A Governmental Audit Quality Center Web Event November 7, 2012

1. The New AICPA OCBOA Publications: What They Are and How They Apply to Governments and Not-for-Profits Using Cash, Modified Cash, and Regulatory Frameworks A Governmental Audit Quality Center Web Event November 7, 2012

2. Administrative Notes Troubleshooting Tips • No Audio? • Ensure that your computer speakers are turned on and that the volume is turned up. • Check to ensure that audio streaming is enabled on your computer • If the presentation slides stop advancing during the presentation you should: • Hit the red “Exit” button located to the right of the main screen; this will close out of the presentation and re-launch the webcast • If you are still having audio or other technical difficulty • Check with your IT personnel at your firm. • Call the AICPA Service Center at 888.777.7077

3. Administrative Notes • We encourage you to submit your technical questions – please limit your questions to the content of today’s program. • You can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen. • You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab. • This event is being recorded and will be posted in an archived format to the GAQC Web site.

4. Continuing Professional Education • To document your participation and obtain CPE, you must click “OK” on 75% of pop-up markers. • There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes). • To track your progress on the pop-up markers, click on the Participation tab on lower portion of screen. • At the end of today’s presentation we will provide steps for obtaining your CPE certificate. • Contact the Service Center for help with obtaining CPE at 888.777.7077 or service@aicpa.org. • If you are not receiving CPE for this event, ignore the pop-up markers if they appear.

5. Presenters Mike Crawford, CPA Chairman Emeritus, Crawford & Associates, P.C. Mike Glynn, CPA, CGMA Senior Technical Manager, AICPA Audit and Attest Standards Team Shelly Hammond, CPA Partner, Allen, Gibbs, & Houlik, L.C.

6. What we will cover • AICPA Other Comprehensive Bases of Accounting (OCBOA) Practice Aids • Why OCBOA/Special Purpose Framework (SPF)? • Standards and Guidance • Financial Statements and Frameworks • Measurement and Recognition • Presentation & Disclosure • Materiality • Auditor Reporting • Questions

7. Practice Aid: Applying OCBOA in State and Local Governmental Financial Statements http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/AuditAttest/IndustryspecificGuidance/Government/PRDOVR~PC-006614/PC-006614.jsp Product# APAOCBO12P

8. Practice Aid: Accounting and Financial Reporting Guidelines For Cash- and Tax-Basis Financial Statements http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/AuditAttest/PRDOVR~PC-006701/PC-006701.jsp?cm_vc=PDPZ1 Product# APACTB12P

9. Understanding the Reasons for and Limitations of Issuing Non-GAAP Financial Statements Why OCBOA/SPF?

10. March 2008 Governmental Accounting Standards Board (GASB) Research Report, State and Local Government Use of GAAP for General Purpose External Financial Reporting Only covered 31,221 of the 89,526 units of state and local governments 98% of all state and local revenue accounted for by these 31,221 governments Study estimates that: 67% of 31,221 governments covered follow Generally Accepted Accounting Principles (GAAP) (26% of those were required to follow GAAP) 33% of the 31,221 governments do not follow GAAP No estimate for the other 58,305 smaller governments GASB GAAP Research

11. The National Center for Charitable Statistics lists more than 1.5 million nonprofit organizations that are registered in the U.S. California: 160,000 Kansas: 17,000 Numerous small entities that do not follow GAAP Not-for-Profits

12. Accounting is easier for some accounting staff to grasp Quicker year-end closing Financial statements less complex to prepare and audit Costs less to prepare and audit annual statements More understandable for unsophisticated users Generally linked more directly to budget Consistent with the short-term focus of many governing bodies and many taxpayers and donors May be required by state law or regulatory agencies Why are OCBOA/SPFs Used?

13. Not a comprehensive economic measure Pay-as-you go does not measure full costs of service, only what is affordable, and all assets and liabilities May not satisfy certain users Rating agencies, creditors, investors, taxpayers, donors and members of governing bodies may have certain needs not met – Financial decisions may be misguided Pay-as-you-go may mislead decisions makers when determining cost of service, setting rates, and balancing the budget Financial condition and results of operations can be more easily manipulated Leaving payables in a drawer, ignoring receivables collection problems, recording cash transactions in improper period Understanding OCBOA/SPF Limitations

14. Changing Standards for OCBOA and Special Purpose Frameworks and Reporting Standards and Guidance

15. Standards or Guidance Affecting OCBOA • Statements on Standards for Accounting and Review Services (SSARS) 19, Compilation and Review Engagements • Effective date: For financial statement periods ending on or after December 15, 2010 • Statement on Auditing Standards (SAS) 122, Clarification and Recodification • Issued as a result of the AICPA Clarity project to converge current standards with those of the International Auditing and Assurance Standards Board and to improve the formatting and clarity of the audit standards • AU-C Section 800 – Special Considerations—Audits of. Financial Statements Prepared in Accordance With Special Purpose Frameworks • Effective for periods ending on or after December 15, 2012 • 2012 edition of AICPA SLG OCBOA Practice Aid • 2012 edition of AICPA OCBOA Practice Aid

16. Summary of Clarity Project Changes • Introduction of new term SPF to define acceptable alternative non-GAAP bases of accounting including OCBOA • Inclusion of “contractual basis” as a form of SPF but not a form of OCBOA • Increased requirements for auditors in understanding and accepting engagements, including understanding of • The purpose for which the statements are prepared • The intended users of the statements • Management’s steps to determine that the SPF is acceptable in the circumstances • For contractual basis presentations, any significant management interpretations made in applying the basis • New requirements for forming opinions and auditor reporting

17. Defining General and Special Purpose Financial Statements and Frameworks Financial Statements and Frameworks

18. Financial Statements Defined • Source: SSARS 19 • A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.

19. Financial Reporting Framework • A set of criteria, encompassing accounting standards established by an authorized or recognized standards setter organization, used for all material items appearing in the financial statements to determine: • Measurement • Recognition • Presentation • Disclosure • Determines both form and content of the financial statements • Includes: • General purpose frameworks • Special purpose frameworks

20. General Purpose Framework • A financial reporting framework that consists of accounting principles recognized as generally accepted • U.S. GAAP issued by: • The Financial Accounting Standards Board (FASB) • The GASB • The Federal Accounting Standards Advisory Board (FASAB) • IFRS issued by: • Issued by the International Accounting Standards Board (IASB)

21. Special Purpose Framework • A financial reporting framework other than GAAP, which is one of the following bases of accounting: • Cash basis • Tax basis • Regulatory basis • Contractual basis Commonly referred to OCBOA Note: New OCBOA for small private companies also being considered by AICPA.

22. Applicable Financial Reporting Framework The financial reporting framework adopted by management and, when appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. Example: Cash basis of accounting adopted by management of a small government that is considered acceptable for their purposes.

23. When and What to Report and How to Value Items in OCBOA Financial Statements Measurement and Recognition

24. Cash Basis • The cash receipts and disbursements basis of accounting (pure cash basis) • Limited to the reporting of cash and cash equivalents and changes therein • Modifications of the cash basis having substantial support (modified cash basis) • Modifications to cash receipt and disbursement transactions or events only • Just like modified accrual starts with accrual basis as its root and works back based on cash inflows and outflows, modified cash basis starts with a cash transaction or event and works forward with a substantial support modification of that cash transaction or event • Modifications should have substantial support in GAAP or other accounting literature and be logical • Such as capitalizing fixed assets resulting from a cash disbursement and recording depreciation on such assets

25. Modified Cash Basis • Essentially results in cash inflows and outflows that provide a future benefit or obligation being spread out over multiple accounting periods • Capital assets and related depreciation over estimated useful lives (future benefit) • Long-term debt and its repayment requirements (future obligations) • Does not mean recording certain elements on a cash basis and other elements on a full GAAP basis • In other words, modifications to record investments arising from cash transactions does not mean those investments should be adjusted for changes in fair value pursuant to GAAP • No accruals or non-cash transactions recorded

26. New Guidance! Cash and Modified Cash Basis • 2012 Practice Aids include new guidance that indicates you may include certain one-step transactions that are in substance two-step cash transactions in cash or modified cash basis frameworks • Equipment loan where lending institution pays cash directly to a vendor rather than giving the cash to the borrower who then pays the vendor • On-behalf payment of cash by one government for the benefit of another, such as a state contribution of cash to a state-wide pension plan on behalf of and for the benefit of a local government • Does not include non-cash transactions or events such as capital leases or donations of capital assets

27. New Guidance! Cash and Modified Cash Basis • 2012 Practice Aids include new guidance that discusses accounting for cash held for others or cash received that is not available for use until a future period • Examples could include: • Taxes collected by one government for subsequent distribution to other governments • Utility deposits received and held for later return to customers • Cash held in an agency capacity for consumers or specified beneficiaries of a not-for-profit • Pure cash basis presentations should report or disclose these restrictions or constraints on cash availability in fund balance or net position • Modified cash basis should report these as liabilities or deferrals

28. New Guidance! Cash and Modified Cash Basis • 2012 Practice Aids include new guidance that discusses accounting for bank overdrafts in a cash basis or modified cash basis framework • Generally, bank overdrafts may be netted with other cash balances of the reporting unit • If the result is an overall negative cash balance: • Under the pure cash basis, the bank overdraft would simply be shown as negative cash on hand at the end of the period. • Under modified cash basis, the bank overdraft should be classified as either a current liability in a non-pooled cash environment, or if the entity uses a pooled cash system as an interfund loan from a fund with a positive share of the pooled cash

29. New Guidance! Modified Cash Basis • 2012 Practice Aids indicate that write-downs or write-offs may be appropriate under a modified cash basis framework • Examples could include permanently impaired investments and capital assets or debt that is forgiven • Temporary changes in the fair value or impairments of an asset or liability should not be recognized • If modified cash basis assets or liabilities have been permanently impaired and have no future cash value or represent no future obligation against cash, then it would be appropriate to write-down or write-off such amounts in modified cash basis financial statements.

30. New Guidance! Modified Cash Basis • 2012 Practice Aids indicate that modified cash basis framework selected should meet primary users needs and not be misleading • Encouraged to be either a simple modification, such as adding investments acquired with cash, or be consistent with all elements (all assets and liabilities arising from cash transactions) • Not intended to be a free-for-all cherry picking of modifications, such as picking up all assets arising from cash transactions but no liabilities • Should be prepared to defend how the decision to modify or not modify is a logical and consistent application of the accounting policy and does not result in misleading financial statements for the purposes for which they are intended

31. Regulatory Basis • A basis of accounting in accordance with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is subject • Regulator and regulations determine the framework, including measurement, recognition, presentation and disclosure requirements • Example: A basis of accounting other than GAAP prescribed by a state agency for school districts for filing with the state department of education

32. New Guidance! Regulatory Basis • Regulatory basis cannot simply be cash basis or modified cash basis • AU-C sec.800.A5 indicates that the cash and tax bases of accounting are not regulatory bases of accounting • 2012 Practice Aid states that in some circumstances, a regulatory agency may prescribe requirements or allow entities subject to their jurisdiction to follow the cash or modified cash basis of accounting without any further description of specific recognition, measurement, presentation or disclosure requirements. In these cases, the financial statements should be considered prepared under the cash or modified cash basis of accounting and not a regulatory basis of accounting

33. Form and Content of the OCBOA Financial Statements Presentation and Disclosure

34. Financial Statements Form and Content • Financial statements are ordinarily comprised of a complete set of financial statements • The requirements of the applicable financial reporting framework determine the form and content of the financial statements, and what constitutes a complete set of financial statements. • For example, for a general-purpose state or local government, a complete set would include the government-wide statements, fund statements, and related notes in accordance with GASB 34/35 • May also be less than a complete set (often used in regulatory or contractual basis presentations): • A single financial statement; or • Financial statements without notes

35. Types of Financial Statements • General purpose financial statements • Financial statements prepared in accordance with a framework recognized as GAAP • Special purpose financial statements • Financial statements prepared in accordance with a special purpose framework other than GAAP (such as cash basis, tax basis, regulatory basis, or contractual basis) • Includes statements prepared using “OCBOA frameworks” defined as cash basis (including modifications), tax basis and regulatory basis

36. Applicability of GAAP Presentations to OCBOA Statements • AU-C Section 800, Exhibit B – states that if GAAP sets forth requirements that apply to the presentation of financial statements, the OCBOA financial statements may either comply with those requirements or provide information that communicates the substance of those requirements. • In other words, GASB-34/35 presentation requirements apply, in substance, to OCBOA basic statements of state and local governments issuing a complete set of financial statements

37. Not-for-profit Financial Statements • For not-for-profits, a complete set of financial statements under modified cash or income tax basis should include: • Statement of Assets, Liabilities and Net Assets (rather than Statement of Financial Position) • Statement of Revenues, Expenses and Other Changes in Net Assets (rather than Statement of Activities) • Statement of Cash Flows • Statement of Functional Expenses for Voluntary Health and Welfare Organizations (VHWO) • Notes to the Financial Statements • Statement titles should be adjusted to include “Modified Cash Basis” or “Income Tax Basis”. For example: “Statement of Functional Expenses – Income Tax Basis” • Pure cash basis statements would only include a Statement of Cash Receipts and Disbursements, plus Notes to the Financial Statements

38. General-Purpose Government Financial Statements • For a general-purpose state or local government (state, county, city), cash and modified cash basis complete basic financial statements should contain (with modified titles): • Government-Wide Financial Statements • Statement of Net Assets • Statement of Activities • Fund Financial Statements • Governmental Funds • Proprietary Funds • Fiduciary Funds • Notes to the Financial Statements • Some statements could be combined if substance of presentation requirements is met • May optionally include Supplementary Information

39. BTA Special-Purpose Government Financial Statements • For a special-purpose government engaged solely in business-type activities (utility district or authority), cash and modified cash basis complete basic financial statements should contain (with modified titles): • Statement of Net Position • Statement of Revenues, Expenses and Changes in Net Position • Statement of Cash Flows • Notes to the Financial Statements • May optionally include Supplementary Information

40. New Guidance! GASB GAAP-RSI Not Applicable to OCBOA • GAAP Required Supplemental Information (RSI) is not required in OCBOA financial statements, including: • Management’s Discussion and Analysis • Budgetary Comparison Information (if not presented in basic statements) • Pension and OPEB funding status schedules • May optionally include certain GAAP-RSI as Supplementary Information (SI) that can accompany OCBOA basic financial statements • MD&A and Budgetary Comparison Information encouraged

41. New Guidance! Basis of Accounting for SI • 2012 OCBOA Practice Aid – Applying OCBOA in State and Local Government Financial Statements indicates that supplementary or other information that accompanies the OCBOA basic financial statements may be prepared in accordance with the requirements of any of the following: • the applicable OCBOA framework applied in the basic statements such as cash or modified cash basis • GAAP • regulatory or contractual requirements • management’s criteria, or • other requirements.

42. New Guidance! Basis of Accounting for SI • For example, a supplementary information schedule of state grant award activity could be presented in accordance with the regulatory requirements of the applicable granting agency, even if those requirements differ from the OCBOA framework and basis of accounting applied in the basic financial statements • To give an in-relation-to opinion on the SI pursuant to SAS 119, the information presented in the SI must be reconcilable to the basic financial statements or accounting records used to prepare the basic statements

43. In-Substance Presentation Guidance • The substance of GAAP presentation requirements may be communicated using qualitative information and without modifying the financial statement format. • Examples: • Instead of reporting net position or fund balance by classification on the face of the financial statements, such breakdown could be included in the footnotes • Accounting Standards Codification (ASC) 958, Not-for-Profit Entities requires not-for-profits to present net assets by class (unrestricted, temporarily restricted, permanently restricted): could be presented with the statements, or disclosed in the Notes. • Information about extraordinary or special items could be disclosed in the notes rather than separately presented in the statements • Cash flow statement for proprietary funds would not be needed for pure cash basis statements if substance of presentation requirements are already met in the other statements

44. New Guidance! Presentation Captions • Authoritative literature is silent regarding the financial statement captions to use within OCBOA financial statements • 2012 Practice Aids indicate that because of the lack of authoritative literature, there is no requirement to modify standard GAAP financial statement captions in OCBOA statements • If modifications are desired, some examples for OCBOA statements could include “Revenue collected over (under) expenditures/expenses paid”, “Net income—modified cash basis”, “Regulatory basis cash receipts”, and similar caption modifications appropriate to the OCBOA framework • It is however important to ensure that financial statement titles are appropriately modified to clearly indicate the OCBOA framework applied to the entire statement

45. Regulatory or Contractual Presentations • Requirements of the regulatory provisions or contractual agreements will determine the presentation requirements and financial statement form and content under these special purpose frameworks • When form and content of presentation is not defined in the regulations or contractual agreement, follow the GAAP framework presentation form and content requirements to the extent considered appropriate

46. Example – Governmental Regulatory Presentation

47. Basic Disclosure Guidelines • Authoritative Guidance • SSARS 19, par. 2.19 • AU-C Section 800, pars. 17, A19-A23 • AU-C Section 800, Exhibit B • AICPA SLG Audit Guide – Chapter 15 • Non-authoritative Guidance • 2012 AICPA SLG OCBOA Practice Aid – Chapter 3 • 2012 AICPA OCBOA Practice Aid – Chapter 3 • Disclosures in 3 broad areas • A summary of significant accounting policies (SSAP) • GAAP required disclosures to the extent applicable to elements contained in the financial statements • Other general informative disclosures

48. SSAP Disclosures • A summary of significant accounting policies including: • A description of the financial reporting entity • A description of the financial statement presentation policies • A description of the OCBOA used, and the OCBOA differences from GAAP (not quantified) • Policies related to specific assets, liabilities, and net position/fund balance accounts • Policies related to specific revenue and expenditure/expense accounts

49. Financial Statement Element Disclosures • Informative disclosures similar to those required by GAAP if the statements contain items that are the same or similar to those in GAAP statements • Cash and investments (including risk disclosures) • Restricted assets • Capital assets • Long-term debt • Interfund balances and transactions • Net position, fund balances or temporarily or permanently restricted net assets • Revenues and expenditures/expenses • However, the disclosures need not include information that is not relevant to the basis of accounting or framework used

50. Other General Informative Disclosures • Other general informative disclosures (limited to the extent applicable to the basis of accounting or framework used) • Pensions and OPEB • Risk management • Commitments and contingencies • Use of estimates and other uncertainties • Subsequent events • Related party transactions • Material noncompliance • Going concern issues • Unconditional promises to give • Endowments