Accountants’ Handbook Special Industries and Special Topics 10th Edition_8

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Nội dung Text: Accountants’ Handbook Special Industries and Special Topics 10th Edition_8

32.7 NEW DISCLOSURE REQUIREMENTS 32 81 • Exhibit 32.9 Continued.
32 82 STATE AND LOCAL GOVERNMENT ACCOUNTING • (b) REQUIRED NOTE DISCLOSURES ABOUT CAPITAL ASSETS AND LONG-TERM LIA- BILITIES. Details should be disclosed in the notes about capital assets and long-term liabili- ties of the primary government, divided into their major classes and between those associated with governmental activities and those associated with business-type activities. Capital assets not being depreciated should be disclosed separately. The following information should be dis- closed about major classes of capital assets: • Beginning- and end-of-year balances, with accumulated depreciation presented separately from acquisition cost • Capital acquisitions • Sales or other dispositions • Current depreciation expense, including the amounts charged to each of the functions in the statement of activities Collections of works of art, historical treasures, and similar assets not capitalized should be described and the reasons they are not capitalized should be given. Disclosures as above should be given for collections capitalized. The following information should be disclosed about long-term debt and other long-term li- abilities, such as compensated absences, claims, and judgments: • Beginning- and end-of-year balances • Increases and decreases, presented separately • The portions of each due within one year • The governmental funds that typically have been used to liquidate other long-term liabilities Whether to make similar disclosures about capital assets and long-term liabilities of dis- cretely presented component units is a matter of professional judgment, depending on each in- dividual component unit’s signiﬁcance to the total of all discretely presented component units and the component unit’s relationship with the primary government. (c) DISCLOSURES ABOUT DONOR-RESTRICTED ENDOWMENTS. The following in- formation should be disclosed about donor-restricted endowments: • Net appreciation on investments of donor-restricted endowments available for authorization for expenditure by the governing board and how it is reported in net assets • State law about the ability to spend net appreciation • The policy for authorizing and spending investment income, such as a spending-rate or total- return policy (d) SEGMENT INFORMATION. Segment information should be disclosed by governments that report enterprise funds or that use enterprise fund accounting and reporting standards. For purposes of this disclosure, a segment is an identiﬁable activity (or grouping of activities) re- ported as or within an enterprise fund or another stand-alone entity for which one or more bonds or other debt instruments (such as certiﬁcates of participation) outstanding, with a rev- enue stream pledged in support of that debt. (Such disclosure is not required for activities whose only outstanding debt is conduit debt for which the government has no obligation be- yond the resources provided by related leases or loans, and for individual funds reported as major funds.) In addition, the activity’s revenues, expenses, gains and losses, assets, and liabil- ities are required to be accounted for separately. (The requirement for separate accounting should be imposed by an external party; for example, accounting and reporting requirements
32.8 REPORTING COMPONENT UNITS 32 83 • commonly are set forth in bond indentures.) Disclosure requirements for each segment should be met by identifying the types of goods and services provided and by presenting condensed ﬁ- nancial information in the notes, including the elements in the three subbullets under the sec- ond bullet below: • The kind of goods or services provided by the segment • A condensed statement of net assets: • Total assets, distinguishing between current assets, capital assets, and other assets, with amounts receivable from other funds or components reported separately • Total liabilities, distinguishing between current and long-term amounts, with amounts payable to other funds or components reported separately • Total net assets, distinguishing between restricted net assets––with expendable and non- expendable components reported separately, unrestricted net assets, and amounts in- vested in capital assets, net of related debt • A condensed statement of revenues, expenses, and changes in net assets: • Operating revenues, by major source • Operating expenses, with depreciation and amortization identiﬁed separately • Operating income or loss • Nonoperating revenues and expenses, separately reporting major revenues and expenses • Capital contributions and additions to permanent and term endowments • Special and extraordinary items • Transfers • Change in net assets • Beginning net assets • Ending net assets • A condensed statement of cash ﬂows: • Net cash provided by: • Operating activities • Noncapital ﬁnancing activities • Capital and related ﬁnancing activities • Investing activities • Beginning cash and cash equivalent balances • Ending cash and cash equivalent balances Whether to provide segment information about component units that use enterprise fund ac- counting and reporting standards is a matter of professional judgment, depending on each indi- vidual component unit’s signiﬁcance to the total of all discretely presented component units and the component unit’s relationship with the primary government. Governments are encouraged to present a statement of activities disaggregated for their multiple-function enterprise funds beyond that required for segment reporting. Special- purpose governments in only business-type activities are encouraged to do the same. 32.8 REPORTING COMPONENT UNITS When GASB Statement No. 34 becomes effective, discrete presentation of component unit ﬁ- nancial information should be given in the statement of net assets and the statement of activities. However, information on component units that are ﬁduciary in nature should be included only in
32 84 STATE AND LOCAL GOVERNMENT ACCOUNTING • the fund ﬁnancial statements, together with the primary government’s ﬁduciary funds. Informa- tion required by paragraph 51 of GASB Statement No. 14 about each major component unit can be given by: • Presenting each major component unit other than those that are ﬁduciary in nature in separate columns in the statements of net assets and activities, • Including combining statements of major component units (with nonmajor component units aggregated in a single column) with the reporting entity’s basic statements after the fund ﬁnan- cial statements, or • Presenting condensed ﬁnancial statements in the notes. The “aggregated total” component unit information, as discussed in paragraph 14 of GASB Statement No. 14, should be the entity totals derived from the component units’ statements of net assets and activities. (Because component units that are engaged in only business-type ac- tivities are not required to prepare a statement of activities, this disclosure should be taken from the information provided in the component unit’s statement of revenues, expenses, and changes in fund net assets.) If component unit information is presented in the notes, the following should be included: • Condensed statement of net assets: • Total assets, distinguishing between capital assets and other assets. Amounts receivable from the primary government or from other component units should be reported separately. • Total liabilities, distinguishing between long-term debt and other liabilities. Amounts payable to the primary government or to other component units should be reported separately. • Total net assets, distinguishing between restricted, unrestricted, and amounts invested in capital assets net of related debt • Condensed statement of activities: • Expenses by major functions and for depreciation expense if separately reported • Program revenues by type • Net program expense or revenue • Tax revenues • Other nontax general revenues • Contributions to endowments and permanent fund principal • Special and extraordinary items • Change in net assets • Beginning net assets • Ending net assets The nature and amount of signiﬁcant transactions with the primary government and other component units should be reported in the notes for each component unit. 32.9 REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MD&A In addition to the information required to be presented as RSI by GASB Statement Nos. 10, 25, and 27, other RSI required to be presented by GASB Statement No. 34 when it becomes effec- tive includes MD&A, budgetary comparison schedules for governmental funds, and information about infrastructure assets reported using the modiﬁed approach (see Section 32.6(b)(1)).
32.9 REQUIRED SUPPLEMENTARY INFORMATION 32 85 • (a) NEW BUDGETARY COMPARISON INFORMATION. When GASB Statement No. 34 becomes effective, budgetary comparison schedules5 should present: (1) the original appropri- ated budgets; (2) the ﬁnal appropriated budgets; and (3) actual inﬂows, outﬂows, and balances, stated on the governmental budgetary basis as discussed in NCGA Statement No. 1, paragraph 154. Separate columns may be provided comparing the original budget amounts with the actual amounts, the ﬁnal budget amounts with the actual amounts, or both. The original budget is the ﬁrst complete appropriated budget, which may be adjusted by reserves, transfers, allocations, supplementary appropriations, and other legally authorized legislative and executive changes made before the beginning of the reporting year. It also includes appropriation amounts auto- matically carried over from prior years by law. The ﬁnal budget is the original budget adjusted by all legally authorized legislative and executive changes whenever signed into law or other- wise legally authorized. Information in a separate schedule or in notes to RSI should be provided that reconciles bud- getary information to GAAP information. Notes to RSI should disclose excesses of expenditures over appropriations in individual funds presented in the budgetary comparison, as discussed in NCGA Interpretation No. 6, paragraph 4, as amended by GASB Statement No. 37. (If the bud- getary comparison information is included in the basic statements, these disclosures should be in the notes to the ﬁnancial statements rather than as notes to RSI.) (b) MODIFIED APPROACH FOR REPORTING INFRASTRUCTURE. A government with eligible infrastructure assets (for subsystems, if any) reported using the modiﬁed approach should present as RSI these schedules derived from the asset management systems: • The assessed condition, based on assessments performed at least every three years, for at least the three most recent complete condition assessments, indicating the dates of the assessments • The estimated annual amount calculated at the beginning of the year to maintain and preserve the assets at or above the condition level established and disclosed by the government com- pared with the amounts actually reported as expense for each of the past ﬁve reporting periods The following should be disclosed with the schedules: • The basis for the condition measurement and the measurement scale used to assess and report condition. For example, a basis could be distresses in pavement surfaces. A scale could range from zero for a failed pavement to 100 for pavement in perfect condition. • The condition level at which the government intends to preserve its eligible infrastructure as- sets reported using the modiﬁed approach. • Factors that signiﬁcantly affect trends in the information reported in the schedules, includ- ing any changes in the basis for the condition measurement, the measurement scale, or the condition measurement methods used. Also to be disclosed is an estimate of the effect of a change in the condition level at which the government intends to preserve eligible infra- structure assets of the estimated annual amount to maintain and preserve the assets for the current period. A government that has asset management systems for infrastructure assets that gather the in- formation required under this subsection but do not use the modiﬁed approach are encouraged to disclose it as supplement information. 5 Governments may elect to report the budgetary comparison information in a budgetary comparison statement as part of the basic ﬁnancial statements rather than as RSI. Such an additional statement should include the same items of information that this section requires to be displayed or disclosed.
32 86 STATE AND LOCAL GOVERNMENT ACCOUNTING • 32.10 BASIC FINANCIAL STATEMENTS REQUIRED FOR SPECIAL-PURPOSE GOVERNMENTS Special-purpose governments are legally separate entities that are component units as described in Section 32.4(c) or other stand-alone governments, which are legally separate government organiza- tions that (1) do not have separately elected governing bodies and (2) are not component units, plus joint ventures, jointly governed organizations, and pools. A special-purpose government that is engaged in more than one governmental program or that has both governmental and business-type activities should meet the reporting requirements for gov- ernments that are not special-purpose governments. A special-purpose government is engaged in more than one governmental program if it budgets, manages, or accounts for its activities as multiple programs, such as a school district that provides regular instruction, special instruction, vocational education, and adult education. (a) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED IN GOVERNMEN- TAL ACTIVITIES. A special-purpose government engaged in a single governmental activity, such as some cemetery districts, levee districts, assessment districts, and drainage districts, may combine its government-wide ﬁnancial statements and its fund ﬁnancial statements in a columnar format that reconciles line items of fund ﬁnancial information to government-wide information in a separate column on the face of the ﬁnancial statements rather than at the bottom of the state- ments or in an accompanying schedule. Otherwise, the special-purpose government may present separate government-wide and fund ﬁnancial statements and may present its government-wide statement of activities in a different format. For example, it may be presented in a single column that reports expenses ﬁrst followed by revenues by major sources. The difference, net revenue or expense, should be followed by contributions to permanent and term endowments, special and ex- traordinary items, transfers, and beginning and ending net assets. (b) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED ONLY IN BUSI- NESS-TYPE ACTIVITIES. A government engaged in only business-type activities should pre- sent only the ﬁnancial statement required for enterprise funds: • MD&A • Enterprise fund ﬁnancial statements: • Statement of net assets or balance sheet • Statement of revenues, expenses, and changes in fund net assets • Statement of cash ﬂows • Notes to ﬁnancial statements • Applicable RSI other than MD&A (c) REPORTING BY SPECIAL-PURPOSE GOVERNMENTS ENGAGED ONLY IN FIDU- CIARY ACTIVITIES. A special-purpose government engaged in only ﬁduciary activities should present only the ﬁnancial statement required for ﬁduciary funds: • MD&A • Statement of ﬁduciary net assets • Statement of changes in ﬁduciary net assets • Notes to ﬁnancial statements A PERS is a special-purpose government that administers one or more deﬁned beneﬁt pen- sion plans and may also administer other kinds of employee beneﬁt plans, such as deﬁned con- tribution, deferred compensation, and postemployment health care plans. One that administers
32.11 TRANSITION TO THE REQUIREMENTS OF GASB STATEMENT NO. 34 32 87 • more than one deﬁned beneﬁt pension plan or postemployment health care plan should present combining ﬁnancial statements for all such plans and, if applicable, required schedules for each plan. (A PERS that administers one or more agent multiple-employer plans applies these re- quirement at the aggregate plan level.) It should (1) present a separate column for each plan on the statement of ﬁduciary net assets and the statement of changes in ﬁduciary net assets or (2) present combining statements for the plans as part of the basic ﬁnancial statements. A PERS should conform with Section 32.6 for all other plans. 32.11 TRANSITION TO THE REQUIREMENTS OF GASB STATEMENT NO. 34 (a) REPORTING GENERAL INFRASTRUCTURE ASSETS AT TRANSITION. Beginning with the effective dates of GASB Statement No. 34, prospective reporting of general infrastructure assets is required in the statement of net assets. Retroactive reporting is encouraged for all major general in- frastructure assets at that date. Such major assets are those that (1) meet the deﬁnition of a major asset stated in Section 32.11(c)(i), (2) are associated with and generally arise from governmental ac- tivities (not from proprietary funds and special-purpose governments engaged in business-type ac- tivities), and (3) are long-lived capital assets that normally are stationary in nature and normally can be preserved for a signiﬁcantly greater number of years than most capital assets. Retroactive report- ing of such assets is required for governments described in footnote 37 as follows: • Phase 1 governments—ﬁscal years beginning after June 15, 2005. • Phase 2 governments—ﬁscal years beginning after June 15, 2006. • Phase 3 governments are encouraged but not required to report them retroactively. If it is not practical to determine the acquisition cost of general infrastructure assets because of inadequate records, a government should estimate and report the acquisition cost of major general infrastructure assets acquired or signiﬁcantly reconstructed or that received signiﬁcant improvements in ﬁscal years ending after June 30, 1980. Methods of estimating such cost and accumulated depreciation are discussed in Sections 32.11(c)(iii) and (iv). Information for networks for which it is available should be reported during the transition period if it is not available for all networks. During transition, these disclosures should be made: • Descriptions of the infrastructure assets being reported and of those not being reported • A description of eligible infrastructure assets the government intends to report using the modi- ﬁed approach (b) TRANSITION TO THE MODIFIED APPROACH FOR REPORTING INFRASTRUCTURE ASSETS. A government may begin to use the modiﬁed approach for reporting eligible infrastruc- ture assets when one complete condition assessment is available and the government documents that the assets are being preserved approximately at or above the condition level the government has es- tablished and disclosed. If the three most recent complete condition assessments and the estimated and actual amounts to maintain and preserve the infrastructure assets for the previous ﬁve reporting periods required as discussed in Section 32.9(b) are not initially available, the information required by that section should be reported for as many complete condition assessments and years of esti- mated and actual expenses as are available. (c) INITIAL CAPITALIZATION OF GENERAL INFRASTRUCTURE ASSETS (i) Determining Major General Infrastructure Assets. Major general infrastructure assets should be determined at the network or subsystem level based on two criteria:
32 88 STATE AND LOCAL GOVERNMENT ACCOUNTING • 1. The actual or estimated cost of the subsystem is expected to be at least 5% of the total actual or estimated cost of all general capital assets reported in the ﬁrst ﬁscal year ending after June 15, 1999. 2. The actual or estimated cost of the network is expected to be at least 10% of the total ac- tual or estimated cost of all general capital assets reported in the ﬁrst ﬁscal year ending after June 15, 1999. (ii) Establishing Capitalization at Transition. If inadequate records make determining acquisi- tion cost at initial capitalization impractical, acquisition cost may be estimated. (iii) Estimating Acquisition Cost—Current Replacement Cost. If the acquisition costs of assets need to be estimated, their current replacement cost may be determined and reduced back to the ac- quisition year or estimated acquisition year using public-sector or private-sector price indexes. Accu- mulated depreciation on assets being depreciated would be determined based on the reduced amounts. (iv) Estimated Acquisition Cost from Existing Information. Bond documents used to obtain ﬁ- nancing for construction or acquisition of infrastructure assets, expenditures reported in capital pro- ject funds or capital outlays in governmental funds, and engineering documents are examples of other information that may provide sufﬁcient support for establishing initial capitalization. 32.12 GRANT ACCOUNTING (a) DEFINITIONS. A grant is a contribution or gift of cash, or other assets from another govern- ment to be used or expended for a speciﬁed purpose, activity, or facility. Some grants are restricted by the grantor for the acquisition or construction of ﬁxed assets. These are capital grants. All other grants are operating grants. An entitlement is the amount of payment to which a government is entitled pursuant to an allo- cation formula contained in applicable statutes. A shared revenue is a revenue levied by one gov- ernment but shared on a predetermined basis with another government. Grants, entitlements, and shared revenues have become major sources of revenues for governments. Frequently, however, special accounting and reporting requirements are associated with these grants. (b) FUND IDENTIFICATION. All grants, entitlements, and shared revenues should be accounted for in one of the seven fund types. The identity of the fund should be based on the purpose or require- ments of the grant. For instance, grants, entitlements, or shared revenues received for purposes normally ﬁnanced through the general fund may be accounted for within that fund, provided that applicable legal requirements can be appropriately satisﬁed. Resources received for the payment of principal or interest on general long-term debt may be accounted for in a debt service fund. Capital grants or shared revenues received for capital acquisitions or construction, other than those associated with enterprise and internal service funds, may be accounted for in a capital projects fund. However, it is not always necessary to es- tablish a separate fund for an individual grant, entitlement, or shared revenue. Existing funds should be used to the extent possible in order to comply with the minimal number of funds principle. If a grant, entitlement, or shared, revenue may be used for more than one purpose and the recipi- ent has not determined the purposes for which it intends to use the funds, the resources may be ac- counted for in an agency fund pending determination of their use. When the determination is made, the assets and revenues should be recognized in the appropriate fund and removed from the agency fund. Since most grants, entitlements, or shared revenues are either unrestricted as to purpose or re- stricted to a speciﬁc purpose, there is seldom a need to use an agency fund. (c) REVENUE AND EXPENDITURE (EXPENSE) RECOGNITION. Grants, entitlements, and shared revenues recorded in governmental funds should be recognized as revenue when they become
32.14 AUDITS OF GOVERNMENTAL UNITS 32 89 • susceptible to accrual, that is, measurable and available. Legal and contractual requirements should be carefully reviewed. If the restriction is more form than substance, revenue should be recognized at the time of receipt or earlier. If the grant is earned by the recipient government as funds are expended for a speciﬁc restricted purpose, revenue should be recognized when the expenditures are made for that pur- pose. The latter are called “expenditure-driven” grants. Grants, entitlements, and shared revenues received before the revenue recognition criteria are met should be reported as deferred revenue and reported as a liability account in the government’s ﬁnan- cial statements. Resources not received should be reported as a receivable if the revenue recognition criteria have been met. If the resources have not been received and the revenue recognition criteria have not been met, the grants should not be reported on the balance sheet at all. They may, however, be disclosed in the notes to the ﬁnancial statements. Grants, entitlements, and shared revenues that are received by a proprietary fund for operating purposes, or that may be used for operations or capital purposes at the discretion of the recipient gov- ernment, should be recognized as nonoperating revenue when earned. Resources restricted to the ac- quisition or construction of capital assets should be recorded as contributed capital. Operating expenses should include depreciation on all depreciable ﬁxed assets, including assets acquired with contributed capital. Depreciation recognized on assets acquired or constructed with contributed capital may be charged to the contributed capital account by “adding back” the depreci- ation on such assets to net income before closing it to retained earnings. To promote greater consistency with respect to the accounting and ﬁnancial reporting for grants and similar ﬁnancial assistance by state and local governments, the GASB issued Statement No. 24, “Accounting and Financial Reporting for Certain Grants and Other Financial Assistance.” Statement No. 24 addresses issues relating to the recognition, measurement, and reporting of grants and other ﬁnancial assistance received and given by state and local governments including: • “Pass-through” grants • Food stamps and similar voucher programs • “On-behalf ” payments of fringe beneﬁts and salaries 32.13 ACCOUNTING PRINCIPLES AND PRACTICES— PUBLIC COLLEGES AND UNIVERSITIES Public colleges and universities should apply the principles discussed in this chapter. 32.14 AUDITS OF GOVERNMENTAL UNITS Audits of governmental units with ﬁnancial statements can be performed in accordance with: • Generally accepted auditing standards (GAAS) • Government Auditing Standards (the “Yellow Book”) • The Single Audit Act Amendments of 1996 and OMB Circular A-133 When performing an audit in accordance with GAAS, the guidance contained in the AICPA Pro- fessional Standards is followed. This is the same guidance followed by auditors when auditing the ﬁ- nancial statement of commercial entities and typically results in the issuance of an opinion of the ﬁnancial statements and perhaps a management letter. Government Auditing Standards, also known as the “Yellow Book” (U.S. Comptroller General, rev. 1994), establishes the concept of an expanded scope audit that includes both ﬁnancial and compliance features. According to the Yellow Book, a ﬁ- nancial audit can help determine whether: • The ﬁnancial statements of an audited entity present fairly the ﬁnancial position and the results of ﬁnancial operations in accordance with GAAP
32 90 STATE AND LOCAL GOVERNMENT ACCOUNTING • • The entity has complied with laws and regulations that may have a material effect on the ﬁnan- cial statements The Yellow Book incorporates the AICPA Professional Standards mentioned above and sets forth additional standards and requirements, including the following six: 1. A review is to be made of compliance with applicable laws and regulations, as set forth in fed- eral audit guides and other applicable reference sources. 2. The auditor reports on the entity’s compliance with laws, regulations, contracts and shall also include material instances of noncompliance and instances or indications of illegal acts found during or in connection with the audit. 3. The auditors shall report on their consideration of the entity’s internal control structure made as part of the ﬁnancial audit. They shall identify as a minimum: a. Scope of auditor’s work in obtaining an understanding of the internal control structure and assessing risk. b. The reportable conditions including separate identiﬁcation of material weaknesses identi- ﬁed as a result of the auditor’s work. 4. Auditors performing government audits are required to obtain 80 hours of continuing educa- tion every two years, of which 24 hours should be directly related to government. At least 20 of the 80 hours should be completed in each year of the two-year period. 5. Audit organizations performing government audits are required to establish an internal quality control system and participate in an external quality control review program. 6. The auditor communicates certain information related to the conduct of the audit to the audit committee or to the individuals with whom they have contracted for the audit. (a) THE SINGLE AUDIT ACT AMENDMENTS OF 1996. Many state and local governments are required to obtain a periodic audit of the federal funds they receive—usually once a year. The audits are normally performed by an independent CPA or public accountant, or, in some states, by the gov- ernment’s internal audit personnel. A few jurisdictions have an independently elected or appointed auditor who conducts the audit. Single audits are conducted in accordance with GAAS, Government Auditing Standards, and the Single Audit Amendments Act of 1996 and its implementing regulation OMB Circular A-133, including its Compliance Supplement. These requirements have been updated for ﬁscal years beginning on or after July 1, 1997, by the Single Audit Amendments Act of 1996. The objectives of the Act are: • To improve the ﬁnancial management of state and local governments with respect to federal ﬁ- nancial assistance programs through improved auditing • To establish uniform requirements for audits of federal ﬁnancial assistance provided to state and local governments • To promote the efﬁcient and effective use of audit resources • To ensure that federal departments and agencies, to the maximum extent practicable, rely on and use audit work performed pursuant to the requirements of the Single Audit Act Though the single audit builds on the annual ﬁnancial statement audit currently required by most state and larger local governments, it places substantial additional emphasis on the consideration and testing of internal controls and the testing of compliance with laws and regulations. The Single Audit Act and OMB Circular A-128 require the auditor to determine whether: • The ﬁnancial statements of the government, department, agency, or establishment present fairly its ﬁnancial position and the results of operations in conformity with GAAP
32.14 AUDITS OF GOVERNMENTAL UNITS 32 91 • • The organization has internal and other control structures to provide reasonable assurance that it is managing federal ﬁnancial assistance programs in compliance with applicable laws and regulations • The organization has complied with laws and regulations that may have a material effect on its ﬁnancial statements and on each major federal ﬁnancial assistance program The governmental units that are subject to single audits include those that receive $100,000 or more of federal ﬁnancial assistance in any ﬁscal year. If a government receives between $25,000 and $100,000 of federal assistance, the entity has the option of having a single audit or separate grant au- dits performed. For those governments receiving less than $25,000 in assistance, there is an exemp- tion from the Single Audit Act requirements. The Single Audit Act provides auditors with guidance on the focus of the audit by deﬁning a level of audit work based on the concept of “major” and “nonmajor” federal assistance programs. Major programs (not grants) are typically the larger programs in which an entity participates and are deter- mined on a sliding scale by the relationship between the expenditures of the program and the total federal expenditures of the entity. For most small and medium-sized governments, a major program is deﬁned as the larger of $300,000 or 3% of the total federal expenditures for all federal programs. For larger governments whose total federal expenditures exceed $100 million, the Single Audit Act deﬁnes a major federal ﬁnancial assistance program based on a sliding scale. The Single Audit Act and OMB Circular A-128 require the auditor to issue several reports: For the entity: • A report on the audit of the general purpose or basic ﬁnancial statements of the entity as a whole, or the department, agency, or establishment covered by the audit • A report on internal control based on an understanding and assessment of the internal control structure obtained as a part of the audit of the general purpose or basic ﬁnancial statements • A report on compliance with laws and regulations that may have a material effect on the ﬁnan- cial statements For its federal ﬁnancial assistance programs: • A report on a supplementary schedule of the entity’s federal ﬁnancial assistance programs, showing total expenditures for each federal assistance program • A report on compliance with laws and regulations identifying all ﬁndings of noncompliance and questioned costs • A report on internal control structure used in administering federal ﬁnancial assistance programs In March 1990, the Ofﬁce of Management and Budget (OMB) issued OMB Circular A-133, “Au- dits of Institutions of Higher Education and Other Nonproﬁt Organizations.” The audit objectives contained in OMB Circular A-133 are patterned after the Single Audit Act of 1984 (described in the preceding section) and bring under the single audit umbrella nonproﬁt organizations receiving federal funds. Although the Circular was issued primarily for nonproﬁt organizations receiving federal funds, institutions of higher education that are operated by a state or local government may elect to conduct a single audit under the provisions of OMB Circular A-133 versus the audit requirements associated with the Single Audit Act of 1984. In 1995, OMB began a process intended to combine the regulations governing single audits into a single document. As a part of this process, OMB proposed changes to Circular A-133. OMB indi- cated that these changes would serve as a model for requested changes to the Single Audit Act of 1984 and that, if those changes were made, Circular A-128 would be abolished and that state and local governments would follow Circular A-133. The major proposals in this revision include: • Use of the concept of risk in determining which programs to audit • Raising the threshold for an audit to $300,000
32 92 STATE AND LOCAL GOVERNMENT ACCOUNTING • • Reduce the time period for submission of the single audit results from 13 to 9 months • Expansion of the scope to include hospitals (b) OTHER CONSIDERATIONS. Most government ofﬁcials and auditors of governmental units realize that a good audit should furnish more than an opinion on the ﬁnancial statements. Other ser- vices a governmental auditor can provide are pinpointing the key information upon which decisions should be based and contributing to the presentation of this information in a manner that facilitates decision making; uncovering deﬁciencies in the accounting system and providing suggestions for improving the efﬁciency and effectiveness of the system; and obtaining and presenting information useful for marketing securities. Obtaining a qualiﬁed auditor, particularly one who can provide the additional services described above, requires that the selection be based on qualiﬁcations and experience, and not solely cost. The National Intergovernmental Audit Forum, in its handbook How to Avoid a Substandard Audit: Sug- gestions for Procuring an Audit, indicates: Public entities should never select auditors without considering ﬁve basic elements of an effective audit procurement process: • planning (determining what needs to be done and when), • fostering competition by soliciting proposals (writing a clear and direct solicitation document and disseminating it widely), • technically evaluating proposals and qualiﬁcations (authorizing a committee of knowledgeable persons to evaluate the ability of prospective auditors to effectively carry out the audit), • preparing a written agreement (documenting the expectations of both the entity and the auditor), and • monitoring the auditor’s performance (periodically reviewing the progress of that performance). This handbook provides detailed information about the ﬁve elements of procurement listed above as well as the use of audit committees in a government environment and other useful information about the auditor procurement process. (i) Governmental Rotation of Auditors. The automatic rotation of auditors after a given num- ber of years is a common practice in many governments; however, it is not always beneﬁcial. Many governments have followed this policy, believing that they will (1) receive a fresh outlook from the audit, (2) spread the work among several ﬁrms, and (3) encourage lower fees. In actual- ity, automatic rotation may be harmful in that it could deprive the government of the extensive knowledge of the entity developed by the current auditor. It may also impair auditing effectiveness since a new auditor may need to spend considerable time learning the government’s system—the government may actually incur more cost since its personnel will need to spend time explaining the organization, systems, and data to the new auditors, and the new auditors will need to spend valuable time reviewing information that is already part of the previous auditor’s workpapers. Al- though a government should continuously monitor its auditor’s performance to assure that the ser- vice obtained is commensurate with the cost, the entity should normally change auditors only because of dissatisfaction with services and not for the sake of receiving a lower fee. (ii) Audit Committees. In recent years, governments have started establishing audit committees similar to those in the private sector. Some appropriate tasks for a local government’s audit commit- tee are: • Reviewing signiﬁcant ﬁnancial information for reliability, timeliness, clarity, appropriateness of disclosure, and compliance with GAAP and legal requirements • Ascertaining that the internal control structure is appropriately designed and functioning effectively • Evaluating independent audit ﬁrms and selecting one for approval by the appropriate body
32.15 PROPOSED CHANGES AND OTHER MATTERS 32 93 • • Overseeing the scope and performance of the independent audit function • Ensuring that the auditors’ recommendations for improvements in internal controls and operating methods receive management’s attention and are implemented on a timely basis • Providing an effective communications link between the auditors and the full governing board The primary beneﬁt of an audit committee is in assisting the full governing board to fulﬁll its re- sponsibilities for the presentation of ﬁnancial information about the governmental unit. There are also secondary beneﬁts: The other parties involved in the issuance of ﬁnancial informa- tion—management and independent and internal auditors—can perform their roles more effec- tively if an audit committee is involved in the process. Finally, there are advantages for the government’s constituencies—in particular, the taxpayers and bondholders. 32.15 PROPOSED CHANGES AND OTHER MATTERS (a) FINANCIAL REPORTING MODEL. GASB Statement No. 11 required the introduction of accrual-basis operating statements for governmental activities. The effective date of Statement No. 11 was delayed indeﬁnitely by Statement No. 17. This delay was to allow the GASB to complete ad- ditional research on the ﬁnancial reporting model, capital reporting, pension accounting, risk ﬁnanc- ing, and insurance projects. Recent actions by the GASB have made it apparent that the GASB intends to develop a new statement that would completely replace Statement No. 11. (b) OTHER ISSUES AT THE GASB. The GASB is also dealing with other current issues facing state and local governments. As a part of the ﬁnancial reporting model project, the GASB also in- tends to address conceptual issues such as the deﬁnition of an asset and related presentation issues, such as what footnotes should be required. Meanwhile, the GASB is also addressing other topics of in- terest. The GASB has been researching postemployment beneﬁts other than pensions in anticipation of developing a statement regarding recording these liabilities. (c) ACCOUNTING FOR MUNICIPAL SOLID WASTE LANDFILL CLOSURE AND POST- CLOSURE CARE COSTS. GASB Statement No. 18, “Accounting for Municipal Solid Waste Landﬁll Closure and Post-closure Care Costs,” provides guidance in response to the issuance of U.S. Environmental Protections Agency rule, “Solid Waste Disposal Facility Criteria,” which re- quires owners and operators of municipal solid waste landﬁlls (MSWLFs) to perform various clo- sure functions and post-closure monitoring and maintenance functions as a condition for the right to operate a MSWLF. The guidance applies to MSWLFs that accept municipal solid waste and are required to incur clo- sure and post-closure care costs. Speciﬁcally, the guidance would require recognition of MSWLF clo- sure and post-closure care costs as an expenditure/expense and as a liability in each period in which the landﬁll accepts waste. Recognition would be based on a systematic and rational method that as- signs estimated total current costs to periods based on landﬁll use rather than the passage of time. The estimated total current cost of MSWLFs’ closure and post-closure consist of the follow- ing costs: • Equipment and facilities used in post-closure monitoring and care • Final cover • Maintenance and monitoring the landﬁll during the post-closure period State and local governments with MSWLFs will be required to disclose in the ﬁnancial state- ments the nature and source of landﬁll closure and post-closure care costs and the fact that the costs are being recognized based on estimated total current costs while the landﬁll is operating regardless
32 94 STATE AND LOCAL GOVERNMENT ACCOUNTING • of when related disbursements are made. In addition, disclosure of ﬁnancing arrangements for clo- sure and post-closure care costs would be required along with an indication of whether or not such ﬁ- nancing arrangements were in compliance with applicable laws and regulations. (d) INVESTMENT VALUATION. The GASB recently concluded its consideration of investment valuation by state and local governments and issued Statement No. 31, “Accounting and Financial Reporting for Certain Investments and for External Investment Pools.” Statement No. 31 requires that most of the typical investments of a state or local governmental entity be reported at fair value. The investments covered by Statement No. 31’s fair value standards include all debt securities and equities (as well as option contracts, stock warrants, and stock rights) that have readily determinable fair values. In addition, open-end mutual funds and investments in interest-earning investment con- tracts and external investment pools are also reported at fair value. Statement No. 31 also requires that investment income, which is deﬁned to include changes in the fair value of investments, should be reported as revenue in the operating statement. The GASB is currently working on an implementation guide to address some of the questions that state and local governments may have in implementing this Statement. (e) AUDIT QUALITY. Perhaps one of the most recurring topics in the government industry today is audit quality. The results of GAO studies of the quality of audits of government units have indi- cated that audit ﬁeldwork and reporting were deﬁcient in a signiﬁcant number of audit engagements. Because the auditor is one defense mechanism against improper spending of federal funds, the GAO looks unfavorably on auditors who are performing substandard work and has taken steps to alleviate the problem. Government Auditing Standards includes a requirement for auditors performing govern- ment audits to meet minimum continuing professional education requirements and for auditing ﬁrms to have independent quality control reviews at least once every three years. (f) SUMMARY. Governmental accounting and reporting is changing and expanding at an in- creasing rapid rate. Coupling this with public accountability issues, the federal government’s pressure for increased audit quality, and the penalties for substandard audit performance re- sults in increasing levels of audit risk. Government audits, often considered low-risk engage- ments by many, are quickly becoming areas of extremely high risk. Auditing professionals need to recognize the risk associated with government engagements now and in the future be- fore incurring severe penalties or embarrassment. The technical issues involved in government auditing are on a par with those in the commercial environment but auditors have much less experience and less technical guidance to fall back on. Dealing with these technical issues requires well-trained, highly motivated individuals and can no longer be left to less experienced members of the audit team. Dealing with the real issues gov- ernments are facing (e.g., infrastructure, AIDS, prison overcrowding, drugs, etc.) requires even more from the individuals in the profession. Like it or not, government accounting and reporting is being thrust into the spotlight and will be scrutinized by a multitude of individuals and groups. It is imper- ative that individuals in the industry realize this fact and begin now to prepare for the future. 32.16 SOURCES AND SUGGESTED REFERENCES American Institute of Certiﬁed Public Accountants, “Audits of State and Local Government Units,” Industry Audit and Accounting Guide. AICPA, New York, 1994. , “AICPA Professional Standards.” AICPA, New York, 1995. Financial Accounting Standards Board, “Classiﬁcation of Short-Term Obligations Expected to Be Reﬁnanced,” Statement of Financial Accounting Standards No. 6. FASB, Stamford, CT, 1975. , “Accounting for Leases,” Statement of Financial Accounting Standards Board No. 13. FASB, Stamford, CT, 1975.
APPENDIX 32.1 32 95 • , “Objectives of Financial Reporting by Nonbusiness Organizations,” Statement of Financial Accounting Concepts No. 4. FASB, Stamford, CT, 1980. General Accounting Ofﬁce, “Government Auditing Standards.” GAO, Washington, DC, 1994. Governmental Accounting Standards Board, “Codiﬁcation of Governmental Accounting and Financial Reporting Standards.” GASB, Stamford, CT, 1995. Government Finance Ofﬁcers Association, “Governmental Accounting, Auditing and Financial Reporting.” GFOA, Chicago, IL, 1994. (Study guide available) APPENDIX 32.1: PRONOUNCEMENTS ON STATE AND LOCAL GOVERNMENT ACCOUNTING Government Accounting Standard Board Effective Date Statement No. 1 Authoritative Status of NCGA On issuance (7/84) Pronouncements and AICPA Industry Audit Guide Statement No. 2 Financial Reporting of Deferred Financial statements for Compensation Plans Adopted under periods ending after 2/15/86 the Provisions of Internal Revenue Code Section 457 Statement No. 3 Deposits with Financial Institutions, Financial statements for Investments (including Repurchase periods ending after 2/15/86 Agreements), and Reverse Repurchase Agreements Statement No. 4 Applicability of FASB Statement No. On issuance (9/86) 87, “Employers’ Accounting for Pensions,” to State and Local Governmental Employers Statement No. 5 Disclosure of Pension Information by Financial reports issued for Public Employee Retirement Systems ﬁscal years beginning after and State and Local Governmental 12/15/86 Employers Statement No. 6 Accounting and Financial Reporting for Financial statements for periods Special Assessments beginning after 6/15/87 Statement No. 7 Advance Refundings Resulting in Fiscal periods beginning after Defeasance of Debt 12/15/86 Statement No. 8 Applicability of FASB Statement No. Fiscal periods beginning after 93, Recognition of Depreciation by 5/15/87 Not-for-Proﬁt Organizations, to Certain State and Local Governmental Entities Statement No. 9 Reporting Cash Flows of Proprietary Fiscal periods beginning after and Nonexpendable Trust Funds and 12/15/89 Governmental Entries that Use Proprietary Fund Accounting Statement No. 10 Accounting and Financial Reporting for Pools—Fiscal periods beginning Risk Financing and Related after 6/15/90 Insurance Issues Other—Fiscal periods beginning after 6/15/93 Statement No. 11 Measurement Focus and Basis of Fiscal periods beginning after Accounting—Governmental Fund 6/15/94 Operating Statements Statement No. 12 Disclosure of Information on Fiscal periods beginning after Postemployment Beneﬁts Other than 6/15/90 Pension Beneﬁts by State and Local Governmental Employers (Continued)
32 96 STATE AND LOCAL GOVERNMENT ACCOUNTING • Government Accounting Standard Board Effective Date Statement No. 13 Accounting for Operating Leases with Leases with terms beginning Scheduled Rent Increases after 6/30/90 Statement No. 14 The Financial Reporting Entity Fiscal periods beginning after 12/15/92 Statement No. 16 Accounting for Compensated Absences Fiscal periods beginning after June 15, 1993 Statement No. 17 Measurement Focus and Basis of Immediately Accounting—Governmental Fund Operating Statements: Amendment of Effective Dates of GASB Statement No. 11 and Related Statements Statement No. 18 Accounting for Municipal Solid Waste Fiscal periods beginning after Landﬁll Closure and Post-closure June 15, 1993 Care Costs Statement No. 19 Governmental College and University Fiscal periods beginning after Omnibus Statement June 15, 1993 Statement No. 20 Accounting and Financial Reporting for Fiscal periods beginning after Proprietary Funds and Other December 15, 1993 Governmental Entities That Use Proprietary Fund Accounting Statement No. 21 Accounting for Escheat Property Fiscal periods beginning after June 15, 1994 Statement No. 23 Accounting and Financial Reporting for Fiscal periods beginning after Refundings of Debt Reported by June 15, 1994 Proprietary Activities Statement No. 24 Accounting and Financial Reporting for Fiscal periods beginning after Certain Grants and Other Financial June 15, 1995 Assistance Statement No. 25 Financial Reporting for Deﬁned Beneﬁt Fiscal periods beginning after Pension Plans and Note Disclosures June 15, 1996, Statement for Deﬁned Contribution Plans No. 26 must be implemented simultaneously Statement No. 26 Financial Reporting for Fiscal periods beginning after Postemployment Healthcare Plans June 15, 1996, Statement Administered by Deﬁned Beneﬁt No. 25 must be implemented Pension Plans simultaneously Statement No. 27 Accounting for Pensions by State and Fiscal periods beginning after Local Governmental Employers June 15, 1997 Statement No. 28 Accounting and Financial Reporting for Fiscal periods beginning after Securities Lending Transactions December 15, 1995 Statement No. 29 The Use of Not-for-Proﬁt Accounting Fiscal periods beginning after and Financial Reporting Principles December 15, 1995 by Governmental Entities Statement No. 30 Risk Financing Omnibus Fiscal periods beginning after June 15, 1996 Statement No. 31 Accounting and Financial Reporting Fiscal periods beginning after for Certain Investments and for June 15, 1997 External Investment Pools Statement No. 32 Accounting and Financial Reporting for Earlier of ﬁscal periods Internal Revenue Code Section 457 beginning after December 31, Deferred Compensation Plans 1998, or amendment of the IRC Section 457 Plan
APPENDIX 32.1 32 97 • Government Accounting Standard Board Effective Date Statement No. 33 Accounting and Financial Reporting Periods beginning after June for Nonexchange Transactions 15, 2000 Statement No. 34 Basic Financial Statements—and (6) Management’s Discussion and Analysis—for State and Local Governments Statement No. 35 Basic Financial Statements––and (7) Management’s Discussion and Analysis—for Public Colleges and Universities: Amendment of GASB Statement No. 34 Statement No. 36 Recipient Reporting for Certain Simultaneously with Statement No. Shared Nonexchange Revenues: 33 Amendment of GASB Statement No. 33 Statement No. 37 Basic Financial Statements—and (8) Management’s Discussion and Analysis—for State and Local Governments: Omnibus Statement No. 38 Certain Financial Statement Note (9) Disclosures Discussion and Analysis— for State and Local Governments Statement No. 39 Determining Whether Certain Periods beginning after Organizations Are Component Units June 15, 2003 Interpretation No. 1 Demand Bonds Issued by State and Fiscal periods ending after Local Governmental Entities June 15, 1985 Interpretation No. 2 Disclosure of Conduit Debt Fiscal periods beginning after Obligations December 15, 1995 Interpretation No. 3 Financial Reporting for Reverse Fiscal periods beginning after Repurchase Agreements December 15, 1995 Interpretation No. 4 Accounting and Financial Reporting for Fiscal periods beginning after Capitalization Contributions to June 15, 1996 Public Entity Risk Pools Interpretation No. 5 Property Tax Revenue Recognition in Fiscal periods beginning after Governmental Funds June 15, 2000 (Continued) 6 In three phases, based on total annual revenue in the ﬁrst ﬁscal year ending after June 15, 1999; Phase 1—governments with total annual revenues of $100 million or more, ﬁscal periods beginning after June 15, 2001; Phase 2—governments with total annual revenues of $10 or more but less than 100 million, ﬁscal periods beginning after June 15, 2002; Phase 3—governments with total annual revenues of less than $10 million, ﬁscal periods beginning after June 15, 2003. 7 Public institutions that are components of another reporting entity should implement the Statement no later than the same year as their primary government. For public institutions that are not compo- nents of another reporting entity, this Statement is effective in the three phases indicated in the pre- ceding footnote. 8 Simultaneously with Statement No. 34. For governments that implemented Statement No. 34 before Statement No. 37 was issued, Statement No. 37 is effective for periods beginning after June 15, 2000. 9 In three phases, based on total annual revenue in the ﬁrst ﬁscal year ending after June 15, 1999: Phase 1— governments with total annual revenues of $100 million or more, ﬁscal periods beginning after June 15, 2001; Phase 2—governments with total annual revenues of $10 million or more but less than $100 million, ﬁscal periods beginning after June 15, 2002; Phase 3—governments with total annual revenues of less than $10 million, ﬁscal periods beginning after June 15, 2003.
32 98 STATE AND LOCAL GOVERNMENT ACCOUNTING • Government Accounting Standard Board Effective Date Interpretation No. 6 Recognition and Measurement of Simultaneously with Statement No. Certain Liabilities and Expenditures 34 in Governmental Fund Financial Statements: an Interpretation of NCGA Statements 1, 4, and 5, NCGA Interpretation 8, and GASB Statement Nos. 10, 16, and 18 Technical Bulletin Purpose and Scope of GASB Technical None No. 84-1 Bulletins and Procedures for Issuance Technical Bulletin Applying Paragraph 66 of GASB On issuance (1/87) No. 87-1 Statement No. 3 Technical Bulletin Disclosures about Derivatives and Fiscal periods ending after No. 94-1 Similar Debt and Investment December 15, 1994 Transactions Technical Bulletin Application of Certain Pension Fiscal periods beginning after No. 96-1 Disclosure Requirements for June 15, 1996 Employers Pending Implementation of GASB Statement No. 27 Technical Bulletin Classiﬁcation of Deposits and Fiscal periods beginning after No. 97-1 Investments into Custodial Credit December 15, 1997 Risk Categories for Certain Bank Holding Company Transactions Concepts Statement Objectives of Financial Reporting None No. 1 Concepts Statement Reporting Service Efforts and None No. 2 Accomplishments National Council on Government Accounting Effective Date Statement 1 Governmental Accounting and Fiscal years ending after 6/30/80 Financial Reporting Principles Statement 2 Grant, Entitlement, and Shared Fiscal years ending after 6/30/80 Revenue Accounting by State and Local Governments Statement 3 Deﬁning the Governmental Reporting Prospectively for ﬁscal years Entity (Superseded) ending after 12/31/82 Statement 4 Accounting and Financial Reporting Fiscal years beginning after Principles for Claims and Judgments 12/31/82; ¶20 extended and Compensated Absences indeﬁnitely by NCGAI 11 Statement 5 Accounting and Financial Reporting Fiscal years beginning after Principles for Lease Agreements of 6/30/83 State and Local Governments Statement 6 Pension Accounting and Financial Extended indeﬁnitely by Reporting: Public Employee NCGAI 8 Retirement Systems and State and Local Government Employers Statement 7 Financial Reporting for Component Prospectively for ﬁscal years Units Within the Governmental ending after 6/30/84 Reporting Entity Interpretation 1 GAAFR and the AICPA Audit Guide Issued 4/86; superseded by (Superseded) NCGAS 1 Interpretation 3 Revenue Recognition—Property Taxes Fiscal years beginning after 9/30/81
APPENDIX 32.1 32 99 • National Council on Government Accounting Effective Date Interpretation 4 Accounting and Financial Reporting for Fiscal years beginning after Public Employee Retirement Systems 6/15/82; superseded by and Pension Trust Funds (Superseded) NCGAS 6 and repealed by NCGAI 8 Interpretation 6 Notes to the Financial Statements Prospectively for ﬁscal years Disclosure beginning after 12/31/82 Interpretation 7 Clariﬁcation as to the Application of the On issuance Criteria in NCGA Statement 3, “Deﬁning the Governmental Reporting Entity” Interpretation 8 Certain Pension Matters Fiscal years ending after 12/31/83 Interpretation 9 Certain Fund Classiﬁcations and Fiscal years ending after 6/30/84 Balance Sheet Accounts Interpretation 10 State and Local Government Fiscal years ending after 6/30/84 Budgetary Reporting Interpretation 11 Claim and Judgment Transactions for On issuance (4/84) Governmental Funds GASB Exposure Drafts Outstanding 2/28/98 The Financial Reporting Entity: Afﬁliated Organizations Accounting and Financial Reporting for Nonexchange Transactions