudit services: • Preparation of financial statements • Preparation of note disclosures • GASB 34 conversion entries • Depreciation schedule • Construction in progress listing • Cash to accrual conversion • Risks of auditors’ independence as a result of performing nonauditservices for auditee

Changes in Audit Process • What does this mean to the auditee? • New engagement letter or engagement addendum • Required to describe all nonaudit services. • Auditor required to assess more thoroughly whether management possesses suitable skill, knowledge, or experience to oversee the nonaudit service and to document that assessment. • The individual is not required to possess the expertise to perform or re-perform the service. • Additional documentation of management taking ownership of nonaudit services.

Changes in Audit Process • Examples of additional documentation: • Preparation of financial statements, notes and GASB 34 conversion • Auditee, internally or externally, completing the governmental disclosure checklist • This is not sufficient by itself; therefore, AICPA recommending another individual within the audit firm performing a review. • Auditee reviewing and approving the audit adjustments. • Depreciation schedule: • Auditee providing list of additions, which should include the useful life of each item, and list of deletions.

Catch My Drift? Basic Bookkeeping Practices