The Great Imbalance Understanding GASB 34 Statement of Net Assets & Balance Sheet
Two Statements With Different Focuses <ul><li>Statement of Net Assets </li></ul><ul><ul><li>Entity as a whole </li></ul></...
Two Statements With Different Focuses <ul><li>Fund Statements </li></ul><ul><ul><li>All major funds part of the FS </li></...
Users of the Financial Statements <ul><li>Investors and rating agencies – Stat Section </li></ul><ul><ul><li>Focus on hist...
Users of the Financial Statements <ul><li>Citizens </li></ul><ul><ul><li>MD&A and General Fund </li></ul></ul><ul><li>Audi...
Enterprise Funds <ul><li>Enterprise Funds still Statement of Net Assets </li></ul><ul><li>Prepared on same basis as the en...
Governmental Funds <ul><li>Balance Sheet not Net Assets </li></ul><ul><li>Major Funds Individually presented </li></ul><ul...
Statement Common Audit Reporting Deficiencies <ul><li>Net Asset Classifications </li></ul><ul><ul><li>Deferred Charges </l...
Statement Common Audit Reporting Deficiencies <ul><li>Receivables – Same Amount on Both Statements </li></ul><ul><li>Allow...
The Dominance of Capital Assets <ul><li>Capital Assets will be the dominant asset category in the governmental activities ...
Uniqueness of Infrastructure <ul><li>Infrastructure will be the dominant asset category for most states, cities and many c...
Nature of Infrastructure <ul><li>No salvage value </li></ul><ul><li>No ability to resell </li></ul><ul><li>Typically gener...
Nature of Infrastructure <ul><li>For majority of governments infrastructure is </li></ul><ul><ul><li>An estimate </li></ul...
Fixed Asset Implications <ul><li>Magnitude of Fixed Assets can create a large Net Asset balance regardless of the financia...
Capital Asset Audit Issues <ul><li>Lack of Comparability </li></ul><ul><ul><li>Estimated Cost vs. Actual Cost </li></ul></...
Categories of Net Assets <ul><li>Three Categories of Net Assets </li></ul><ul><ul><li>Invested in Capital Assets-Net of Re...
Calculating Net Asset Categories <ul><li>Financial statement categories should be consistent with the Net Asset Categories...
Net Asset Categories <ul><li>Unrestricted Net Assets is a general indicator of financial strength & flexibility. </li></ul...
Analyzing Unrestricted Net Assets <ul><li>An entity’s Unrestricted Net Assets are $0. </li></ul><ul><li>UNA consists of $1...
Net Asset Audit Issues <ul><li>Residual of Transactions </li></ul><ul><li>Most Common GASB 34 Required Adjustments </li></...
Analyzing Financial Health <ul><li>Financial Position vs. Financial Condition </li></ul><ul><li>Statement of Net Assets an...
Financial Health Audit Concerns <ul><li>Pre GASB 34 </li></ul><ul><ul><li>Liquidity and Fund Balance Reserves </li></ul></...
Fund Statements <ul><li>Governmental Funds Fund Balances are a key indicator of short term financial position and are most...
Warning Signs in the Fund Statements <ul><li>Large number of inter-fund balances </li></ul><ul><ul><li>GASB 34 “repaid wit...
Warning Signs  (continued) <ul><li>Short term (cash flow) borrowings </li></ul><ul><li>Large subsidies between operations ...
Fund Statements Common Audit Concerns <ul><li>Magic of Fund Accounting, Subsidies & Transfers </li></ul><ul><li>Collectibi...
For the Future <ul><li>Entity-Wide will include increasingly more accruals that will require future swag predictions </li>...
For the Future  (continued) <ul><li>Upcoming GASB Statement on the effect of enabling legislation on Net Asset categories....
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The Great Imbalance

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  • Austin-95%, Lubbock 80%, Dallas
  • Carrollton’s 2003 Net Assets increased by $18 million or 15% of total expenses.
  • Dallas County $56 million negative b/c road bonds are included.
  • Some governments have non-major funds equal to 75 to 80% of total.
  • Footnote disclosure on schedule of future payments for some of the larger accruals.
  • The Great Imbalance

    1. 1. The Great Imbalance Understanding GASB 34 Statement of Net Assets & Balance Sheet
    2. 2. Two Statements With Different Focuses <ul><li>Statement of Net Assets </li></ul><ul><ul><li>Entity as a whole </li></ul></ul><ul><ul><li>Two columns and a total (Primary Government) </li></ul></ul><ul><ul><li>Full Accrual with elimination of interfund balances </li></ul></ul><ul><ul><li>Residual balances of ISF allocated to appropriate Column </li></ul></ul><ul><ul><li>Equity divided by nature of underlying assets </li></ul></ul><ul><ul><ul><li>Capital, net of related debt </li></ul></ul></ul><ul><ul><ul><li>Restricted </li></ul></ul></ul><ul><ul><ul><li>Unrestricted </li></ul></ul></ul>
    3. 3. Two Statements With Different Focuses <ul><li>Fund Statements </li></ul><ul><ul><li>All major funds part of the FS </li></ul></ul><ul><ul><li>Non major Funds shown in aggregate only </li></ul></ul><ul><ul><li>Individual Internal Service Funds not part of the major funds (reported by fund type) </li></ul></ul><ul><ul><li>Individual Fiduciary Funds not part of major funds (reported by fund type) </li></ul></ul><ul><ul><li>Component Units, if any not part of the FS </li></ul></ul><ul><ul><li>No interfund eliminations </li></ul></ul><ul><ul><li>Enterprise Funds still same Basis and Name </li></ul></ul>
    4. 4. Users of the Financial Statements <ul><li>Investors and rating agencies – Stat Section </li></ul><ul><ul><li>Focus on historical sustained revenue growth </li></ul></ul><ul><ul><li>Strong financial reserves </li></ul></ul><ul><ul><li>Moderate debt levels and coverage </li></ul></ul><ul><li>Council </li></ul><ul><ul><li>Budget – RSI </li></ul></ul><ul><li>Budget </li></ul><ul><ul><li>Statement of Activities is the starting point for performance measures </li></ul></ul>
    5. 5. Users of the Financial Statements <ul><li>Citizens </li></ul><ul><ul><li>MD&A and General Fund </li></ul></ul><ul><li>Auditors </li></ul><ul><ul><li>Everything </li></ul></ul><ul><ul><li>Opinion units & materiality </li></ul></ul>
    6. 6. Enterprise Funds <ul><li>Enterprise Funds still Statement of Net Assets </li></ul><ul><li>Prepared on same basis as the entity-wide </li></ul><ul><li>Should be very few reconciling differences between the entity-wide and fund statements </li></ul><ul><ul><li>Internal Service Funds </li></ul></ul>
    7. 7. Governmental Funds <ul><li>Balance Sheet not Net Assets </li></ul><ul><li>Major Funds Individually presented </li></ul><ul><li>Non-major shown in the aggregate </li></ul><ul><li>Modified Accrual Basis of Accounting </li></ul><ul><li>Based on Current Funds Flows </li></ul><ul><li>Fund Balance Reservations reflect liquidity constraints not restrictions to purpose </li></ul>
    8. 8. Statement Common Audit Reporting Deficiencies <ul><li>Net Asset Classifications </li></ul><ul><ul><li>Deferred Charges </li></ul></ul><ul><ul><li>Unspent Proceeds </li></ul></ul><ul><ul><li>Negative Unrestricted Net Assets </li></ul></ul><ul><li>Reserves do not Represent Restricted Net Assets </li></ul><ul><li>Designations </li></ul>
    9. 9. Statement Common Audit Reporting Deficiencies <ul><li>Receivables – Same Amount on Both Statements </li></ul><ul><li>Allowances More Meaningful </li></ul><ul><li>Long-Term Liabilities </li></ul>
    10. 10. The Dominance of Capital Assets <ul><li>Capital Assets will be the dominant asset category in the governmental activities column for most states, cities and many counties </li></ul><ul><ul><li>Carrollton TX, 93% of all Net Assets are Capital related. </li></ul></ul><ul><ul><li>State of Pennsylvania, 94% of all Net Assets are Capital related </li></ul></ul><ul><ul><li>Orange County, CA, 78% of all Net Assets are Capital related. </li></ul></ul>
    11. 11. Uniqueness of Infrastructure <ul><li>Infrastructure will be the dominant asset category for most states, cities and many counties </li></ul><ul><ul><li>Carrollton TX, CV of Infrastructure is $200 million or 83% of all Fixed Assets. </li></ul></ul><ul><ul><li>State of Pennsylvania, CV of Infrastructure is $13.6 billion or 81% of all Fixed Assets </li></ul></ul><ul><ul><li>Orange County, CA, CV of Infrastructure is $833 million or 60% of Fixed Assets </li></ul></ul>
    12. 12. Nature of Infrastructure <ul><li>No salvage value </li></ul><ul><li>No ability to resell </li></ul><ul><li>Typically generates no direct revenue but requires significant resources to maintain </li></ul><ul><li>Often replaced a node at a time </li></ul><ul><li>Size, magnitude and existence of Public Works records make creation and maintenance of detailed accounting records impractical </li></ul>
    13. 13. Nature of Infrastructure <ul><li>For majority of governments infrastructure is </li></ul><ul><ul><li>An estimate </li></ul></ul><ul><ul><li>Incomplete </li></ul></ul><ul><ul><ul><li>Pre 1980 assets </li></ul></ul></ul><ul><ul><ul><li>Capitalize only major systems </li></ul></ul></ul><ul><ul><ul><li>Four additional years for retroactive restatement of infrastructure </li></ul></ul></ul>
    14. 14. Fixed Asset Implications <ul><li>Magnitude of Fixed Assets can create a large Net Asset balance regardless of the financial health of the entity. </li></ul><ul><li>Relatively small percentage changes in Infrastructure can create a relatively large change in Net Assets. </li></ul><ul><li>Total Net Assets comparability between even similar governments will be extremely difficult if not downright deceiving. </li></ul>
    15. 15. Capital Asset Audit Issues <ul><li>Lack of Comparability </li></ul><ul><ul><li>Estimated Cost vs. Actual Cost </li></ul></ul><ul><ul><li>All Infrastructure vs. Post 1989 </li></ul></ul><ul><li>Future Replacement Costs Can Now Be Analyzed </li></ul><ul><li>Healthy Net Assets vs. Hidden Maintenance Costs </li></ul><ul><li>County Issues – Negative Unrestricted Net Assets </li></ul><ul><li>Retirements Not Consistently Recorded </li></ul>
    16. 16. Categories of Net Assets <ul><li>Three Categories of Net Assets </li></ul><ul><ul><li>Invested in Capital Assets-Net of Related Debt </li></ul></ul><ul><ul><li>Restricted </li></ul></ul><ul><ul><li>Unrestricted </li></ul></ul><ul><li>Invested in Capital Assets-Net of Related Debt </li></ul><ul><ul><li>All capital debt is not in this category if you do not continue to “own” the related asset. </li></ul></ul><ul><ul><li>Unexpended proceeds on capital debt is in the restricted categories </li></ul></ul>
    17. 17. Calculating Net Asset Categories <ul><li>Financial statement categories should be consistent with the Net Asset Categories </li></ul><ul><li>Detail in Financial Statements should be consistent with the Net Asset calculation </li></ul><ul><li>Restricted balances for the GA column are not nearly as well defined as for the BTA column. </li></ul><ul><li>There may be inconsistencies between columns and asset & liabilities vs. Net Asset category. </li></ul>
    18. 18. Net Asset Categories <ul><li>Unrestricted Net Assets is a general indicator of financial strength & flexibility. </li></ul><ul><li>It is not an indicator of liquidity. </li></ul><ul><li>While negative Unrestricted Net Assets is generally bad, there are exceptions. An analysis of unrestricted could improve understanding. </li></ul>
    19. 19. Analyzing Unrestricted Net Assets <ul><li>An entity’s Unrestricted Net Assets are $0. </li></ul><ul><li>UNA consists of $10 million each of assets and liabilities. </li></ul><ul><li>Would your opinion of UNA change if: </li></ul><ul><ul><li>Assets were all cash and investments? </li></ul></ul><ul><ul><li>Assets were all short term receivables? </li></ul></ul><ul><ul><li>Assets were mostly long term receivables? </li></ul></ul><ul><ul><li>Liabilities were all trade payables? </li></ul></ul><ul><ul><li>Liabilities were all long-term in nature (OPEB, landfill, compensated absences, long term bonds etc)? </li></ul></ul>
    20. 20. Net Asset Audit Issues <ul><li>Residual of Transactions </li></ul><ul><li>Most Common GASB 34 Required Adjustments </li></ul><ul><li>Fund Balance – Short Term Liquidity vs. Net Assets (Long Term Prospects) </li></ul><ul><li>Comp. Absences, OPEB, Net Pension Obligation, W/C & Health Internal Service Funds </li></ul><ul><li>Importance of MD&A </li></ul>
    21. 21. Analyzing Financial Health <ul><li>Financial Position vs. Financial Condition </li></ul><ul><li>Statement of Net Assets and Balance Sheet focus on Financial Position. </li></ul><ul><li>Even with this narrower focus, understanding the composition of Net Assets and Fund Balance is critical to understanding FP. </li></ul><ul><li>Remember, the real wealth of a government is not on any balance sheet or Statement of Net Assets-it is our ability to tax and generate revenue and the overall health and direction of our economy (Financial Condition). </li></ul>
    22. 22. Financial Health Audit Concerns <ul><li>Pre GASB 34 </li></ul><ul><ul><li>Liquidity and Fund Balance Reserves </li></ul></ul><ul><ul><li>GFOA Minimum Fund Balance </li></ul></ul><ul><li>Post GASB 34 </li></ul><ul><ul><li>Full Accrual Effect – OPEB, Risk Funds, NPO, Comp. Absences </li></ul></ul><ul><ul><li>No GFOA Minimums </li></ul></ul><ul><ul><li>Unrestricted can be misleading </li></ul></ul><ul><li>Bottom Line </li></ul><ul><ul><li>Tax Capacity </li></ul></ul><ul><ul><li>Debt Capacity </li></ul></ul>
    23. 23. Fund Statements <ul><li>Governmental Funds Fund Balances are a key indicator of short term financial position and are most closely tied to the budget. </li></ul><ul><li>Understanding the flow between funds and the distinction between Reserves and Designations is critical to understanding the funds. </li></ul><ul><li>Remember the choice of major funds can both illuminate or conceal. </li></ul><ul><li>Transactions and balances between funds can also illuminate or conceal. </li></ul>
    24. 24. Warning Signs in the Fund Statements <ul><li>Large number of inter-fund balances </li></ul><ul><ul><li>GASB 34 “repaid within a reasonable period” is vague and subject to interpretation </li></ul></ul><ul><ul><li>No distinction between “due to/from and advances-GASB 34 never uses the terms </li></ul></ul><ul><li>Large receivables in the General Fund </li></ul><ul><li>Funds whose only source of money is transfers </li></ul><ul><li>Small overall cash & investment balances </li></ul>
    25. 25. Warning Signs (continued) <ul><li>Short term (cash flow) borrowings </li></ul><ul><li>Large subsidies between operations </li></ul>
    26. 26. Fund Statements Common Audit Concerns <ul><li>Magic of Fund Accounting, Subsidies & Transfers </li></ul><ul><li>Collectibility of Due To/Due Froms </li></ul><ul><li>Disclosing Purpose of Significant Nonrecurring Transfers </li></ul><ul><li>Collapsing Funds into the General Fund </li></ul>
    27. 27. For the Future <ul><li>Entity-Wide will include increasingly more accruals that will require future swag predictions </li></ul><ul><li>Entity-Wide will have increasing volatility as estimates have to be adjusted from year to year. </li></ul><ul><li>Increasing need for third party experts (actuaries, landfill engineers, infrastructure engineers etc.) </li></ul><ul><li>Understanding the entity’s underlying cash flows (near term vs. long term) will be critical. </li></ul>
    28. 28. For the Future (continued) <ul><li>Upcoming GASB Statement on the effect of enabling legislation on Net Asset categories. </li></ul><ul><li>Ongoing GASB project on Fund Balance disclosures. </li></ul>

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