FOCUS Fall 2011 - Goldstein Notes to the Financial Statements · Basic ConsiderationsBasic Considerations (contd )(contd.) Some information may be presented either onSome information

Notes to theNotes to the Financial StatementsFinancial Statements

FOCUSFOCUSGeorge Mason University

November 8, 2011

Larry Goldstein

November 8, 2011 © Campus Strategies, LLC 1

Larry GoldsteinPresident, Campus Strategies, LLC

Basic ConsiderationsBasic Considerations

Communicate information essential to fairCommunicate information essential to fair presentation that is not displayed on face of financial statementsfinancial statementsNotes form an integral part of basic financial statementsstatements Notes should focus on primary government

d f b i i i i [GASBand reference business-type activities [GASB Codification 2300.102]…


Basic Considerations (contd )Basic Considerations (contd.)

Some information may be presented either onSome information may be presented either on face of statements or in notes

Disclose in notes only if not presented on– Disclose in notes only if not presented on face of statements [2300.103]

N h ld b l d i hNotes should not be cluttered with unnecessary and immaterial disclosures– Circumstances and materiality must be

considered in determining what to include [2300.108]


Notes Essential to Fair PresentationNotes Essential to Fair Presentation

Contained in various GASB standards:Contained in various GASB standards: NCGA 1, NCGAI 6, GASB 9, GASB 14, GASB 25, GASB 27, GASB 31, GASB 34, GASB 38, GASB 39, GASB 43, GASB 45, GASB 48, and GASB 50 (and others when

li bl )applicable)– Level A within the GASB GAAP hierarchy

Consolidated in GASB Codification Section 2300—Notes to Financial Statements


– Level A GAAP

Significant Accounting Policies


Statements DescribedStatements Described

Description of government-wide financialDescription of government-wide financial statements

Statement of Net Assets– Statement of Net Assets– Statement of Revenues, Expenses, and

Ch i N AChanges in Net Assets– Statement of Cash Flows

Technically a fund statement but should be addressed [2300.106.a.(1)][ ( )]


Reporting Entity / Component Units

Reporting entity should be describedReporting entity should be describedDistinguish between primary government (PG) and any component unit(s) (CU)and any component unit(s) (CU)Identify status of PG as component unit if

li blapplicable– Description of reporting entity technically is

not an accounting policy but should be included…


Reporting Entity / Component Units (contd.)

Unlike many matters with required notesUnlike many matters with required notes, professional judgment plays a key role

Both in determining whether a CU should– Both in determining whether a CU should be reported and, if so, which disclosures are requiredrequired

Clearly differentiate between disclosures for PG d CUPG and CUDecisions about disclosures should be made on a CU-by-CU basis…


Reporting Entity / Component Units (contd.)

Brief description of the CU(s) and relationshipBrief description of the CU(s) and relationship to PGDiscussion of criteria for selection as CUDiscussion of criteria for selection as CU– Merely citing GASB 39 is not sufficient

How reported—blending versus discrete displayHow to obtain CU financial statements [2300.106.a.(2)][ ( )]


MFBAMFBA

Description of measurement focus and basis ofDescription of measurement focus and basis of accounting used in government-wide statementsstatements– Reference business-type activities

E i f– Economic resources measurement focus– Accrual basis of accounting [2300.106.a.(4)

and 1600.130]


EliminationsEliminations

Describe policy for eliminating internalDescribe policy for eliminating internal activity in the statement of activities [2300 106 a (6)][2300.106.a.(6)]


Capitalizing AssetsCapitalizing Assets

Describe policy for capitalizing assets andDescribe policy for capitalizing assets and estimating useful lives of those assets [2300 106 a (7)][2300.106.a.(7)]


Operating Versus NonoperatingOperating Versus Nonoperating

Policy for defining operating and nonoperatingPolicy for defining operating and nonoperating revenues [2300.106.a.(9)]


Applying FASB PronouncementsApplying FASB Pronouncements

Describe the policy for applying FASBDescribe the policy for applying FASB pronouncements issued after November 30, 1989 [2300 106 a (10)]1989 [2300.106.a.(10)]


Cash and Cash EquivalentsCash and Cash Equivalents

Define cash and cash equivalents as used inDefine cash and cash equivalents as used in the statement of cash flows [2300.106.a.(11)]


Applying Restricted Versus Unrestricted Funds

Describe the policy regarding whether to firstDescribe the policy regarding whether to first apply restricted or unrestricted funds when an expense is incurred for purposes for whichexpense is incurred for purposes for which both restricted and unrestricted net assets are available [2300 106 a (12)]available [2300.106.a.(12)]


Questions?


Other Required Disclosures


Cash Deposits with Financial Institutions

Legal or contractual provisions for depositsLegal or contractual provisions for depositsDeposits as of statement of net assets date and during the periodduring the periodAny significant violations of legal or

l i i f d icontractual provisions for depositsCustodial credit risk and foreign currency riskDeposit policies related to risks, or indication that exposure exists but policies have not been p pestablished [2300.106.b and C20.103-110]


InvestmentsInvestments

Methods and significant assumptions used toMethods and significant assumptions used to estimate fair value when not relying on quoted market pricesmarket pricesPolicy for determining which investments, if any reported at amortized costany, reported at amortized costFor investments in non-SEC-registered

l i l d ib lexternal investment pools, describe regulatory oversight and whether fair value is same as

l f l hvalue of pool shares…November 8, 2011 © Campus Strategies, LLC 20

Investments (contd )Investments (contd.)

Any involuntary participation in an externalAny involuntary participation in an external investment poolMethods used to estimate value of investmentsMethods used to estimate value of investments in pools if pool sponsor does not provide information and reasons why estimate wasinformation, and reasons why estimate was necessaryI f i i d i hIncome from investments associated with one fund assigned to another fund…



Legal or contractual provisions forLegal or contractual provisions for investments, including reverse repurchase agreementsagreementsInvestments, including reverse repurchase agreements as of statement of net assets dateagreements, as of statement of net assets date and during the periodF ll i di l h ld b i d bFollowing disclosures should be organized by investment type (e.g., U.S. Treasuries,

b d i l )corporate bonds, or commercial paper)…November 8, 2011 © Campus Strategies, LLC 22


– Legal or contractual provisionsLegal or contractual provisions– Significant violations of legal or contractual

provisionsprovisions– Describe investment policies related to

f ll i i k ( d h i k h l )following risks (and the risks themselves)Credit riskCustodial credit riskConcentration of credit riskConcentration of credit risk…



Interest rate riskInterest rate riskForeign currency risk

Addi i l di l fAdditional disclosures for some very rare occurrences not likely to affect higher d i [2300 106 d I50 122 136]education [2300.106.c and I50.122-136]


Contingent LiabilitiesContingent Liabilities

Contingent liabilities not requiring accrualContingent liabilities not requiring accrual, including all significant facts If no accrual is made for loss contingencyIf no accrual is made for loss contingency because it is not probable or the amount or range of amounts cannot be estimatedrange of amounts cannot be estimated, disclosure should be made indicating the nature of the loss contingency [2300 106 dnature of the loss contingency [2300.106.d, 1500.114, and C50.115]


Subsequent EventsSubsequent Events

Significant effects of subsequent eventsSignificant effects of subsequent events [2300.106.f]


Annual Pension Cost / Net Pension Obligations

For each defined benefit pension plan (thoughFor each defined benefit pension plan (though combining information is appropriate to avoid unnecessary duplication)unnecessary duplication)– Plan description including name, entity

administering plan identification of planadministering plan, identification of plan type (e.g., single employer, agent employer)

D i i f f b fi dDescription of types of benefits and authority under which benefits are

bli h d b d destablished or may be amended…November 8, 2011 © Campus Strategies, LLC 27

Annual Pension Cost /Net Pension Obligations (contd.)

Whether a stand-alone financial report isWhether a stand-alone financial report is issued or the plan is included in the report of another entity and how to obtain theof another entity and how to obtain the report

Funding policy– Funding policyAuthority under which obligations to

ib b l b l ( )contribute by plan members, employer(s), and other entities are established or may b d dbe amended…



Required contribution rates of active planRequired contribution rates of active plan members and employer

Sole / agent employers must also discloseSole / agent employers must also disclose– Details about pension cost, contributions,

d i bli iand net pension obligation– For current and two preceding years,

additional information about pension cost, percentage of cost contributed each year, net pension obligation at end of each year



– Funded status and various actuarialFunded status and various actuarial informationActuarial methods and assumptions– Actuarial methods and assumptions…

For each defined contribution pension plan ( h h bi i i f i i i(though combining information is appropriate to avoid unnecessary duplication)– Plan name, entity administering plan,

identification of plan as defined contribution…



– Plan description provisions authority underPlan description, provisions, authority under which plan was established or may be amendedamended

– Contribution requirements for plan members employer and other contributingmembers, employer, and other contributing entities and authority under which requirements were established or may berequirements were established or may be amended…



– Contributions actually made by planContributions actually made by plan members and employer [2300.106.g, P20 117-118 and P20 124]P20.117-118, and P20.124]


Annual OPEB Cost / Net OPEB Obligations

For each defined benefit OPEB plan (thoughFor each defined benefit OPEB plan (though combining information is appropriate to avoid unnecessary duplication)unnecessary duplication)– Plan description

F di li– Funding policySole / agent employers must also disclose– Details about OPEB cost, contributions, and

net OPEB obligation if one exists…g


Annual OPEB Cost / Net OPEB Obligations (contd.)

– For current and two preceding yearsFor current and two preceding years, additional information about OPEB cost, percentage of cost contributed each year netpercentage of cost contributed each year, net OPEB obligation at end of each yearFunded status and various actuarial– Funded status and various actuarial informationA i l h d d i– Actuarial methods and assumptions…



For each defined contribution OPEB planFor each defined contribution OPEB plan (though combining information is appropriate to avoid unnecessary duplication)to avoid unnecessary duplication)– Plan name, entity administering plan,

identification of plan as defined contributionidentification of plan as defined contribution– Plan description, provisions, authority under

hi h l bli h d bwhich plan was established or may be amended…



– Contribution requirements for planContribution requirements for plan members, employer, and other contributing entities and authority under whichentities and authority under which requirements were established or may be amendedamended

– Contributions actually made by plan members and employer [2300 106 hmembers and employer [2300.106.h, P50.120-121, and P50.127]


Violation of Finance ProvisionsViolation of Finance Provisions

Significant violations of finance-related legalSignificant violations of finance-related legal or contractual provisionsActions taken to address such violationsActions taken to address such violations [2300.106.i and 1200.112]


Debt Service RequirementsDebt Service Requirements

Principal and interest requirements presentedPrincipal and interest requirements, presented separately, for each of five subsequent fiscal years and in five-year increments thereafteryears and in five-year increments thereafterTerms by which interest rates change for variable rate debt [2300 106 j and 1500 118]variable-rate debt [2300.106.j and 1500.118]


Operating Lease CommitmentsOperating Lease Commitments

Commitments under noncapitalizedCommitments under noncapitalized (operating) leasesSpecific reference is made to FASB 13Specific reference is made to FASB 13 disclosure requirements

Will h h GASB 62 k ff (b– Will change when GASB 62 takes effect (by FY 2012-13) [2300.106.k and L20.125]


Construction CommitmentsConstruction Commitments

Construction and other significantConstruction and other significant commitments [2300.106.l]


Capital AssetsCapital Assets

By major class of assetBy major class of asset– Beginning and ending balances, with

accumulated depreciation presentedaccumulated depreciation presented separately from historical costC i l i i i– Capital acquisitions

– Sales or other dispositions– Current-period depreciation expense, with

amounts charged to each function…g


Capital Assets (contd )Capital Assets (contd.)

Capital assets not being depreciated should beCapital assets not being depreciated should be disclosed separately from those being depreciateddepreciatedFor collections not capitalized describe collection and provide reasons forcollection and provide reasons for noncapitalization [2300.106.m, 2300.111-113, and 2300 115]and 2300.115]


Long-term LiabilitiesLong term Liabilities

For long-term debt and other long-termFor long-term debt and other long-term liabilities

Beginning and ending balances– Beginning and ending balances– Increases and decreases separately presented– Portions of each item due within one year

[2300.106.n and 2300.114-115]


DeficitsDeficits

Deficit fund balance or net assets of individualDeficit fund balance or net assets of individual nonmajor funds [2300.106.o]


Component Unit TransactionsComponent Unit Transactions

For each major CU the nature and amount ofFor each major CU, the nature and amount of significant transactions with other discretely presented CUs or the PG [2300 106 q]presented CUs or the PG [2300.106.q]


Donor-restricted EndowmentsDonor restricted Endowments

Net appreciation on investments that isNet appreciation on investments that is available for spending

How amounts are reported in net assets– How amounts are reported in net assetsIdentify state law addressing ability to spend

i inet appreciationPolicy for authorizing and spending investment income (e.g., spending rate, total return policy) [2300.106.r and 2300.117]


Questions?


Potentially Required Disclosures


Potentially Required DisclosuresPotentially Required Disclosures

GASB Codification Section 2300 107 lists 36GASB Codification Section 2300.107 lists 36 separate disclosures that may be deemed necessarynecessary– Appear as separate listings from a to zz—

only those applicable to BTAs are presentedonly those applicable to BTAs are presented here

E i i k i i iEntity risk management activitiesSegment information for enterprise funds…


Potentially Required Disclosuresy q(contd.)

Condensed financial statements for majorCondensed financial statements for major discretely presented CUsShort term debt instruments and liquidityShort-term debt instruments and liquidityRelated-party transactionsNature of PG’s accountability for related organizationsCapital leasesJoint venturesJoint ventures…



Debt refundingsDebt refundingsNonexchange transactions that are not recognized because they are notrecognized because they are not measurableU i d d i iUnrestricted net asset designationsNature and amount of inconsistencies caused by transactions between CUs having different fiscal years or changes in CU fiscal year-ends…



Identification of the PG in whoseIdentification of the PG in whose financial report (i.e., Commonwealth of Virginia’s CAFR) a CU (e g publicVirginia s CAFR) a CU (e.g., public university) is presented and the nature of the relationshipthe relationshipReverse repurchase and dollar reverse repurchase agreementsrepurchase agreementsSecurities lending transactionsDemand bonds…



Pollution remediation obligationsPollution remediation obligationsOn-behalf payments for fringe benefits and salaries (could be relevant ifand salaries (could be relevant if foundations are paying salaries for institution’s employees)institution s employees)External investment pools reported as

f d ( l l if i i itrust funds (only relevant if institution sponsors the pool)…



Significant transactions / events that areSignificant transactions / events that are unusual or infrequent but outside management’s controlmanagement s controlDiscounts and allowances that reduce gross revenues when not reported on thegross revenues when not reported on the face of the statementsDi i f i bl d blDisaggregation of receivable and payable balances…



Impairment losses idle impaired capitalImpairment losses, idle impaired capital assets, and insurance recoveries if not apparent on the face of the statementsapparent on the face of the statementsTermination benefitsF h l d d ldFuture revenues that are pledged or soldDerivative instruments


Additional InformationAdditional Information

Notes may be more informative whenNotes may be more informative when presented in a logical order

GASB Codification Section 2300 901– GASB Codification Section 2300.901 presents a nonauthoritative sequence for notes derived from an appendix to NCGAI 6notes derived from an appendix to NCGAI 6

Summary of significant accounting policies is i d b i b dd d irequired but it can be addressed in notes or as

stand-alone document (with references on each f fi i l ) [2300 110]page of financial statements) [2300.110]


Financial Statements ReviewedFinancial Statements Reviewed

Christopher Newport University (2009)Christopher Newport University (2009)James Madison University (2010 unaudited)

f lk S i i (2009)Norfolk State University (2009)University of Mary Washington (2009)Virginia Community College System (2009)Virginia Tech (2010)Virginia Tech (2010) – Same as for MD&A last spring


Global ObservationsGlobal Observations

Generally very good disclosures by allGenerally very good disclosures by all institutions

Usually clear and easy to understand (within– Usually clear and easy to understand (within constraints of GASB requirements)

S diff i t t t t i lSome differing treatment on some material itemsNote count ranges from a low of 16 notes to a high of 28…


Global Observations (contd )Global Observations (contd.)

Two institutions provide a table of contents—Two institutions provide a table of contentsvery helpfulAll but one institution include reporting entityAll but one institution include reporting entity disclosure as part of significant accounting policiespoliciesAll but one of the institutions with collections h t d t t it li th ll tihave opted not to capitalize the collectionsTwo institutions include a note about income taxes…



Universal (or nearly universal) issuesUniversal (or nearly universal) issues Constructive criticism, not necessarily blatant errorserrorsIn some cases merely neutral observations– Too many references to specific GASB

standards (e.g., 28, 34, 35, 39, 40)No requirement to cite specific standards anywhere in notes except when initially y p yissued and then when implemented…



Should simply acknowledge presentationShould simply acknowledge presentation is made in accordance with relevant GASB standardsGASB standards – And FASB standards issued before

November 30 1989 that do notNovember 30, 1989 that do not contradict or conflict with GASB standards (until 2012 2013)standards (until 2012-2013)

Comparable reference to FASB standards f i h li blfor component units when applicable…



– Most do not include policy for eliminatingMost do not include policy for eliminating internal activity in statement of activitiesCapitalization threshold is fairly consistent– Capitalization threshold is fairly consistent at $5,000 but one institution is at $2,000F i i i l i d– Four institutions apply restricted net assets first when both are available, one relies on

b l i d f ilcase-by-case analysis, and one fails to disclose their policy…



– Quite a mix in handling CU disclosuresQuite a mix in handling CU disclosures between separate notes or inclusion with PG’s notes on the topicPG s notes on the topic

– Issues not addressed in any institution’s notesnotes

Description of the financial statements– Having this in MD&A is not sufficient

Segment…g



Nonexchange transactions not reportedNonexchange transactions not reported due to inability to measureViolations of finance related legal orViolations of finance-related legal or contractual provisionsD fi i i j f dDeficit net assets in major fundsPollution remediation obligationsImpairment losses– In these cases this is good news!In these cases this is good news!...


Questions?


Institution AInstitution A

Fails to identify criteria for inclusion of CUsFails to identify criteria for inclusion of CUsFails to identify the specific categories of revenues pledged to the repayment of debtrevenues pledged to the repayment of debtDisclosure for donor-restricted endowments d i h l ll idoes not mention the state law allowing appreciation to be spent…


Institution A (contd )Institution A (contd.)

Natural classification expenses in matrix noteNatural classification expenses in matrix note– Salaries and benefits

ili i– Utilities– Scholarships– Depreciation– Services supplies and otherServices, supplies, and other


Institution BInstitution B

Fails to identify criteria for inclusion of CUsFails to identify criteria for inclusion of CUsFails to disclose policy related to post-November 30 1989 FASB standardsNovember 30, 1989 FASB standardsFails to provide definition of cash and cash

i lequivalentsFails to identify the specific categories of revenues pledged to the repayment of debt…


Institution B (contd )Institution B (contd.)

Includes excessive disclosures for foundationIncludes excessive disclosures for foundation (e.g., fair value of financial instruments, lines of credit)of credit)Disclosure for donor-restricted endowments does not indicate amount of net appreciationdoes not indicate amount of net appreciation available for authorization for expenditure and where its reported in net assetswhere its reported in net assets…


Institution B (contd )Institution B (contd.)

Natural classification expenses in matrix noteNatural classification expenses in matrix note– Salaries and wages

i b fi– Fringe benefits– Services and supplies – Scholarships– UtilitiesUtilities– Plant and equipment

D i i– DepreciationNovember 8, 2011 © Campus Strategies, LLC 70

Institution CInstitution C

Natural classification expenses in matrix noteNatural classification expenses in matrix note– Compensation and benefits

C l i– Contractual services – Other supplies and materials– Travel– Operating expensesOperating expenses– Scholarships and fellowships

S d b– Sponsored programs subcontractsNovember 8, 2011 © Campus Strategies, LLC 71

Institution DInstitution D

Fails to identify criteria for inclusion of CUsFails to identify criteria for inclusion of CUsFails to disclose policy related to restricted funds when both restricted and unrestricted arefunds when both restricted and unrestricted are availableF il id if h ifi i fFails to identify the specific categories of revenues pledged to the repayment of debtTransactions with CUs reported as related party transactions rather than CU transactions…


Institution D (contd )Institution D (contd.)

Separate note for “affiliated foundation” thatSeparate note for affiliated foundation that doesn’t qualify as a CU includes condensed balance sheetbalance sheet– Not material and should not be presented

It i l t d t t ti ld b– It is a related party so transactions could be disclosed as related party transactions

Notes for CU exclude foundation endowment note– Should be included as its material




i b fi– Fringe benefits– Services and supplies– Utilities– Plant and equipmentPlant and equipment– Depreciation

S h l hi d f ll hi i i dScholarships and fellowships is omitted…November 8, 2011 © Campus Strategies, LLC 74


Functional category expenses in matrix noteFunctional category expenses in matrix note– Standard higher education functional

categories pluscategories plusMuseum and cultural services– Should be academic support

Historical attraction management– Should be academic support,

institutional support, or auxiliary pp , yenterprises


Institution EInstitution E

Fails to disclose required information relatedFails to disclose required information related to endowments

Probably immaterial since most endowment– Probably immaterial since most endowment is held by foundation

A ili i i i h ld b dAuxiliary activities note should be presented after notes as Supplementary Information…


Institution E (contd )Institution E (contd.)


i b fi– Fringe benefits– Services and supplies– Scholarships and fellowships– UtilitiesUtilities– Plant and equipment


Institution FInstitution F

Basis of presentation note refers back to fund-Basis of presentation note refers back to fund-based model

No longer relevant– No longer relevantFails to disclose policy related to post-N b 30 1989 FASB d dNovember 30, 1989 FASB standardsAuxiliary activities note should be presented after notes as Supplementary InformationFails to disclose transactions with CU…


Institution F (contd )Institution F (contd.)


i b fi– Fringe benefits– Services and supplies– Scholarships and fellowships– UtilitiesUtilities– Plant and equipment


Fi i l S IFinancial Statement Issues

Questions, Comments,and Reactions

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540.942.9146

Documents

FOCUS Fall 2011 - Goldstein Notes to the Financial Statements · Basic ConsiderationsBasic Considerations (contd )(contd.) Some information may be presented either onSome information