Notes
Outline
State Agency Training Session – October 2000
Understanding GASB Statement 34/35
Course Agenda
Introduction by Dr. Ron Rhames, VP, Midlands Technical College
Welcome by Comptroller General Jim Lander
Overview of Current Financial Reporting Process
Status of OCG’s GASB 34 Implementation Efforts
Overview of GASB 34/35
Preliminary Discussion of STARS changes
Agency Monitoring Requirements
Administrative Information
Questions
Overview of Current Financial Reporting Process
Agencies Using STARS or Other Cash-Basis Systems
GAAP =
               Cash-Basis Balances + Accrual Adjustments
Closing Packages vs. Audited Financial Statements
OCG’s Financial Statement Preparation Process
JV’s Based on OCG Analysis of STARS Activity for all Agencies - Examples
Adjust activity throughout the fiscal year within/between GAAP funds
Between funds – convert to Transfers In/Out if appropriate
Within the same fund – eliminate revenues/expenditures if appropriate (i.e. eliminate double reporting)
Reclassify FM12/13 JV’s, Transfers, and IDT’s posted after 6/30 to Due To/From Other Funds, Interfund Receivables/Payables, Advances From/To Other Funds
Allocate investment purchases/sales unsettled at 6/30 to GAAP funds participating in pooled accounts
Status of OCG’s GASB 34 Implementation Process
Phase I – Readiness Assessment
Obtained assistance from KPMG with GASB 34 Implementation efforts
Performed a Readiness Assessment of the OCG’s ability to prepare GASB 34 compliant statements
Performed a separate assessment of the OCG’s financial accounting and reporting systems’ abilities to produce GASB 34 compliant statements
Identified year-end closing packages that will need significant revisions
Phase I, continued
Planned a training program for State agencies
Prepared an overall implementation work plan for the Comptroller General’s Office
Phase II – Implementation – Current Status
Review/conceptual design of STARS changes currently in progress (to discuss in later section of training session)
In process (early stages) with Series Z (financial reporting system) modifications
Establishment of a state-wide advisory committee
Training efforts
Implementation efforts will intensify upon completion of the current year State of SC Comprehensive Annual Financial Report (CAFR)
Basic Financial Statements--and Management’s Discussion and Analysis--for State and Local Governments/Colleges and Universities
Statements  34 and 35
"Overview of the Statements"
Overview of the Statements
Reporting Model-Primary Features
Management’s Discussion and Analysis (MD&A)
Basic Financial Statements
Government-wide
Fund
Notes
Required Supplementary Information (RSI)
Reporting Model-Effective Date
GASB 34/35 are required for South Carolina State Agencies and Colleges & Universities reports for fiscal year
 2002
But in practice, processes must be
in place at least 12 months in advance
(July 1, 2001)
Slide 16
Policy Considerations
New Funds
Major Funds
Depreciation alternatives
Infrastructure modified approach
Capitalization thresholds
Valuation of assets
Enterprise activities
Indirect cost allocation
Internal Service activities
Program expense distribution
Program revenues
MD & A content
Budgetary presentation
Restricted assets
Accounting Issues
Major funds
Enterprise fund accounting
Internal service fund accounting
Infrastructure/modified approach
Capitalized interest cost
Depreciation/accum dep
Valuation of receivables
Inventory valuation
Restricted assets
L-T liabilities
Elimination of internal allocations
Accrual adjustments
Cost allocation
Interest exp distrib.
FASB stmts
Reporting Issues
Major funds
Enterprise funds
Internal service funds
Pensions
Liabilities
Fixed assets
Functional categories
Stmt of net assets
Stmt of activities
Direct stmt of cash flows
Footnotes & RSI
Budget presentation
MD&A
Gov’t wide vs fund reconciliation
System Capabilities
Fixed asset infrastructure
Functionalization of revenues/expenses
Indirect cost allocation
Capitalized interest
Budget information
Government wide vs. fund reconciliation
Depreciation expense distribution
Long/short-term liabilities
Interfund transactions
Accrual basis adjustments
Report compilation
MD&A
"GASB 34/35 Requirements –..."
GASB 34/35 Requirements – MD&A
Reporting Model-MD&A
Primarily impacts the OCG and State agencies who prepare stand-alone financial statements
Brief description of basic statements
Condensed financial information for last year and this year derived from government-wide financial statements
Analysis of financial position and results of operations (significant variances)
Analysis of budgetary changes and results
Reporting Model-MD&A
Description of capital asset and long-term debt activity
Description of currently known facts, decisions, or conditions that are expected to have a material effect on the entity.
Governments are encouraged not to duplicate MD&A information in the letter of transmittal
"GASB 34/35 Requirements –..."
GASB 34/35 Requirements – Government-Wide Statements
Reporting Model-Government-wide Statements
Statement of Net Assets
Statement of Activities--Cost of services approach
Economic resources
Accrual basis
Consolidated
Reporting Model-Statement of Net Assets
All assets (including infrastructure) and liabilities
Net assets (rather than fund balances, retained earnings,etc.)
Invested in capital assets, net of related debt
Restricted
Unrestricted
Choice between two formats
Most significant effect for closing package agencies will be centered around the differences between modified accrual basis information (currently submitted) and accrual basis information for governmental funds
Significant Accrual Adjustments - Statement of Net Assets – Governmental Funds
Long term assets
Receivables ( present value - APB 21)
Capital Assets (including interest - SFAS 34)
Liabilities -  separated between due dates less than 1 year and greater than one year
Debt
Compensated absences
Claims and judgments
Pension benefit obligation
Significant Accrual Adjustments - Statement of Net Assets – Governmental Funds
Inventory (expense when used rather than when purchased)
Interest payable on long-term debt
"Capital Assets and Infrastructure"
Capital Assets and Infrastructure
What Classes of Assets are Required Under GASB Statement 34?
Non-Depreciable Asset Classes
Land
Land Improvements
Construction in progress
Infrastructure – modified approach
Inexhaustible works of art & historical treasures
Depreciation
State agencies will receive guidance on the following areas from the OCG
Depreciable lives
Depreciable methods
Capitalization thresholds
$25,000  (land/bldgs.)
$1,000 (equipment)
TBD(infrastructure)
Depreciation Implies:
A Detailed, Auditable Property Record
Specific identification of assets
Historical cost
Year of purchase
An Adequate Software System/Process
Proper segregation of depreciable/non-depreciable assets
Possible Limitations of Current Recorded Assets
Missing data
Title Issues
Improper classification of assets
Unrecorded retirements, additions & transfers
Incorrect descriptions, serial number model, etc.
Age of the current system
Definition of Infrastructure
Infrastructure Assets, defined as:
Long-lived capital assets that are a part of a network of assets that can be preserved for a significantly greater period than most capital assets, and that
Are normally stationary.
Examples
Roads and bridges, dams,
Water and sewer systems
Few agencies are expected to have significant infrastructure assets
Infrastructure Assets
Required to be reported for the first time by governmental funds
Reporting alternatives
Historical cost-based depreciation
Modified approach
Historical Cost/Depreciation Approach
Infrastructure assets will be reported in the statement of net assets based on historical costs (cost when built)
Infrastructure assets will be depreciated over their useful lives
“Modified” Approach
No depreciation is required if the government demonstrates that it is maintaining qualifying infrastructure assets approximately at or above the condition level that it established
Condition assessments must be performed at least every three years
Initial Capitalization of General Infrastructure Assets
General infrastructure assets = infrastructure assets of governmental funds
All “major” capital assets including:
Renovations
Restorations
Improvements
Determining “major” assets
Subsystem --5 percent
Network --10 percent
A capitalization threshold will be established and communicated by the OCG
Initial Capitalization of General Infrastructure Assets
Retroactive to years ending after June 30, 1980 (NCGA Statement 1)
Phase I governments (State of SC) -- periods beginning after June 15, 2005 (June 30, 2006)
Must begin capitalizing newly acquired infrastructure assets on July 1, 2001
Valuation of Infrastructure Assets for Transition
Infrastructure assets will be reported in the closing packages/statement of net assets at historical cost less accumulated depreciation.  Historical cost includes estimated historical cost.
Replacement cost or current cost, which is then deflated back to the acquisition date, is an acceptable method for estimating  original cost of infrastructure in governmental funds.
Transition rules do not apply to enterprise funds or to colleges/universities.
Provisions for Infrastructure Assets at Transition
If infrastructure records of governmental funds are inadequate or if determining actual historical cost is not practical
Report only the estimated historical cost for major infrastructure assets and networks of infrastructure asset systems
Only major Infrastructure assets acquired or assets that have had significant improvements in fiscal years ending after June 30, 1980.
Reporting Model-Statement of Activities
Net cost format (expenses minus program revenue = net cost)
Expenses by functions/programs
Revenues by:
Charges for services
Operating grants and contributions
Capital grants and contributions
General (e.g., taxes and other non-program revenue)
Special, extraordinary items, and transfers
Most significant impact on closing package agencies will likely be the addition of separate accounts to identify capital from operating grants/program from general grants (discussed in next section)
Statement of Activities-Expenses
Expenses are reported by function
Direct expenses--required
Indirect expense allocation permitted
Separate column for indirect expenses, if allocated
Depreciation
Interest
Statement of Activities- Program and General Revenues
Program revenues reduce the net cost of a program
Charges for services
Program specific grants and contributions
Net cost is financed by general revenues
Significant Accrual Adjustments - Statement of Activities
Recognition of revenues deferred because of availability criteria
Recognition of expenses for long-term liabilities
Compensated absences
Claims and judgments
Pension benefit obligation
Other Accrual Issues
FASB Statements
Identification of direct charges for services
Allocation of internal service fund equity
Elimination of interfund activities at government wide level
"GASB 34/35 Requirements -..."
GASB 34/35 Requirements - Fund Level Statements
Reporting Model-Fund Structure
New Fund Definitions
Permanent fund
Enterprise fund
Internal service fund
Investment trust fund
Private purpose trust fund
Reporting Model-
Fund Presentations
Major funds
Nonmajor funds presented in a single column by category
Concept does not apply to fiduciary funds and internal service funds
Primarily impacts the OCG and State agencies who prepare stand-alone financial statements
Reporting Model-
Major Fund Criteria
General fund always major
Individual fund is:
At least 10 percent of assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) of the relevant fund category or fund type
At least 5 percent of  total governmental and enterprise funds combined
Other funds that are important
Reporting Model-
Governmental Fund Statements
Required statements:
Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund Balances
Characteristics of governmental fund statements:
Current financial resources
Modified accrual
Reconciliation required for both statements
Treatment of Internal Service Funds
Remove the “doubling-up” effect of internal service fund activity
Generally, assets and liabilities are reported with governmental activities—internal service funds are not part of business-type activities
Reporting Model-Proprietary Funds
Economic resources
Accrual basis
Enterprise redefined--debt\user charge-based; definition is permissive but requires certain funds to be enterprise funds
Debt secured solely by pledge of net revenues from fees or charges
Laws or regulations require recovery of cost
Pricing policy designed to recover cost
Reporting Model-Proprietary Fund Statements
Statement of Net Assets/Balance Sheet
Statement of Revenues, Expenses, and Changes in Fund Net Assets/Equity
Statement of Cash Flows
Reconciliation required for financial position and operating statements (if necessary)
Proprietary Fund Statements-Statement of Net Assets
Classified – current vs. long-term
Restricted assets must be reported as such
Fund net assets/equity-three classifications replace contributed capital and retained earnings
Invested in capital assets, net of related debt
Restricted
Unrestricted
Proprietary Fund Statements-Operating Statement
Distinguish between operating and nonoperating
Capital contributions and transfers reported separately
Proprietary Fund Statements-Cash Flows
Four categories of cash flows
Operating
Noncapital financing
Capital and related financing
Investing
Direct method required for operating activities
Indirectly determining direct method cash flows
Adjust accrual basis revenues and expenses for changes in receivables and payables
Most agencies with proprietary funds currently report using the indirect method
Reporting Model-Fiduciary Fund Statements
Statement of Fiduciary Net Assets
Statement of Changes in Fiduciary Net Assets
Reporting Model-Fiduciary Funds
Redefined--cannot be used to support the government’s own programs
Economic resources
Accrual basis
Reporting Model-Component Unit Presentations
Discrete presentation in government-wide statements
Major component unit reporting choices:
Separate columns in the government-wide statements
Separate statements after fund presentations
Condensed information in the notes
Primarily impacts the OCG and State agencies who prepare stand-alone financial statements

Reporting Model-Note Disclosures
Summary of significant accounting policies
Changes in capital assets and long-term liabilities
Segment reporting
Other potential disclosures
Primarily impacts the OCG and State agencies who prepare stand-alone financial statements.  Structure of fixed asset and liability closing packages also will need to change.
Reporting Model-RSI
Budgetary comparisons for general fund
Original and final budget
Actual on budgetary basis
Infrastructure-modified approach
Three most recent condition assessments
Estimated amount to maintain and preserve versus actual amount for last five years
Primarily impacts the OCG and State agencies who prepare stand-alone financial statements
Questions?
"Recap of Potential Significant Implementation..."
Recap of Potential Significant Implementation Issues
Potential Implementation Issues
System capabilities
Chart of account changes
Subsidiary ledger changes
Capital assets
Accounts receivable
Inventory
Long-term obligations
Identification of program revenues vs. general revenues (capital vs. operating grants)
Capital assets/infrastructure
Accounts receivable/valuation
Beginning net assets
Inventory – consumption method
Additional Issues for Agencies Issuing Stand-
Alone Financial Statements
System changes for reporting requirements
Preparation of direct method statement of cash flows
Preparation of Management’s Discussion & Analysis (MD&A)
Functionalization of revenues/expenditures
Accrual basis/modified accrual basis of accounting for same transactions
Elimination of interfund activities at the government-wide level
Unique Issues for Public Colleges and Universities
Method of reporting – Business -Type Activity (BTA)
Classification of Expenses – natural vs. functional
Segment reporting
Preparation of direct method statement of cash flows
Preparation of MD & A
"Available Resources"
Available Resources
Technical Literature
GASB Statement 34
AICPA Publication
GASB – Implementation Guide
OCG’s GASB 34 Website
http://www.cg.state.sc.us/gasb34/gasb34.htm
Currently includes -
Advisory Committee Organizational Chart
Overview – GASB 34 Implementation in South Carolina
Minutes of the Advisory Committee Meetings
Training for State Agencies
Links to Other Sites Containing GASB 34 Information *
*  Includes most of those shown on the next slide
Other Websites
www.aicpa.org
www.gfoa.org
(Government Finance Officers
Association)
www.nasact.org
(National Association of State Auditors,
Comptrollers and Treasurers)
www.aga.org
(Association of Government Accountants)
Other State Government websites
Professional Assistance
Internal resources e.g. Maintenance Engineers, Inventory clerks
Upfront involvement of auditors
Other outside consultants
Preliminary STARS Changes Effective for FY Beginning July 1, 2001
Internal vs. External Activity and Balances
In government-wide financial statements, some internal activity and balances must be reclassified, consolidated, or eliminated.
Internal activity and balances – result of resource flows between the funds of a primary government (including blended components, but not discrete component units)
External activity and balances – result of resource flows between the primary government and other parties external to the primary government (i.e. vendors, contractors, legally separate discretely presented component units, etc.)
Internal vs. External Activity and Balances
2 options for distinguishing between internal/external transactions in STARS:
Dual set of revenue/expenditure object codes – one for transactions with internal parties, one for transactions with external parties
New data element to identify each STARS document as internal/external
Advantages for new data element option
STARS will automatically identify and record all types of internal and external batch type transactions except journal vouchers
Internal vs. External Activity and Balances
Change for State Agencies
Change in Preparation of Journal Vouchers (JVs) (batch “0”) only (no other batch entries affected) beginning July 1, 2001
Addition of an indicator in document header which identifies JVs as internal/external
“Zero-I” – all lines affect internal revenue/expenditure objects
“Zero-E” – all lines affect external revenue/expenditure objects
“Zero-Blank” – no lines affect revenue/expenditure objects
Additional Object Codes – Grant Revenues
GASB 34 requires grant revenues to be reported in the following categories:
Program revenue – operating grants
Program revenue – capital grants
General revenue
Program revenue – restricted for use by a particular agency or functional grouping of agencies
General revenue – all other revenue
Capital grants – grants used for capital assets or other resources restricted for capital purposes
Operating grants – other grants
Additional Object Codes – Grant Revenues
Beginning July 1, 2001, single object codes (ex. 2801 – Federal revenue) will be replaced with 3 separate object codes
Program revenue – operating grants
Program revenue – capital grants
General revenue
Some codes related to specific grants (ex. 2810 Child Support Enforcement Reimbursements) will continue to use single object codes after June 30, 2001
State Agency Monitoring Requirements
Communication to OCG
Objectives
Communicate state agency’s GASB 34 progress on a quarterly basis
Identify significant agency issues/assist in their resolution
Content
Initial Reporting - preliminary issues identified
Quarterly Reporting Form
Progress toward initial implementation issues identified
Additional significant issues identified – progress reported
Significant roadblocks encountered
Communication to OCG
Steps
Complete/submit to OCG Initial Reporting Form with preliminary issues identified
Complete/submit to OCG Quarterly Status Report (7 days after quarter end – i.e. Jan., April, July, October) through June 30, 2002
Initial Reporting and first Quarterly Status Report due January 7, 2001.
Administrative Information
OCG Information
Additional Training
STARS changes/significant issues (Spring 2001)
Revised closing packages (Spring 2002)
OCG Website
http://www.cg.state.sc.us/gasb34/gasb34.htm
Implementation Questions
Contact Barbara Hevener/Pat O’Cain
Questions?