Lecture 6: Accounting and Financial Condition

1
Lecture 6 Accounting and Financial Condition

• EDA 757/PPA 730
• Fall 2002
• TL 955
• Spring 03

2
Lecture 6 Outline

• Overview
• Financial statementspre-GASB 34.
• GASB 34Overall financial statements
• Using financial statements to assess fiscal
  health.

3
Good Sources of Information on Accounting and
GASB 34

• GASB Statement No. 34 Implementation
  Recommendations of School Districts. ASBO
  International, 2000.
• Dean Michael Mead. What You Should Know About
  Your School Districts Finances. GASB, 2000.
• GASB. Guide to Implementation of GASB Statement
  34 on Basic Financial Statementsand Managements
  Discussion and Analysisfor State and Local
  Governments. GASB, 2000.
• DESE (MO) GASB 34 Site
• http//www.dese.state.mo.us/divadm/finance/gasb34/
  GASB203420index.html

4
Overview of Government Accounting

• Financial management requires a common language,
  so that all parts of the government can be
  compared--that language is the governmental
  accounting system. It is the set of definitions
  and rules which guide the collection,
  categorization and reporting of financial data.
• The language of accounting can differ across
  organizations, but it can be difficult without
  training to detect the difference.
• It is important to understand the different types
  of accounting systems, their objectives, how data
  is recorded, and what financial information tells
  you about the organizations finances.

5
Fundamental Equation of Accounting

• Assets Liabilities Fund Balance
• Assets Liabilities Fund Balance
• Change in Assets Change in Liabilities
  Revenues Expenditures.

6
Accounting--Definitions

• Assets What government owns.
• Current assets Assets that can be liquidated
  this year.
• Cash
• Short-term investments
• Accounts (and taxes and grants) receivable
• Inventories.
• Non-current assets Assets that are more
  permanent in nature.
• Capital assets not to be depreciatedland,
  facilities under construction.
• Capital assets that have depreciated facilities,
  equipment.
• Long-term financial investments.

7
Accounting--Definitions

• Liabilities What government owes.
• Current liabilities will come due this year.
• Accounts payable
• Deferred revenue
• Short-term debt (BANs, TANs, RANS)
• Due other funds or governments.
• Non-current liabilities
• Long-term debt
• Compensated absences
• Post-employment benefits
• Due retirement systems
• Judgments and claims payable

8
Accounting--Definitions

• Fund balance (net assets) Defined as the
  difference between assets and liabilities. Can
  be divided into
• Reserves for encumbrances
• Other reserves (e.g., capital, repair, Workers
  Compensation, Unemployment Insurance, debt
  service, insurance, etc.)
• Unrestricted, unreserved fund balance, which is
  available for any purpose.

9
Accounting--Definitions

• Revenues
• Property taxes
• Other taxes
• Charges for services
• State revenues
• Federal revenues.
• One-time sales

10
Accounting--Definitions

• Expenditures (expenses) By function.
• General support
• Instruction
• Pupil transportation
• Community service
• Employee benefits
• Debt service
• Capital outlay (depreciation)
• Cost of Sales

11
Expenditure Classification (accounting codes)

• NCES classification system
• Fund (1 digit)
• Year (2 digits)
• Function (4 digits)
• Program (3 digits)
• Object (3 digits)
• Cost center (3 digits)usually school.
• Example 1 99 1000 100 610 105

12
Expenditure Classifications

• Kansas
• 1000 - Instruction
• 100 - Salaries
• 110 - Certified
• 2000 - Support Services (2100 Student Support,
  2200 Instr. Support, 2300 General Administration,
  2400 School Administration)
• Missouri
• 1110-20 (elementary), 1130-40 (Middle), 1150-80
  (High School) FUND?
• 6110 (Certified Teacher Salaries)
• 6410 Supplies
• .71 Language Arts, .72 Math, .73 Science

13
Revenue Classification

• Kansas
• By Fund Level of Govt
• General, Supplemental, Capital, Special Ed etc.
• Local (1000)
• County (2000) formerly only motor vehicle tax
• State (3000)
• Federal (4000)
• Missouri
• 5100 Local
• 5200 County
• 5300 State

14
Measurement Focus

• The definition of what should be measured is
  called the measurement focus, and the issue of
  when transactions are recorded in the accounting
  system is the basis of accounting.
• Accrual (business) accounting Objective is to
  preserve equity of the investors, which
  accountants refer to as a economic resource
  measurement focus.
• Modified accrual accounting Objective is to
  assure financial control or accountability for
  general government functions, which implies a
  measurement focus on current financial resources.
  

15
Basis of Accounting

• Accrual
• Assets and liabilities Under accrual accounting
  it is important to report all assets and
  liabilities on the balance sheet. This implies
  that even long-term assets, such as buildings and
  equipment, should be added when acquired and
  long-term liabilities, such as debt, pension
  obligations, etc., should be reported as they are
  incurred (see Figure 10-1)
• Receipts and expenses Receipts are recognized
  and recorded when they have been earned
  regardless of whether payment has been received.
  Accrual accounting recognizes expenses or the
  monetary value of resources used during the
  period to produce revenues when the resources
  have been used regardless of when the resources
  are paid for (Figure 10-1).

16
Basis of Accounting

• Modified Accrual
• Assets and liabilities focus on those assets and
  liabilities, which tend to be short-term in
  nature. This implies that modified accrual
  accounting focuses on current assets and current
  liabilities. (Figure 10-1).
• Revenues and expenditures Revenues are recorded
  only when they are measurable and available.
  This implies for many taxes, such as the sales
  and income tax that they are recorded only when
  the cash is received. The term expenditures
  reflects commitments to pay for purchases of
  goods and services with current financial
  resources, not when resources are used.
  Therefore, the modified accrual basis is more
  conservative in its recording of revenues and
  expenditures (Figure 10-1).

17

18
Fund Accounting

• A crucial difference between public and private
  sector accounting is in the use of multiple funds
  in the public sector. Funds are separate fiscal
  and accounting entities used to record assets,
  liabilities, revenues and expenditures/expenses
  associated with certain government functions.
• Three types of funds
• Governmental funds Used to record finances of
  general government operations.
• Proprietary funds Used to record finances of
  government business operations.
• Fiduciary funds Report assets that are held for
  others and that cannot be used to support the
  governments own programs.

19
Governmental Funds

• a) General fund The largest single fund in most
  governments is the "general fund". As the name
  implies this is fund used to account for all
  revenues, expenditures, assets and liabilities
  not required to be reported somewhere else. Most
  general revenue sources go directly into the
  general fund and most of the current operations
  of government departments are recorded in this
  fund. In addition, there is a great deal of
  transfers between other governmental funds and
  the general fund.
• b) Special revenue fund This is a fund used to
  account for special revenue sources which are
  earmarked for use for specific purposes. The
  most common in New York is a special aid fund
  that records transactions associated with
  categorical state and federal grants.
• c) Capital projects fund This is used to
  account for the construction of capital projects
  to be used for general government operation, not
  for a special revenue group or public enterprise.
  For example, the construction of school
  buildings would generally be recorded under this
  fund. It receives its revenues from debt
  recorded in the "debt service fund" or general
  revenue sources from the general fund.
• d) Debt service fund Is used to account for the
  long-term "general-obligation" debt committed by
  a community. In this fund would be recorded the
  payment of principal and interest. The revenues
  from these payments will generally come from the
  general fund.
• e) Permanent fund Is used to record a permanent
  endowment provided the government. The endowment
  itself is not to be spent. Instead, interest
  payments from the endowment may be used.
• Accounting standard Modified accrual.

20
Proprietary Funds

• a) Enterprise funds Are used to account for
  agencies of the government, which produce a
  self-financing service for external customers.
  Examples might include a fund for school lunch,
  school store, and transportation. Since this is
  supposed to emulate a private firm, these funds
  are generally self-contained, including all debt,
  and capital construction transactions.
• b) Internal service fund This is a parallel type
  of fund used to record transactions for a
  government agency which provides services to
  other government agencies. Examples might be a
  motor pool/repair department, computer support or
  a print shop. Other governments agencies are
  supposed to be charged the full cost of the
  service.
• Accounting standard Accrual.

21
Fiduciary Funds

• Trust funds are created to record resources the
  district is managing as a trustee. The district
  invests the funds, and may expend interest and
  principal.
• Agency funds are created when the district acts
  as an agent to manage resources for another group
  (e.g., student and parent organizations).
• Accounting standard Accrual.

22
FIGURE 10-2 FUND ORGANIZATIONAL CHART      
The Reporting Entity
A. Governmental Fund Types
1. General
2. Special Revenue
3. Capital Projects
4. Debt Service
5. Permanent  
B. Proprietary Fund Types
6. Enterprise
7. Internal Service
C. Fiduciary Fund Types
Agency
Employee Benefit Trust
Investment Trust
Private Purpose Trust
23
Financial Statements(Pre-GASB 34)

• Balance sheet Measures the assets and
  liabilities at a given point in time (last day of
  the fiscal year).
• For governmental funds, only current assets and
  liabilities are recorded.
• For proprietary funds (and long-term fixed asset
  account group) will include property, plant and
  equipment as assets, and long-term bonds and
  capital leases as liabilities (also in long-term
  obligations account group).

Example of pre-GASB 34 CAFR for Cincinnati City
School District http//www.cpsboe.k12.oh.us/gener
al/finances/2001CAFR.pdf
24
(No Transcript)
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
Financial Statements(Pre-GASB 34)

• Statement of revenue, expenditures and changes in
  fund balance Records flows over the course of
  the year
• Revenues (receipts) additions to fund balance.
• Expenditures (expenses) subtractions from fund
  balance.
• Fund balance at beginning of year and end of
  year difference is the surplus or deficit in
  this fund.
• Totals (Memorandum only) indicates that the
  sum of the three different types of funds should
  be viewed with caution, because of different
  accounting standards.

Example of pre-GASB 34 CAFR for Cincinnati City
School District http//www.cpsboe.k12.oh.us/gener
al/finances/2001CAFR.pdf
29
(No Transcript)
30
(No Transcript)
31
Changes Under GASB 34

• Management discussion and analysis section, which
  is meant to provide a user friendly introduction
  and summary to the CAFR.
• Government-wide financial reporting using an
  accrual basis of accounting. Even financial data
  for governmental funds, which will continue to
  be reported using modified accrual accounting,
  will also be recast on an accrual basis so that
  picture of the financial position of the whole
  government can be determined.
• Government-wide financial reports will record for
  the first time all long-term assets (equipment,
  land, building, other infrastructure), and
  liabilities (long-term debt).
• Expenses that include consumption of capital
  assets (depreciation), rather than expenditures,
  which include the full cost of capital purchases
  in the year the purchases were made, will be
  reported on a government-wide basis.
• Two new financial statements will be requiredThe
  Statement of Net Assets, and Statement of
  Activities (discussed below).

32
Comprehensive Annual Financial Report (CAFR)

• Principal reporting of audited financial
  information to board of education, citizens,
  federal and state governments.
• Organized into 5 sections
• Introduction Transmittal letter of auditor,
  letter from independent auditor, organization of
  government, management discussion and analysis.
• Government wide financial statements.
• Combined financial statements by fund type.
• Notes to financial statements (see below).
• Supplementary material, and statistical
  information.

33





FIGURE 10-3












-

THE FINANCIAL REPORTING PYRAMID



























































































(1)












I
NTRO. SEC.,












AUDITOR LETTER,



MGT. DISCUSSION
















AND ANALYSIS














THE














COMPREHENSIVE

(2)










ANNUAL




GOVERNMENT
-
WIDE

FINANCIAL











FINANCIAL STATEMENTS

REPORT (CAFR)

(NET ASSETS, ACTIVITIES)













(3)

COMBINED STATEMENTS BY FUND TYPE

BALANCE SHEET, INCOME STATEMENT,

CASH FLOWS


(4)


INDIVIDUAL FUND AND ACCOUNT GROUP

STATEMENTS


(5)

SCHEDULES


(6)

TRANSACTION DATA

(THE ACCOUNTING SYSTEM)











































34
Government-wide Financial Statements

• Statement of Net Assets
• Assets current assets, capital assets (cant be
  depreciated), capital assets that can be
  depreciated. Capital assets may be presented net
  of depreciation.
• Liabilities current liabilities, and long-term
  liabilities due this year (or after this year),
  which include long-term debt, funds due to
  pension systems, uncompensated absences, benefits
  (health care) due employees after retirement.
• Net assets Investment in capital assets net of
  related debt, restricted net assets, and
  unrestricted net assets.

35
Sample School District
Statement of Net Assets
June 30, 2002
36
LIABILITIES
Payables
Accounts payable

Accrued liabilities
Due to other governments
Bond interest and matured bonds
Notes payable
Tax anticipation
Revenue anticipation
Bond anticipation
Deferred credits
Overpayments and collections in advance
Deferred revenues - planned balance
Deferred revenues - other
Long-term liabilities
Due and payable within one year
Bonds payable
Installment purchase debt payable
Due to teachers' retirement system
Due to employees' retirement system
Compensated absences payable
Other postemployment benefits payable
Judgments and claims payable
Due and payable after one year
Bonds payable
Installment purchase debt payable
Due to teachers' retirement system
Due to employees' retirement system
Compensated absences payable
Other postemployment benefits payable
Judgments and claims payable
37
(No Transcript)
38
(No Transcript)
39
Government-wide Financial Statements

• Statement of activities is a major change from
  the previous statement of revenues and
  expenditures. Includes information on
• Expenses (costs) by program or function (e.g.,
  instruction), and indirect expenses allocated to
  each function. Provides key information for cost
  analysis.
• Revenues associated with a particular program or
  function including charges and fees, and
  operating and capital grants.
• Net revenues by program.
• General revenues, which fund multiple programs of
  the school district.
• Changes in net assets, net assets at the
  beginning and end of the year.The difference
  between the net assets this year and last year is
  the surplus/deficit.

40
(No Transcript)
41
GENERAL REVENUES
Real property taxes
Other tax items
Nonproperty taxes
Use of money and property
Sale of property and compensation for loss
Miscellaneous
Interfund revenue
State sources
Federal sources
Medicaid reimbursement
Total General Revenues
-


Change in Net Assets
-


Total Net Assets - Beginning of year
Total Net Assets - End of year
-


42
(No Transcript)
43
Other Parts of CAFR

• Consolidated financial statements by type of
  fund These are very similar in form to what
  these statements would look like before GASB 34.
  
• Governmental funds modified accrual
• Proprietary funds accrual
• Fiduciary funds accrual

44
Other Parts of CAFR

• Notes (GASB 34)
• Note 1 Significant Accounting Policiesprovides
  a description of the accounting system and some
  of the terminology.
• Note 2 Reconciliation of governmental fund
  statements and district-wide statements.
• Note 3 Changes in accounting principles.
• Note 4 Stewardship and compliance with legal and
  contractual provisions. Discusses actions to
  correct problems.
• Note 5 Cash in financial institutions
• Note 6 Participation in BOCES.
• Note 7 ST investments at fair market value by
  type of investment.
• Note 8 Capital assets balance and activity
  during year.
• Note 9 Related party transactions.
• Note 10 Short-term debt by type.
• Note 11 Long-term debt and lease-purchase
  obligations.

45
Other Parts of CAFR

• Note 12 Interfund balances and activity.
• Note 13 Pension funds.
• Note 14 Post-employment benefits (primarily
  health care for retirees.
• Note 15 Risk management practices.
• Note 16 Fund balances and reserve funds.
• Note 17 Excess of actual expenditures over
  budget (budget variance information).
• Note 18 Donor restricted endowments.
• Note 19 On-behalf-of payments (payments made to
  a 3rd party).
• Note 20 Discretely presented component units
  (most districts wont have this.)
• Note 21 Subsequent events (capital projects
  committed this year but completed in future
  years.)
• Note 22 Contingent liabilities possible
  liability for returning grant funds.
• For a full list and description of notes see
  Reference Manual for Audits of General Purpose
  Financial
• Statements Appendix 3http//www.emsc.nysed.gov/
  mgtserv/for_those_districts_implementing20GASB34
  20.htm

46
Other Parts of CAFR

• Supplemental information Optional but very
  important to financial analysis of district.
• Revenues and expenditures for last 10 years.
• Assessed and equalized value of property for 10
  years.
• Debt ratios (discussed in facilities planning
  section)
• Demographic statistics.
• Principal taxpayershelps to identify how diverse
  district revenue sources are.
• Enrollment trends and projections.
• Per pupil spending trends and comparison.

47
Using Financial Statements to Assess Fiscal Health

• Sound fiscal health is imperative to the
  effective operation of municipalities in New York
  State. For this reason, local managers should
  periodically assess the financial condition of
  their local government. Office of the State
  Comptroller, 2002.
• Audited financial statements provide one of the
  best sources of information to examine the
  financial condition of a government.
• Determining financial condition can be complex,
  but there are some simple indicators that can
  provide visibility on the fiscal health of
  district.

48
Defining Financial Condition

• Financial condition may be defined as a local
  governments ability to finance services on a
  continuing basis. This ability involves
  maintaining adequate service levels while
  surviving economic disruptions, being able to
  identify and adjust to long-term changes and
  anticipating future problems. (NYS Comptroller,
  1992, p. 1)
• Adequate service levels imply providing adequate
  resources so that students have the opportunity
  to reach Regents standards.

49
Figure 10-4 Framework for Measuring Financial
Condition

Overall
Evaluation


LR Financial
SR Financial

Service

Condition
Condition
Level

Adequacy


Fund

Liquidity
Surplus/Deficits
Balance


Dropout
Regents Exams
Other Exams

Rates

Economic
Financial
Financial
Debt Ratios
Measures
Management


Factors

(based on survey)

50
Framework for Financial Condition Indicator System

• Short-run financial condition Ability to pay
  bills over the course of the year, balance the
  budget, and maintain adequate fund balance
  without extraordinary measures. Categories of
  indicators include
• Liquidity Ability to pay bills.
• Structural balance Do revenues cover
  expenditures without use of fiscal gimmicks?
• Fund balance Does district have adequate
  reserves to cover financial emergencies?

51
Short-Run Financial Condition

• Liquidity
• Current assets/current liabilities (current
  ratio)
• Rule of thumb at least 1.25 to 1.5
• Alternatives
• (Cash current investments)/current liabilities
  (quick ratio)
• Rule of thumb at least 0.5 to 1.0

52
Short-Run Financial Condition

• Operating Surplus (Deficit)
• Total revenues-total expenditures in general fund
  divided by total expenditures.
• Rules of thumb should be positive. Deficits
  should be no greater than 2 of total expend.
• Alternatives
• Same ratio for all funds (same criteria).
• Short-term borrowing as percent of spending (RANs
  and TANs)
• Rules of thumb Look at trend. Use of ST debt
  should not be going up as percent of budget.

53
Short-Run Financial Condition

• Fund Balance
• Unreserved, undesignated general fund balance
  divided by GF expenditures.
• Rules of thumb Nationally the standard of 5 is
  often used. NY limits this percent to 2.
• Alternatives
• Total general fund balance selected reserves
  divided by expenditures.
• Rules of thumb should be between 3 and 5.

54
ST Financial Condition--Example

• Current ratio (Figure 10-5) District 1 has had a
  current ratio below 1 for the last 6 years, while
  district 2 has had a ratio well above 2 in all
  years.
• Unreserved, undesignated GF balance as of
  expend. (Figure 10-6) District 1 has had a
  declining fund balance, which has been negative
  for the last 7 years. District 2 has had a fund
  balance of 2 of spending.
• Surplus/deficit for GF as of expend. (Figure
  10-7) District 1 has been much more volatile
  with 5 years of deficit and 4 years of surplus.
  District 2 revenues and expenditures are about
  equal in most years with very low surpluses and
  deficits.
• Comparison suggests that District 1 is in
  financial trouble, while District 2 appears to
  have much more stable finances, and much stronger
  capability to withstand financial emergencies.

55
(No Transcript)
56
(No Transcript)
57
(No Transcript)