• Financial Statement Elements
• Liabilities
• Fund Balance/Net Assets
• Revenues
• Fund Financial Statements-Reporting of Expenditures/Expenses
• Governmentwide Statements-Reporting of Expenses
• Financial Statements
• Conclusion

Although the content, presentation, and basis of accounting may vary according to the reporting requirements of Statement 34, the basic elements of the financial statements remain the same. The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements. However, the narrative does not exhaustively discuss all reporting requirements that school districts may face. School district personnel, therefore, should refer to the actual GASB statements or other definitive sources for detailed disclosure requirements and reporting formats.

Assets

Assets are defined as a probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. The following typically represent the major asset categories:

• Cash and Investments
• Receivables
• Prepaid Items
• Inventory
• Capital Assets

The following discussion about cash and investments does not illustrate all the possible investment scenarios that a local government might use. However, the following five general rules may protect a school district from problems related to investment decisions.

• For public funds, the investment objectives have traditionally been safety of principal first, then liquidity, followed by yield.
• All investments should be made with consideration of the district's cash requirements and cash flows.
• The district must understand the investment instrument, the investment mechanics, and the associated risk of the investment. Knowing the factors and variables that affect the market value of each investment will help the district determine investment policies and strategies.
• School district personnel should know with whom they are dealing before purchasing an investment. This means researching any financial institutions or brokers/dealers that the district uses.
• Proper protection of investments includes acquiring legal ownership or custody of securities. It also includes ensuring that deposits have been properly insured and collateralized.

• Cash is considered to be the most liquid (readily available) asset owned by an entity and represents readily available cash held by the organization.
• Cash equivalents are short-term, highly liquid investments (readily convertible to known amounts of cash) that are so near to maturity that they present an insignificant risk of changes in value resulting from changes in interest rates. Generally only investments with original maturities of three months or less qualify under this definition. Items commonly considered cash equivalents are treasury bills, commercial paper, short-term deposits in financial institutions, and money market funds. However, investments that qualify as cash equivalents are not all required to be treated as cash equivalents. Therefore, an entity should establish a policy concerning the classification of qualified investments as cash equivalents, which may be no more liberal than the authoritative definition except as discussed below under pooling of cash and investments. The policy must be disclosed in the notes to the financial statements.
• Investments are defined as securities and similar assets acquired primarily to earn income or profit. A security is a transferable financial instrument that evidences ownership or creditor status. Securities that are often held by or pledged to school districts generally include U.S. Treasury bills, notes, and bonds; federal agency and instrumentality obligations; direct obligations of a state or its agencies; commercial paper; negotiable and non-negotiable certificates of deposit; fully collateralized repurchase agreements; and prime domestic bankers' acceptances.

Financial Statement Presentation and Disclosure. The complexity and range of investment potential and the large amounts of cash and other assets present in most governmental units emphasize the need to carefully capture and present these data in usable form. Cash and investment balances are segregated into individual funds and, depending on contractual requirements, may be classified as restricted assets. If a fund overdraws its share of a pooled cash account, the overdraft should be reported as a liability of that fund. Fund overdrafts of this type should be reported as interfund payables and receivables.

Disclosures for cash and investments normally include, in addition to the GASB Statement 3 disclosures (see following chapter), the valuation basis of investments (e.g., investments are stated at fair value that approximates market). Changes in fair value are included as a component of investment income.

The detailed disclosure requirements for cash and investments have been established in GASB Statement 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements (issued in April 1986); GASB Statement 28, Accounting and Financial Reporting for Securities Lending Transactions (issued in May 1995); and GASB Statement 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools (issued March 1997). These GASB statements and the entity's external auditor should both be consulted regarding disclosure requirements for cash and investments.

Receivables

Receivables usually arise as a result of revenue transactions. The following are the main sources of revenues for school districts that would result in outstanding receivables:

• Property taxes
• State and federal grants
• Intergovernmental revenues (due from other governmental entities)
• Interest income

Because governmental funds use the modified accrual basis of accounting, governmental fund revenues should be recognized in the accounting period in which they become susceptible to accrual, that is, when they become both measurable and available to finance expenditures of the fiscal period. "Available" refers to the collectibility of the receivable within the current period or soon enough thereafter to be used to pay for liabilities of the current period. A general criterion for availability is 60 days, although a longer or shorter period may be used, except for property taxes in which the maximum period may not be more than 60 days. The availability period will be disclosed in the notes. Each entity should adopt a revenue accrual policy that implements the susceptibility to accrual criterion and applies it consistently. This policy should also be disclosed in the notes to the financial statements.

Proprietary funds use the accrual basis of accounting to determine when revenues and related receivables should be recorded. Revenues are recognized when they are earned, that is, when the earnings process is complete and an exchange has taken place.

GASB Statements 33, Accounting and Financial Reporting for Nonexchange Transactions, and 36, Recipient Reporting for Certain Shared Nonexchange Revenues, may have an impact on a governmental entity's reporting of revenues related to certain non-exchange transactions. Entities should consult the statements and their external auditors to determine the impact.

Property Taxes Receivable. Property taxes are generally assessed to finance expenditures of a specific fiscal year. On the assessment date or levy date, the property taxes become a lien against the assessed property. Property taxes should be recorded in the governmental funds by using the modified accrual basis of accounting (recorded when they are both measurable and available). The amount of the property taxes receivable is based on the assessed value of the property, the current property tax rate, and an estimate of the uncollectible portion. When taxes are levied, the revenue and related receivable should be recognized, net of estimated uncollectible amounts. A receivable is usually recognized at the time an enforceable legal claim arises. The revenue is usually recognized in the first period in which the use of the revenues is permitted or required.

If taxes that are levied to finance a subsequent fiscal period are collected in the current period, the amount collected should be recorded as deferred revenue. In the next fiscal year, a journal entry will be recorded to recognize the revenue amount that was collected in advance.

In the fund financial statements, when property taxes are delinquent but expected to be collected, they should be reported as deferred revenues if it is estimated that the taxes will not be available to pay current obligations of the governmental fund. This situation indicates that the delinquent property taxes are not expected to be collected within 60 days of the close of the fiscal year, although a shorter availability period may be used.

Due From State. This receivable represents amounts from state resources that exceed the amounts received during the fiscal year for which the school district has met all eligibility requirements. A district should also use the measurable and available criteria that are consistent with the modified accrual basis of accounting in the governmental funds to record revenues due from the state. Revenue due from the state for which all eligibility requirements were met during the fiscal year, and which is expected to be received within the availability period (e.g., 60 days) from the financial statement date, should be recorded as a receivable using this account.

Due From Federal Agencies. This account represents amounts for which all eligibility requirements have been met by a district under a federal financial assistance program that are expected to be available to finance current liabilities. Such revenues are usually accounted for in special revenue funds using the measurable and available criteria, as appropriate for a modified accrual-based fund. If this is an expenditure-driven grant, revenues may be recognized only to the extent that expenditures have been incurred.

Due From Other Governments or Agencies. In some instances, districts become eligible for revenue from other local governments or agencies through grant programs or by providing services. The receivable earned from such revenue should be recorded only if it also meets the measurable and available criteria. Thus, when the revenue has been earned under the grant program or the services have been provided, the district should recognize the revenues and receivables for the amount earned. In addition, if the amount of an outstanding receivable at the end of a fiscal year is not expected to be collected within the availability period (e.g., 60 days) from the financial statement date, the district should record a deferred revenue for the outstanding amount.

Accrued Interest Receivable. Accrued interest represents the amount of interest at the end of an accounting period on all cash accounts and investments held at that date. Accrued interest should be computed for all investments and cash accounts held by the government that generate interest earnings regardless of the expected payment date.

[back to top]

Inventory

Governmental accounting generally requires that amounts spent to purchase goods be recorded as an expenditure at the time of the purchase. An exception to this general rule is made for inventory. If the amount of inventory on hand at year-end is significant, the value of such inventory should be recorded as an asset. This is considered the "Purchase Method" whereupon fund balance is reserved for the amount of inventory. Inventory may also be recorded as an expenditure when it is consumed rather than when it is purchased. Under the "Consumption Method," purchase transactions are first recorded in the inventory account. As inventory is actually used, an entry to recognize the expenditure is posted to the appropriate accounts. This method is required for the proprietary funds.

It is not uncommon for school districts to have a relatively high level of inventory at the end of the fiscal year, since this often coincides with the start of a new school year. In addition to the balance sheet presentation, note disclosure regarding the method of accounting for inventory should be made. Districts often distribute inventoried supplies to schools prior to fiscal year-end to accommodate the beginning of the new academic school year. Such inventories may either be included in inventory at year-end or be expensed in the year of distribution.

For the entity-wide statements, the consumption method must be used. If the purchase method is used in the governmental funds and the consumption method produces a different result, the difference should be included in the reconciliations of governmental funds to governmental activities. (Second Statement 34 Q & A, Q23)
Inventories in school districts generally represent goods that are insignificant individually, but are significant as a whole. These items may be described as follows:

• Consumable goods that have a relatively short shelf life. Common examples are office supplies, paper, computer supplies, building and maintenance supplies, and science lab supplies.
• Items that are expected to be used within a short time, including cafeteria foods such as commodities received from the United States Department of Agriculture (USDA).
• Tangible personal property that is durable but does not meet the entity's criteria for capitalization as an asset. Examples are textbooks, calculators, and physical education equipment.

• Monitoring and valuation of inventory
• Accounting for transactions related to inventory

Accounting for and Control of Inventory. Governmental entities have several options for physical counts of inventory. Independent auditors are required by generally accepted auditing procedures to conduct physical observations of inventories at least annually when such inventories are material to the district's operations. The physical observations should be conducted as of the balance sheet date or as of a single date that is within a reasonable time before or after the balance sheet date. The independent auditor is usually present at the time of the inventory to assess the effectiveness of the inventory-taking procedures and to determine the reliance that the independent auditor can place on the entity's representations relating to the physical condition and quantities of the inventory. The most common physical inventory count methods are

• cycle counts,
• full counts taken at fiscal year-end, and
• full counts taken at times other than fiscal year-end.

However, there may be instances in which resources are transmitted before the eligibility requirements are met. These resources would be reflected by the recipient as deferred revenues. (Statement 33, paragraph 21).

Pension Assets

The advanced funding of pension plans is an intangible asset, which is recognized by an employer for contributions to a pension plan, which were greater than pension expense. This asset will be amortized against the pension costs of the employer when due.

Capital Assets

Governmental entities are responsible for accounting for, controlling, and reporting both current and capital assets. Capital assets have certain properties that distinguish them from other types of assets:

• Tangible or intangible in nature
• Long-lived (have a life longer than one year)
• Of a significant value at the time of purchase or acquisition
• Reasonably identified and controlled through a physical inventory system

• Land and land improvements
• Easements
• Buildings and building improvements
• Vehicles
• Machinery and equipment
• Technological assets such as computers and network equipment
• Works of art and historical treasures (discussed separately below)
• Infrastructure (discussed separately below)
• Software

• Quantity and types of assets
• Location of assets
• Life expectancy of assets

Basis of Capital Assets. Capital assets are included in the financial records at cost. In some situations, the purchase or acquisition documents may not be available for capital assets already on hand. If reliable historical records are not available, an estimate or appraisal of the original cost based on other information, such as price index levels at time of acquisition, may be used. The intent of such valuation is to record a fair value at the date of acquisition and not expend excessive resources in ascertaining exact costs. If capital assets are acquired by gift, then the fair value on the date received is the appropriate amount to include in the capital asset records.

Capital assets may be acquired by several methods:

• Purchase
• Lease-purchase
• Construction
• Tax foreclosures
• Gifts and contributions

Capital Asset Reporting. GASB Statement 34 establishes reporting requirements for general government capital assets. Previously, financial statement presentation for capital assets of the general government was limited to the general fixed asset account group in the combined balance sheet. No depreciation was recognized on these assets. However, Statement 34 establishes the following new reporting requirements for capital assets:

• Depreciable capital assets should be reported in the Statement of Net Assets (a governmentwide statement) at historical cost, net of accumulated depreciation.
• The historical cost should include the ancillary charges necessary to place the asset into its intended location and condition for use, including freight and transportation charges, site preparation costs, and professional fees that directly relate to the acquisition of the asset.
• Depreciable capital assets may be reported on the face of the Statement of Net Assets as a single item or by major class. Detailed information will be reported in the notes.
• Significant nondepreciable capital assets that are inexhaustible, such as land, certain nondepreciable site improvements, and infrastructure assets reported using the modified approach should be reported separately from depreciable capital assets on the statement of net assets. GASB has defined an inexhaustible capital asset as one whose economic benefit or service is used up so slowly that its estimated useful life is extraordinarily long. Construction-in-progress should be included with nondepreciable capital assets in the Statement of Net Assets.
• Accumulated depreciation may be reported on the face of the Statement of Net Assets, parenthetically or as a separate line item reducing capital assets. However, regardless of the statement presentation in the Statement of Net Assets, the notes to the financial statements should disclose balances and changes in accumulated depreciation for the period by major asset class, as well as information regarding depreciation methods used.

[back to top]

Capitalization Thresholds, Estimated Useful Lives, and Depreciation Methods for Capital Assets

Given the new requirements in Statement 34 to depreciate general capital assets, governments must establish a range of policies regarding capitalization thresholds for capital assets, estimates for useful lives, and depreciation methods. Statement 34 does not prescribe policies for any of these areas; however, note disclosure is required. Management is granted discretion to determine appropriate policies for control purposes in accordance with the laws and regulations under which the entity operates. Some states have established specific regulations surrounding capital assets; therefore, school districts should consult state sources in establishing new policies.

Capitalization Thresholds. Capitalization threshold refers to the dollar value threshold at which purchases of assets will be capitalized in the financial records of the governmental entity rather than be recorded as an expenditure/expense at the time of purchase. Many assets having useful lives greater than one year do not have values that are material to the entity's financial statements. Additionally, the costs of tagging, tracking, and accounting for numbers of immaterial items may be considered excessive by the entity. As a result, many local governments establish capitalization thresholds that exclude reporting these items as capital assets and instead rely on systems other than the financial management system for tracking and control purposes (e.g., PC inventories, building equipment lists, maintenance systems).

In determining an appropriate capitalization threshold, entities should consider the following factors:

• Total value of all capital assets
• Impact of the new/revised capitalization threshold on values reported in the statement of net assets
• Value of any related debt (financial statement presentations may be misleading if significant assets acquired through debt are excluded by the capitalization threshold)
• Costs associated with tracking and reporting assets
• Applicable state or federal requirements (typically for grant funds)

Finally, local governmental entities should review applicable state and federal requirements related to asset capitalization in determining appropriate policies. For example, the federal government uses a dollar threshold of $5,000 for federal grant management purposes. This threshold may have an impact on an entity's policies, particularly as it relates to capital assets that are acquired with federal grant funds.

Estimated Useful Lives. The estimated useful life of an asset is the period (of months or years) that the asset will be used for the purpose for which it was purchased. In determining the estimated useful life of an asset, consideration must be given to the asset's present condition and intended use, maintenance policy, and how long the asset is expected to meet service and technology standards. School districts may use general guidelines obtained from professional or industry organizations, information on comparable assets of other school districts/governments, and internal historical data. The determination of appropriate estimated useful lives is a management decision that is affected by a number of factors:

• Experience with asset management
• Plans for asset use
• Property management practices
• Asset maintenance practices
• Applicable federal or state regulations

• GASB Statement 34 implementation guides issued by state education agencies and other key state agencies, including state auditors and comptrollers. Many of these agencies have web sites that contain information about the useful lives of various asset classes in the state. Further, many of these web sites may be accessed through the GASB web site at http://www.GASB.org/.
• Statement 34 Implementation Guide for schools issued by ASBO, International. This guide discusses capitalization policies and depreciation methods at length.

Depreciation Methods. GASB Codification Section 1400.113 states that "depreciation expense should be measured by allocating the net cost of depreciable assets (historical cost less estimated salvage value) over their estimated useful lives in a systematic and rational manner." Although GASB requires governmental entities to depreciate capital assets (other than nonexhaustible assets), the Statement does not prescribe the method. As a result, depreciation methods are a management decision that should be based on the resources necessary to determine the various calculations and the capabilities of asset management systems. In addition to composite or group methods, any established depreciation method may be used (e.g., straight-line, sum-of the-years' digits, or double-declining balance).

Depreciation may be calculated for individual assets or it may be determined for a

• class of assets,
• network of assets, or
• subsystem of a network.

To simplify the calculations involved, the composite method may be used to calculate depreciation expense. It is applied to a group of similar assets or dissimilar assets in the same class, using the same depreciation rate, but not across classes of assets. The estimated life for the group may be based on the individual weighted average, the simple average of the useful lives of the assets in the group, or the weighted average or assessment of the life of the group as a whole. This method assumes no salvage value for assets; therefore, it simplifies the calculations and the recording of asset dispositions.

Works of Art and Historical Treasures. Works of art, historical treasures, and similar assets are a special class of capital assets that may require developing a specific capitalization and depreciation policy. These assets are defined as items held singly or in collections that meet all of the following conditions (Statement 34, paragraph 27):

• Held for public exhibition, education, or research in furtherance of public service, rather than financial gain.
• Protected, kept unencumbered, cared for, and preserved.
• Subject to an organization policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

Depreciation is not required for those capitalized collections or individual items that are considered to be inexhaustible. Inexhaustible collections of individual works of art or historical treasures are those with extraordinarily long useful lives. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.

Technology Assets. Technology-related assets are a class of capital assets that may require special treatment and reporting by school districts based on local or state reporting and accountability requirements or policies. Although technology assets are not dissimilar from other capital assets such as vehicles or furniture and fixtures, the resources dedicated to the installation and ongoing support and use of technology by school districts have resulted in an increased level of interest by policymakers and citizens related to the use of resources dedicated to these purposes. Thus, many school districts have instituted special accounting and reporting practices associated with expenditures for technology-related assets.

To facilitate the proper accounting and reporting of technology expenditures by school districts, chapter 6 (Account Classification Descriptions) of this handbook establishes a number of expenditure and asset reporting codes. As chapter 6 outlines, school districts should account for technology-related expenditures according to the following principles:

• Expenditures related to the technology and media-related activities that support instruction (function code 2230) should be segregated from those associated with administrative technology (function code 2580).
• Expenditures associated with purchased services to support technology should be distinguished from other types of purchased and professional services. Expenditure object codes 351 and 352 have been established for this purpose.
• Expenditures associated with the rental of computer and other technology equipment should be distinguished from other types of rentals. Expenditure object code 443 has been established for this purpose.
• Communications expenditures should include all costs associated with voice, data, and video communications charges regardless of the media used (expenditure object code 530).
• Technology supplies should be segregated from other types of supplies. Expenditure object code 650 has been established for this purpose.
• Purchases of technology capital equipment should be specifically tracked for analysis purposes. Expenditure object codes 734 and 735 have been established for this purpose.

• capture information on both instructional and administrative technology costs and
• accumulate the total expenditures associated with technology for operating purposes (expenditure object codes 351, 352, 443, 530, and 650) and capital purchases (expenditure object codes 734 and 735).

Infrastructure Assets. Infrastructure assets are long-lived capital assets that are normally stationary in nature and that can be maintained for a significantly greater number of years than most capital assets. Infrastructure assets include

• roads,
• bridges,
• drainage systems,
• water and sewer systems, and
• lighting systems.

Reporting Requirements.Infrastructure assets have several reporting requirements:

• Governmental entities are required to capitalize and report major general infrastructure assets that were acquired in fiscal years ending after June 30, 1980, or that received major renovations, restorations, or improvements during that period. Governments with revenues of less than $10 million (annually) are not required to report their infrastructure assets retroactively.
• Prospective reporting of general infrastructure assets is required for all entities at the date of implementation of Statement 34.
• Statement 34 defines major general infrastructure at the network or subsystem level on the basis of the following criteria:
• The cost or estimated cost of the subsystem is expected to be at least 5 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999.

  or

• The cost or estimated cost of the network is expected to be at least 10 percent of the total cost of all general capital assets reported in the first fiscal year ending after June 15, 1999.

• The reporting of nonmajor networks is encouraged, but not required.

Valuation of Infrastructure Assets.Infrastructure assets are reported at historical cost or estimated historical cost. If a determination of the historical cost is not viable because of incomplete records, an estimated historical cost may be determined in the following ways:

• Using standard costing, which relies on available records from the period of acquisition to estimate asset cost. These records may include historical documents such as invoices for similar assets and vendor catalogs from the acquisition period.
• Calculating the current replacement cost of a similar asset and deflating this cost back by using price-level indexes to the year or average year of acquisition. Refer to the web site http://www.fhwa.dot.gov/programadmin/publicat.htm for the Price Trends for Federal-Aid Highway Construction, published by the U.S. Department of Transportation, Federal Highway Administration, Office of Program Administration, Office of Infrastructure.

• The entity has a qualifying asset management system that
  • has an up-to-date inventory of infrastructure;
  • performs consistent and complete condition assessments every three years, the results of which are summarized using a measurement scale; and
  • can estimate, on an annual basis, the cost to maintain and preserve the infrastructure assets at the disclosed condition level.
• The entity documents that the eligible infrastructure assets are being preserved approximately at or above a condition level established and disclosed by the government.

If entities choose the modified approach for reporting general infrastructure assets, they are required to present information on condition and on estimated versus actual maintenance as required supplementary information (RSI).

If the governmental entities report eligible infrastructure assets using the modified approach, additional schedules and disclosures are required as RSI.

Entities should consult their external auditors and the detailed disclosure requirements outlined in Statement 34 to determine policy decisions concerning the modified approach of infrastructure asset reporting.

[back to top]

CONTINUED
<< BACK   1  2  3  4  5  >> NEXT