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The Great Imbalance Understanding GASB 34 Statement of Net Assets & Balance Sheet
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The Great Imbalance

Nov 18, 2014

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Page 1: The Great Imbalance

The Great Imbalance

Understanding GASB 34 Statement of Net Assets &

Balance Sheet

Page 2: The Great Imbalance

Two Statements With Different Focuses

• Statement of Net Assets– Entity as a whole– Two columns and a total (Primary Government)– Full Accrual with elimination of interfund balances– Residual balances of ISF allocated to appropriate

Column– Equity divided by nature of underlying assets

• Capital, net of related debt• Restricted• Unrestricted

Page 3: The Great Imbalance

Two Statements With Different Focuses

• Fund Statements– All major funds part of the FS– Non major Funds shown in aggregate only– Individual Internal Service Funds not part of the major

funds (reported by fund type)– Individual Fiduciary Funds not part of major funds

(reported by fund type)– Component Units, if any not part of the FS– No interfund eliminations– Enterprise Funds still same Basis and Name

Page 4: The Great Imbalance

Users of the Financial Statements

• Investors and rating agencies – Stat Section– Focus on historical sustained revenue growth– Strong financial reserves– Moderate debt levels and coverage

• Council– Budget – RSI

• Budget– Statement of Activities is the starting point for performance

measures

Page 5: The Great Imbalance

Users of the Financial Statements

• Citizens– MD&A and General Fund

• Auditors– Everything– Opinion units & materiality

Page 6: The Great Imbalance

Enterprise Funds

• Enterprise Funds still Statement of Net Assets

• Prepared on same basis as the entity-wide• Should be very few reconciling differences

between the entity-wide and fund statements– Internal Service Funds

Page 7: The Great Imbalance

Governmental Funds

• Balance Sheet not Net Assets• Major Funds Individually presented• Non-major shown in the aggregate• Modified Accrual Basis of Accounting• Based on Current Funds Flows• Fund Balance Reservations reflect liquidity

constraints not restrictions to purpose

Page 8: The Great Imbalance

Statement Common Audit Reporting Deficiencies

• Net Asset Classifications– Deferred Charges– Unspent Proceeds– Negative Unrestricted Net Assets

• Reserves do not Represent Restricted Net Assets

• Designations

Page 9: The Great Imbalance

Statement Common Audit Reporting Deficiencies

• Receivables – Same Amount on Both Statements

• Allowances More Meaningful

• Long-Term Liabilities

Page 10: The Great Imbalance

The Dominance of Capital Assets

• Capital Assets will be the dominant asset category in the governmental activities column for most states, cities and many counties– Carrollton TX, 93% of all Net Assets are

Capital related.– State of Pennsylvania, 94% of all Net Assets

are Capital related– Orange County, CA, 78% of all Net Assets are

Capital related.

Page 11: The Great Imbalance

Uniqueness of Infrastructure

• Infrastructure will be the dominant asset category for most states, cities and many counties– Carrollton TX, CV of Infrastructure is $200

million or 83% of all Fixed Assets.– State of Pennsylvania, CV of Infrastructure is

$13.6 billion or 81% of all Fixed Assets– Orange County, CA, CV of Infrastructure is

$833 million or 60% of Fixed Assets

Page 12: The Great Imbalance

Nature of Infrastructure

• No salvage value• No ability to resell• Typically generates no direct revenue but

requires significant resources to maintain• Often replaced a node at a time• Size, magnitude and existence of Public

Works records make creation and maintenance of detailed accounting records impractical

Page 13: The Great Imbalance

Nature of Infrastructure

• For majority of governments infrastructure is– An estimate– Incomplete

• Pre 1980 assets• Capitalize only major systems• Four additional years for retroactive restatement of

infrastructure

Page 14: The Great Imbalance

Fixed Asset Implications

• Magnitude of Fixed Assets can create a large Net Asset balance regardless of the financial health of the entity.

• Relatively small percentage changes in Infrastructure can create a relatively large change in Net Assets.

• Total Net Assets comparability between even similar governments will be extremely difficult if not downright deceiving.

Page 15: The Great Imbalance

Capital Asset Audit Issues

• Lack of Comparability– Estimated Cost vs. Actual Cost– All Infrastructure vs. Post 1989

• Future Replacement Costs Can Now Be Analyzed

• Healthy Net Assets vs. Hidden Maintenance Costs

• County Issues – Negative Unrestricted Net Assets

• Retirements Not Consistently Recorded

Page 16: The Great Imbalance

Categories of Net Assets

• Three Categories of Net Assets– Invested in Capital Assets-Net of Related Debt– Restricted– Unrestricted

• Invested in Capital Assets-Net of Related Debt– All capital debt is not in this category if you do not

continue to “own” the related asset.– Unexpended proceeds on capital debt is in the

restricted categories

Page 17: The Great Imbalance

Calculating Net Asset Categories

• Financial statement categories should be consistent with the Net Asset Categories

• Detail in Financial Statements should be consistent with the Net Asset calculation

• Restricted balances for the GA column are not nearly as well defined as for the BTA column.

• There may be inconsistencies between columns and asset & liabilities vs. Net Asset category.

Page 18: The Great Imbalance

Net Asset Categories

• Unrestricted Net Assets is a general indicator of financial strength & flexibility.

• It is not an indicator of liquidity.• While negative Unrestricted Net Assets is

generally bad, there are exceptions. An analysis of unrestricted could improve understanding.

Page 19: The Great Imbalance

Analyzing Unrestricted Net Assets

• An entity’s Unrestricted Net Assets are $0.• UNA consists of $10 million each of assets and

liabilities.• Would your opinion of UNA change if:

– Assets were all cash and investments?– Assets were all short term receivables?– Assets were mostly long term receivables?– Liabilities were all trade payables?– Liabilities were all long-term in nature (OPEB, landfill,

compensated absences, long term bonds etc)?

Page 20: The Great Imbalance

Net Asset Audit Issues

• Residual of Transactions

• Most Common GASB 34 Required Adjustments

• Fund Balance – Short Term Liquidity vs. Net Assets (Long Term Prospects)

• Comp. Absences, OPEB, Net Pension Obligation, W/C & Health Internal Service Funds

• Importance of MD&A

Page 21: The Great Imbalance

Analyzing Financial Health• Financial Position vs. Financial Condition• Statement of Net Assets and Balance Sheet

focus on Financial Position.• Even with this narrower focus, understanding the

composition of Net Assets and Fund Balance is critical to understanding FP.

• 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).

Page 22: The Great Imbalance

Financial Health Audit Concerns

Pre GASB 34– Liquidity and Fund Balance Reserves– GFOA Minimum Fund Balance

• Post GASB 34– Full Accrual Effect – OPEB, Risk Funds, NPO, Comp.

Absences– No GFOA Minimums– Unrestricted can be misleading

• Bottom Line– Tax Capacity– Debt Capacity

Page 23: The Great Imbalance

Fund Statements• Governmental Funds Fund Balances are a key

indicator of short term financial position and are most closely tied to the budget.

• Understanding the flow between funds and the distinction between Reserves and Designations is critical to understanding the funds.

• Remember the choice of major funds can both illuminate or conceal.

• Transactions and balances between funds can also illuminate or conceal.

Page 24: The Great Imbalance

Warning Signs in the Fund Statements

• Large number of inter-fund balances– GASB 34 “repaid within a reasonable period”

is vague and subject to interpretation– No distinction between “due to/from and

advances-GASB 34 never uses the terms• Large receivables in the General Fund• Funds whose only source of money is

transfers• Small overall cash & investment balances

Page 25: The Great Imbalance

Warning Signs (continued)

• Short term (cash flow) borrowings• Large subsidies between operations

Page 26: The Great Imbalance

Fund Statements Common Audit Concerns

• Magic of Fund Accounting, Subsidies & Transfers

• Collectibility of Due To/Due Froms

• Disclosing Purpose of Significant Nonrecurring Transfers

• Collapsing Funds into the General Fund

Page 27: The Great Imbalance

For the Future

• Entity-Wide will include increasingly more accruals that will require future swag predictions

• Entity-Wide will have increasing volatility as estimates have to be adjusted from year to year.

• Increasing need for third party experts (actuaries, landfill engineers, infrastructure engineers etc.)

• Understanding the entity’s underlying cash flows (near term vs. long term) will be critical.

Page 28: The Great Imbalance

For the Future (continued)

• Upcoming GASB Statement on the effect of enabling legislation on Net Asset categories.

• Ongoing GASB project on Fund Balance disclosures.