Governmental Audit Update

Governmental Audit Update
Corey Arvizu, CPA

Pension Accounting and Reporting
GASB No. 68
 How do we treat additional employer contributions (those in-excess of statutory
requirements)?
• Contributions are irrevocable and should be recognized in the period made
• May need to adjust note disclosures or required supplementary information
schedules
 What are nonemployer contributions and should these contributions be
recognized?
• Nonemployer contributions are made by an entity other than the employer
(i.e. fire insurance premium tax, State contribution to the EORP)
• These contributions should be recognized in the period made
 Restoring of covered payroll for RSI reporting to prior definition that
included only “pensionable salary”
3

Fair Value Measurement
GASB No. 72
 The statement addresses
accounting and financial reporting
issues related to fair value
measurements; it defines fair value
as the price that would be received
to sell an asset or paid to transfer a
liability in an orderly transaction
between market participants at the
measurement date. It also provides
guidance for determining a fair
value measurement for financial
reporting purposes.
Fair Value
Level
3
Level
2
Level
1
4

GASB No. 72
5
Fair Value Categories
Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities
Level 2: quoted prices for similar assets or liabilities, quoted
prices for identical assets or liabilities in markets that are not
active, or other than quoted prices that are observable
Level 3: unobservable inputs

GASB No. 72
 Investments not measured at fair value include the following:
• Money market investments
• External investment pools (2a7-like)
• Investments in life insurance contracts
• Common stock meeting the criteria for the equity method
• Unallocated insurance contracts
• Synthetic guaranteed investment contracts
 Additional note: a government is permitted in certain
circumstances to establish the fair value of an investment that
does not have a readily determinable fair value by using the net
asset value per share (or its equivalent) of the investment
6

GASB Updates – Upcoming
7
Statement No. 73
(Pensions)
Statement No. 74
(OPEB)
Statement No. 75
(OPEB)
Statement No. 77
(Tax Abatements)
Statement No. 79
(Investment
Pools)
Statement No. 78
(Pensions)
Statement No. 80
(Component
Units)
Statement No. 81
(Split-Interest
Agreements)
Statement No. 82
(Pensions)

Financial Reporting for OPEB Plans
GASB Statements No. 74 and 75
 The statements replace prior statements for OPEB plans
 The scope of the statements include OPEB plans administered
through trusts that meet the following criteria: irrevocable,
dedicated to benefits, legally protected
 The statements also include OPEB plans not administered
through trusts and defined contribution OPEB plans
 Effective fiscal year 2017 for plans, fiscal year 2018 for
employers
8

 Measurement of the Net OPEB Liability
• Total OPEB liability less the OPEB plan’s fiduciary net position
• Total OPEB liability valuation requires the use of an actuary; except, if a plan has
fewer than 100 members (active and inactive) – an alternative measurement
calculation is available
• Actuarial valuation or calculations required every two year (every year
encouraged)
• If a valuation or calculation of the total OPEB liability is not performed on the
plan’s fiscal year then, then a roll-forward is required (no more than 24 months
prior)
• All assumptions for the determination of the total pension liability are generally
required to be in conformity with the guidance in the Actuarial Standards of
Practice
9

Notes to Financial Statements
Single/Agent
Employer
Cost-Sharing
Employer
OPEB Plan Description  
Information About the Net OPEB Liability:  
-Assumptions and Other Inputs  
-OPEB Plan’s Fiduciary Net Position  
-Changes in the Net OPEB Liability 
-Proportionate Share of Collective Net OPEB Liability 
10
Required Supplementary Information
Schedule of Changes in Net OPEB Liability and Related Ratios 
Schedule of Contributions  
Schedule of Proportionate Share of the Net OPEB Liability 

What happens if there is not a trust?
• Accumulated assets for OPEB purposes are required to be
reported as assets of the employer, commonly as agency fund
• Assets in excess of liabilities for benefits due to plan members, as
well as accrued investment and administrative expense, is
required to be reported as a liability to the participating employer
• An approach similar to plans with a trust related to measurement
of OPEB liabilities, expense, and DIR/DOR is required
• Similar note disclosures and RSI is required
• No OPEB plan assets are incorporated
11

Other considerations
• Defined contribution plans recognize expense for the amount
of contributions to employees’ accounts
• ASRS, PSPRS and single-employer plans, if applicable, will
have required OPEB NPL reporting and note disclosure
requirements
• Note disclosures similar to pensions with OPEB also
requiring a health care cost trend rate sensitivity disclosure
• Enter into discussions with single-employer plan actuaries
soon to ensure reporting timelines are met
12

Tax Abatement Disclosures
GASB Statement No. 77
 The statement requires governments that entered into tax abatement agreements
to disclose the following information about the agreements
• Brief descriptive information, such as the tax being abated, the authority under which
tax abatements are provided, eligibility criteria, the mechanism by which taxes are
abated, provisions for recapturing abated taxes, and the types of commitments made
by tax abatement receipts
• The gross dollar amount of taxes abated during the period
• Commitments made by the government, other than to abate taxes, as part of a tax
abatement agreement
 Additionally, the disclosures should be organized by major tax abatement
program and may disclose information for individual tax abatement agreements
within those programs
 Effective fiscal year 2018
13

Brief Descriptive
Information
Gov’t’s Own
Abatements
Other
Gov’t’s
Abatements
Name of government 
Tax being abated  
Name of program 
Purpose of program 
Authority to abate taxes 
Eligibility criteria 
Abatement mechanism 
Recapture provisions 
Types of recipient
commitments

14
Other Disclosures
Gov’t’s Own
Abatements
Other
Gov’t’s
Abatements
Dollar amount of taxes
abated
 
Amounts received or
receivable from other
governments associated
with abated taxes
 
Other commitments by
the government

Quantitative threshold
for individual disclosure
 
Information omitted
due to legal prohibitions
 

15

16

Blending Requirements for Component Units
The statement amends the blending requirements for
the financial statement presentation of component units
of all state and local governments. The additional
criterion requires blending of a component unit
incorporated as a not-for-profit corporation in which the
primary government is the sole corporate member. The
additional criterion does not apply to component
units included in the financial reporting entity
pursuant to the provisions of Statement No. 39
Effective fiscal year 2017
17

Irrevocable Split-Interest Agreements
 The statement requires that a government that receives funds through an
irrevocable split-interest agreement recognize related assets, liabilities,
and deferred inflows of resources at the inception of the agreement.
Additionally, the statement requires that revenues are recognized when the
resources become applicable to the reporting period
 The statement also requires that a government recognize assets
representing its beneficial interest in irrevocable split-interest agreement
when they are administered by a third party (if the government controls the
present service capacity of the beneficial interests
 Effective for fiscal year 2018
18

Lease Accounting
Will effectively eliminate the distinction between capital
and operating leases
Leases will create a new intangible asset
Leases with terms less than 12 months will recognize
expenses based on contract terms
FASB and international standards have made similar
changes
Final pronouncement likely to be issued prior to summer
19

Fiduciary Activities
The term “Custodial Funds” will replace “Agency Funds”
All fiduciary funds to be reported in the Statement of
Changes in Fiduciary Net Position
Any administrative or direct financial involvement of the
assets will result in the reporting of the activity as a
governmental fund (or business-type activity)
• Administrative or direct financial involvement includes
maintaining checkbook, reconciliation of account,
expenditure compliance determination, etc.
• I.e. most all student activities funds will now be reported as a
governmental fund
21

Financial Reporting Model Improvements
Invitation to Comment
Three proposed approaches:
• Near-term approach – focus on activity within 90 days of
year-end
• Short-term approach – focus on activity with 12 months of
year-end
• Long-term approach – effectively accrual accounting that
excludes capital assets and capital-related debt
23

Financial Reporting Model Improvements
Invitation to Comment
All three would exclude capital assets and capital-
related debt
All three approaches would require a same-page
reconciliation to the government-wide statements
Short-term and long-term approaches would require a
statement of cash flows
Budgetary comparison to original budget may be
required
Comments on ITC due March 31, 2017
24

Audit Requirements
Key differences from current requirements
• Increases audit threshold from $500,000 to $750,000
• Type A/B threshold – minimum increases from $300,000 to $750,000
• Less flexibility with high-risk Type A program criteria
• Percentage of coverage from 50/25% to 40/20%
• Low-risk auditee criteria less restrictive
• Schedule of expenditures of federal awards changes
• Audit findings (threshold from $10,000 to $25,000)
26

Audit Findings
Increases the threshold for reporting known and likely
questioned costs from $10,000 to $25,000
Requires identification of whether audit finding is a
repeat from the immediately prior audit and if so the
prior year audit finding number
Provides that audit finding numbers be in the format
prescribed by the data collection form, i.e. 2017-001
Status of prior year “Yellow Book” findings now required
27

Small Purchases Procurements
Small purchases are procurements using Federal funds
between $3,000 and $150,000
Federal guidelines do require competitive procurement
methods
Intended to be relatively simple and informal
Quotations required from more than one source
Sources may be online search, public websites, phone
quotation, etc.
28

Other Procurement Considerations
Must maintain written standards of conduct covering conflicts of interest
with respect to employees engaged in the selection, award, and
administration of contracts, including disciplinary actions for violations
Definition of supplies revised to include computer equipment with an
acquisition cost of less than $5,000
Contracting with small and minority business, women’s business
enterprises and labor surplus area firms
29

Uniform Guidance” has replaced “OMB Circular A-133” in single
audit reports
The SEFA must include a note as to whether or not the entity used
the 10% de minimis indirect cost rate
SEFA must report amount paid to subrecipients on face of schedule
Time and effort changes intended to reduce administrative burden
Specific guidance provided on Corrective Action Plan
30
Uniform Guidance Changes

Yellow Book Refresher and
Update
31

When Does the Yellow Book Apply?
 When required (i.e. law, regulation, contract)
• HUD Audit Guide, US Dept. of Education Audit Guide
• Increased application to For-Profit entities
 Usually participation in federal programs (i.e. single
audit)
 Most governmental performance audits
 Voluntary election by the auditee
 Updated revision of Yellow Book expected to be
released as an exposure draft in next month
32

Additional Yellow Book Requirements
 Additional audit report
• Internal control over financial reporting
• Report on compliance
 Additional independence documentation
 Auditor competence and CPE
 Additional considerations for material noncompliance
 Considerations for abuse of funds
33

Yellow Book Findings Format
 Elements of the finding
• Criteria – what should we have seen?
• Condition – what did we see?
• Cause – why did we see what we saw?
• Effect – what is the result of what we saw?
 Views of responsible officials
 Recommendations
 Status for prior year Yellow Book findings now
required for Single Audits
35

AICPA Code of Professional Conduct
36

Revised Code of Professional Conduct
 Two New Conceptual Frameworks
 Structure
• Preface
• Part 1: Members in public practice (includes independence)
• Part 2: Members in business
• Part 3: All Other Members
 New Numbering Format
• Appendix D to Code is a mapping document to the prior code
citations
37

Code of Conduct - Members in Business
 Prohibits a member from knowingly misrepresenting facts or subordinating his or
her judgment
 Requires a member to be candid and not knowingly misrepresent facts when
dealing with an external accountant
 Requires a member to have the knowledge required to perform duties and perform
additional research or seek consultation when needed
 Requires a member to correct an entity’s financial statements that are materially
false or misleading
 Requires a member to comply with regulations regarding the timely filing of
personal tax returns
 Must maintain confidentially of employer’s records and may not use confidential
information as a result of prior employment to his or her personal advantage or
advantage of a third party, such as a prospective employer
38

Conflicts of Interest (COI)
 Examples of Conflict of Interest for Members in Business
• Serving in a management or governance position for two employing organizations
and acquiring confidential information from one employing organization that could
be used by the member to the advantage or disadvantage of the other employing
organization
• Being responsible for selecting a vendor for the member’s employing organization
when the member or his or her immediate family member could benefit financially
from the transaction
• Serving in a governance capacity or influencing an employing organization that is
approving certain investments for the company in which one of those specific
investments will increase the value of the personal investment portfolio of the
member or his or her immediate family member
 Steps outlined for addressing conflicts of interest
 Identify COI, Evaluate COI, Disclose/Obtain Consent
39

 Online Platform
• Basic and Advanced Search
Capability
• Pop-ups
• Bookmarks
• Record Notes
• Hyperlinking
 Available at aicpa.org
Online Code of Professional Conduct
40

Governmental Audit Update

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