Section 2 - Ch 4

Question 1

Cash and Investments

Answer 1

Notes disclosures should identify risks associated with investments and restrictions on cash, etc.

Question 2

Custodial Credit Risk

Answer 2

Risk that, in the event of a failure of a financial institution, a government will not be able to recover deposits or collateral that is in the possession of an outside party.

Question 3

Cash Deposits are exposed to Custodial Credit Risk

Answer 3

If not covered by depository insurance and:

• Uncollateralized
• Collateralized with securities held by the pledging financial institutions
• Collateralized with securities held by the pledging financial institution’s trust department but not in the depositor-government’s name.

Disclosures: IF a government has deposits subject to Custodial Credit Risk = it must disclose the deposit amounts.

Question 4

Investments

Answer 4

Must disclose risks (more detailed than cash disclosure)

Investments are exposed to “Custodial Credit Risk” IF not insured and not registered in the name of the government and are held by either:

• The counterparty, OR
• The counterparty’s trust department and not in the government’s name

Disclosures:

• any investments subject to custodial credit risk.
• Disclose the Concentrations of Credit Risk for investments that represent 5% or more of the total investment except for those guaranteed by US gov’t, mutual funds, and external investment pools.
• Disclose Interest Rate Risk
• Disclose Foreign Currency Risk

Question 5

Securities Lending Transaction

Answer 5

• Securities lent must be reported as assets in Balance Sheet.
• Cash or collateral received must also be reported as assets if the government has the ability to pledge or sell them without borrower default.
• Liabilities resulting should also be reported on government’s balance sheet.

GASB Codification Section I60 provides specific guidance on accounting and reporting for securities lending transactions. In these transactions, governmental entities transfer their securities to broker-dealers and other entities for collateral (cash, securities or letters of credit), and simultaneously agree to return the collateral for the same securities in the future. The statement requires governmental entities to report securities lent (the underlying securities) as assets in their balance sheets. Cash received as collateral on securities lending transactions, and investments made with that cash, should also be reported as assets. Invested collateral should be measured according to Section I50 - Investments.

Question 6

Reporting Investments at Fair Value

Answer 6

• Investment income and changes in Fair Value of investments, should be reported as income on operating statement.

Question 7

Accounts Receivable

Answer 7

• No DIFFERENCE in recognizing receivables between ACCRUAL and MOD ACCRUAL.
• The only difference is the recognition of revenue for the receivable.

Question 8

Exchange Transaction

Answer 8

gives up something and receives something of equal value (fee charges). If payment is not made at time of exchange, a receivable is established.

Question 9

Exchange-like Transaction

Answer 9

• If value given up and received is not equal (a charge for a license).
• If payment is not made at time of exchange, a receivable is established.

Question 10

Non-Exchange Transaction (Classified in one of four ways)

Answer 10

1. Derived Tax Revenue Transactions:Result from governments ability to impose assessments (income tax). Requires a taxpayer to file taxes… a receivable is established at time of exchange.
2. Imposed Nonexchange Revenue Transactions: governments impose an assessment based on something other than an exchange (property tax assessment). If the property tax is not paid, a fine is levied. A receivable is recognized in the period when the government has an enforceable legal claim (when a “lien” is placed on the property)
3. Government Mandated Nonexchange Transactions: when a government at one level, provides resources to a government at another level and requires them to be used for specific purposes. A receivable is recognized by recipient when it meets the eligibility requirements established by the provider. Provider recognizes a liability.
4. Voluntary Nonexchange Transactions: 2 or more parties willingly enter into an agreement either through legislation or contract. Eligibility requirements may still have to be met. A receivable is recognized when the recipient meets requirements and a payable is recognized by provider.

Question 11

Loans

Answer 11

if loan is not required to be repaid if the borrower follows certain requirements, no receivable is recognized. If the requirements are not met, a receivable should be recognized.

~ALL receivables are reported “net of allowances and discounts”.

Question 12

Disclosures

Answer 12

Disclosures: Government should disclose if receivables are aggregated on the face of the financial statements. Also, should disclose any significant receivables not expected to be collected within one year.

Question 13

Interfund Activity (two types)

Answer 13

• Reciprocal Activity:similar to exchange transaction. 2 types:
  
  • Interfund Loans: (ONLY interfund activity that involves assets and liabilities)
    
    • Loans between funds only affect the balance sheet or statement of net position (NOT operating statement).
    • Fund making the loan records an asset — “Due from other fund”
    • Fund receiving the loan records a liability — “Due to other fund”
    • Disclosure is required for Interfund Loans
  • Interfund Services
• Nonreciprocal Activity:
  
  • Interfund Transfers
  • Interfund Reimbursements

Question 14

Inventory

Answer 14

• Inventory is usually associated with “Proprietary Funds” and “Business-Type Activities”.
• Governmental Funds do NOT maintain an inventory.

Consumption Method (asset): inventory is an asset until it is consumed (used) when an expense is recorded.

Purchases Method (expense): governmental funds usually do not have inventory. When goods are purchased, an expenditure is recorded. If the value of inventory is “significant”, there is a requirement to report it.

• Can “elect” consumption method for reporting the value of inventory.
• Government must disclose which method is used.

Question 15

Prepaid Items and Deferred Charges

Answer 15

• Prepaid Items: Reported similar to inventory, either consumption or purchase method (must be disclosed) Gov funds can use the consumption method here.
• Deferred Charges: Must defer and amortize bond issue costs, premiums, and discounts over the life of the issue. For governmental funds, bond issue costs are expenditures. Premiums are reductions in interest expense. Discounts are increases to interest expense.

Question 16

Capital Assets

Answer 16

• Not reported in governmental funds (5 types)
• ARE reported for governmental activities, business-type activities, proprietary funds, fiduciary funds

Question 17

Classification of Capital Assets

Answer 17

(all but Land can be depreciated)

• Land: cost of land includes purchase price, legal/title fees, surveying fees, appraisal fees, etc.
• Buildings: cost of buildings includes purchase price, fees, insurance premiums, etc.
• Improvements: other than buildings, includes any improvement to enhance land.
• Machinery and Equipment: trucks, cars, furniture, computers. Cost includes purchase price less salvage value, installation costs, transportation costs.
• Works of art and historical treasures: capitalized at historical cost.
• Infrastructure: long lived assets that are stationary.
• Construction in progress: temporary capitalization of direct labor and materials, overhead costs of construction project.

Question 18

Capital Assets - Additions, Betterments, and Preservation

Answer 18

Additions: extend the life or expand the capacity of capital assets.

Betterment: if transaction improves condition over original condition; capitalize excess amount.

Preservation: applies to infrastructure and applies to costs incurred to restore infrastructure to its original condition. For example, 10 lane-miles of road are reconstructed. The original two-lane road is replaced by a new two-lane road. If the government does not use the modified approach for infrastructure assets, then the preservation costs are capitalized. If the government uses the modified approach, then the preservation costs are expensed.

Question 19

Depreciation (Capital Assets)

Answer 19

• Capital Assets should be depreciated over useful life (except land)

Question 20

Impairment of Capital Assets and Insurance Recoveries

Answer 20

• Impaired capital assets should be reported at the “lower” of carrying value or FMV.
• Methods for measuring impairment:
  
  • Restoration cost approach: amount of impairment is the cost to restore the utility of the asset.
    
    • IF there is “physical damage” = use this method.
  • Service units approach: amount of impairment is determined by evaluating the service provided by the asset before and after the event or change in circumstances.
  • Deflated depreciation replacement cost approach: current cost to replace the asset is depreciated to give impairment amount.
• Insurance Recoveries should be “netted” with the impairment loss
• Disclosures:
  
  • Disclose capitalization policy used
  • Insurance recoveries

Question 21

*RECONCILIATION between “Fund Balances” and “Net position of Governmental Activities”

Answer 21

Governmental Funds are reported using the “current financial resources measurement” (MOD ACCRUAL)

Governmental Activities at the government-wide level use the “economic resources” (ACCRUAL).

• “Government-Wide” = Proprietary and Fiduciary Funds = ACCRUAL
• Capital Assets: Governmental Funds report expenditures for capital outlays (MA) and at Government-Wide Level, capital outlays > government’s capitalization need to be capitalized.
  
  • : Eliminate expenditure and record asset (net of acc dep)
• LT Debt:Governmental Funds à issuance of debt results in inflow of resources reported on operating statement. Government-Wide Level à transaction needs to be reported as LT debt.
• Other LT Obligations: Most such as compensated absences, claims and judgments, do not required financial resources until some future time. At Government-Wide Level, recognized liability when it was incurred.
• Principal on LT Debt: Payment of LT Debt requires fund financial resources and is reported on operating statement. At Government-Wide Level, the principal repayment reduces the liability and has not impact on the operating statement.
• Deferred Revenue: In Governmental Funds, revenue not available is deferred. At Government-Wide Level, revenue is ONLY deferred if it has not been “earned”.
  
  • Reverse the entry for deferred revenue and recognizing the revenue in the current period.
• Internal Service Funds:At the fund level, internal service funds are reported with proprietary funds. If the predominate customers of internal service funds are Governmental Funds, then the assets and liabilities are reported as Governmental Activities.

Question 22

Notes, Bonds, and Capital Leases (Notes)

Answer 22

Notes: short term financing instruments (1 year or less).

• Tax Anticipation Note: issued to ensure cash flow while waiting for payment of taxes (property tax) and redeemed after received.
• Bond Anticipation Note: issued to provide cash to undertake a capital project. BANs are retired from the proceeds of LT financing sources when bonds are issued. Sometimes reported as a LT obligation.

Question 23

Notes, Bonds, and Capital Leases (Bonds)

Answer 23

Bonds: long term debt obligations. Usually the bond maturity must be no longer than the life of the asset that is being constructed or purchased from bond proceeds.

• Certificates of Participation:a pool of investors.
• Refunding Bonds:take advantage of declines in interest rates.

A certificate of participation (COP) is a type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. Certificates of participation are secured by lease revenues.

Question 24

Notes, Bonds, and Capital Leases (Capital Leases)

Answer 24

Capital Leases: Must satisfy 1 out of 4 requirements to be a CL:

1. Lease transfers ownership of the property to lessee by end of lease term
2. Lease contains a Bargain Purchase Option
3. Lease term is equal or greater than 75% of the estimated life of the leased property
4. PV of minimum lease payments is equal or greater than 90% of the FV of leased property less tax credit

IF criteria are NOT met à Operating Lease.

Question 25

Escheat Property

Answer 25

Escheat Property

• Property can “escheat” to government in several ways… death (no will), etc.
• Should be reported as revenue to government with a liability for any amount of a possible refund that could be claimed.

Question 26

Deferred Revenue

Answer 26

Deferred Revenue: For Governmental activities, Business type activities, Proprietary funds a resource inflow that has not been “earned” is deferred.

Property Tax revenue not received:

Accounts receivable xx

Revenue xx

Revenue xx

Deferred Revenue xx

Question 27

Long-term obligations

Answer 27

Long Term Obligations: debt structures for long term obligations

• Compensated Absence:sick leave, vacation leave.
• Claims and Judgments: losses are recognized when 2 requirements are met:
  
  • Information available asserts it is “probable” an asset is impaired or liability has been incurred.
  • The amount of the loss can be “reasonably estimated”.
    
    • IF it is only “possible” not “probable” and amount of the loss can be “reasonably estimated”, a contingency still exists and must be DISCLOSED.
    • IF it is “remote” à no disclosure.

Question 28

Risk Financing Activities

Answer 28

Risk Financing Activities: GAAP allows general fund or internal service fund to account for these.

Question 29

Insurance

Answer 29

report insurance premiums as expenditures, analyze potential for additional losses, consider level of risk transferred to insurer.

Question 30

Landfills, Pensions, OPEBs

Answer 30

• Landfills: (LT obligation) Must establish a written estimate of cost of closing a landfill if necessary: Estimate is based on:
  
  • Laws governing closure and post closure care
  • Estimate is adjusted for inflation annually
  • Estimate is increased whenever the maximum closure cost is increased
  • Estimate is reduced whenever it exceeds the maximum closure cost
    
    • GAAP REQUIRES that estimated closure and post closure costs be RECOGNIZED while the landfill is operating, regardless of when cash disbursements are made.
      
      • Portion of cost should be expensed and a liability accrued each period a landfill accepts solid waste.
• Pensions: pension liabilities are not recognized until they are due and payable.
  
  • Must disclose type of plan, etc.
• Postemployment Benefits other than Pension Plans:healthcare, etc.