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1 Phase 3 PSAB Implementation Newfoundland and Labrador Municipalities Department of Municipal Affairs September to November 2009.

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Presentation on theme: "1 Phase 3 PSAB Implementation Newfoundland and Labrador Municipalities Department of Municipal Affairs September to November 2009."— Presentation transcript:

1 1 Phase 3 PSAB Implementation Newfoundland and Labrador Municipalities Department of Municipal Affairs September to November 2009

2 2 Objectives of the Presentation 1. Help you understand the differences between the old & new F/S. 2. Help you understand the requirements of the new F/S.

3 3 PSAB Reporting Model  PSAB – Public Sector Accounting Board  It regulates accounting principles and practices for the public sector.  Prior to 2009, PSAB had separate standards for municipalities using a modified cash basis of accounting.  Beginning January 1, 2009 all governments will use the same financial reporting model which utilizes accrual accounting.

4 4 PSAB Reporting Model  The move to PSAB by municipalities should be seen as an evolving trend to:  provide greater disclosure of financial information,  meet the needs of a wider range of users, and  facilitate better decision making by users.  PSAB Reporting provides a more comprehensive set of financial statements that places equal emphasis between the annual surplus/deficit and the overall financial health of the municipality.

5 5 Urgency for PSAB compliance The 2009 financial statements will require comparative figures for This means:  Municipalities should have started gathering information that they needed for their 2009 financial statements in 2008.

6 6 If Municipality is Non Compliant…  Municipal auditor must qualify his/her audit opinion.  Could affect financing costs with banks.  Could create public concern over Council’s management practices.  Would affect a Municipality’s receipt and eligibility for Federal and/or Provincial programs, such as the Gas Tax Funding Agreement.

7 7 Three Phases of the Department’s Action Plan  Phase 1 - January to September 2008 Established a Steering and Working Committee Created the TCA Reference Manual Conducted Training Sessions  Phase 2 - September to December 2008 Launched the PSAB resource website Created the TCA Valuation Manual Created the Phase Two Reference Manual -Municipal Reporting Entities, Consolidations -Accruals, Environment Liabilities, etc. Conducted Training Sessions

8 8 Three Phases of the Department’s Action Plan continued…  Phase Three - September to November 2009 Created a Phase Three Reference Manual -Financial Statement Presentation & Disclosures -Financial Planning (Budgets) Reconciliation Modified and updated the PSAB resource website Currently offering Phase Three Training Sessions. Now, we’re here

9 9 PSAB Reporting Model Municipalities in many of the other provinces are already complying with PSAB. This would include the provinces of:  B.C.,  Alberta,  Saskatchewan,  Ontario, and  Nova Scotia.

10 10 PSAB Reporting Model There are four statements required by PSAB: 1. Statement of Financial Position ( Balance Sheet) 2. Statement of Operations ( Income Statement) 3. Statement of Change in Net Debt 4. Statement of Cash Flow

11 11 There are five major changes in the new PSAB financial statements: 1. TCA/Amortization 2. Accrual Accounting 3. Debt Payments 4. Reporting Entity 5. Transfers

12 12 Major Changes in the Financial Statements 1. TCA/Amortization Old F/S  Capital Expenditures are directly expensed.  100% of cost is expenditure of accounting period. PSAB F/S  Capital payments are recorded as TCAs.  Cost of a TCA is amortized over its useful life.  Cost is spread over more then one period.

13 13 Major Changes in the Financial Statements 1. TCA/Amortization - Example Old F/S  New Computer Network $40,000  Expense entire $40,000 PSAB F/S  New Computer Network $40,000  Record as TCA  Determine Useful life - 4 yrs  Amortization -$10,000/yr which is a Non–cash expense

14 14 Major Changes in the Financial Statements 2. Accruals Old F/S  Prepared on a modified cash basis.  Expenditures were recorded when cash was disbursed. PSAB F/S  Prepared on a full accrual basis.  Expenses are recorded as incurred.  Examples; accrued salaries, accounts payable, environmental liabilities

15 15 Major Changes in the Financial Statements 2. Accruals - Example Old F/S  Mr. X earns 2 wks severance pay ($2,000)/year of service  He retires after 20 yrs  $40,000 is expensed in his year of retirement PSAB F/S  Mr. X earns 2 wks severance pay ($2,000)/year of service  $2,000 is accrued each year  $40,000 liability paid in year of retirement

16 16 Major Changes in the Financial Statements 3. Debt Payments Old F/S  Debt service charges included interest & principal payments  This total was expensed. PSAB F/S  Debt service charges only include interest  Principal payments reduce the liability.

17 17 Major Changes in the Financial Statements 4. Reporting Entity Old F/S  F/S only report on the activities of the municipality.  Each fund is presented separately in the F/S.  General Operating Fund  Reserves  General Capital Fund PSAB F/S  F/S include all organizations that are controlled by the municipality.  All controlled organizations and government partnerships are consolidated into one set of summary F/S.  Consolidated statements are only required for the year end audited financial statements.

18 18 Major Changes in the Financial Statements 4. Reporting Entity continued… A quick refresher…what do we mean by control…..

19 19 1. Having the power to govern Power to unilaterally appoint or remove majority of governing members. 2. Have the authority to determine financial & operating policies Does not necessarily mean day-to-day management 3. Expected benefits or risk of loss  Benefits may be financial or non-financial  Most benefits are service oriented  Does risk of loss accrue to the government? Major Changes in the Financial Statements 4. Reporting Entity continued…. What are the PRIMARY indicators of control…

20 20 PRIMARY indicators of control….. 3. Hold a majority of the voting shares  Municipal governments don’t often have voting shares 4. Unilateral power to dissolve the organization  Access assets  Become responsible for its obligations Major Changes in the Financial Statements 4. Reporting Entity continued…. If any one (1) of these indicators exists, the organization is likely controlled and should be consolidated and included in the MRE!

21 21 1)Significant input into the appointment of a governing body. 2)Can appoint or remove key personnel of the organization. 3)Establish or amend an organization’s mandate or mission. 4)Can establish borrowing or investment limits. What about the SECONDARY indicators of control: Major Changes in the Financial Statements 4. Reporting Entity continued….

22 22 5) Are able to restrict revenue generating capacity. 6) Can establish or amend organizational policies. 7) Can approve and make changes to the organization’s budget. Remember to consider the indicators collectively. The more indicators that exist, the more likely control exists! SECONDARY indicators of control, cont’d: Major Changes in the Financial Statements 4. Reporting Entity continued….

23 23 Still not sure? See the Municipal (Consolidated) Reporting Entity Checklist in the Phase 2 Reference Manual or online at the PSAB website. Major Changes in the Financial Statements 4. Reporting Entity continued….

24 24 Major Changes in the Financial Statements 4. Reporting Entity continued… Controlled Entities Government Partnerships Core Government General Op Fund General Op Reserve Capital Fund Etc. Everything within the red circle is part of the Municipal Reporting Entity (MRE)!

25 25 Municipal Reporting Entity  Identify controlled entities & gov’t partnerships (GP)  Ensure entity F/S will be available on time.  Difficulties with entities will create problems for June 30, 2010 deadline  Discuss with your auditor as to the level of assurance required for each entity. Depends on materiality.

26 26 Major Changes in the Financial Statements 5. Transfers Old F/S  Inter-fund and inter- organizational balances and transactions were recorded. PSAB F/S  Transfers to reserves are not expenses and transfers from reserves are not revenues.  Inter-fund and inter- organizational balances and transactions are eliminated.

27 27 Budgeting “ The landscape has remained the same, but the picture is being taken from a different perspective” Daryl Wilson Chair of PSAB February 10, 2003

28 28 Budgeting  The budget process will not change for municipalities.  Still budgeting on a “cash basis” as in previous years.  Municipalities are still required to prepare a balanced budget in accordance with the Municipalities Act or applicable City’s Act.  A reconciliation between the financial plan and the PSAB budget will have to be disclosed in the notes and/or schedules to the financial statements because of the “budget disconnect”.

29 29 Budgeting  What is the “Budget Disconnect”?  A Budget Disconnect is the difference between what is budgeted on a cash basis and the operating results reported under PSAB. = Budgeted Cash Surplus/Deficit Surplus/Deficit Reported Under PSAB

30 30 Budgeting A Budget disconnect results from the fact: 1) the financial plan is prepared on a cash basis while PSAB is prepared using accrual accounting, 2) under PSAB, transfers are neither revenues nor expenses, 3) PSAB only records the interest portion of debt repayments as an expense. The current budget records the entire debt repayment as an expenditure, 4) the financial plan expenses the entire amount of a capital transaction in an accounting period. PSAB capitalizes and amortizes this same expense over a number of years.

31 31 Standards of Financial Statement Presentation  Financial Statement Objectives (4)  Qualitative Characteristics of Financial Statements(4)  General Reporting Principles (10)

32 32 Financial Statement Objectives 1) Financial Statements should include all the organizations the government controls; i.e. MRE 2) Financial Statements should report the government’s financial position. 3) Financial Statements should report changes in the government’s financial position. 4) Financial Statements should demonstrate if resources were administered in accordance with the budget.

33 33 Qualitative Characteristics of Financial Statements  Relevance  Reliability  Comparability  Understandability

34 34 Relevance Financial Statements are relevant when they help users make decisions and provide information that: a) has predictive & feedback value;  Predictive value of the Statement of Operations is enhanced if abnormal items are disclosed separately. Information that confirms or corrects previous predictions has feedback value.  Example – A municipality realizes a very large gain from the sale of a tangible capital asset. This would not be a normal recurring source of revenue so predictive value would be improved by disclosure of the abnormal item.

35 35 Relevance continued… b) provides accountability;  Information that helps users assess a government's stewardship of the resources entrusted to it has accountability value.  Enhanced when financial statements compare actual results against financial objectives and targets.  Example - budgets c) and is timely.  In order for information to be useful, the decision maker must receive the information before it loses the capacity to influence decisions.  Example – Financial statements issued long after the fiscal period they are reporting on.

36 36 Reliability Inaccurate, inappropriate or incomplete information, or information that is biased or does not faithfully represent what it purports to represent, will inhibit rather than enhance understanding and decision making by users. Reliable information has the following characteristics: a) Representation Faithfulness  Transactions s/b accounted for in a manner that conveys their substance rather than necessarily their legal form.  Example: Capital leases – The legal title to a piece of equipment may remain with the lessor but the lessee has taken on all the risks and benefits of ownership. The lessee therefore accounts for the transaction exactly as if he had borrowed funds and purchased the equipment outright. 

37 37 Reliability continued…. b) Completeness  Means providing sufficient information about transactions & balances for a user to understand the government’s finances.  Example: Notes to the F/S c) Neutrality  Information should be free from bias, it should be neutral and report economic activity without coloring the image in some particular direction.

38 38 Reliability continued…. d) Conservatism  Used when estimates must be made in conditions of uncertainty.  When uncertainty exists ensure that assets & revenues are not overstated, or liabilities & expenses are not understated. e) Verifiability  A transaction is veridical if a knowledgeable and independent observer would concur that it is in agreement with the actual underlying transition with a reasonable degree of precision.  Deals with the measurement of a transaction rather than its appropriateness

39 39 Qualitative Characteristic trade-off  In practice there is often trade-offs between the qualitative characteristics.  The aim is to achieve an appropriate balance between the characteristics but there is often a trade-off between relevance and reliability. Example: Land is for sale but has to be valued at the lower of historical or net realizable value. Valuing the land at fair market value would be more relevant but historical cost would be more reliable.

40 40 Comparability  Comparability between governments is enhanced when they follow the same accounting standards.  Consistent application of accounting policies between accounting periods enhances comparability.

41 41 Understandability For information to be useful it must be understood by others. Understandability can be enhanced in financial Information by ensuring:  Information is presented clearly and simply.  Avoid excessive detail & complex presentation formats which often result in confusion & errors.

42 42 Chart of Qualitative Characteristics Understandability Decision Usefulness ReliabilityRelevance Comparability Verifiability Accountability Timelines Predictive value Representational Faithfulness Completeness Neutrality Conservatism Consistency

43 43 General Reporting Principles 1) Financial Statements should be clearly identified and are the responsibility of the government. 2) Notes and Schedules that are integral to the Financial Statements should be clearly identified. 3) Notes and supporting schedules should not be used as a substitute for proper accounting. 4) Financial Statements should present the government’s: i. Financial position ii. Results of operations iii. Change in net debt iv. Cash flows 5) Financial Statements should use common terminology & classification of items so the information is understandable.

44 44 General Reporting Principles continued…. 6) Financial Statements should include comparatives. 7) Financial Statements should be issued on a timely basis. 8) The valuation of assets & liabilities should be applied consistently, and where it is not self evident, it should be disclosed. 9) Where Financial Statements are subject to audit, the auditor’s report should be appended to the statements. Unaudited statements should be clearly identified. 10) Financial Statements should present the substance of transactions & events.

45 45 Statement of Financial Position ( Balance Sheet) Presents a year end snapshot and highlights the following key figures that describe the financial position of the government; 1) Financial assets (FA) 2) Liabilities 3) Net Debt or Net FA Position 4) Non-Financial Assets (NFA) 5) Accumulated Surplus

46 46 Key Figures in the Statement of Financial Position 1. Financial Assets (FA) Financial Assets are assets that can be used to pay existing liabilities or finance future operations and are not for consumption in the normal course of business. They represent the resources available to pay existing liabilities or finance future operations. Some examples:  Cash & cash equivalents  Temporary or short-term investments  Amounts Receivable (within 1 year of F/S date)  Inventories for sale

47 47 Key Figures in the Statement of Financial Position 2. Liabilities Represent present obligations of a government to others arising from past transactions or events. Some examples:  Accounts payable & accrued liabilities:  Trade payables  Accrued salaries & wages  Accrued audit fees  Accrued interest payable  Deferred revenue  Deposits for services & goods which have not been delivered  Prepaid taxes  Tax levies in advance

48 48 Key Figures in the Statement of Financial Position 2. Liabilities continued… More examples which maybe of a more long-term nature:  Liability for the remediation & mitigation of contaminated sites  Obligations under capital leases  Loans from other governments  Borrowings:  Debentures  Bank loans

49 49 Key Figures in the Statement of Financial Position 2. Liabilities continued… Environmental Liabilities There are three criteria that must be met for an Environmental Liability to be reported, namely; 1) the contamination must exceed an environmental standard, 2) the government must be directly responsible or accept responsibility for the site, and 3) a reasonable estimate of the amount must be able to be made.

50 50 Environmental Liability Decision Tree

51 51 In general for Environmental Liabilities….  Identify your existing & potential contaminated sites.  Value and record as of Jan 1/09 and/or Dec 31/09.  Record liability if: 1. Contamination exceeds an environmental standard; 2. Muni is directly responsible or accepts responsibility; and 3. Reasonable estimate of the cost can be made.  Otherwise disclose

52 52 Key Figures in the Statement of Financial Position 3. Net Debt/Net FA  A Government’s Net Debt position is a key indicator of it’s overall financial health.  Net Debt is simply a government’s financial assets less it’s liabilities.  If a government’s financial assets are greater then it’s liabilities then it is called Net Financial Assets. If a government’s financial assets are less then it’s liabilities then it is called Net Debt.  A Net Debt balance represents a lien against future operations while a Net Financial Assets balance means the government has resources available for future. In general: If financial assets are greater then liabilities = Net Financial Assets If financial assets less then liabilities = Net Debt

53 53 If a Municipality is in a net debt position does that mean that it’s bankrupt? The answer is…NO!!  Not all the liabilities are due at the Financial Statement date. It simply means:  Net debt balance represents a lien against future operations.  Net FA balance means the government has resources available for future operations.

54 54 Key Figures in the Statement of Financial Position 4. Non – Financial Assets Non-financial assets are assets that:  unlike financial assets do not normally provide resources to pay existing liabilities.  are normally employed to deliver government services and  unlike financial assets maybe consumed in the normal course of operations. Examples of Non-financial assets:  Prepaid expenses  Inventories for consumption: Culverts Chemicals Fuel  TCAs!

55 55 Remember Tangible Capital Assets? TCA Are held for use: In production of goods and services For rental to others For administrative purposes For the development, construction, maintenance & repair of other TCA Are not for sale in the ordinary course of operations Are to be used on a continuing basis Have useful lives extending beyond an accounting period

56 56 Tangible Capital Asset (TCA) cont…  Tangible – can be touched…substance  Capital – lasts over time…sustainable  Asset – has measurable value…to the public or the municipality

57 57 What info do you need to collect or look for?  Description of each asset  Asset category, or class  Year of acquisition  Expected useful life  Significant improvements made since acquisition  Estimated residual value, if any In theory, any asset that meets the definition of a TCA should be capitalized however you need to keep in mind capitalization thresholds! Tangible Capital Asset (TCA) cont…

58 58 Items whose original cost or value is above the threshold are capitalized as assets. Items whose value is below the threshold are expensed. threshold Below threshold = EXPENSED Above threshold= CAPITALIZED The capitalization threshold defines the minimum dollar level a municipality will use to determine which expenditures will be capitalized and which will be expensed. Tangible Capital Asset (TCA) cont…

59 59 SO, what’s the bottom line? The proper capitalization threshold is a balance between the:  accurate presentation of results, and  the cost of acquiring & maintaining the accounting records. Tangible Capital Asset (TCA) cont…

60 60 Tangible Capital Assets  Should be completed as of Jan 1/09  Most municipalities have completed their TCA  Time is running out!  Refer to the Tangible Capital Asset Valuation Manual and the Tangible Capital Assets Reference Manual.  Critical that you complete ASAP

61 61 Key Figures in the Statement of Financial Position 5. Accumulated Surplus  The accumulated surplus is another key indicator of a municipality’s overall financial health.  The accumulated surplus does not represent a pool of surplus cash. It represents: 1) a municipality’s net worth, 2) the amount by which all assets exceed liabilities, 3) the Net financial assets (or net debt) + Non-Financial Assets, 4) the net resources available to provide future services, and 5) the sum of all annual surpluses and deficits since the municipality existed

62 62 TOWN OF ANYWHERE CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at December 31, FINANCIAL ASSETS Cash and temporary investments $ 1,497,300 $ 1,547,100 Amounts receivable 410, ,950 Portfolio investments 81,500 75,000 Real estate properties held for sale 147, ,000 $ 2,136,700 $ 2,067,050 LIABILITIES Accounts payable and accrued liabilities $ 1,111,300 $ 1,136,100 Deferred revenue15,00030,000 Landfill closure and post closure liabilities 26,000 20,650 Long-term debt 152, ,220 1,304,800 1,326,970 NET FINANCIAL ASSETS $ 831,900 $ 740,080 NON-FINANCIAL ASSETS Tangible capital assets $ 742,500 $ 516,000 Inventories 10,000 20,000 Prepaid expenses 37,200 31, , ,200 ACCUMULATED SURPLUS $ 1,621,600 $ 1,307,280 A B A-B C A – B + C

63 63 Statement of Operations (Income Statement) The Statement of Operations displays the cost of government services provided in the accounting period, the revenues recognized in the accounting period and the difference between them. It highlights: 1) the sources of revenues, 2) the types of expenses, 3) the annual surplus/deficit (difference between 1 & 2) and 4) the change in the accumulated surplus at the beginning and end of the period.

64 64 Statement of Operations Revenues Revenues, including gains, are increases in economic resources. Some examples:  Taxation  All municipal taxes including penalties & interest i.e. Property taxes, business taxes, water and sewer taxes, etc.  User Fees  Parking meters, rentals, park fees

65 65 Statement of Operations Revenues continued…  Grants  Gas Tax Agreement Revenue  Municipal Operating Grants  Multi Year Capital Works Programs  Other provincial grants  Permits, Licenses & Fines  Building permits  Business licenses  Animal control fines and fees  Occupancy Permits

66 66 Statement of Operations Revenues continued  Investment Income  Interest earned  Other Revenue  Miscellaneous  Rule of thumb - Should not exceed 10% of total revenue or more detailed disclosure required.  Water & Sewer  All revenues from water and sewer operations

67 67 Statement of Operations ( Income Statement) Expenses Expenses, including losses, are decreases in economic resources. Some examples:  General Government Services Expenses  Expenses relating to the operation of Council and the Municipality.  Includes any expenses that cannot be attributed to a particular program.  Includes employee pensions and benefits and other general government expenses.

68 68 Statement of Operations Expenses continued…  Transportation Services Expenses  Maintenance of roads, streets, sidewalks and bridges.  Protective Expenses  Provision of fire protection, traffic enforcement  Recreation and Cultural Services  Maintenance and operation of community centers, swimming pools, arenas, libraries, etc.

69 69 Statement of Operations Expenses continued… Expenses are reported by function on the Statement of Operations. Expenses by object are normally disclosed in a schedule. Examples of expenses by object would be:  Utilities  Lighting & heating, phone, cable/internet  Amortization  Interest on Long term Debt  Interest expense on loan and debentures

70 70 Statement of Operations Expenses continued…  Bad debt Expense  Expenses relating to doubtful amounts receivable.  Maintenance Materials and Supplies  cleaning supplies  office supplies  small tools  automotive and equipment parts  Other Operating Expenses  Miscellaneous  Rule of thumb - Should not exceed 10% of total expenses or more detailed disclosure is required.

71 71 Accounting For HST Rebates  HST Rebates are not Federal transfers!!! They are refunds of HST paid.  HST rebates & HST paid should not affect the Statement of Operations.  Example: Purchase new stationary on Jan 1/09: Dr. Expense - GG$1,000 Dr. AR- HST Refund (B/S)$ 50 Cr. Bank$1,050

72 72 Accounting For HST Rebates Assume this is the only transaction for 1 st quarter of In the 2 nd quarter you receive your HST refund and make the entry: Dr. Bank$ 50 Cr. AR- HST Refund$ 50  For fiscal 2008 & 2009 there should be:  No HST refunds in your revenues  No HST paid in your expenses  Correct past errors as best you can with reversing entries. Dr. HST Revenue Cr. HST Paid - Expenses

73 73 TOWN OF ANYWHERE CONSOLIDATED STATEMENT OF OPERATIONS Year Ended December 31, REVENUE Budget Actual Taxation$ 540,000$ 543,000595,000 Grants in lieu of taxation40,000 39,500 User fees40,00037,80034,400 Government Transfers240,000241,700215,000 Permits, licenses and fines20,00017,70015,000 Investment income20,00021,80026,000 Other income8,0007,8208,100 Total revenue908,000909,820933,000 EXPENSES General government services170,000170,500165,000 Protective services20,000 19,000 Transportation services220,000215,000232,500 Environmental health services23,00020,00025,000 Public health and welfare services12,00010,00012,000 Regional planning and development36,00036,70038,300 Resource conservation28,00027,30022,700 Recreation and cultural services95,00096,000100,800 Total expenses604,000595,500615,300 ANNUAL SURPLUS304,000314,320317,700 ACCUMULATED SURPLUS, beg of year1,307, ,580 ACCUMULATED SURPLUS, end of year$ 1,611,280$ 1,621,600$ 1,307,280

74 74 Statement of Change in Net Financial Assets ( Net Debt) Reports the extent to which revenues were sufficient to cover cash expenditures. It:  reconciles opening net debt balance to closing net debt balance, and  highlights changes in TCA balance caused by;  Acquisitions,  amortization expense and/or  disposals & write downs.

75 75 Statement of Change in Net Debt cont… The Statement of Change in Net Debt & the Statement of Cash Flows are “derivative statements”. MEANING? They can’t be completed until you have first completed your Statement of Financial Position and your Statement of Operations! WHY?

76 76 Statement of Change in Net Debt cont… The reason the Statement of Change in Net Debt is considered a derivative statement is because before you can prepare it you need: 1) Annual surplus/deficit for the year – Statement of Operations (Income Statement) 2) Changes in your non-financial assets – Statement of Financial Position (Balance Sheet)

77 77 Statement of Change in Net Debt Annual Surplus (Deficit) Changes in Non Financial Assets: ( Acquisition of TCA) Proceeds on disposals (Gains) & losses on disposal of TCA Write-down of TCA Amortization Decrease (increases) in inventories Decreases (increases) in prepaids Changes in Net Debt Net Debt, Beginning of Year Net Debt, End of Year

78 78 Statement of Cash Flow The Statement of Cash Flow reconciles your opening cash balance to your cash balance at the end of the year! It reports the sources and uses of cash by: 1) 1) Operations 2) Capital transactions (acquisitions & disposals) 3) Investments (purchases & disposals) ) 4) Financing (debt proceeds & payments)

79 79 Statement of Cash Flow continued… The first step in preparing a Statement of Cash Flows is to distinguish between sources and uses of cash.  Decreases in non-cash assets are sources of cash, while increases are uses of cash.  Liabilities are completely the opposite so increases in liabilities are sources of cash while decreases in liabilities are uses of cash.  Some examples:

80 80 Statement of Cash Flow continued…  Annual Surplus - Source of Cash  Annual Deficit - Use of Cash  Acquisition of TCA - Use of Cash  Disposal of TCA - Source of Cash (proceeds)  Issue Loan - Use of Cash  Sale of Property - Source of Cash  Repay Bank Loan - Use of Cash  Issue Debenture - Source of Cash

81 81 Statement of Cash Flow continued… Cash Provided by Operating Transactions: Surplus (Deficit) Changes in Non-Cash Items Cash Provided by Capital Transactions  Proceeds on sale of TCAs or cash used to acquire TCAs. Cash Provided by Investing Transactions  Portfolio investments or real estate held for resale Cash Provided by Financing Transactions  Proceeds of long-term debt and debt repayments Increase (Decrease) in Cash Cash, Beginning of Year Cash, End of Year

82 82 Financial Statement Note Disclosures  Needed to provide users with sufficient information about transactions & balances.  PSAB Statements will require enhanced note disclosure.  However, a Municipality is not required to include notes that are not applicable or immaterial.

83 83 Financial Statement Notes Note 1 - Status of the organization  A short description of the Municipality and its relevant legislation. Sample: 1. Status of the Town of Anywhere The incorporated Town of Anywhere is a municipal government that was incorporated in 1986 pursuant to the Province of Newfoundland and Labrador’s Municipalities Act. The Town provides or funds municipal services such as fire, public works, parks and recreation, tourism, and other general government operations.

84 84 Financial Statement Notes continued… Note 2 – Significant Accounting Policies  Disclosure of significant accounting policies should be included every year. Sample: 2. Significant Accounting Policies The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles as recommended by the Public Sector Accounting Board (PSAB) of the Canadian Institute of Chartered Accountants and reflect the following significant accounting policies:

85 85 Financial Statement Notes continued… Note 2 Continued…. 2 a. Basis of Consolidation  Discloses the entitles included in the Municipal Reporting Entity. Sample: a) Basis of Consolidation The consolidated financial statements include the assets, liabilities, revenues and expenses of the reporting entity. The reporting entity is comprised of all organizations, local boards and committees of the council which are controlled by the Municipality which include the following: Community Development Corporation Anywhere Public Library Anywhere Memorial Stadium

86 86 Financial Statement Notes Continued … Note 2 Continued…. 2 b. Significant accounting policies on assets and liabilities  Details on the accounting policies for only those with balances in the Statements. Sample: b) Cash and Temporary Investments Cash and temporary investments include cash and short term investments with maturities of three months or less from the date of acquisition.

87 87 Financial Statement Notes continued…. Note 2 Continued…. c) Investments Sample : Temporary investments are accounted for at the lower of cost and market. Other investments are recorded at cost. d) Inventories Sample: Inventories are valued at the lower of cost and replacement cost.

88 88 Financial Statement Notes continued…. Note 2 Continued…. e) Tangible Capital Assets Sample: Tangible capital assets are recorded at cost which includes all amounts that are directly attributable to the acquisition, construction, development or betterment of the asset. Assets under construction are not amortized until the asset is put into use and one-half of the annual amortization is charged in the year of acquisition and in the year of disposal. The cost, less residual value, of the tangible capital assets are amortized on a straight line basis over their estimated useful lives as follows: Buildings 25 years Computer hardware and software 5 years Equipment 5 years Roads 20 years Vehicles 10 years Water and Sewer 60 years

89 89 Financial Statement Notes continued…. Note 2 Continued…. f) Revenue Recognition Sample: Revenues are recognized as earned and when collection is reasonably assured. Tax rates are approved annually by Council. g) Use of estimates Sample: The preparation of financial statements in conformity with Canadian generally accepted accounting principles for the public sector requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

90 90 Financial Statement Notes continued…. Note 3 - Cash & Temporary Investments:  Disclose the nature and terms of temporary investments together with any valuation allowances. Sample: 3. Cash and Temporary Investments Cash and temporary investments are comprised of the following: Cash$ XXX$ XXX Temporary investments XXX XXX $ XXXX $ XXXX Temporary investments are comprised mainly of guaranteed investment certificates and term deposits and have a market value approximating cost. The Municipality has designated $XXX (2008 $XXX) to reserves for debt principal repayments and tangible capital asset acquisitions.

91 91 Financial Statement Notes continued…. Note 4 – Amounts Receivable  Disclose the nature and terms of a government's financial assets net of any doubtful allowance amounts. Sample: 4. Amounts Receivable Poll tax $ XXX $ XXX Business tax XX XX Water and sewer XX XX HST Rebate XX XX Other XX XX XXX XXX Less allowances for doubtful amounts ( XX) ( XX) $ XXX

92 92 Financial Statement Notes continued…. Note 5 – Portfolio Investments  Disclose amount that is designated for reserves, the market values if available and the amount of investment income. Sample: 5. Portfolio Investments Marketable securities: Government of Canada $ XXX $ XXX Province of Newfoundland & Labrador XX XX Other investments X X $ X $ X

93 93 Financial Statement Notes continued…. Note 6 – Inventories  Disclose inventories for sale (FA) & inventories of supply separately (NFA). Sample: 6. Inventories Inventories for use: Chemicals $ XXX $ XXX Culverts XX XX Gravel XX - $ XXX $ XXX

94 94 Financial Statement Notes continued…. Note 7 – Accounts Payable & Accrued Liabilities  Disclose between types; accounts payable, accrued liabilities, etc. but don’t include excessive detail. Sample: 7. Accounts Payable and Accrued Liabilities Accounts payable $ XXX $ XXX Accrued expenses XX XX Other governments XX XX XXX XXX

95 95 Financial Statement Notes continued…. Note 8 - Long Term Debt  Should disclose: Interest rates Payments Maturity dates Principal payments over the next 5 years Sample: 8. Long Term Debt Newfoundland Municipal Financing Corporation loan with interest at 12%, payable in monthly installments and maturing December $ XXX $ XXX Royal Bank term loan with interest at 8%, repayable in monthly installments and maturing October XX XX

96 96 Financial Statement Notes continued…. Sample continued…. 8. Long Term Debt Royal Bank term loan with interest at 7%, repayable in monthly installments and maturing October XX XX $ XXX $ XXX Principal payments required in each of the next five years are as follows: 2010 $ XXXX 2011 XXXX 2012 XXXX 2013 XXXX 2014 XXXX

97 97 Financial Statement Notes continued…. Note 9 – Commitments  Disclose obligations that will become liabilities in the future. Note 10 – Contingencies  Disclose existing conditions that may become a liability in the future or those that are not accrued because a reasonable estimate of costs could not be made. Examples would be lawsuits or remediation for a contaminated sites.

98 98 Financial Statement Notes continued…. Note 11 – Financial Instruments  A financial instrument is any contract that gives rise to a financial asset for one party and a financial liability for another party; i.e. a loan. An example of a generic note adequate for most situations: 11. Financial Instruments The Town as part of its operations carries a number of financial instruments. It is management’s opinion the Town is not exposed to significant interest, currency or credit risk arising from these financial instruments, except as otherwise disclosed. Unless otherwise noted, the fair value of these financial instruments approximates their carrying values.

99 99 Financial Statement Notes continued…. Note 12– Subsequent Event  Is an event that occurs sometime between the financial statement date and the date the financial statements are completed. There are basically two types: 1) Conditions existed at the year end date but only became evident before the completion of the financial statements - should adjust Statements for! Examples: o Bad debt o Loan guarantee in default

100 100 Financial Statement Notes continued…. Note 12 – Subsequent Events continued… 2) Conditions which arose after the year end date - Disclose in notes! Examples:  Damage by fire or flood  Decline in market value of investments  Issuance of new debt Sample of each type…

101 101 Financial Statement Notes continued…. Note 12 – Subsequent Events continued… 12. Subsequent Events (This is an example of the first type of subsequent event. Since it has already been accrued in the financial statements it would be unnecessary to disclose the subsequent event in the notes.) Subsequent to the year end a major local business in the Town filed for bankruptcy. At the financial statement date the business owned $10,000 in taxes and $5,000 for water and sewer to the Town. Council believes that the collection of these amounts is doubtful and has therefore included these balances in the allowance for doubtful accounts at December 31, (This is an example of the second type of subsequent event. These types of subsequent events should be disclosed in the notes to the financial statements) Subsequent to the year end council has approved and entered into an agreement to purchase a new fire truck in the amount of $75,000. The purchase of the fire truck is to be financed through the general reserve.

102 102 Financial Statement Notes continued…. Note 13 – Budget Remember:  Your Budget is not PSAB compliant  Difference will result due to the Budget Disconnect  Your budget is prepared on a non-consolidated basis (controlled organizations and government partnerships are not included).  Municipalities will have to “PSAB” their budgets  Reconciliation b/t budget & the PSAB budget will be disclosed in a Schedule.

103 103 Financial Statement Notes continued …. Note 13 – Budget sample: 13. Budget In accordance with the Municipalities Act (1999) every council must adopt a financial plan for each fiscal period in a form approved by the minister. The financial plan is prepared on a revenue and expenditure basis that does not meet the recommendations of PSAB. For comparative purposes, the Town has modified its financial plan to prepare a budget that is consistent with the scope and accounting principles used to report the actual results. The budget figures used in these financial statements have been approved by Council. The reconciliation between the financial plan and the budget figures used in these statements is disclosed in Schedule 8 – Reconciliation of the Financial Plan to the Budget.

104 104 Financial Statement Notes continued The final note relates to Accounting Changes! Basically four types of accounting changes: 1) A change in presentation A change in how accounts have been grouped for financial statement purposes. These changes impair comparability between years if both years are not changed. 2) A change in Accounting Policy, Can occur for two reasons: i. To conform to new PSAB recommendations (or adopt PSAB) ii. Change from one appropriate accounting policy to another Examples would include the adoption of full accrual accounting, the consolidation of controlled entities and capitalization and amortization of TCAs.

105 105 Financial Statement Notes continued 3) A change in accounting estimate, or  Changes in accounting estimates are different  Estimates are often updated for new information  Changes in estimates are not errors!  You do not restate prior periods for changes in accounting estimates 4) A correction of an error in prior periods. An unintentional error, such as miscalculations, in the statements. If material to the point that prior period statements are no longer fairly presented then it should be corrected retroactively.

106 106 In summary…. You should never adjust your accumulated surplus except for a: 1. Change in accounting policy ; or 2. A material error “To adjust for an error, the error has to be so material as to make the comparative numbers misleading!”

107 107 Some Examples of Changes in Accounting Policies: Indicate whether the example is: 1. Change in accounting policy 2. Change in accounting estimate 3. An error 1. Municipality forgot to accrue severance payable of $200 for a new employee in it’s 2008 F/S? Error, not material Do not adjust the accumulated surplus 2. Municipality is recording severance expense for the first time in 2009? Change in accounting policy Adjust the accumulated surplus

108 108 Some Examples of Changes in Accounting Policies continued… 3. Study showed that an environmental liability for a contaminated site should be increased from $1M to $2M? Change in estimate Do not adjust the accumulated surplus 4. Municipality is capitalizing and amortizing TCAs for the first time in 2009? Change in accounting policy Adjust the accumulated surplus

109 109 Some Examples of Changes in Accounting Policies continued…. 5. Municipality forgot to accrue for a delivery of $500,000 of culverts in their 2008 F/S? Error, likely material as it affects the net debt Adjust the accumulated surplus 6. The allowance on a tax account in arrears is decreased? Change in accounting estimate Do not adjust the accumulated surplus

110 110 Some Examples of Changes in Accounting Policies continued…. 7.Municipality is preparing consolidated F/S for the first time? Change in accounting policy Adjust the accumulated surplus

111 111 Example of the note for Changes in Accounting Policies Opening Fund Balances: General Operating Utility Operating Capital Funds Reserves XXX Opening Accm Surplus, Previously Rep Adjustments: TCA Fixed Assets Landfill liability XXX (XXX) XXX (XXX) Opening Non Cons Accm Surplus, Restated Consolidation of Controlled Entities & GP XXX Opening Cons Accm Surplus, Restated Consolidated Annual Surplus XXX Cons Accm Surplus, End of YearXXX You will only have to do this for your 2009 F/S unless there are new standards issued by PSAB.

112 112 Schedules  For some disclosure requirements the information can be more clearly presented in a schedule as opposed to a note.  All schedules should be properly identified and the presentation should be clear and understandable.  Schedules are part of the financial statements and should be audited with the statements and the notes.

113 113 Schedules continued…. A listing of the Schedules are:  Schedule 1 – Consolidated Schedule of Tangible Capital Assets  Schedule 2 – Consolidated Schedule of Revenues  Schedule 3 – Consolidated Schedule of Expenses  Schedule 4 – Consolidated Schedule of Operations by Program  Schedule 5 – Consolidated Schedule of Core Government Results  Schedule 6 – Change in Reserve Fund Balances  Schedule 7 – Trust Funds  Schedule 8 – Reconciliation of the Financial Plan to the Budget

114 114 Schedule 1 Consolidated Schedule of Tangible Capital Assets  Disclose for each major category of TCA & in total: a) cost at the beginning and end of the year, b) additions in the year, c) disposals in the year, d) the amount of any write-downs in the year, e) the amount of amortization for the year, f) accumulated amortization at the beginning and end of the year, and g) the Net Book Value (NBV) at the beginning and end of the year.  Total NBV at the end of the year should tie into the balances in the Statement of Financial Position.

115 115 Schedule 1 Consolidated Schedule of Tangible Capital Assets cont... The financial statements should also disclose: a) the amortization method and rate for each major category, b) the Net Book Value of TCAs not being amortized; i.e. assets under construction, c) the nature and amount of donated TCAs received during the year, d) the nature of any TCAs recognized at a nominal value, and e) the amount of interest capitalized during the year.  Some of the above was disclosed in Note 2 – Significant Accounting Policies.

116 116 Schedule 2 Consolidated Schedule of Revenues  The Consolidated Schedule of Revenues has the purpose of providing more details on revenues without cluttering up the Statement of Operations. Examples would be: Taxation Municipal taxes levied Penalties and interest Grants Federal government Provincial government Other local governments Non-government organizations  Total Revenue amount on this schedule should agree to the total revenue on your Consolidated Statement of Operations!

117 117 Schedule 3 Consolidated Schedule of Expenses  Consolidated Schedule of Expenses has the purpose of providing more details on the expenses without cluttering up the Statement of Operations. Some examples would be: Protective services Fire Emergency Recreational and cultural Community center and hall Skating and curling rinks Parks and playgrounds Museums Libraries Transportation services Road and street maintenance Sidewalk maintenance Street lighting  The total expenses on this schedule should agree to the total expenses on the Statement of Operations.

118 118 Schedule 4 Consolidated Statement of Operations by Program There are two purposes for this Schedule: 1) To disclose the expenses by object or type, and 2) To report on the segments. What are segments? They are distinguishable activities or a group of activities of a government for which it is appropriate to separately report financial information on. Some examples: General Government Protective Services Transportation Services  For each of these segments you would show the various types of revenues and expenses. The total of the Revenues and Expenses for all segments along with the ending surplus/deficit which would again tie into the Consolidated Statement of Operations.

119 119 Schedule 5 Consolidated Schedule of Core Government Results The purposes of this Schedule are: 1) to disclose the expenses by object or type ( this means breaking them down by such things as utilities, amortization, interest, etc.) and 2) to report on the segments. The segments are broken down into the: 1) core municipality, ( What was reported in the old financial statements) 2) the controlled entities, and 3) any government partnerships.

120 120 Schedule 6 Schedule of Change in Reserve Fund Balances  Reserves are funds that have been put aside, the use of which can be restricted for a general or specific purpose.  Users of the financial statements need to understand the extent of restricted funds because they limit the municipalities financial flexibility.  Discloses activity by each reserve and in total:  Revenues (i.e. investment income)  Expenses (i.e. investment charges)  Net operating results  Transfers into & out of reserve  Change in reserve fund balance  Opening fund balance  Ending fund balance

121 121 Schedule 7 Trust Funds  Trusts are assets that have been assigned to the municipality to act as a trustee.  The Municipality has no authority to change the terms and conditions of the trust agreement.  Disclose by fund & in total:  Assets  Liabilities & Fund Balance  Revenues & Expenditures  Net revenues over expenditures  Fund balance, beginning of year  Fund balance, end of year

122 122 Schedule 8 Reconciliation of the Financial Plan to the Budget  Note 13 – tells users that the financial plan is not GAAP.  The Municipality’s budget must be presented on the same basis (PSAB) & scope (consolidated)  Schedule 8 discloses the reconciliation of the financial plan and a PSAB budget.  It discloses those items causing the budget disconnect.  There are two working examples in the Phase 3 Manual on how to convert your financial plan (budget) into a PSAB budget.

123 123 What are the steps for Preparing Consolidated Financial Statements? Consolidate Controlled Entities & GP Prepare Consolidated Statement of Financial Position Prepare Consolidated Statement of Operations Prepare Schedule 1 – Consolidated Schedule of TCA Prepare Consolidated Statements of Change In Net Debt & Cash Flows Prepare Notes & Schedules Close Off Municipality’s GL Prepare Trial Balance Consolidate Municipality's Funds Eliminate inter-co balances & transactions

124 124 Contact Information General Inquiries Paul Tucker Director, Municipal Finance Rayanne Hibbs PSAB Project Manager Sheila TulkPSAB Coordinator


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