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Darcy Spilchen, CA, CFP, CMAPartner – Parker Quine LLP in Yorkton17 years experience in audits.Audit team leader and fieldwork
supervisor on the audits of 15 towns, 5 villages, 1 city.
Steve Brown, B.Admin, CGASenior Financial Analyst, Municipal
AffairsCurrently assisting in the
implementation of PS 3150.Experience in both commercial and
government accounting environments.
To understand and interpret financial statement information.
To perform basic analytical analysis on financial statement information.
To better understand municipal budgeting in the new environment.
1. Financial Statement Introduction 2. Financial Statement Analytical
Review
3. Municipal Budgeting discussion
Handout #1 – Sample Municipal Financial Statements
Handout #2 – Municipal Budgeting Session
Introduction
A review of the current financial statements
Basic analytical review of the statements
Issues going forward in 2010 and beyond
Why?▫Accountability▫A lot can be learned about a municipality
from financial statement review : what it’s priorities are; how well it plans for the future; how well it manages its resources; and what kind of resources it has.
Demonstrates how public funds are used in a municipality.
1990’s and before - little or no national accounting standards.
Public Sector Accounting Board (PSAB) of Canadian Institute of Chartered Accountants (CICA) was established to issue standards on accounting and financial reporting.
Saskatchewan municipalities have been required to prepare financial statements in accordance with PSAB standards since 2002.
Current format is prescribed by the PSAB.
Collaborative effort involving Municipal Affairs, municipal auditors and Saskatchewan’s municipal associations.
Significant changes were required to the financial statements due to the new accounting requirements in 2009.
New accounting standards prescribed by PSAB in 2009:
Adoption of full accrual accounting. Tangible Capital Asset Reporting.
A municipal financial reporting framework that is similar to other levels of government in Canada.
New PSAB reporting model has emphasis on:
Annual surplus or deficit. Overall financial health of the municipality .
A key measure in the new statements on the financial health of the municipality is the net financial assets or net debt.
Page 5, Handout #1
Financial Assets
- Financial Liabilities
= Net financial assets
+ Non Financial Assets
= Accumulated Surplus
$ 711,715 $ 1,017,972
$ 9,436,133
Accumulated Surplus
Unappropriated Surplus
Appropriated Surplus
Net Investment in Tangible Capital Assets
Total Accumulated Surplus: $11,165,820
Accumulated Surplus is one aspect of the new financial statements.
Other aspects of the financial statement that have changed include: Tangible Capital Asset Schedules Functional Segment Disclosure Accountability reports – Management ‘s
Responsibility
Page 2, Handout #1
Demonstrates to financial statement users that municipal management is responsible for the financial statements.
Signed by an elected and administrative official.
Not the Auditor’s Report
Page 3, Handout #1
Provides the auditor’s opinion on the financial statements attached to the auditors report.
Four types of audit opinions: Unqualified Qualified Adverse Report Disclaimer of Opinion
Page 3, Handout #1
Section 1 – identifies what is being reported on, what is management’s responsibility, and the auditor’s responsibility.
Section 2 – describes the auditor’s procedures with regards to the financial statements.
Section 3 – identifies the auditor’s opinion on the financial statement.
An example of an adverse audit opinion (3): The audit opinion states: “ In our opinion, because the Municipality did not
record the net value of tangible capital assets and any impairment or related amortization as explained in the preceding paragraph, these financial statements do not present fairly the financial position of the Municipality as at December 31, 2009, and the results of its operations and its cash flow for the year then ended in accordance with GAAP.”
Page 5
Purpose of Statement: to present the financial position of the municipality on a specific date.
Presents the resources controlled by a municipality.
Page 5
Sections of the statement are:
Section 1 – Total Financial Assets Section 2 – Total Liabilities Section 3 – Net Financial Assets Section 4 – Total Non-Financial Assets Section 5 – Accumulated Surplus
As part of the workshop, we will look at a handful of financial ratios and indicators.We will look at the balance sheet, income statement, and the notes and schedules.
Financial ratios are used to evaluate an organization’s financial health, useful in determining financial trends, and help inform key users of the financial statements.
Page 4 For the Statement of Financial
Position, we will look at the following financial ratios and indicators:
1. Change in Net Financial Assets2. Cash and Liquid Investments Change3. Assets to Liabilities Ratio4. Municipal Debt Limit5. Long Term Debt per Capita
Page 4, Point A Calculation – Previous year’s net financial
asset balance less current year’s balance.
Purpose – identifies how revenues matched against expenditures for the defined period.
In 2009, the municipality purchased an extensive amount of capital assets.
Page 4, Point B Calculation – Previous year’s cash &
temp inv. asset balance less current year’s balance.
Purpose – shows how the cash position has changed year over year
In 2009, the municipality had a decrease of $1,205,633 in cash assets.
Page 4, Point C Calculation – Total assets owned by a
municipality divided by total liabilities.
Purpose – shows the extent to which a municipality is financed by debt.
In 2009, the ratio increased from 2.78 to 3.15.
Page 4, Point DCalculation – Total debt outstanding
divided by the municipal debt limit.
Purpose – Indicates the municipality’s borrowing limits.
Some debt is allowed to exceed a prescribed limit.
Page 4, Point E Calculation – Total debt outstanding
divided by population of a municipality.
Purpose – Develop a trend on how much debt the municipality is carrying.
From 2008 to 2009, the debt per person has decreased from $2,334 to $2,266.
Page 7 in Handout
Purpose of Statement: To present the financial activity for a defined fiscal period.
Similar to a profit and loss statement in a commercial operation.
Expenses are presented by functional/program area in a municipality.
Page 7
Areas of the statement are:
Section 1 – Municipal Operating Revenues
Section 2 – Operating Expenses (Incl. Amortization)
Section 3 – Municipal Capital Revenues
Page 7Some of the financial indicators on
the Statement of Operations are: Long Term Debt Flexibility Level of Capital Investment Municipal Reserve Size Municipal Administration Third Party Transfers
Page 6, Point F
Calculation – Long Term Debt repayments divided by total municipal operating revenues.
Purpose – shows how much flexibility a municipality has to respond to operational changes.
Food for thought,
If 24% of a municipality’s existing cash flow was going to debt repayment, how much room will the municipality have to react to a 3% increase in operational expenses?
Page 6, Point GCalculation – tangible capital asset
acquisitions divided by total revenues.
Purpose – shows what percentage of revenues have gone into municipal infrastructure.
Page 6, Point H
Calculation – Appropriated Reserves divided by total annual operating revenues.
Purpose – shows the percentage of annual operating revenues that are in municipal reserves.
Reserves play in a key role in long term financial plans.
Page 6, Point I Calculation – General government
expenses divided total operating expenses.
Purpose – shows the percentage the municipality spends on administration related expenses.
Caution when comparing to other municipalities due to allocating differences.
Page 6, Point J
A financial indicator suggested by PSAB.
Calculation – Third party transfers received divided by total operating revenues.
Could be done with other third party transfers such as inter-municipal agreements, capital transfers, and other outside revenue sources.
Purpose – shows how much the municipality receives in third party revenue.
Wherever possible, management should identify trends, ratios and variances in their operations.
The analysis is part of a municipality’s municipal controls to ensure municipal objectives are achieved.
A common form of analysis is budget to actual comparisons, or variance analysis.
Page 8 & 9 Explain to council not only where the
budget variances occurred, but why? There could be a number of reasons for
variances, which is why they should be investigated. Some examples are: Custom work is higher due to higher volumes. Water revenues are up because rates increased
after the budget was set.
Page 11 Purpose: Reconcile the annual surplus/(deficit)
back to the change in net financial assets or debt.
Useful to reconcile accrual surplus back to the cash surplus.
For 2009 provides the most relevant comparison of actual vs. budget since some of the 2009 budgets were not prepared on the accrual basis.
Page 11 Sections included in Statement 3 are:
Section 1 – Accrual surplus/(deficit) from Statement 2.
Section 2 – Net change in tangible capital asset transactions.
Section 3 – Net change in other non-financial assets.
Section 4 – Increase or decrease in Net Financial Assets.
If we tie Sections 1 through 3 together, we arrive at Section 4.
Actual to budget comparison was favorable because ($879K) was less than ($1,401K) in section 4.
Net difference between budget and 2009 actuals was $521,947.
Page 10
Reconciles the change in net financial asset back to actual cash change.
Adding the numbers identified on Page 12:
$879,710 + ($779,519) = $(100,191)
Debt transactions and reserve transfers are not revenues nor expenditures.
Reserve transfers are internal allocations: only relevant for internal reporting (cash basis)
Debt transactions are offsetting: $1 million loan adds to the assets and to the
liabilities only relevant for internal reporting (cash basis)
Page 13
Purpose: Provides the breakdown of how cash balances change from one year to the next.
Broken down by sections: Section 1 – Operating changes Section 2 – Capital changes Section 3 – Investing changes Section 4 - Financing changes
Purpose: Provides further details to the numbers presented in the financial statements.
The workshop handout will look at notes such as consolidation, land for resale, and government transfers.
Page 15, Financial statement handout
Municipality and controlled entities are consolidated in a municipality’s financial statements.
Consolidation is intended to show the financial statement users all the resources under direct or indirect control by the municipality.
Page 15 Control over organizations is deemed where:
A municipality has the ability to directly control the organization’s activities through the board of directors, key personnel appointments, or approve budgetary documents.
There also may be deemed control if the municipality has responsibility for debts and losses of the organization.
Page 15 (d)
Revenue should be recognized in the year it was earned or authorized, regardless of receipt.
Some municipalities are recognizing the revenue on a proportionate basis to which the project being funded is finished.
PSAB is still working on providing better flexibility in this section.
A number of exposure drafts have been provided to replace the existing government transfers section.
The latest exposure draft from PSAB on this standard closed September 15, 2010.
Page 17
Provides a summary of the details found in a municipality’s TCA policy.
Items such as asset useful lives, capitalization of interest, and amortization methods are found in the notes.
Page 17 Identifies the key program or service
delivery areas in the municipality.
Describes what each function or program area represents.
Revenues and Expenses are presented around functional/program areas.
Page 19Breakdown between tax title
property and other land for resale.
Land for resale includes only costs directly related to achieve sale to 3rd party.
Page 19Money that has been received but not
spent or earned by the municipality.
Project reports from contractors, municipal employees, and other stakeholders can identify the progress of capital projects.
This item ties to the discussion on government transfers.
Page 21, Financial statement handout Not a new note, carried over from 2002.
This note recognizes the reserve established for decommissioning a landfill at the end of it’s useful life.
Outside assistance might be required to develop the long term financial plan for the landfill reserve.
Page 21 A note change for 2009.
Identifies the municipality’s debt limit which is defined as it’s own source revenue.
Saskatchewan Municipal Board is the regulatory body over long term borrowing in Saskatchewan.
Page 23Details taxes and unconditional
revenues received by the municipality.
These revenues are generally not tied to a particular function or program area in a municipality.
Page 25 - 33Revenue segmentation by functional
area is a requirement of PSAB. (Section 2700)
Details the municipal fees, grants and other revenues by functional area while segregating operating and capital revenues in each category.
Page 35 - 39
Not significantly different from 2002 statement.
Expenses organized by functional area. Amortization now recorded in replace
of capital expenditures.
Page 35, Point K
Calculation – Allowance for uncollectables divided by total operating revenues.
Purpose – To measure how much revenue is lost to bad debt every year.
Page 41 & 43 Purpose: Summarizes revenues and
expenses for each function for 2009 & 2008.
Taxes and Unconditional revenues are left unallocated at the bottom of the schedule.
All other revenues and expenses are allocated by functional areas.
Page 45Purpose: Show TCA values by asset
type. (Roads, Buildings, Equipment)
Schedule setup to show: Section 1 - Asset cost at the top of the
schedule Section 2 - Accumulated Amortization Section 3 - Net Book Value
Page 44, Point I
Calculation – Net Book Value of TCA divided by Book Value of TCA.
Purpose – The older the assets are, the lower the percentage is. If the assets are newer, less amortization will be taken on them, hence the percentage will be higher.
Page 47 Purpose: Separates the TCA assets by
functional area as opposed to asset type.
Overall format is the same as Schedule 6.
Useful for identifying areas in a municipality with a significant asset base.
$ 711,715 $ 1,017,972
$ 9,436,133
Accumulated Surplus
Unappropriated Surplus
Appropriated Surplus
Net Investment in Tangible Capital Assets
Total Accumulated Surplus: $11,165,820
Page 49
Ending surplus or deficits are closed off to accumulated surplus at the end of every fiscal period.
Three areas to the statement: Section 1 - Unappropriated Surplus Section 2 – Appropriated Surplus Section 3 – Net Investment in TCA
Financial information evaluation can assist with achieving municipal objectives.
The most relevant approach to financial analysis is to look at year over year anlaysis.
Financial information can be presented using different mediums or avenues going forward.
Regulations will be updated in the near future.
Options will be available to those who wish to look at amortization more closely.
Moving towards asset management - pilots
Auditors have indicated there should be less time and effort spent on the 2010 audit than the 2009 audit.
Auditor Issues:
Not expecting any changes of significance on the 2010 financial statements template.
Change in the auditing profession as existing Canadian auditing standards are to be replaced with international auditing standards that will be adopted as new Canadian Auditing Standards (CASs)
New CASs may mean auditors will have additional and or different questions of you, and may require additional and or different file documentation
Administrators can do little to prepare for this.
The expectation is that this extra time required will be less than the additional time need to complete the 2009 audit
Time will be needed to adapt and learn the new accounting standards, it won’t happen overnight.
Financial analysis can be used to assist in managing municipal operations.
Documents and support will be available on the Sasktca.ca website until March 2011.
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