Proprietary, Fiduciary and Government-Wide Financial Statements January 11, 2018

Learning Objectives Review the Government-wide financial statements, Proprietary statements, and fiduciary statements Understand the key components of the reconciliations from the government-wide financial statements to the governmental funds Take a deeper dive into the complex transactions and related entries for government-wide conversion Discuss the most common and new footnote disclosures Identify and review the sections of the CAFR Discuss the GFOA Certificate of Excellence in Financial Reporting

CAFR Basics Clarity Completeness Consistency Compliance Financial statements should posses these four elements to be transparent and useful to its users

CAFR Basics Introductory Section Independent Auditors’ Report Letter of Transmittal Certificates of Excellence in Financial Reporting Organizational Chart Principal and Elected Officials Other Unaudited Information Introductory Section Independent Auditors’ Report Management’s Discussion and Analysis Government-Wide Financial Statements Governmental Fund Financial Statements Proprietary Financial Statements Fiduciary Financial Statements Basic Financial Statements Budgetary Information Pension Proportionate Share and Contributions OPEB Funding Progress Notes to the RSI Required Supplementary Information Financial Trends Revenue Capacity Debt Capacity Demographic and Economic Information Operating Indicators Statistical Section

Government-wide Financial Statements

Government-wide Financial Statements Include 2 statements: Statement of Net Position Statement of Activities Includes all governmental and business-type activities of the primary government and discretely presented component units, but does not include fiduciary activities Reported on the full accrual basis of accounting Provides cost information on providing various services

Statement of Net Position

Statement of Activities Extraordinary Items Items that are both unusual in nature and infrequent in occurrence Special Items Significant items, subject to management’s control, that meet one, but not both of the criteria used for identifying extraordinary items General Revenues All taxes Unrestricted intergovern-mental revenues Interest (not legally restricted for a specific program) Gain on sale of capital assets Miscellaneous revenues Program Revenues Charges for services Operating grants and contributions Capital grants and contributions Expenditures

Statement of Activities

Governmental Funds Balance Sheet Where are the capital assets?

Governmental Funds – Statement of Revenues, Expenditures and Changes in Fund Balances How do these costs get converted to assets/liabilities?

Reconciliation of Governmental Fund Balance Sheet to Statement of Net Position Governmental Fund’s Fund Balance Plus: Assets Long-Term in Nature and Deferred Inflows of Resources Capital assets, less accumulated depreciation Deferred Inflows of Resources Other long-term assets, not available to pay for current year expenditures (notes receivable, inventories recorded on the purchase method) Less: Liabilities Long-Term in Nature Long-term debt (bonds, notes, loans, capital leases, premiums and discounts on long-term debt, etc.) Long-term compensated absences, other post employment benefits and pension liability Plus: Assets and Liabilities from Internal Service Funds Included in Governmental Activities Net Position of Governmental Activities

Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Position

Reconciliation of Governmental Fund Statement of Revenues, Expenditures and Changes in Fund Balances to Governmental Activities Statement of Activities Net Change in Fund Balance Changes in Capital Assets Plus: capital asset additions Less: current year depreciation Less: loss on disposal of capital assets Plus: Revenues that do not Provide Current Financial Resources Less: Expenses that do not Use Current Financial Resources Changes in Long-Term Debt Less: Issuance of long-term debt Plus: Principal payment on long-term debt Net Resources of Internal Service Fund Reported with Governmental Activities Change in Net Position Governmental Activities

Reconciliation of the Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balance to the Statement of Activities Aren’t these usually recorded as capital assets when incurred?

Proprietary Fund Financial Statements Include 3 statements: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Reported on the full accrual basis of accounting Includes enterprise funds and internal service funds Must report all major funds as separate columns and all nonmajor funds aggregated into one column Internal service funds are aggregated into one column and presented following the enterprise funds

Proprietary Fund Financial Statements (Continued) Statement of Net Position Balance sheet format v. Net position format (May use either format) Assets+Deferred Outflows = Liabilities+Deferred Inflows+Net Position Assets+Deferred Outflows – Liabilities+Deferred Inflows = Net Position Classified Presentation Must separate current assets/liabilities v. noncurrent assets/liabilities Generally current are those that are “reasonably expected to be realized in cash” within one year. Major funds generally reported as At least 10% of the total for enterprise funds At least 5% of the combined total for enterprise and governmental funds May also be reported as major for significant importance to readers

Proprietary Fund Financial Statements – Statement of Net Position

Proprietary Fund Financial Statements (Continued) Statement of Revenues, Expenses and Changes in Net Position Distinguish operating revenue and expense v. Non-operating revenue and expense There is no authoritative definition of what constitutes operating revenue or expense. Each government must disclose the basis on which it distinguishes operating from non-operating items. Interest income in generally non-operating, unless it is the sole purpose of the proprietary fund. Statement of Cash Flows Cashflows from operating activities Cashflows from capital and related financing activities Cashflows from investing activities

Proprietary Fund Financial Statements – Statement of Revenues, Expenditures & Changes in Net Position

Proprietary Fund Financial Statements – Statement of Cashflows

Internal Service Funds Recorded on essentially the same method as enterprise funds Economic Method Full Accrual Main Difference from Enterprise Funds Internal Service Funds are only permitted if there is an intent to provide goods or services on a cost-reimbursement basis Only appropriate if charges to customers (other departments) are intended to be recovered at full cost “break-even” They can have an ending net position in a given period

Modified Accrual to Full Accrual Conversion Process – Common Complex Entries Current Year Additions, Dispositions & Donations Depreciation Expense Reclassification from CIP to Depreciable Assets Capital Asset Entries Proceeds from Debt Issuance or Refunding Current year principal payments Current year amortization of deferred amounts on refunding Current year amortization on premiums/discounts Long-Term Debt Change in Deferred Inflows, Deferred Outflows, and Net Pension Liability Change in pension expense Pension Activity

Modified Accrual to Full Accrual Conversion Process – Other Common Entries Changes in current year activity Compensated Absences Change in unavailable revenues Unavailable revenues in governmental funds Change in Internal Service Fund Net Position Reduced by amount related to Enterprise Activities Internal Service Fund Elimination

Modified Accrual to Full Accrual Conversion Process – Capital Assets What conversion entries were posted to properly state capital asset activity on the Statement of Net Position? Record Beginning Balances Record Additions & Donations Record Dispositions Record Depreciation Reclassify CIP to Depreciable Assets

Modified Accrual to Full Accrual Conversion Process – Capital Assets To record the beginning balance of capital assets. Debit   Credit 1901 Non-depreciable 1,586,806.00 1902 Depreciable (net) 22,431,805.00 3100.1 Unrestricted net assets 24,018,611.00 Total To record capital asset additions and reclassify CIP 2,082,394.00 477,332.00 4601.5 Capital donations - general government 130,827.00 5000 General Government 19,626.00 5200 Highways and streets 306,164.00 5300 Culture and recreation 23,668.00 5800 Capital outlay 1,124,777.00 To record current year dispositions. 4,778.00 To record depreciation expense. 647,074.00 5100 Public Safety 607,908.00 821,086.00 421,875.00 5400 Redevelopment and housing 4,243.00 2,502,186.00

Modified Accrual to Full Accrual Conversion Process – Long Term Debt What conversion entries were posted to properly state long-term debt activity on the Statement of Net Position? Record Beginning Balances Record Additions Record current year payments Reclassify “due within one year”

Modified Accrual to Full Accrual Conversion Process – Long Term Debt To record the beginning debt balances. Debit   Credit 3100.1 Unrestricted net assets 7,782,606.00 2912 Capital leases payable 1,162,606.00 2913 Bonds, notes and loans payable 6,620,000.00 Total To record the current loan payments and reclassify due within one year. 280,000.00 2903 Bonds, notes and loans payable - current 145,000.00 5900 Principal retirement 135,000.00 750,000.00 375,000.00 1,030,000.00 To record the capital lease activity for the current year. 690,921.00 9300 Proceeds from capital lease 140,482.00 2902 Capital leases payable - current 427,406.00 403,997.00 831,403.00 To record the compensated absences activity To record beginning balances. 1,279,555.00 2911 Compensated absences To record current year activity. 712,855.00 5100 Public Safety 64,342.00 5200 Highways and streets 32,611.00 5300 Culture and recreation 11,288.00 2901 Compensated absences - current 64,962.00 5000 General Government 43,279.00 2,100,651.00

Modified Accrual to Full Accrual Conversion Process – Pension Entries – Tips for Success Start with last year’s ending balances. (remember the liability reported for the current year is derived from the previous years contributions) Most of the information will come from the pension system GASB 68 reports The pension system GASB 68 reports disclose the deferred outflows, but do not include the current year contributions that are deferred. Keep it simple, if you know the ending liability balance, deferred inflows and deferred outflows, the remainder gets allocated to expenditures based on functional allocation. Remember, these are estimates.

Modified Accrual to Full Accrual Conversion Process – Long Term Debt To record the beginning debt balances. Debit   Credit 3100.1 Unrestricted net assets 7,782,606.00 2912 Capital leases payable 1,162,606.00 2913 Bonds, notes and loans payable 6,620,000.00 Total To record the current loan payments and reclassify due within one year. 280,000.00 2903 Bonds, notes and loans payable - current 145,000.00 5900 Principal retirement 135,000.00 750,000.00 375,000.00 1,030,000.00 To record the capital lease activity for the current year. 690,921.00 9300 Proceeds from capital lease 140,482.00 2902 Capital leases payable - current 427,406.00 403,997.00 831,403.00 To record the compensated absences activity To record beginning balances. 1,279,555.00 2911 Compensated absences To record current year activity. 712,855.00 5100 Public Safety 64,342.00 5200 Highways and streets 32,611.00 5300 Culture and recreation 11,288.00 2901 Compensated absences - current 64,962.00 5000 General Government 43,279.00 2,100,651.00

Modified Accrual to Full Accrual Conversion Process – Pensions To record the current year ASRS and PSPRS pension activity. Debit   Credit To record the government-wide entry for the ASRS pension liability. 1860 Deferred Outflow of Resources 957,939.00 3100.1 Unrestricted net assets 5,740,723.00 5000 General Government 6,000.00 5100 Public Safety 3,076.00 5200 Highways and streets 1,779.00 5300 Culture and recreation 1,717.00 2555 Deferred Inflow of Resources 969,478.00 2930 Pension Liability 5,305,650.00 167,406.00 40,735.00 85,816.00 20,881.00 49,620.00 12,074.00 47,915.00 11,659.00 To record the government-wide entry for the PSPRS pension liability. 5,897,329.00 21,048,997.00 458,019.00 1,577,324.00 25,827,021.00 Total 34,115,579.00

Modified Accrual to Full Accrual Conversion Process – Internal Service Fund Elimination Internal service funds are intended to work on a cost reimbursement basis. Meaning they should essentially “break-even” over time. Therefore, the current year net position, will be eliminated through a “look-back” adjustment: To eliminate the internal service fund ending net position. Debit   Credit Revenues - Internal Customers 49,079.00 Expenditures - General government 25,000.00 Expenditures - Public safety 15,000.00 Expenditures - Highway and streets 9,000.00 Expenditures - Culture and recreation 79.00 Total

Fiduciary Fund Financial Statements Include 2 statements: statement of fiduciary net position state of changes in fiduciary net position Fiduciary Capacity (Implicit Definition) Ongoing responsibility Third-party ownership Unavailable for government use Usually two types Trust (operates pursuant an agreement) Agent (acts in a custodial capacity with no formal agreement) Reported on the full accrual basis of accounting Must report the net position format Fiduciary Funds should be reported by the various fiduciary fund types (pension trust funds, investment trust funds, private-purpose trust funds, and agency funds), not by major fund

Fiduciary Fund Financial Statements (Continued) Example: Statement of Assets and Liabilities Example: Statement of Changes in Net Position

Notes to the Financial Statements and Effects of Recent GASB Pronouncements

Notes to the Financial Statements Third element of the basic financial statements The required disclosures are designed to support and provide additional information related to the first two elements of the basic financial statements Negative disclosure normally should be avoided Note disclosures only apply to material items The notes should focus on the primary government (Governmental activities, business-type activities; major funds – governmental and enterprise; and nonmajor funds in the aggregate. Describe accounting and finance-related policies underlying amounts recognized in financial statements (Summary of Significant Accounting Policies) More detail about or explanations of amounts recognized in financial statements (Other Disclosures)

Summary of Significant Accounting Policies A summary of significant accounting policies is always required. Governments should also comment in their summaries if they have a choice of different accounting policies for specific transactions, use a policy that is peculiar to those being followed in the government's industry, or apply GAAP in an unusual or innovative way Disclosures should be limited to material transactions/balances The summary of significant accounting policies should not duplicate disclosures included in other disclosures

Summary of Significant Accounting Principles Description of the government-wide financial statements Identify governmental and business-type activities Describe the absence of fiduciary funds and similar component units Identify the components of net position Identify the key elements of the statement of activities Brief description of component units Describe the relationship to the primary government, including criteria for including component units Identify whether component units are blended or discretely presented Provide information about how to obtain the separate financial statements of the component unit Description of major funds, internal service fund and fiduciary funds

Summary of Significant Accounting Principles Measurement focus and basis of accounting Revenue recognition policy in the fund financial statements, including the length of time defining available Policy for eliminating internal activity in the government-wide statement of activities The basis on which inventory amounts are stated (i.e. cost) and the method of determining cost (i.e. flow assumption used) The policy for capitalizing assets Capitalization thresholds Methods of estimating cost Extent of infrastructure capitalization

Summary of Significant Accounting Principles Description of types of transactions included in program revenue and policy for allocating indirect expenses The policy for defining operating and nonoperating revenues of proprietary funds The definition of cash and cash equivalents in the statement of cash flows The policy regarding whether to first apply restricted or unrestricted resources when an expense is incurred for purposes for which both restrict and unrestricted is available Fund balance classification policies and procedures

Other Required Note Disclosures Budgetary Basis and Violations of Legal Provisions If budgetary comparisons are presented in the basic financial statements – may be presented on or with budgetary statements If budgetary comparisons are presented as RSI – the disclosure should be made with RSI unless the legal violations are material to the basic financial statements Many governments disclose their budget calendar and other budget related matters, but this is not required If fund balance classifications are not detailed on the face of the financial statements, the notes should disclose the classification of nonspendable, restricted, committed and assigned.

Other Note Disclosures Cash and Investments Certain disclosures related to cash deposits with financial institutions, including the types of deposits authorized by legal and contractual provisions; any violations of those provisions during the period; and the portion of bank balances for which there is collateral credit risk at year-end Types of Investments Investment Ratings Investment Maturities The level of the fair value hierarchy within which the fair value measurement is measured The policy related to credit risk, concentration of credit risk, interest rate risk and foreign currency risk

Other Note Disclosures Cash and Investments Investment Maturity Concentration of Credit Risk

Other Note Disclosures Cash and Investments Investment Fair Value Hierarchy

Other Note Disclosures Cash and Investments Investment Rating

Other Note Disclosures Long-Term Debt The schedule of changes in long-term liabilities should include all long-term obligations (both bonded and operating) The schedule of debt service requirements to maturity – report interest and principal separately for each of the next five years and in five-year increments thereafter The future minimum lease payments on capital and operating leases must be disclosed, including principal and interest for each of the next five years and in five-year increments thereafter The amount of depreciation amortized on all outstanding capital leases

Other Note Disclosures Long-Term Debt Debt secured by pledged revenue – disclose the specific revenue pledged and approximate length of the pledge; general purpose for which secured debt was issued; period in which pledged revenue will not be available; ratio of the pledged amount to the total for that specific revenue; comparison of pledged revenues to principal and interest payments made during that period Details of refunding transactions Amount of debt issued to refund other debt Amount of debt refunded Savings as a result of the debt refunding The net present value of the refunding The amount of all unmatured defeased debt outstanding, but removed from the government’s liability

Other Note Disclosures Cost Sharing Defined Benefit Pension Plans Aggregate amount of net pension asset/liability, deferred outflows of resources, deferred inflows of resources and pension expense Plan Description and availability of separately issued report Summary of the benefits provided Contribution requirements and actual contributions to plan for the current and two preceding years Pension liability Dollar amount the pension asset/liability Proportionate share of the net pension asset/liability Summary of pension expense, categories of deferred inflow and outflows of resources, and future amortization schedule of deferred inflows and outflows

Other Note Disclosures Cost Sharing Defined Benefit Pension Plans Actuarial assumptions Long-term expected rate of return on pension investments Discount rate Sensitivity of the proportionate share of the net pension asset/liability to the change in the discount rate Pension plan fiduciary net position Agent Pension Plans Plan Description and availability of separately issued report Summary of the benefits provided Employees covered by benefit terms Contribution requirements and actual contributions to plan for the current and two preceding years

Other Note Disclosures Agent Pension Plans Pension liability Dollar amount the pension asset/liability Proportionate share of the net pension asset/liability Actuarial assumptions Long-term expected rate of return on pension investments Discount rate Changes in the plans pension asset/liability Sensitivity of the of the net pension asset/liability to the change in the discount rate Pension plan fiduciary net position Summary of pension expense, categories of deferred inflow and outflows of resources, and future amortization schedule of deferred inflows and outflows

Other Note Disclosures Other Postemployment Benefits (single employer defined benefit plan) Plan description and benefits provided Funding policy and employees covered Actuarial methods and assumptions Change in total OPEB liability Discount rate Sensitivity to the change in discount rate Health care cost trend rate sensitivity OPEB expense and components of the expense Categories of deferred inflow and outflows of resources, and future amortization schedule of deferred inflows and outflows

Other Note Disclosures Tax Abatements Brief description of 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 recipients The gross dollar amount of taxes abated during the period Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement For tax abatements entered into by other governments the government should disclose: The names of the governments that entered into the agreements The specific taxes being abated

Required Supplementary Information (RSI) Budgetary comparison schedules for the General Fund and major special revenue funds if not presented in the basic financial statements Ten year schedule of proportionate share of the net pension asset/liability of cost sharing pension plans Ten year schedule of net pension asset/liability and related ratios of agent pension plans Ten year schedule of pension contributions to cost sharing and agent pension plans Ten year schedule of OBEB liability Notes to RSI

Other Elements of the CAFR

The Financial Statements Introductory Section Certificates of Achievement List of Principal Officials Organizational Report Letter of Transmittal Financial Section Independent Auditors’ Report Managements Discussion & Analysis Basic Financial Statements Notes to the Basic Financial Statements RSI other than the MD&A Statistical Data Information on financial trends Information on revenue capacity Information on debt capacity Demographic & economic data Operating information

The Transmittal Letter To convey the CAFR to its intended users Profile of the government Present Information useful in assessing the government’s economic condition Awards and Acknowledgements

The Transmittal Letter Include Profile of Government Basic Information Services|Geography Population|History Component Units Budget Economic Conditions Local Economy Long-term Financial Planning Relevant Financial Policies Major initiatives Do Not Include! Cash Management Risk Management Postemployment Benefits

The Financial Section Independent Auditors Report Managements Discussion and Analysis Basic Financial Statements (Footnotes) Required Supplementary Information (Other than MD&A) Financial Section

Management’s Discussion and Analysis Originated from the private sector(SEC) Provide users with a narrative, introduction, overview, and analysis of the basic financial statements GAAP identifies a list of the specific topics to address, if relevant to the government's circumstances Because MD&A is required supplementary information, a government may not address additional topics not found on the following list (next slide) Should be placed in front of the Basic Financial Statements Graphs should be limited to enhance information provided MD&A should focus on the primary government

Management’s Discussion and Analysis Discussion of the Basic Financial Statements Condensed comparative data Overall analysis Fund analysis Budget variances in the General Fund Capital asset activity Long-term debt activity Infrastructure (Under modified approach) Other potentially significant matters

The Statistical Section Financial Trends Revenue Capacity Debt Capacity Demographic & Economic Information Operating Information

The Statistical Section Information about net position Information about changes in net position Information about fund balances Information about changes in fund balance Financial Trend Data Information about the revenue base Information about revenue rates Information about principal revenue payers Information about property tax levies and collections Revenue Capacity Ratios of Outstanding Debt Ratios of General Bonded Debt Direct and Overlapping Debt Debt Limitations Pledged Revenue Coverage Debt Capacity

The Statistical Section Population Total personal income Per capita personal income Unemployment rate Information on principal employers Demographic & Economic The number of government employees Indicators of the demand or level of service Indicators of volume, usage, or nature of capital assets Operating Information

The Statistical Section - Narrative Describe the objectives of the different types of information contained in the statistical section Explain basic but potentially unfamiliar concepts Explain how information provided elsewhere may help the reader to better appreciate the data presented in a given statistical table Explain atypical trends and anomalous data that users would not otherwise understand Describe the source of data not extracted from the financial statements

Benefits to Preparing a CAFR Public recognition of excellence in financial reporting More transparency to the public and bond holders Meet requirements of bond covenants, bond holders and bond rating agencies Provide more detail to governance, including trend information (statistical section), current events, future projects and operations of the government (transmittal letter) The certificate of excellence is valid for a period of one year. Each year the government can apply for the certificate to be recognized for excellence in financial reporting

Dennis J Osuch, CPA Principal Dennis. Osuch@CLAConnect Dennis J Osuch, CPA Principal Dennis.Osuch@CLAConnect.com Dennis V Maschke, MBA, CPA Dennis.Maschke@CLAConnect.com Thank you!