GASB 34 Focus Group

2/9/01 Meeting

GASB 34 FOCUS GROUP

February 9, 2001 Meeting Highlights

Members Present:

Bruce Chase, Radford UniversityJohn Kroll, County of Rockingham

Rob Churchman, KPMG Peat MarwickWalt Kucharski, Auditor of Public Accounts

Sammy Cohen, VA Beach City Public SchoolsMary Lechner, County of Northampton

Dale Craver, City of ChesapeakeTom Smith, Robinson, Farmer, Cox Assoc.

J.P. D’Amato, Dept. of EducationLaura Triggs, City of Alexandria

Jeff Franklin, County of ChesterfieldKim Via, APA

Phil Grant, Town of ViennaGreg Whirley, Dept. of Transportation

Staci Henshaw, APANannette Williams, APA

Bill Johnson, City of Colonial Heights

Visitors:

Stacy McCracken, Dept. of TransportationDebra King, County of Stafford

Karen Stephenson, City of NorfolkMickey Kwiatkowski, County of Stafford

George Hannah, City of RichmondLance Wolff, City of Norfolk

Lyzell Townsend, Norfolk City Public Schools

Update on School Board Asset/Debt Issue

The Focus Group continued to discuss how local governments should report the debt associated with assets recorded by the School Board.

The APA is going to meet with the Association of School Boards and the Dept. of Education on March 1 to discuss issue.

Mary Lechner discussed this issue with GFOA. However, the GFOA has decided not to explore this issue any further. They believe the debt should be kept with the primary government. Regarding whether the school boards should be reported as a component unit or part of the primary government, GFOA believes the issue at hand is whether the school board can be sued without recourse to the local government.

The APA’s preference is to allocate the debt over to the school board. This would present the true economic (not legal) transaction. However, not all of the local government auditors agree with this position. Therefore, it may prevent some localities from receiving a clean audit opinion. So this may not be an option.

Walt will have a final decision at the next Focus Group meeting.

Update on Infrastructure

VDOT has completed their infrastructure inventory valuation and, pending final revisions, will make infrastructure methodology and inventory schedules and values available on both VDOT’s and APA’s website. As discussed previously, the Commonwealth has elected to depreciate infrastructure using the historical approach.

A letter explaining VDOT’s position on infrastructure asset ownership has been drafted and is currently being reviewed. That will also be available soon.

The APA is recommending that localities use VDOT’s information rather than trying to derive their own – it is more cost and time beneficial.

Discussion of the Modified Approach:

The modified approach is difficult to justify from an audit standpoint. Engineers support the modified approach since they believe they can use it to justify additional funding for infrastructure. The main problem from an auditing standpoint is an accounting issue. The governing body has to set a standard by which to measure infrastructure and a condition level at which infrastructure will be maintained. The infrastructure must be maintained at this level starting from day one. In addition, the local government must estimate the annual amount to maintain and preserve the infrastructure assets at the condition level established. If the level of funding is not maintained, or if the governing body changes the condition level, the auditor would have to determine whether it is a change in estimate or a change in principle. Also, lowering the level of maintenance (or funding) could significantly impair the asset (deteriorate the condition of the roads) and prevent the locality from meeting the condition level. These items may impact the audit report on the financial statements if they are not properly accounted for and disclosed.

Kim Via discussed local government accounting entries to record the state highway funds and assets they receive. These entries will be posted on the APA website under Official Guidance.

Other Issues

  1. New AICPA Audit Guide Draft:

-The new Audit Guide has not yet been issued mainly because the AICPA and GASB are at an impasse over materiality

*GASB wants to set audit materiality at the major fund level

*AICPA wants to set audit materiality at the entity wide statement level

-Also being discussed is the issue of departmental statements: can a department or agency of a primary government issue GAAP financial statements? It currently looks as if they will not be allowed. The AICPA is taking the position that there will be no OCBOA (other comprehensive basis of accounting) allowed for any governmental unit. GASB 34 will be the only GAAP.

-Also included in the draft for the new guide is a discussion about auditor’s responsibility in bond issuances, auditor’s responsibilities in general, and a discussion on what constitutes a government.

  1. AGA Teleconference – GASB 34 Update

-Those unable to attend can purchase either a videotape or a web cast of the teleconference.

-The teleconference provides a full 8 hours of CPE

-The new audit guide will be included among the topics

-They will also spend some time on early implementers

  1. Omnibus

-GASB’s omnibus including clarifications on GASB 34 has been issued as an exposure draft. It covers 8 topics, but does not provide a lot of additional clarification. It discusses program revenue, but didn’t really clarify much

Discussion Topics

  1. Methods for capturing data needed for reporting drainage system infrastructure. The focus group members are still researching alternatives for capturing data. Drainage system infrastructure is a different issue for cities and counties. Cities could use lane mile data to estimate how much drainage system infrastructure they have. It may be possible to use bonding documents in counties to determine drainage systems in subdivisions. Other sources of information include Board minutes and industry standards. The cost can be estimated by deflating current replacement cost.
  1. Contributed Capital that is property, plant, or equipment should be collapsed into Invested in Capital, Net of Related Debt, not unrestricted net assets. (See Implementation Guide Q. 208, p. 49) If a locality has contributed capital that is cash, it may be reclassified as either restricted or unrestricted net assets depending on use requirements.
  1. Advice on GASB 34:

Sit down with your CPA firms and discuss the following:

-What do they consider material?

-What assets and accruals they are expecting to see?

-What is the auditor willing to tolerate in terms of supporting documentation required and estimates made by locality?

-Are auditors going to focus on beginning fund balance when compared to prior ending balances?

-Find out what your auditors want & expect, and don’t do more than you need to.

Once you have discussed the above issues with the CPA firm, sit down with your governing bodies and walk them through it.

Be wary of consultants.

Look at what is available to you from other sources, such as VDOT for infrastructure – you may not need to do the work.

For capital assets, look at your outstanding debt. You cannot issue operating debt in the state of Virginia (except school issues) - all debt is capital asset related. As a ballpark/benchmark, look at your debt and that amount should represent the minimum dollar amount of your capital assets.

Keep good records of all decisions made.

  1. How to determine restricted vs. unrestricted fund balance

-At the local level, ask the governing body. If you can only spend for project A, then it is restricted. Look at what is in the budget document.

-If the person who places the restriction can remove it, then it is not restricted.

Submitted Questions

  1. If the land (right of way) under the road is deeded to the County, but the road is turned over to the State (for maintenance purposes), who should report the value of the right of way? (State or County)

Answer: ROW goes with the maintenance of the road. Therefore, the State should report the value of the ROW since they maintain the roads and are recording the value of these roads on its financial statements.

  1. Should Best Management Practices (BMPs) be reported as infrastructure? BMPs are collection ponds (or lakes) for drainage systems and erosion purposes. Traditionally, the BMPs were the responsibility of the homeowner association, business, etc. However, starting in July, Chesterfield will be taking over the maintenance of approximately 70 of them.

Answer: The locality should look at its drainage system in order to determine what should be capitalized. Only items that are actually constructed or part of a constructed fixture such as pipes, concrete, and dams should be capitalized. If a BMP is basically a grassy trench to direct water to the pond and the pond is an indentation in the ground than there is no infrastructure to capitalize. To the extent that the County is only performing maintenance on the BMPs, they would recognize an expense.

  1. Under GASB 34, can a locality capitalize a building as a single asset as opposed to by component (ex. structure, wiring, A/C, plumbing, etc.) since the components may have different useful lives (for depreciation purposes) and items may be retired/replaced at different intervals? How are other localities capitalizing buildings?

Answer: Generally we recommend that the building be capitalized as a unit. This would include all infrastructure, wiring, plumbing, etc. When a major part of the infrastructure needs replacing (air conditioner for instance) the locality can capitalize that replacement/ upgrade separately. At this time, the locality needs to make a decision concerning whether to retire the component being replaced based on the circumstances of the replacement. (ex. current value and remaining life of the replaced component)

  1. For ledger purposes, a locality has separate funds for school operations and school grants. The School Operations budget is a legally adopted annual budget. The grants fund is a life to date fund that only is adopted in its first year and continues until it ends. For financial statement purposes grants and school operations are combined into one School Operating Fund. Should the carry forward of grants be reported in the original budget or in the amended budget column of the School Operating Fund in a subsequent year?

Answer: The carry forward of unexpended grant money can be included in either the original budget or as an amendment to the original budget. There is no automatic carryover of unexpended grant money. Therefore, it must be included in the budget each year. This goes back to the discussion on legally adopted budgets from the June 2000 focus group meeting. The carry forward amount would be part of the original budget if an amount (even if it is an estimate) for the unspent grant proceeds was included in the budget that is presented for public hearing and legally adopted. If it was not in the original budget presented for public hearing, then it should be shown in the amended budget column. Most governments amend the original budget after the beginning of the year to reappropriate unspent funds from the end of the prior year.

Future Meeting Date

NEXT MEETING: Friday March 23, 10:00 a.m.

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