Pub. 2 2020 Issue 1

17 nebraska society of cpas W W W . N E S C P A . O R G Paul H. Koehler, CPA, is a sole practitioner in Lincoln, Neb. He has more than 43 years’ experience auditing, training, and consulting, specializing in nonprofit organizations and state and local governments. For more information, contact Paul Koehler at (402) 488-1578. This article was originally published in On Balance, a publication of the Wisconsin Institute of CPAs, and is used with their permission. to change to the Big 14. Also, a batter in the recent World Series hit a ball that struck halfway up the right-field foul pole and was ruled a home run—the “foul” pole is considered to be in fair territory, so it’s really a “fair” pole. It is most important to know what something really means. A GAAP Reminder GAAP principles are generally considered to address the four aspects of financial reporting as follows: • Recognition –The timing of transaction recognition (for example, cash basis versus accrual ormodified accrual basis) • Measurement – At what value is a transaction reported? • Presentation – How do transactions— and the statements overall—appear? • Disclosure – What’s included in the footnotes as well as on the faces of the statements themselves? Material misstatements can occur in any of these four areas. It is widely accepted in the audit profession that a single material misstatement left uncorrected in a set of audited financial statements would preclude an unmodified opinion by the auditor. A careful reading of recent GASB pronouncements will enable a financial statement preparer or auditor to ascertain which aspect of GAAP is being impacted by a particular pronouncement provision. What If a Government Doesn’t Follow GAAP? Believe it or not, only about one-third of the roughly 90,000 governments in the U.S. follow full GAAP (or really “GARP”).Many use the cash basis of accounting; however, that doesn’t mean the otherGAAP principles don’t or can’t apply. Cash-basis statements report only cash receipts, disbursements, and beginning and end-of-period cash balances, ignoring transaction occurrence. (One of my longtime cash-basis local government clients has consistently reported in their footnotes: “TheVillage’s financial statements are presented in accordance with generally accepted accounting principles (GAAP), using the cash basis of accounting.”) Common GAAP Misstatements Observed Review of recent state and local government financial statements have brought to my attention departures from not-so-recently effective GASB statements for which an update would prove helpful. Some of these GAAP departures are listed below (even if immaterial, it makes no sense to me for a preparer to report something blatantly non-GAAP): • Reporting Entity footnotes sometimes still refer to an “oversight entity” or “oversight authority,” which was superseded by GASB 14 almost 30 years ago. • Basis of Accounting footnotes often still refer to accrual-basis revenues being “earned.” The majorit y of revenues in many governments result from nonexchange transactions like property taxes or sales taxes. GASB 33 as amended, effective about 20 years ago, addresses nonexchange transactions but never used the word “earned.” Earnings apply to exchanges. • Special Items, as defined by GASB 34, paragraph 56, effective about 20 years ago, are apparently occurring but not being properly reported as such. (I once saw a special-purpose local government report a $126million receipt of a donated capital asset in their otherwise five-digit operating statement as “Miscellaneous Revenue”—the auditor’s opinion was nonetheless unmodified. Yes, the statement was prepared by the auditor.) • Donated Capital Assets (not “fixed” assets—see GASB 34) received by governments are still often disclosed as being reported at fair value. This GAAP requirement was changed to “acquisition value” as defined by GASB 72, paragraph 79, effective for reporting periods beginning after June 15, 2015. More Recent GASB Statement Requirements The following are some of the provisions of more recently effectiveGASBstatementswith relatively broad applicability: • GASB Statement 84, Fiduciary Activities , effective for reporting periods beginning after Dec. 15, 2018, establishes criteria for identifying fiduciary activities. Provisions include replacing agency funds with custodial funds and having a Statement of Changes in Fiduciary Net Position report changes for all fiduciary fund types, including custodial (unlike previous statements, which excluded agency funds). • GASB Statement 87, Leases, effective for reporting periods beginning after Dec. 15, 2019, establishes a single model for leases based on the principle that leases are financings of the right to use an underlying asset. Lessees will report a lease liability and an intangible right-to- use lease asset, and lessors will report a lease receivable and a deferred inflow of resources, except for short-term leases. The “lease term” is newly defined and involves evaluating whether various options are reasonably certain of being exercised or not. “Reasonably certain” is a new term, which the GASB Board, according to paragraph B22 of the pronouncement, believes has a higher threshold of likelihood than the historic term “probable.” • GASB Statement 88, Certain Disclosure Related to Debt, effective for reporting periods beginning after June 15, 2018, imposes disclosure requirements for direct borrowings and direct placements of debt. It also establishes a specific definition of the term “debt” to be used for the purpose of these disclosures (for example, “debt” does not include leases). Where Are We Now? As of thewriting of this article, the lastGASB statement issued was in May 2019—GASB Statement 91, Conduit Debt Obligations , effective for reporting periods beginning after Dec. 15, 2020. The GASB has also issued three Implementation Guides (remember, they’re “level B” authoritative GAAP) in 2019. There’s always something new on which to be updated to the extent applicable. One’s need for a GASB update, and how far back to go, is very challenging for one to self- determine. Many GASB pronouncements were issued well before some practitioners were evenborn, let aloneworking as financial statement preparers or auditors. In view of the fact that “you don’t knowwhat you don’t know,” one would be wise to act in the public interest by obtaining an outside expert’s evaluation of one’s needs. Ultimately, to maintain your professional competency, you are that one. t