governmental audit update

Governmental Audit UpdateCorey Arvizu, CPA

GASB Update

Pension Accounting and ReportingGASB No. 68

How do we treat additional employer contributions (those in-excess of statutory

requirements)?

• Contributions are irrevocable and should be recognized in the period made

• May need to adjust note disclosures or required supplementary information

schedules

What are nonemployer contributions and should these contributions be

recognized?

• Nonemployer contributions are made by an entity other than the employer

(i.e. fire insurance premium tax, State contribution to the EORP)

• These contributions should be recognized in the period made

Restoring of covered payroll for RSI reporting to prior definition that

included only “pensionable salary”

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Fair Value MeasurementGASB No. 72

The statement addresses accounting and financial reporting issues related to fair value measurements; it defines fair valueas the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also provides guidance for determining a fair value measurement for financial reporting purposes.

Fair Value

Level 3

Level 2

Level 1

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Fair Value Categories

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other than quoted prices that are observable

Level 3: unobservable inputs


Investments not measured at fair value include the following:• Money market investments

• External investment pools (2a7-like)

• Investments in life insurance contracts

• Common stock meeting the criteria for the equity method

• Unallocated insurance contracts

• Synthetic guaranteed investment contracts

Additional note: a government is permitted in certain circumstances to establish the fair value of an investment that does not have a readily determinable fair value by using the net asset value per share (or its equivalent) of the investment

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GASB Updates – Upcoming

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Statement No. 73 (Pensions)

Statement No. 74 (OPEB)

Statement No. 75 (OPEB)

Statement No. 77 (Tax Abatements)

Statement No. 79 (Investment

Pools)


Statement No. 80 (Component

Units)

Statement No. 81 (Split-Interest Agreements)


Financial Reporting for OPEB PlansGASB Statements No. 74 and 75

The statements replace prior statements for OPEB plans

The scope of the statements include OPEB plans administered through trusts that meet the following criteria: irrevocable, dedicated to benefits, legally protected

The statements also include OPEB plans not administered through trusts and defined contribution OPEB plans

Effective fiscal year 2017 for plans, fiscal year 2018 for employers

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Measurement of the Net OPEB Liability• Total OPEB liability less the OPEB plan’s fiduciary net position

• Total OPEB liability valuation requires the use of an actuary; except, if a plan has

fewer than 100 members (active and inactive) – an alternative measurement

calculation is available

• Actuarial valuation or calculations required every two year (every year

encouraged)

• If a valuation or calculation of the total OPEB liability is not performed on the

plan’s fiscal year then, then a roll-forward is required (no more than 24 months

prior)

• All assumptions for the determination of the total pension liability are generally

required to be in conformity with the guidance in the Actuarial Standards of

Practice

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Notes to Financial StatementsSingle/AgentEmployer

Cost-Sharing Employer

OPEB Plan Description

Information About the Net OPEB Liability:

-Assumptions and Other Inputs

-OPEB Plan’s Fiduciary Net Position

-Changes in the Net OPEB Liability

-Proportionate Share of Collective Net OPEB Liability

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Required Supplementary Information

Schedule of Changes in Net OPEB Liability and Related Ratios

Schedule of Contributions

Schedule of Proportionate Share of the Net OPEB Liability


What happens if there is not a trust?

• Accumulated assets for OPEB purposes are required to be

reported as assets of the employer, commonly as agency fund

• Assets in excess of liabilities for benefits due to plan members, as

well as accrued investment and administrative expense, is

required to be reported as a liability to the participating employer

• An approach similar to plans with a trust related to measurement

of OPEB liabilities, expense, and DIR/DOR is required

• Similar note disclosures and RSI is required

• No OPEB plan assets are incorporated

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Other considerations• Defined contribution plans recognize expense for the amount

of contributions to employees’ accounts

• ASRS, PSPRS and single-employer plans, if applicable, will have required OPEB NPL reporting and note disclosure requirements

• Note disclosures similar to pensions with OPEB also requiring a health care cost trend rate sensitivity disclosure

• Enter into discussions with single-employer plan actuaries soon to ensure reporting timelines are met

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Tax Abatement DisclosuresGASB Statement No. 77

The statement requires governments that entered into tax abatement agreements

to disclose the following information about the agreements

• Brief descriptive information, such as the tax being abated, the authority under which

tax abatements are provided, eligibility criteria, the mechanism by which taxes are

abated, provisions for recapturing abated taxes, and the types of commitments made

by tax abatement receipts

• The gross dollar amount of taxes abated during the period

• Commitments made by the government, other than to abate taxes, as part of a tax

abatement agreement

Additionally, the disclosures should be organized by major tax abatement

program and may disclose information for individual tax abatement agreements

within those programs

Effective fiscal year 2018

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Brief Descriptive Information

Gov’t’s OwnAbatements

Other Gov’t’s Abatements

Name of government

Tax being abated

Name of program

Purpose of program

Authority to abate taxes

Eligibility criteria

Abatement mechanism

Recapture provisions

Types of recipient commitments

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Other DisclosuresGov’t’s OwnAbatements

Other Gov’t’s Abatements

Dollar amount of taxes abated

Amounts received or receivable from other governments associated with abated taxes

Other commitments by the government

Quantitative threshold for individual disclosure

Information omitted due to legal prohibitions


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Blending Requirements for Component Units GASB Statement No. 80

The statement amends the blending requirements for the financial statement presentation of component units of all state and local governments. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. The additional criterion does not apply to component units included in the financial reporting entity pursuant to the provisions of Statement No. 39

Effective fiscal year 2017

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Irrevocable Split-Interest AgreementsGASB Statement No. 81

The statement requires that a government that receives funds through an

irrevocable split-interest agreement recognize related assets, liabilities,

and deferred inflows of resources at the inception of the agreement.

Additionally, the statement requires that revenues are recognized when the

resources become applicable to the reporting period

The statement also requires that a government recognize assets

representing its beneficial interest in irrevocable split-interest agreement

when they are administered by a third party (if the government controls the

present service capacity of the beneficial interests

Effective for fiscal year 2018

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Lease Accounting

Will effectively eliminate the distinction between capital and operating leases

Leases will create a new intangible asset

Leases with terms less than 12 months will recognize expenses based on contract terms

FASB and international standards have made similar changes

Final pronouncement likely to be issued prior to summer

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Lease Accounting

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Fiduciary ActivitiesThe term “Custodial Funds” will replace “Agency Funds”

All fiduciary funds to be reported in the Statement of Changes in Fiduciary Net Position

Any administrative or direct financial involvement of the assets will result in the reporting of the activity as a governmental fund (or business-type activity)

• Administrative or direct financial involvement includes maintaining checkbook, reconciliation of account, expenditure compliance determination, etc.

• I.e. most all student activities funds will now be reported as a governmental fund

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Financial Reporting Model ImprovementsInvitation to Comment

Three proposed approaches: • Near-term approach – focus on activity within 90 days of

year-end

• Short-term approach – focus on activity with 12 months of year-end

• Long-term approach – effectively accrual accounting that excludes capital assets and capital-related debt

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Financial Reporting Model ImprovementsInvitation to Comment

All three would exclude capital assets and capital-related debt

All three approaches would require a same-page reconciliation to the government-wide statements

Short-term and long-term approaches would require a statement of cash flows

Budgetary comparison to original budget may be required

Comments on ITC due March 31, 2017

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Uniform Guidance Update

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Audit Requirements

Key differences from current requirements

• Increases audit threshold from $500,000 to $750,000

• Type A/B threshold – minimum increases from $300,000 to $750,000

• Less flexibility with high-risk Type A program criteria

• Percentage of coverage from 50/25% to 40/20%

• Low-risk auditee criteria less restrictive

• Schedule of expenditures of federal awards changes

• Audit findings (threshold from $10,000 to $25,000)

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Audit Findings

Increases the threshold for reporting known and likely questioned costs from $10,000 to $25,000

Requires identification of whether audit finding is a repeat from the immediately prior audit and if so the prior year audit finding number

Provides that audit finding numbers be in the format prescribed by the data collection form, i.e. 2017-001

Status of prior year “Yellow Book” findings now required

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Small Purchases Procurements

Small purchases are procurements using Federal funds between $3,000 and $150,000

Federal guidelines do require competitive procurement methods

Intended to be relatively simple and informal

Quotations required from more than one source

Sources may be online search, public websites, phone quotation, etc.

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Other Procurement Considerations

Must maintain written standards of conduct covering conflicts of interest with respect to employees engaged in the selection, award, and

administration of contracts, including disciplinary actions for violations

Definition of supplies revised to include computer equipment with an acquisition cost of less than $5,000

Contracting with small and minority business, women’s business enterprises and labor surplus area firms

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Uniform Guidance” has replaced “OMB Circular A-133” in single audit reports

The SEFA must include a note as to whether or not the entity used the 10% de minimis indirect cost rate

SEFA must report amount paid to subrecipients on face of schedule

Time and effort changes intended to reduce administrative burden

Specific guidance provided on Corrective Action Plan

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Uniform Guidance Changes

Yellow Book Refresher and Update

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When Does the Yellow Book Apply?

When required (i.e. law, regulation, contract)• HUD Audit Guide, US Dept. of Education Audit Guide• Increased application to For-Profit entities

Usually participation in federal programs (i.e. single audit)

Most governmental performance audits

Voluntary election by the auditee

Updated revision of Yellow Book expected to be released as an exposure draft in next month

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Additional Yellow Book Requirements

Additional audit report

• Internal control over financial reporting

• Report on compliance

Additional independence documentation

Auditor competence and CPE

Additional considerations for material noncompliance

Considerations for abuse of funds

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Yellow Book Findings Format

Elements of the finding• Criteria – what should we have seen?• Condition – what did we see?• Cause – why did we see what we saw?• Effect – what is the result of what we saw?

Views of responsible officials

Recommendations

Status for prior year Yellow Book findings now required for Single Audits

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AICPA Code of Professional Conduct

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Revised Code of Professional Conduct

Two New Conceptual Frameworks

Structure• Preface

• Part 1: Members in public practice (includes independence)

• Part 2: Members in business

• Part 3: All Other Members

New Numbering Format• Appendix D to Code is a mapping document to the prior code

citations

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Code of Conduct - Members in Business

Prohibits a member from knowingly misrepresenting facts or subordinating his or

her judgment

Requires a member to be candid and not knowingly misrepresent facts when

dealing with an external accountant

Requires a member to have the knowledge required to perform duties and perform

additional research or seek consultation when needed

Requires a member to correct an entity’s financial statements that are materially

false or misleading

Requires a member to comply with regulations regarding the timely filing of

personal tax returns

Must maintain confidentially of employer’s records and may not use confidential

information as a result of prior employment to his or her personal advantage or

advantage of a third party, such as a prospective employer

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Conflicts of Interest (COI)

Examples of Conflict of Interest for Members in Business• Serving in a management or governance position for two employing organizations

and acquiring confidential information from one employing organization that could be used by the member to the advantage or disadvantage of the other employing organization

• Being responsible for selecting a vendor for the member’s employing organization when the member or his or her immediate family member could benefit financially from the transaction

• Serving in a governance capacity or influencing an employing organization that is approving certain investments for the company in which one of those specific investments will increase the value of the personal investment portfolio of the member or his or her immediate family member

Steps outlined for addressing conflicts of interest

Identify COI, Evaluate COI, Disclose/Obtain Consent

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Online Platform

• Basic and Advanced Search Capability

• Pop-ups

• Bookmarks

• Record Notes

• Hyperlinking

Available at aicpa.org

Online Code of Professional Conduct

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governmental audit update

Government & Nonprofit