Update on Recent GASB/SAS Pronouncements

1. Update on Recent GASB/SAS Pronouncements GFOAz Training Governmental Accounting 101 January 11, 2008 Presented by Corey Arvizu, CPA Heinfeld, Meech & Co.

2. Communication of Audit Matters • New audit standard - Communicating Internal Control Related Matters Identified in an Audit – SAS No. 112 • New terminology for audit findings • “Harmonization” of international, public company, and government audit standards • Threshold for reporting items has been lowered • Must be issued within 60 days of report release date • Effective for December 31, 2006 and later audits

3. Communication of Audit Matters

4. Communication of Audit Matters – Examples of Potential Deficiencies • Lack of segregation of duties • The identification by the auditor of a material adjustment • In general ledger or supporting schedules • Lack of controls when the auditor drafts the financial statements • Fraud involving cash • Numerous exceptions noted during controls test work

5. Communication of Audit Matters – Auditor Drafting Financial Statements • Internal control must extend beyond the general ledger • Auditor cannot be part of a client’s internal control • Client’s designation of individual to oversee service is not a control • Auditor’s drafting of statements does not cause a control deficiency • Contracting of accounting services and statement preparation to a third-party does not relieve management of its responsibilities

6. Communication of Audit Matters – Demonstrating and Documenting Controls when the Auditor Drafts the Financial Statements • Agree financial statements to your general ledger and schedules • Use a financial statement checklist • Create a written procedure as to your review of the draft • Ask questions • Remember - client is not expected to be able to replicate auditor’s work

7. Communication of Audit Matters – Discussions with the Governing Body and Other • Understand the language in the auditors reports • Material weakness doesn’t result in a qualified opinion? • Cost considerations for any internal control must be considered • Have auditors attend a Board meeting • Develop an audit committee

8. SAS 112 CASE STUDIES

9. GASB –Net Assets Restricted by Enabling Legislation • Intended to prevent blanket determinations • External party can compel the government to abide by the restriction • Matter of professional judgment • Net assets restricted by enabling legislation should be disclosed in the notes

10. GASB – Other Postemployment Benefits • Implementation follows GASB No. 34 format – phase one in fiscal year 2008 • Perform an actuarial study of OPEB prior to required implementation • Study may be performed up to two years prior to the beginning of the implementation year • Don’t forget about implicit rate subsidy element of the pronouncement • Plan and budget for costs of actuarial study • Ensure governing body and other parties are aware of the financial impact of benefits plans

11. GASB – Other Postemployment Benefits

12. GASB – Sales and Pledges of Receivables • Assumes all “sales” transactions are borrowings, or pledges, unless certain criteria are satisfied • Control based checklist determines sale of receivable and revenues • Revenue from sale should typically be recognized over duration of agreement • Note disclosure required for pledged revenues • Effective for fiscal year 2008

13. GASB – Sales and Pledges of Receivables • Example disclosure for pledged revenues: • Note 10: Utility Revenues Pledged • The City has pledged future water customer revenues, net of specified operating expenses, to repay $5.7 million in water system revenue bonds issued in December 2003. Proceeds from the bonds provided financing for the construction of the 17th Street filtration plant. The bonds are payable solely from water customer net revenues and are payable through 2028. Annual principal and interest payments on the bonds are expected to require less than 22 percent of net revenues. The total principal and interest remaining to be paid on the bonds is $8,849,250. The total principal and interest paid for the current year and total customer net revenues were $470,250 and $2,612,500.

14. GASB – Intangible Assets • Issues addressed in draft - • Characteristics • Classified as capital assets • When to capitalize • Internally generated software • Possible indefinite useful lives for certain assets • Retroactive implementation • New attention and focus on water rights and reporting as assets • Effective for fiscal year 2010

15. GASB – Fund Balance Reporting • GASB position and arguments - • Most utilized element of governmental financial information • Users want to clearly identify discretionary resources • Governments report reserved fund balance that should be unreserved • Provide method to categorize components of fund balance • Fiscal year 2010 effective period?

16. GASB – Fund Balance Reporting

17. GASB – Fund Balance Reporting, Definitions • Expect narrow definition of special revenue funds • Enhances definitions of debt service and capital projects funds • Encumbrances must be appropriated to be reported as reserved • Term “legally limited” will likely appear as additional guidance

18. Expenditure Limitation Reports • Exclusions exceed expenditures at the fund level • Not all expenditures/expenses included, in particular other financing uses • Interest revenues claimed as both exclusion and a carryforward • Special district do not qualify as “political subdivisions” • Budget for internal service expenses and inter-departmental charges if looking to go “home rule”

19. Audit Committees • Growing and increasing emphasis on the importance of audit committees for governments • Sarbanes-Oxley “creep” to governments • Accounting profession encouraging more responsibility by auditees • Practical means for the governing board to provide oversight of internal controls and the financial reporting process • Our firm has begun including the evaluation of audit committees in management letters

20. Resources for Audit Committees • AICPA - Audit Committee Toolkit for Government Organizations: www.aicpa.org/AudCommCtr/ • GFOA - Recommended Practice – Audit Committees: www.gfoa.org/services/rp/caafr.shtml • The Institute of Internal Auditors – model audit committee charter • Maricopa County Community College District – Audit and Finance Committee Resource Guide

21. Other Topics • HURF reporting and related requirements of allowable expenditures • Street and highways certification • Electronic submission of CAFR to GFOA • IRS fringe benefits audits • Audit committees for governmental • Federal study of Single Audit quality • New risk assessment standards for auditors

22. Thank You! Corey Arvizu (520) 742-2611 ext. 101 carvizu@heinfeldmeech.com