While it’s easy to see why your finance department might begin to resent taking time away from daily operations to work on compiling your district’s GASB 34 financial statements every year, it’s important to remember that (regardless of your personal feelings about the annual exercise) these statements are critical to your statutory reporting requirements. Therefore, after you’ve closed the books on your fiscal year, consider taking a closer look at your capital assets and debt refunding – critical areas that are known to have more than their fair share of errors.
Read Also: Uniform Grant Guidance: What All Government Entities Need To Know
Conquer Capital Assets
Sorting through your capital assets can get a little messy. The following tips will help you eliminate errors, giving you more time to focus on other pressing financial matters and future initiatives.
- Review your capitalization policy/threshold to develop a starting point for identifying purchases used in operations that have initial useful lives extending beyond a single reporting period. Remember that the cost of an addition includes the asset and “any ancillary charges necessary to place the asset into its intended location and condition for use.”
The Government Finance Officers Association recommends a minimum capitalization threshold of $5,000 for any individual items. Capitalization thresholds are best applied to individual items rather than to groups of similar items (i.e. desks and computers) unless the effect of not doing so would be to eliminate a significant portion of the total capital assets.
- Review your disbursement ledgers for items that exceed the capitalization threshold as reported in 600 object codes.
- Determine if an effort was an improvement or maintenance. Generally speaking, improvements provide additional value, which is achieved by lengthening the estimated useful life of a capital asset or increasing the capital assets ability to provide service (i.e. the addition of a lane to an existing road increases the capacity for traffic). Repairs and maintenance, on the other hand, refer to efforts that retain an asset’s value (i.e. the replacement of a roof or the resurfacing of a parking lot retains the value of the property). So, while these efforts may not lengthen the original useful life of an asset, they are necessary for the asset to reach its assigned useful life. Therefore, expenses accrued should be treated as current period expenses.
Note: Remember to review the costs included in object code 423 (repairs & maintenance) to determine completeness of additions and potential misclassification of expenditures.
- Construction in progress can be difficult to track because significant projects are likely to extend over multiple fiscal years.
- Start by reviewing resolutions and/or open purchase orders at year-end to identify incomplete projects (those not placed in service) and the costs that were incurred at the conclusion of the fiscal year.
- Next, review expenditure ledgers for purchases with 418 object codes (professional services). If the project is still in its beginning stages, you may need to capitalize the architect, engineering and/or design services. If you have an Ohio Facilities Construction Commission project, be sure to capture and record all construction manager fees paid directly by OFCC. This information should be captured in your ledgers through a journal entry to record the direct payments.
- Then, identify the vendors used and summarize their costs to assist with capitalizing components of the project into the appropriate class of asset once the project is complete.
- Finally, when you have a significant construction contract, do not rely on your payables report alone, as the service date of a significant portion of your contract may not have been invoiced. Instead, inspect the contractor “applications for payment” subsequent to year-end to determine the timing of any work that was performed. Then compile any and all payments subsequent to year end that include work performed within the fiscal year for inclusion in the Construction in Progress and Contracts Payable portions of your GASB 34 report.
Note: These are typically large payments and, if missed, could result in material audit adjustments.
- Request capital asset disposals from each department responsible for maintaining significant capital assets. This could include a current listing of assets with a request that it be updated/verified and returned to the finance department for final review. This is typical for the purchase of vehicles and buses when there was a trade-in that may not have been identified for the purpose of deleting the previous asset. This step could be added to your annual closing process as a method to keep your listings up to date.
- In your review, search revenue ledgers for 19** receipt codes that would be indicative of a disposal through a sale or insurance recovery and review lease agreements for maturity. If a lease has matured, find out if you still have the asset or whether a new lease has been entered into.
- Insurance proceeds could be used as an indicator for review of capital asset impairment.
- Do have any buildings that are no longer being used for their intended purpose? Discuss specific situations with your financial statement compiler to determine if there are any potential impairment issues.
- Material commitments, per GAAP, must be disclosed in the notes of an entity’s financial statements. The AICPA, State and Local Governments, Section 8.110 defines these commitments as “existing arrangements to enter into future transactions or events, such as long-term contractual obligations with suppliers for future purchases at specified process and sometimes at specified quantities.” In order to identify significant commitments, consider tracking large projects and contracts by vendor or purchase order, identifying the amount expended to date and expected future obligations – as discussed above.
Review Your Debt Refunding Responsibilities
An Advance Refunding (most common type of refunding) is when the issuer sells new bonds, places proceeds into an escrow account, and pays off bonds at scheduled maturity date or first call date. This transaction must be recorded in the accounting system on a cash-basis. A sample entry is provided below. For assistance with these entries, contact you financial statement compiler.
| Bond issuance cost | $XX | ||
| Payment to the Refunded Bond Escrow Agent | $XX | ||
| Discount on Refunding Bonds | $XX | ||
| Sale of Refunding Bonds | $XX | ||
| Premium on Refunding Bonds | $XX | ||
For Bond Issuance and Refunding
When issuing a bond or refunding outstanding bonds, be aware of the budgetary implications.
According to Ohio Revised Code 5705.41(A) – “…the authorization of a bond issue shall be deemed to be an appropriation of the proceeds of the bond issue …” In other words, a bond issuance or refunding does not require formal appropriation as it is determined to be appropriated through the approval of the bond or refunding. Since this is considered an appropriation by law, it should be updated within the accounting system. Likewise, the Certificate of Estimated Resources must be amended to include the issuance or refunding.
During the compilation process, “deemed appropriated” transactions will be included as appropriations as they are legally adopted and required to be included in Generally Accepted Accounting Principles budgetary statements for financial reporting.
If appropriations are not recorded in the system, and the Certificate was not correspondingly increased, noncompliance citation may be issued.
Email Rea & Associates to learn how to avoid these and other financial statement mishaps moving forward.
By Zac Morris, CPA, principal (Millersburg office)