How to Understand and Prepare the Entity-Wide Financial Statements

Why are we here today?

WHY?  New auditing standards require Skills, Knowledge, and Experience (SKE) sufficient to understand the statements  Save money on your audit by preparing your own  Because it’s fun!!! SKE is the KEY!

I HEAR AND I FORGET. I SEE AND I REMEMBER. I DO AND I UNDERSTAND. -CONFUCIUS

MY HEAD IS FULL OF STUFF I DO NOT UNDERSTAND - RANDOM TEXT MESSAGE

Presenters Susan Barkley CPA Assistant Director District Support Kentucky Department of Education Edward D. Muns CPA Director of Accounting Jefferson County Public Schools

Introduction to the Entity-Wide Statements – Structure and Theory

One Picture – Two Views Fund Statements  Separate funds  Modified accrual  Fiscal accountability Entity-Wide Statements  Integrated reporting unit  Full accrual  Operational accountability

Structure Governmental Activities  Governmental funds Business-Type Activities  Enterprise funds Fiduciary Funds are not incorporated into the entity-wide statements

Conversion  Fund statements  Governmental – current financial resources  Proprietary funds – economic resources  Entity-Wide statements  All information is economic resources  Requires converting governmental funds information to economic resources measurement focus

The Big Differences  Capital Assets  Purchase  Depreciation  Long-term Debt  Issuance  Repayment

Example: Capital Assets Gov’t Funds  No asset  Purchase = expenditure in that year  No depreciation Entity Wide  Purchase = asset  Expense is only annual depreciation

Terminology Current Financial Resources  Revenue or Other Financing Source  Expenditure or Other Financing Use Economic Resources  Revenue  Expense I love accounting

When is revenue recognized? Modified Accrual  When earned IF  Measurable and  Available  Collectible within the current period or soon enough thereafter to use for liabilities of current period Accrual  When earned

When is expenditure/expense recognized? Modified Accrual  When liability is incurred EXCEPT  Unmatured debt  Accrued interest  Inventories  Prepaids  Certain accrued liabilities not expected to be liquidated with expendable available financial resources Accrual  When liability is incurred

Statement of Activities  Presents the cost of providing services Expense – Revenue = Net Change  Upper section shows program costs and program-specific revenue  Lower section shows additional revenue needed to support the programs  Minimum level of expenditure detail is function

Revenues  Program Revenue  Charges for Services  Operating Grants & Contributions  Capital Grants & Contributions  General Revenues  Examples: Property taxes, SEEK, grants that are not program-specific

Reconciliations  The “map”  Between government funds statements and entity-wide statements  Listing of the conversion items to produce the entity-wide statements

Conversion Process  MUNIS = governmental funds statements  Entity-wide is prepared off-system  Excel spreadsheet  Quickbooks sort of software

Exercise Small Group Quiz: Entity-Wide Statements

Conversion Entries: Governmental Funds to Entity- Wide

Gather Documents  Prior year entity-wide statements  Current year governmental funds statements (Munis)  Long-term debt information  Refunding bonds  Capital asset information  Materials from this class

PY Entity-wide statements  Enter the ending balances of the accounts that appear ONLY on the entity- wide statements  Including net assets (position)  These provide a beginning balance for the current year conversion activity  Accounts in ALL CAPS

CY fund statements  All other beginning balances in trial balance come from funds statements  Accounts in upper/lower case Be sure debits and credits net to zero

Conversion entries  Begin listing the conversion entries  Need guidance?  PY financial statements  Resources from this class  GFOA blue book

Conversion entries  Do not enter the conversion entries into Munis  The conversion is performed off-system

Capital assets  CY additions  CY depreciation expense  CY disposals  Accumulated depreciation on CY disposals  Can group these together or perform 4 separate conversion entries

CY additions  Recorded as expenditure in the funds  Will be an asset in entity-wide Dr. CAPITAL ASSETS Cr. Expense ENTRY A

CY depreciation  Is not recorded at all in the funds  Will be expense in entity-wide Dr. Expense Cr. ACCUMULATED DEPRECIATION ENTRY B

CY disposals  Not recorded in the funds  Will be a reduction of an asset in entity- wide Dr. Expense Cr. CAPITAL ASSETS ENTRY B

Accumulated depreciation on CY disposals  Not recorded in the funds  Will be a reduction of accumulated depreciation in entity-wide Dr. ACCUMULATED DEPRECIATION Cr. Expense ENTRY B

Long Term Debt  Bond proceeds  Bond principal payments  Refundings  Deferred outflows/inflows  Accrued interest  Premiums and discounts

Bond proceeds  Recorded as Other Financing Source in funds  Will be a LT liability in entity-wide Dr. Other Financing Source Cr. LT BONDS PAYABLE ENTRY F

Bond principal payments  Recorded as expenditure in the funds  Will be reduction of liability in entity-wide Dr. LT BONDS PAYABLE Cr. Expenditure – debt principal ENTRY G

Refundings  Is recorded as Other Financing Source and Use in funds  Will be eliminated in entity-wide Dr. Other financing source Cr. Other financing use ENTRY F, G

Deferred outflows/inflows  New with GASB 65  Analyze all outstanding refundings  Prior period adjustment required  Record the CY net savings/cost as a revenue  Amortize the total remaining lifetime savings/cost as an expense  Remainder is deferred outflow/inflow

Deferred outflows/inflows Sample shows a CY net cost: Dr. Expense Dr. Miscellaneous revenue Cr. Deferred outflows ENTRY C

Accrued interest  Not recorded in funds  Will be a liability in entity-wide  Record the change in the balance Dr. Expense – interest Cr. ACCRUED INTEREST PAYABLE ENTRY E

Premiums/discounts  Recorded as Other financing source/use in funds  Will be eliminated in entity-wide Dr. Other financing source (premiums) Cr. Other revenue Dr. Other revenue Cr. Other financing use (discounts) ENTRY D

Other LT debt  Vacation leave, sick leave, other  Not recorded in funds  Will be liability in entity-wide  Record the change in the account balance Dr. Expense Cr. LT liability (for an increasing balance) ENTRY H, M

Transfers  Funds include transfers within governmental activities  Eliminate them on entity-wide Dr. Transfers in Cr. Transfers out ENTRY J

Due to / Due from  Funds include amounts owed between governmental funds  Eliminate for entity-wide Dr. Due to other funds Cr. Due from other funds ENTRY K

Indirect costs  Funds include indirect cost amounts among governmental funds  Eliminate for entity-wide Dr. Other revenue Cr. Other expense ENTRY I

Revenues  Revenues classified by source in funds  Different categories on entity-wide Dr. Other local revenue Cr. CHARGES FOR SERVICES Dr. Federal source revenue Cr. OPERATING GRANTS & CONTRIBUTIONS ENTRY L, O

Function 4XXX  Expenditures are shown by function in funds  Different presentation in entity-wide  Eliminate balance in this function  DO THIS LAST Dr. Expense (other functions) Cr. Expense (function 4XXX) ENTRY Q

Additional Entries  Your district may have additional entries

Post to Trial Balance  Once all conversion entries are listed, post the amounts to an off-system trial balance  Entry reference letter  Be sure total debits = total credits  Resulting entity-wide balances are shown in the two far right columns

Ending Net Position  Calculate the amount of revenues over (under) expenses from the entity-wide balances in the two far right columns  Add this amount to beginning net position to arrive at ending net position

Reconciliations  Must show how to get from:  Balance sheet to statement of net position  Statement of revenues, expenditures and changes in fund balances to statement of activities  Conversion entries will help you complete the reconciliations

Game Brain-teaser

Excel Template

PY Statement of Net Position  Need for beginning balances in ENTITY-WIDE accounts PY Stmt net position TAB 1

Balance Sheet  CY balance sheet  Agrees to Munis  Governmental funds information  Accounts in red box provide beginning balances Balance sheet TAB 2

Statement of Revenues, Expenditures, and Changes in Fund Balances  CY “income statement”  Agrees to Munis  Governmental funds information  Accounts in red box provide beginning balances Stmt rev exp TAB 3

Capital Assets  Information needed to prepare note  CY depreciation expense by function (from Munis) Capital assets TAB 4

LT Liabilities  Information needed to prepare note  Difference between short-term and long- term  Changes in balances LT liabilities TAB 5

Deferred Outflow  Schedule of all refundings  Need CY total and historical total Deferred outflow TAB 6

Expense Allocation  Systematic approach to spreading costs over each function  Use any reasonable method – be consistent – document  Can use different methods for different costs  Capital assets purchases for capital asset costs  Salary expenditure for vacation liability Expense alloc TAB 7

Conversion Entries  Listing of all off-system entries needed to get from fund statements to entity-wide Conv entries TAB 8

Trial Balance  The Hub  Fill in beginning balances  “Post” entries  Two right columns show entity-wide statements  Change in net assets calculated at the bottom Trial balance TAB 9

Reconciliation – Balance Sheet  Listing of all the items that change between the balance sheet and the statement of net position  “map” Recon bal sheet TAB 10

Reconciliation – “Income Statement”  Listing of all the items that change between the statement of revenues, expenditures, and changes in fund balances and the statement of activities  “map” Recon rev exp TAB 11

Statement of Net Position  The entity-wide statement of net position  All balances come form the trial balance  Must allocate total net position among the classifications  Net investment in capital assets  Restricted  Unrestricted Net position TAB 12

Statement of Activities  All balances for governmental activities come from the trial balance  Business-type activities are the same as fund statements Stmt of activities TAB 13

Sample School District - Walkthrough

Questions