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EX C LE SI O R

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GASB 34:What Are Your Options?

Presenter for the Office of the State Comptroller

John Kelley, CPA

September 2001

H. Carl McCall, ComptrollerPatricia Lamb McCarthy, Deputy Comptroller

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GASB 34’s GoalTo answer key questions:

Did financial position improve or deteriorate?

Were this year’s revenues sufficient to pay for services?

What’ s the overall cost of services?

How were programs financed-revenues, fees, grants?

How much is invested in capital assets?

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GASB 34’s Major Changes

A second set of financial statements (Government-wide statements) using different accounting rules, including reporting depreciation and infrastructure.

A letter (Management’s Discussion and Analysis) explaining what happened.

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GASB 34 Implementation Phases

Implement Retroactive

Phase GASB 34 in Infrastructure by

Years Beginning After June 15

1 2001 2005

2 2002 2006

3 2003 Optional

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GASB 34 Revenue CalculationTotal revenues (980 account) for all funds $_______

(except internal service)*

Minus: Interfund transfer revenues) (______)

(account 5031

Minus: Other financing sources (______)

(borrowings, sale of land, etc.)

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GASB 34 Revenue Calculation(Continued)Minus: Extraordinary items

(______)

(GASB 34, paragraph 53) (Disaster Aid, etc.)

Total revenues for first year ending after $_______

6/15/99

If Over $100 Million = Phase 1

If $10 – 100 Million = Phase 2

If Under $10 Million = Phase 3

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Implementation Phases In NYS 1 2 3 Total

Counties 25 31 1 57

Cities 5 46 10 61

Schools 19 467 220 706

Towns 7 58 867 932

Villages 0 20 533 553

Fire Districts 0 0 858 858

Total 56 622 2,489 3,167

2% 20% 78% 100%

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If FY ends June 30- Nov. 30 First Add Year RetroactivePhase Affected is Infrastructure by

1 2001-02 2005-06

2 2002-03 2006-07

3 2003-04 Optional

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If FY ends December 31 First Add Year RetroactivePhase Affected is Infrastructure by

1 2002 2006

2 2003 2007

3 2004 Optional

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If FY ends Jan. 31 -May 31 First Add Year RetroactivePhase Affected is Infrastructure by

1 2002-03 2006-07

2 2003-04 2007-08

3 2004-05 Optional

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GASB 34 Core Financial Reporting

1. Government-wide Financial Statements2. Fund Financial Statements3. Notes to Financial Statements4. Required Supplemental Information

• Management’s Discussion and Analysis (MD&A)

• Budgetary Comparison Statement• Infrastructure Data (only if modified

approach is used – no depreciation)

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What is OSC policy ?

OSC collects only fund level information in the legally required annual financial report.

OSC encourages local governments to implement GAAP (generally accepted accounting principles), while recognizing that full implementation may not always be cost beneficial.

Local governments need to do a cost benefit analysis. This involves the governing board, chief fiscal officer, and other officials.

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Financial Reporting Issues

Full implementation of GASB 34 is needed

to meet GAAP reporting and to get a “clean” (unqualified) opinion on audited financial statements. May affect bond rating.

Federal Single Audit Act is triggered when governments expend more than $300,000 of federal money.

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What It Means To You

A cost benefit analysis involves the

governing board, chief fiscal officer and department heads.

Can you do it with existing staff?

What outside help do you need?

What records do you have?

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Capital Assets Must Be Reported

Land, buildings and equipment.

Infrastructure (roads and bridges and sewer and water lines, etc.)

Capitalization thresholds need to be set.

What are repairs versus improvements?

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Capitalization Thresholds Used by NYS for

Equipment1980’s 15,000*

1990’s 25,000

2000’s ?

*cars under $15,000 weren’t reported

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Capitalization Thresholds

GAAP thresholds can be different for:

Different types of assets

Existing assets

Newly acquired assets

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Capitalization ThresholdsAre different for:

Inventory Control

Insurance

Legal Requirements (e.g. Federal Common Rule $5,000)

Financial Reporting (GAAP)

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Buildings and EquipmentMust Be Depreciated

Historical Cost – can be estimated

Salvage Value- could be zero

Useful Life- period of probable usefulness (Local finance Law 11.00

Age of Asset – can be estimated

Depreciation Method –straight-line

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Infrastructure – “Depreciation Expense”

Options

Report depreciation expense in the government-wide statements.

(Note: Depreciation isn’t budgeted or reported in the fund financial statements; i.e.; the general fund and other governmental funds.)

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Infrastructure – “Depreciation Expense”

Options(continued)

OROR Use the “Modified Approach”

(If an Asset Management System is in place that meets certain rules, the money spent to maintain assets serves as a surrogate for depreciation expense.)

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Retroactive (Existing) Infrastructure Options

Phase 3 units can elect to not report it at all. (Report it, if there’s outstanding debt.)

Phase 1 and 2 governments:

- Can delay reporting up to 4 years.

- Can go back to June 30, 1980 only.

- Can limit to “major general”

infrastructure.

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Retroactive (Existing) Infrastructure Options

(Continued)

Can calculate initial capitalization, using deflated current replacement cost to represent estimated historical cost.

Can use bond documents, engineering documents, and capital projects funds expenditures as source documents when estimating historical cost.

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Retroactive (Existing) Infrastructure Options

(Continued)

Can use composite depreciation rates based on groupings of similar assets or classes of dissimilar assets.

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Identifying UndepreciatedCapital Assets

What outstanding debt do you have for capital assets?

Are depreciation expense and principal payments about equal?

Are useful life and period of probable usefulness about equal?

($ Borrowed – principal payments = Outstanding Debt)

(Asset cost – accumulated depreciation = Book Value)

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Land, Buildings and Equipment

Set high capitalization thresholds Use assessment rolls for land and buildings Equipment (vehicles, machinery, equip.) Capitalize large equipment to get started (highway vehicles, buses, fire engines, etc.) Use lower threshold after 34 implementation (GAAFR “no lower than $5,000”)

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Identifying Undepreciated Infrastructure

What infrastructure was acquired since June 30, 1980?

Acquired, significantly reconstructed, or

received significant improvement. Look at outstanding debt. Look for items that aren’t bonded

(CHIPS capital projects)

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Identifying Undepreciated Infrastructure

Look back 10 years to identify CHIPs projects that aren’t fully depreciated.

• Do they have a 10-year useful life?• Are they repairs or improvements?• Are they above your capitalization threshold?

Look back beyond 10 years for significant projects only.

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Interpretation No. 6

“Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.”

Effective date coincides with implementation of Statement No. 34.

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Modified Accrual Basis – Flow of Current Financial Resources

NCGA 4 - Recognize long-term liabilities to the extent that they are "normally expected to be liquidated with expendable available financial resources.”

GASB Int. 6 - Recognize these liabilities to the extent they mature (come due for payment) each period.

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Current vs. Long-Term

Matured portions of the above liabilities should be reported as governmental fund liabilities

Long-term liabilities in GLTDAG

Accumulated money is reported as reserved fund balance

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Reserve for Employee Benefit Accrued Liability

General Municipal Law 6-p.

The purpose of this account is to reserve funds for the payment of any accrued employee benefit due to an employee upon termination of service.

This reserve fund may be established by a majority vote of the board and is funded by budgetary appropriations and such other reserves and funds that may be legally appropriated.

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Statement No. 33

Accounting and Financial Reporting for Nonexchange Transactions

Nonexchange transaction – a government gives (or receives) value without directly receiving (or giving) equal value in return (e.g., property taxes)

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Statement No. 33

Exchange transaction each party receives and gives up essentially equal values (e.g., sale of merchandise)

The issue is the timing of recognition of nonexchange transactions

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Statement No. 33 - Classes of Nonexchange Transactions

Derived tax revenues (e.g., income taxes, sales tax)

Imposed nonexchange revenues(e.g., property taxes, fines)

Government-mandated nonexchange revenues(e.g., Federal & State mandated programs)

Voluntary nonexchange transactions (e.g., certain grants and private donations)

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Statement No. 33 - Revenue Recognition

Derived tax revenues – when underlying exchange transaction has occurred (e.g., income was earned, sale was made)

Imposed nonexchange revenue – when use of resources is permitted (e.g., period for which property taxes are levied)

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Statement No. 33 – Revenue Recognition

Government-mandated revenues and voluntary nonexchange transactions – when applicable eligibility requirements are met (e.g., for certain grants when expenditure is incurred)

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Statement No. 33 – Revenue Recognition

Availability criterion – must be met for all non-exchange transactions

Receivables for Federal and State grants

Effective date – FYE June 30, 2001

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Implementation Process

For governmental funds, fund financial statements (modified accrual basis) will continue to be prepared as they are today

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Implementation Process

To prepare government-wide statements, combine funds and account groups and convert modified accrual to accrual

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Implementation Process

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Trial balance with adjusting entries

Conversion to accrual will be in subsidiary records or workpapers only

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Implementation Process

Books for subsequent year will be opened with modified accrual balances from prior year

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To Convert From Modified Accrual to Full Accrual

Report revenue that is not yet available.

Report expense for supplies inventories and prepaid items (insurance) based on usage (rather than when outlays are made). Report supplies inventories and prepaid items (insurance) as assets in statement of net assets.

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To Convert From ModifiedAccrual to Full Accrual

Remove proceeds of long-term debt from operating statement, and report liability in statement of net assets.

Report interest expense when incurred (rather than when paid). Report accrued liability in statement of net assets.

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To Convert From ModifiedAccrual to Full Accrual

Remove debt service principal and interest outlays from operating statement, and reduce liabilities for debt (principal) and accrued interest payable in statement of net assets.

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To Convert From ModifiedAccrual to Full Accrual

Remove outlays from operating statement and replace with expense for certain operating liabilities (compensated absences, claims and judgements, landfill closure and post closure costs, special termination benefits). Report liability in statement of net assets.

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To Convert From Modified Accrual to Full Accrual

Remove capital outlays from operating statement. Report as capital assets in statement of net assets.

Report depreciation expense in statement of activities and accumulated depreciation in statement of net assets.

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To Convert From Modified Accrual to Full Accrual

Remove sale of assets (revenue) from operating statement and replace with gain/loss on sale of assets in statement of activities.

Remove asset and accumulated depreciation from statement of net assets.

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Internet Resourcesgasb.org Governmental Accounting Standards Board

nasact.org National Association of State Auditors, Comptrollers and Treasurers

gfoa.org Government Finance Officers Association

osc.state.ny.us NYS Comptroller’s Office

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GASB Lite Use a least cost implementation strategy

There are many options in implementing GASB 34. If it doesn’t make a big difference, don’t do it.

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OSC Plan

To provide guidance on implementation issues.

Change NYUSA to facilitate GASB 34 Reporting

Questions? Contact OSC Regional Offices.