hot topics in school district accounting and auditing dennis p. kotzan, cpa, cff kimberly a....
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Hot Topics in School District Accounting and Auditing
Dennis P. Kotzan, CPA, CFF
Kimberly A. Dorchak, CPA, CGFM
Brenda A. Pawlowski, CPA, CFE
GASB Statement No. 45
Accounting and Financial Reporting by Employers for
Postemployment Benefits Other than Pensions
GASB 45Background and Objectives
What is GASB 45? It is an accounting standard issued by
the Government Accounting Standards Board that applies to non-pension post-employment benefits. This standard requires the recognition of benefit costs that will be paid in the future for current retirees and for active employees when they retire.
GASB 45Background and Objectives
Who must comply with GASB 45? All public employers that follow GASB
accounting standards and that offer post-employment benefits to retired employees are subject to GASB 45
This affects: State governments Cities and towns Counties Boards of Education Public utilities Water districts And others
What benefits are covered by GASB 45? GASB 45 applies to non-pension benefits
provided to retirees, including: Medical Dental Pharmacy Vision Hearing Life Insurance Long Term Care Insurance
GASB 45Background and Objectives
GASB 45How does GASB 45 impact us?
Financial reporting before GASB 45: This year’s financial statements reflect this year’s
premium for retirees receiving benefits this year Financial reporting after GASB 45:
In addition to the above, this year’s financial statements cover
Value of postemployment benefits earned by active employees for this year’s service
Amortization of post-employment benefits earned by current retirees for service done in previous years
Amortization of post-employment benefits earned by active employees for service done in previous years
Post-employment benefits are part of compensation and need to be recognized as a cost when benefits are earned, not when the benefits are paid
Consistent with accounting theory Consistent treatment with pension
benefits
GASB 45Why did GASB create GASB 45?
GASB 45How was the valuation done?
Organization qualified for the simplified approach to GASB 45, (known as the Alternative Measurement Method or AMM)
Used an online self-help tool created by Milliman to perform the valuation (GASBhelp.com)
Saved about 70% of the cost of a full actuarial valuation
Two key elements of GASB 45 financial reporting: Annual Required Contribution (ARC) Unfunded Actuarial Accrued Liability
(UAAL)
GASB 45Key Elements of GASB 45 Reporting
Components of ARC: Value of postemployment benefits by
active employees for this year’s service Amortization of postemployment benefits
earned by active employees and current retirees for service done in previous years
Required to compute and report it, not to fund it (though funding affects the size of the ARC)
GASB 45Annual Required Contribution (ARC)
ARC for fiscal year 2009: $66,430 Compare to current cost for current
year’s premium for current retirees:
GASB 45Our ARC
GASB 45What gets done with the ARC?
Reported as a balance sheet item on the organization’s financial statements
Amount reported is the difference of the ARC over the amount actually contributed to cover the affected benefits
Amount accumulates over time, each year adding the next year’s ARC reduced by the next year’s contributions
Components of UAAL: Value of postemployment benefits
earned by active employees for this year’s service
Value of postemployment benefits earned by active employees and current retirees for service done in previous years
Required to compute and report it, not to fund it (though funding affects the size of the UAAL)
GASB 45Unfunded Actuarial Accrued Liability (UAAL)
GASB 45Our UAAL
UAAL as of 12/31/09: $668,107 Contributions: $0 Net UAAL: $668,107
Qualified audit opinions Affect on bond ratings and borrowing
rates Rating agencies are considering GASB
reporting and management as part of their evaluation of government entities with respect to credit-worthiness
GASB 45What happens if we don’t recognize our GASB 45 liability?
Funding or not? Funding approach affects the discount rate
which affects the size of the ARC and UAAL Funding allows investment earnings to cover
some of the future costs (as opposed to paying them out of future budgets)
Revise benefit plan designs Change retiree contributions toward the
cost of their benefits Change eligibility for retiree benefits for
current actives and/or new hires
GASB 45How do we manage the liability?
GASB Statement No. 54
Fund Balance Reporting and Governmental Fund Type Definitions
Statement released in March 2009 Effective for periods beginning after
June 15, 2010 Applies to Governmental Funds only Does not impact Proprietary and
Fiduciary Funds Does not impact Government-wide
statements
GASB 54Effective Dates and Application
Why did we need GASB 54? The standards defining the current fund
balance classifications and governmental fund type definitions were deemed vague resulting in considerable variation in how governments report this information. These inconsistencies led to reduced comparability.
GASB 54Background and Objectives
What are the objectives of GASB 54? To improve the usefulness and
comparability of governmental fund balance information by reporting fund balance in more meaningful components
To clarify and update the definitions of the types of governmental funds eliminating points of confusion that have diminished consistency in practice.
GASB 54Background and Objectives
Current Fund Balance Categories
Reserved
Unreserved – designated
Unreserved - undesignated
Nonspendable
Restricted
Committed
Assigned
Unassigned
GASB 54New Fund Balance Categories
Generally corresponds to our current classification of “reserved fund balance”
Amounts that literally cannot be spent either because of their physical form or because of legal or contractual requirements that prevent them from being spent.
GASB 54Nonspendable Fund Balance
Nonspendable because of physical form include assets that are not expected to be converted into cash in the near term Inventory and prepaid expenditures Long-term receivables Property acquired for resale
GASB 54Nonspendable Fund Balance
Nonspendable because of legal or contractual restrictions The corpus or principal included in a
permanent fund – resources that must legally be maintained intact
GASB 54Nonspendable Fund Balance
Amounts are spendable but must be used as directed by an external party or by a constitutional provision or enabling legislation External parties include creditors
(through debt covenants/bond indentures), grantors, donors, other governmental units.
GASB 54Restricted Fund Balance
Like nonspendable, restricted fund balance generally corresponds to our current classification of “reserved fund balance”
The key to Restricted Fund Balance is “EXTERNAL” party (i.e. not school board).
GASB 54Restricted Fund Balance
Amounts can only be used as specified by the “formal action of the government’s highest level of decision-making authority”.
School board resolution would commit fund balance
GASB 54Committed Fund Balance
Amounts reported as committed can be redeployed for other purposes by using the same formal process that created the commitment – i.e. a school board resolution to change or remove the commitment
To commit funds as of June 30th, a formal board action should be approved prior to year-end, however, the exact dollar amount can be determined at a later date.
GASB 54Committed Fund Balance
Generally corresponds to our current classification of “unreserved-designated fund balance”
Committed funds, like restricted and nonspendable, are excluded from fund balance when determining compliance with Section 688 of the school code (8% limit on fund balance prior to raising taxes)
GASB 54Committed Fund Balance
Amounts that the government intends to use for a specific purpose
Intent does NOT require formal action by the school board
Likewise, redeploying assigned resources does NOT require formal action by the school board
GASB 54Assigned Fund Balance
Resources can be assigned by a governing body or another body or person to whom the governing body gives the authority to do so Finance committee Business manager Superintendent
Under the current classifications, these amounts were generally considered “unreserved – undesignated”.
GASB 54Assigned Fund Balance
Resources accounted for in a governmental fund other than the general fund are assumed to be, at a minimum, intended for the purpose of that fund and therefore, the minimum fund balance classification would be “assigned” (except for a deficit fund balance which would be “unassigned”)
GASB 54Assigned Fund Balance
The residual fund balance category for the General Fund
Resources are available for any purpose
Reporting positive unassigned balances is permitted in the General Fund only
GASB 54Unassigned Fund Balance
For governmental funds other than the general fund, the unassigned fund balance category is only used to report a deficit fund balance
No fund should ever report a negative amount in the restricted, committed or assigned fund balance categories
GASB 54Unassigned Fund Balance
Contrary to Pre-GASB 54 reporting, encumbrances should not be reported separately within the fund balance categories
Encumbrances should be classified as either committed or assigned as appropriate per the definitions of those categories
GASB 54Encumbrances
While encumbrances will no longer be reported separately on the financial statements, governments may continue to employ encumbrance accounting internally
Significant encumbrances should be disclosed in the notes to the financial statements along with other significant commitments.
GASB 54Encumbrances
Anticipated PSERS increase is currently recorded as “unreserved-designated fund balance”. Under GASB 54 how would we record if: Board formally approves specific funds
be used for this purpose? Business Manager makes the decision to
use specific funds for this purpose?
GASB 54Fund Balance Questions
Board formally approves funds for PSERS increase? Committed
Business Manager makes the decision to use funds for PSERS increase? Assigned
GASB 54Fund Balance Answers
Debt Service is maintained in your General Fund and recorded as “Reserved for Debt Service”. Under GASB 54 how would we record if: Debt covenants dictate that funds must
be set aside to service debt? Finance committee establishes certain
funds to be used for debt service?
GASB 54Fund Balance Questions
Debt covenants dictate that funds must be set aside to service the debt? Restricted
Finance committee establishes certain funds to be used for debt service? Assigned
GASB 54Fund Balance Answers
GASB 54Example Fund Balance Classification
Current Classification (Pre GASB 54)
(10)General
Fund
(22)Capital Reserve
(30)Capital Project
(40)Debt
Service
Fund Balance
Reserved for:
Inventory 50,000
Encumbrances 9,581
Unreserved-Designated (PSERS) 600,000
Unreserved-Undesignated 1,848,467 4,131,786 392,300 2,768,447
GASB 54Example Fund Balance Classification
(10)General
Fund
(22)Capital Reserve
(39)Capital Project
(40)Debt
Service
Fund Balance
Nonspendable
Inventory 50,000
Restricted:
Capital reserve purposes 4,131,786
Construction project 392,300
Debt service 2,768,447
Committed: PSERS Increases
600,000
Assigned:
Encumbrances 9,581
Unassigned 1,848,467
New Classification per GASB 54
0810 – Nonspendable fund balance 0820 – Restricted fund balance 0830 – Committed fund balance 0840 – Assigned fund balance 0850 – Unassigned fund balance
Note that 0840 and 0850 are considered when determining compliance with Section 688 of the school code (8% limit on fund balance prior to raising taxes)
GASB 54Account Code Changes
Highest level of decision-making authority and the formal action required to establish, modify or rescind a commitment of fund balance
The bodies or persons having the authority to assign resources, as well as the policy, resolution or other legislation that delegates such authority
GASB 54Required Note Disclosures
Policy regarding the order in which resources will be spent when resources for a specific purpose are available in more than one fund balance classification
The required detail of the nonspendable, restricted, committed and assigned fund balance amounts, if not fully displayed on the face of the balance sheet
GASB 54Required Note Disclosures
A helpful mnemonic:Nobody Really Cares About Us
NonspendableRestrictedCommittedAssignedUnassigned
GASB 54New Fund Balance Categories
GASB Statement 54 states:“The general fund should be used to account for
and report all financial resources not accounted for and reported in another fund.”
“Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed for specific purposes other than debt service and capital projects.”
GASB 54Governmental Fund Type Definitions
Note that debt service expenditures cannot be made from special revenue funds.
Note that capital expenditures cannot be made from special revenue funds.
GASB 54Special Revenue Funds
GASB Statement 54 further states:“One or more specific restricted or committed revenue sources should be the foundation for each special revenue fund and comprise a substantial portion of the fund’s inflows on an ongoing basis.”
GASB 54Special Revenue Funds
Special Revenue funds must have a dedicated revenue stream
Transfers from other funds are NOT considered revenue
Specific revenue source should comprise a substantial portion of the fund.
GASB 54Special Revenue Funds
Many districts currently report their Athletics Fund as a special revenue fund (Fund 29)
Under GASB 54, in most cases, the Athletic Fund will no longer meet the definition of a special revenue fund.
GASB 54Athletic Fund
Most Athletic Funds are not self-sustaining and are largely funded by General Fund transfers
Consequently, beginning with the 2010-11 year, many districts’ Athletic Fund information will be reported in the General Fund
Revenue code 6710 for Admissions Expenditures coded to 3250 series
GASB 54Athletic Fund
You are permitted to continue reporting the Athletic Fund separately for internal purposes
Regardless of the internal reporting method, in most cases the Athletic Fund will need to be combined with the General Fund for budgeting purposes, on the AFR and the financial statements in the audit report
A board resolution is NOT required to dissolve the Athletic Fund
GASB 54Athletic Fund
GASB 54 broadens the usage of capital project funds
Instead of using a capital project fund to account for “major capital facilities”, GASB 54 states that capital projects funds can be used to account for capital outlays in general
GASB 54Capital Projects Funds
Capital Reserve Funds should be reclassified as Capital Project Funds beginning in 2010-11 fiscal year
Current Fund 21 (per School Code 690) and Fund 22 (Municipal Code 1431) should be reclassified to Capital Project Funds 31 and 32, respectively, under GASB 54
GASB 54What about Capital Reserve Funds?
Your current Capital Project Fund – Fund 30 will become Fund 39 with the implementation of GASB 54
Fund 31, 32 and 39 are expected to be separate columns on AFR
On audited financial statements, Funds 31, 32 and 39 will be aggregated and reported as one major capital project fund
GASB 54Capital Projects Funds
GASB 54 makes clear the existing requirement that debt service funds must be used whenever legally mandated or when financial resources are being accumulated to pay off principal and interest maturing in future years
Debt Service fund remains Fund 40
GASB 54Debt Service Fund
Capital Reserve (21) – Eliminated Capital Reserve (22) – Eliminated New: Capital Project (31)
Funds established pursuant to sections 690 and 1850.1 of PA School Code – Former Capital Reserve Fund 21
New: Capital Project (32) Funds established pursuant to section
1431 of Municipal Code – Former Capital Reserve Fund 22
GASB 54Fund Dimension Changes
New: Capital Project (39) Former Fund 30 used primarily for major
construction projects funded with debt Athletics Fund (29)
Fund 29 will still exist, however, most schools will be required to combine into Fund 10. Although, Fund 29 may continue to be used for internal reporting purposes.
GASB 54Fund Dimension Changes
The purpose of each special revenue fund, identifying which revenues and other resources are reported in each special revenue fund
GASB 54Required Note Disclosures
Improvements in financial reporting Improvements in internal controls Compliance issues Other issues
Internal Controls, Fraud Prevention and Other Hot Button Areas
Reconciliation of bank accounts Ensures revenues and expenditures are
recorded Differences could indicate a payroll or
other error, requiring a change to a filed report
Improvements in Financial Reporting
Material audit adjustments Recording all grants receivable at year
end Recording all liabilities at year end Balancing interfunds and transfers Ensuring supporting documentation for
balance sheet items agree to ledger
Improvements in Financial Reporting
Use of funding source dimensions – federal source codes AFR reporting – federal expenditures reported
separately Social security and retirement subsidy
reimbursements Recording of grants receivable at year end Accurate reporting on quarterly reports and final
completion reports Auditor testing of expenditures charged to major
federal program(s)
Improvements in Financial Reporting
Not recording purchase orders as expenditures in year of issue, but in year invoice is received Software vendor gave district 3 choices for rolling
forward open P.O.’s at year end Roll them into the new year as open P.O.’s for
old year Roll them into the new year as P.O.’s for new
year Record them as expenditures in the year
closing – NO!
Improvements in Financial Reporting
Decrease reliance on spreadsheets to improve efficiency Some track cash on manual or Excel
spreadsheets Enter batches of checks or each check Enter deposits at end of month
Some track smaller funds on spreadsheets or not at all (Debt Service, Capital Reserve, Athletics)
Provide the auditor with investment statements to derive a TB
Provide the auditor with a spreadsheet in lieu of a TB
Weigh the time it takes for manual vs automated
Improvements in Financial Reporting
Segregation of duties and cross-training Reduce instances of error or fraud Coverage for illness, injury, etc.
Often staff limitations Business manager by default
Improve Internal Controls
Controls over disbursements - limit how much one person does Facsimile signatures Mailing checks Reconciling accounts Use of an imprest account
Monitor old outstanding checks Escheat Reissue
Improve Internal Controls
Reconciliation of Tax Collectors Tax collectors are required to use the DCED-approved
monthly report Required to reconcile by Jan. 15th
District should monitor amounts received during collection period
Delays in remittances could indicate a problem Be cautious of changes in collectors’ behavior
Taxpayers tend to pay same time each year Comparison of monthly collections by year
Monitor new collectors Overwhelmed Confused County training?
Improve Internal Controls
Compliance Issues
Purchases > $4,000 Government pricing Quotes
Purchases > $10,000 Government pricing Bids
Compliance Issues
Recording only ½ retirement to federal programs
Reporting federal wages for social security subsidy reimbursement
Problem areas Federal source codes not used Federal expenditures reclassified at year end Business manager not aware of requirement Potential to under-spend grant Inaccurate reports filed
Compliance Issues
Tracking payments to vendors for Form 1099-MISC reporting (Athletic Fund) More likely to occur when:
Accounting is not centralized Fund not maintained in G/L software
Always try to avoid IRS issues!
Other Issues
Student Activities Need a good “gate keeper” Avoid booster groups, parent groups, elementary
accounts Proper documentation for checks written
Original invoice Proper approval - student and advisor
Proper control over receipts Ticket counts Tracking of sales for candy, subs, etc. 2 people counting cash and signing off
Other Issues
ARRA funding Auditor required to test all ARRA money spent
(basically) ARRA grant follows other federal requirements
(Title I, IDEA-B, etc.) Caution on IDEA-B MOE expenditures
Special Ed costs only 50% of IDEA-B additional spent
Compliance Supplement for auditors to use is still in draft form
1512 report will need audited in some fashion Controls over ARRA monies evaluated Increase audit costs? Apply to ARRA?
Other Issues
Antifraud Program Control environment - basic building block for an
organization Organizational style Ethical values Trustworthiness of an organization
Working Antifraud Program Establish a “Tone at the Top”
o Portray a reputation of integrity Deal fairly with employees
o Discourage unethical behavior
Other Issues
Working Antifraud Program (continued) Adopt and distribute a formal program
o Outline internal controlso Provide guidelines for reporting fraud or
suspected fraud, including steps to investigate
o Develop a Code of Conducto Post the Code and Program prominentlyo Advise current and new employees of both
and provide a copy of each
Other Issues
Working Antifraud Program (continued) Adopt and distribute a formal program
o Establish a Fraud (Whistle-Blower) Hotline Available for employees to report
suspicions of fraud or misconduct Demonstrate the district’s serious intent to
prevent and detect fraud Internal hotline (or external)
- Superintendent- PA Department of Education- PA Ethics Commission- PA Auditor General
Questions?
