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2010 Municipal Financial Statement and Budget Workshop

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2010 Municipal Financial Statement and Budget Workshop Powered By Docstoc
					   Darcy Spilchen, CA, CFP, CMA
   Partner – Parker Quine LLP in Yorkton
   17 years experience in audits.
   Audit team leader and fieldwork supervisor
    on the audits of 15 towns, 5 villages, 1 city.
   Steve Brown, B.Admin, CGA
   Senior Financial Analyst, Municipal Affairs
   Currently assisting in the implementation of
    PS 3150.
   Experience in both commercial and
    government accounting environments.
   To understand and interpret financial
    statement information.

   To perform basic analytical analysis on
    financial statement information.

   To better understand municipal budgeting in
    the new environment.
1. Financial Statement Introduction

2. Financial Statement Analytical Review

3. Municipal Budgeting discussion
   Handout #1 – Sample Municipal Financial
    Statements

   Handout #2 – Municipal Budgeting Session
   Introduction

   A review of the current financial statements

   Basic analytical review of the statements

   Issues going forward in 2010 and beyond
 Why?
  ▫ Accountability
  ▫ A lot can be learned about a municipality from
    financial statement review :
       what it’s priorities are;
       how well it plans for the future;
       how well it manages its resources;
       and what kind of resources it has.

 Demonstrates how public funds are used in a
 municipality.
 1990’s and before - little or no national
 accounting standards.
 Public Sector Accounting Board (PSAB) of
 Canadian Institute of Chartered Accountants
 (CICA) was established to issue standards on
 accounting and financial reporting.
 Saskatchewan municipalities have been required
 to prepare financial statements in accordance
 with PSAB standards since 2002.
   Current format is prescribed by the PSAB.

   Collaborative effort involving Municipal
    Affairs, municipal auditors and
    Saskatchewan’s municipal associations.

   Significant changes were required to the
    financial statements due to the new
    accounting requirements in 2009.
   New accounting standards prescribed by
    PSAB in 2009:

     Adoption of full accrual accounting.


     Tangible Capital Asset Reporting.


     A municipal financial reporting framework that is
     similar to other levels of government in Canada.
   New PSAB reporting model has emphasis on:

     Annual surplus or deficit.
     Overall financial health of the municipality .


   A key measure in the new statements on the
    financial health of the municipality is the net
    financial assets or net debt.
   Page 5, Handout #1

                   Financial Assets

                 - Financial Liabilities

                = Net financial assets

               + Non Financial Assets

               = Accumulated Surplus
              Accumulated Surplus
                   $ 711,715
                       $ 1,017,972

                                       Unappropriated Surplus

                                       Appropriated Surplus

                                       Net Investment in
                                       Tangible Capital Assets


                      Total Accumulated Surplus: $11,165,820
$ 9,436,133
   Accumulated Surplus is one aspect of the new
    financial statements.

   Other aspects of the financial statement that
    have changed include:
     Tangible Capital Asset Schedules
     Functional Segment Disclosure
     Accountability reports – Management ‘s
     Responsibility
   Page 2, Handout #1

   Demonstrates to financial statement users
    that municipal management is responsible
    for the financial statements.

   Signed by an elected and administrative
    official.

   Not the Auditor’s Report
   Page 3, Handout #1

   Provides the auditor’s opinion on the financial
    statements attached to the auditors report.

   Four types of audit opinions:
     Unqualified
     Qualified
     Adverse Report
     Disclaimer of Opinion
   Page 3, Handout #1

   Section 1 – identifies what is being reported on,
    what is management’s responsibility, and the
    auditor’s responsibility.

   Section 2 – describes the auditor’s procedures with
    regards to the financial statements.

   Section 3 – identifies the auditor’s opinion on the
    financial statement.
   An example of an adverse audit opinion (3):
     The audit opinion states:
    “ In our opinion, because the Municipality did not
     record the net value of tangible capital assets and
     any impairment or related amortization as
     explained in the preceding paragraph, these
     financial statements do not present fairly the
     financial position of the Municipality as at
     December 31, 2009, and the results of its operations
     and its cash flow for the year then ended in
     accordance with GAAP.”
   Page 5

   Purpose of Statement: to present the
    financial position of the municipality on a
    specific date.

   Presents the resources controlled by a
    municipality.
   Page 5

   Sections of the statement are:

     Section 1 – Total Financial Assets
     Section 2 – Total Liabilities
     Section 3 – Net Financial Assets
     Section 4 – Total Non-Financial Assets
     Section 5 – Accumulated Surplus
   As part of the workshop, we will look at a
    handful of financial ratios and indicators.
    We will look at the balance sheet, income
    statement, and the notes and schedules.

   Financial ratios are used to evaluate an
    organization’s financial health, useful in
    determining financial trends, and help inform
    key users of the financial statements.
   Page 4
   For the Statement of Financial Position, we
    will look at the following financial ratios and
    indicators:
    1.   Change in Net Financial Assets
    2.   Cash and Liquid Investments Change
    3.   Assets to Liabilities Ratio
    4.   Municipal Debt Limit
    5.   Long Term Debt per Capita
   Page 4, Point A
   Calculation – Previous year’s net financial
    asset balance less current year’s balance.

   Purpose – identifies how revenues matched
    against expenditures for the defined period.

   In 2009, the municipality purchased an
    extensive amount of capital assets.
   Page 4, Point B
   Calculation – Previous year’s cash & temp inv.
    asset balance less current year’s balance.

   Purpose – shows how the cash position has
    changed year over year

   In 2009, the municipality had a decrease of
    $1,205,633 in cash assets.
   Page 4, Point C
   Calculation – Total assets owned by a
    municipality divided by total liabilities.

   Purpose – shows the extent to which a
    municipality is financed by debt.

   In 2009, the ratio increased from 2.78 to 3.15.
   Page 4, Point D
   Calculation – Total debt outstanding divided
    by the municipal debt limit.

   Purpose – Indicates the municipality’s
    borrowing limits.

   Some debt is allowed to exceed a prescribed
    limit.
   Page 4, Point E
   Calculation – Total debt outstanding divided
    by population of a municipality.

   Purpose – Develop a trend on how much debt
    the municipality is carrying.

   From 2008 to 2009, the debt per person has
    decreased from $2,334 to $2,266.
   Page 7 in Handout

   Purpose of Statement: To present the
    financial activity for a defined fiscal period.

   Similar to a profit and loss statement in a
    commercial operation.

   Expenses are presented by
    functional/program area in a municipality.
   Page 7

   Areas of the statement are:

     Section 1 – Municipal Operating Revenues


     Section 2 – Operating Expenses (Incl.
     Amortization)

     Section 3 – Municipal Capital Revenues
   Page 7
   Some of the financial indicators on the
    Statement of Operations are:
     Long Term Debt Flexibility
     Level of Capital Investment
     Municipal Reserve Size
     Municipal Administration
     Third Party Transfers
   Page 6, Point F

   Calculation – Long Term Debt repayments
    divided by total municipal operating
    revenues.

   Purpose – shows how much flexibility a
    municipality has to respond to operational
    changes.
   Food for thought,

     If 24% of a municipality’s existing cash flow was
     going to debt repayment, how much room will the
     municipality have to react to a 3% increase in
     operational expenses?
   Page 6, Point G
   Calculation – tangible capital asset
    acquisitions divided by total revenues.

   Purpose – shows what percentage of
    revenues have gone into municipal
    infrastructure.
   Page 6, Point H

   Calculation – Appropriated Reserves divided
    by total annual operating revenues.

   Purpose – shows the percentage of annual
    operating revenues that are in municipal
    reserves.
   Reserves play in a key role in long term
    financial plans.
   Page 6, Point I
   Calculation – General government expenses
    divided total operating expenses.

   Purpose – shows the percentage the
    municipality spends on administration
    related expenses.

   Caution when comparing to other
    municipalities due to allocating differences.
   Page 6, Point J

   A financial indicator suggested by PSAB.

   Calculation – Third party transfers received divided by
    total operating revenues.

   Could be done with other third party transfers such as
    inter-municipal agreements, capital transfers, and other
    outside revenue sources.

   Purpose – shows how much the municipality receives in
    third party revenue.
   Wherever possible, management should
    identify trends, ratios and variances in their
    operations.

   The analysis is part of a municipality’s
    municipal controls to ensure municipal
    objectives are achieved.

   A common form of analysis is budget to
    actual comparisons, or variance analysis.
   Page 8 & 9
   Explain to council not only where the budget
    variances occurred, but why?
   There could be a number of reasons for
    variances, which is why they should be
    investigated. Some examples are:
     Custom work is higher due to higher volumes.
     Water revenues are up because rates increased after the
      budget was set.
   Page 11
   Purpose: Reconcile the annual surplus/(deficit) back
    to the change in net financial assets or debt.

   Useful to reconcile accrual surplus back to the cash
    surplus.

   For 2009 provides the most relevant comparison of
    actual vs. budget since some of the 2009 budgets
    were not prepared on the accrual basis.
   Page 11
   Sections included in Statement 3 are:

   Section 1 – Accrual surplus/(deficit) from Statement 2.

   Section 2 – Net change in tangible capital asset
    transactions.

   Section 3 – Net change in other non-financial assets.

   Section 4 – Increase or decrease in Net Financial Assets.
   If we tie Sections 1 through 3 together, we
    arrive at Section 4.

   Actual to budget comparison was favorable
    because ($879K) was less than ($1,401K) in
    section 4.

   Net difference between budget and 2009
    actuals was $521,947.
   Page 10

   Reconciles the change in net financial asset
    back to actual cash change.

   Adding the numbers identified on Page 12:

     $879,710 + ($779,519) = $(100,191)
   Debt transactions and reserve transfers are
    not revenues nor expenditures.

   Reserve transfers are internal allocations:
     only relevant for internal reporting (cash basis)


   Debt transactions are offsetting:
     $1 million loan adds to the assets and to the
      liabilities
     only relevant for internal reporting (cash basis)
   Page 13

   Purpose: Provides the breakdown of how
    cash balances change from one year to the
    next.
   Broken down by sections:
     Section 1 – Operating changes
     Section 2 – Capital changes
     Section 3 – Investing changes
     Section 4 - Financing changes
   Purpose: Provides further details to the
    numbers presented in the financial
    statements.


   The workshop handout will look at notes such
    as consolidation, land for resale, and
    government transfers.
   Page 15, Financial statement handout

   Municipality and controlled entities are
    consolidated in a municipality’s financial
    statements.

   Consolidation is intended to show the financial
    statement users all the resources under direct or
    indirect control by the municipality.
 Page 15
 Control over organizations is deemed where:


     A municipality has the ability to directly control the
      organization’s activities through the board of
      directors, key personnel appointments, or approve
      budgetary documents.

     There also may be deemed control if the municipality
      has responsibility for debts and losses of the
      organization.
   Page 15 (d)

   Revenue should be recognized in the year it
    was earned or authorized, regardless of
    receipt.

   Some municipalities are recognizing the
    revenue on a proportionate basis to which
    the project being funded is finished.
   PSAB is still working on providing better
    flexibility in this section.

   A number of exposure drafts have been
    provided to replace the existing government
    transfers section.

   The latest exposure draft from PSAB on this
    standard closed September 15, 2010.
   Page 17

   Provides a summary of the details found in a
    municipality’s TCA policy.

   Items such as asset useful lives, capitalization
    of interest, and amortization methods are
    found in the notes.
   Page 17
   Identifies the key program or service delivery
    areas in the municipality.

   Describes what each function or program
    area represents.

   Revenues and Expenses are presented
    around functional/program areas.
   Page 19
   Breakdown between tax title property and
    other land for resale.

   Land for resale includes only costs directly
    related to achieve sale to 3rd party.
   Page 19
   Money that has been received but not spent
    or earned by the municipality.

   Project reports from contractors, municipal
    employees, and other stakeholders can
    identify the progress of capital projects.

   This item ties to the discussion on
    government transfers.
   Page 21, Financial statement handout
   Not a new note, carried over from 2002.

   This note recognizes the reserve established
    for decommissioning a landfill at the end of
    it’s useful life.

   Outside assistance might be required to
    develop the long term financial plan for the
    landfill reserve.
   Page 21
   A note change for 2009.

   Identifies the municipality’s debt limit which
    is defined as it’s own source revenue.

   Saskatchewan Municipal Board is the
    regulatory body over long term borrowing in
    Saskatchewan.
   Page 23
   Details taxes and unconditional revenues
    received by the municipality.

   These revenues are generally not tied to a
    particular function or program area in a
    municipality.
   Page 25 - 33
   Revenue segmentation by functional area is a
    requirement of PSAB. (Section 2700)

   Details the municipal fees, grants and other
    revenues by functional area while
    segregating operating and capital revenues in
    each category.
   Page 35 - 39

   Not significantly different from 2002
    statement.

   Expenses organized by functional area.

   Amortization now recorded in replace of
    capital expenditures.
   Page 35, Point K

   Calculation – Allowance for uncollectables
    divided by total operating revenues.

   Purpose – To measure how much revenue is
    lost to bad debt every year.
   Page 41 & 43
   Purpose: Summarizes revenues and expenses
    for each function for 2009 & 2008.

   Taxes and Unconditional revenues are left
    unallocated at the bottom of the schedule.

   All other revenues and expenses are allocated
    by functional areas.
   Page 45
   Purpose: Show TCA values by asset type.
    (Roads, Buildings, Equipment)

   Schedule setup to show:
     Section 1 - Asset cost at the top of the schedule
     Section 2 - Accumulated Amortization
     Section 3 - Net Book Value
   Page 44, Point I

   Calculation – Net Book Value of TCA divided
    by Book Value of TCA.

   Purpose – The older the assets are, the lower
    the percentage is. If the assets are newer,
    less amortization will be taken on them,
    hence the percentage will be higher.
   Page 47
   Purpose: Separates the TCA assets by
    functional area as opposed to asset type.

   Overall format is the same as Schedule 6.

   Useful for identifying areas in a municipality
    with a significant asset base.
              Accumulated Surplus
                   $ 711,715
                       $ 1,017,972

                                       Unappropriated Surplus

                                       Appropriated Surplus

                                       Net Investment in
                                       Tangible Capital Assets


                      Total Accumulated Surplus: $11,165,820
$ 9,436,133
   Page 49

   Ending surplus or deficits are closed off to
    accumulated surplus at the end of every fiscal
    period.

   Three areas to the statement:
     Section 1 - Unappropriated Surplus
     Section 2 – Appropriated Surplus
     Section 3 – Net Investment in TCA
   Financial information evaluation can assist
    with achieving municipal objectives.

   The most relevant approach to financial
    analysis is to look at year over year anlaysis.

   Financial information can be presented using
    different mediums or avenues going forward.
   Regulations will be updated in the near future.

   Options will be available to those who wish to look
    at amortization more closely.

   Moving towards asset management - pilots

   Auditors have indicated there should be less time
    and effort spent on the 2010 audit than the 2009
    audit.
   Auditor Issues:

     Not expecting any changes of significance on the
     2010 financial statements template.

     Change in the auditing profession as existing
     Canadian auditing standards are to be replaced
     with international auditing standards that will be
     adopted as new Canadian Auditing Standards
     (CASs)
 New CASs may mean auditors will have
  additional and or different questions of you, and
  may require additional and or different file
  documentation
 Administrators can do little to prepare for this.

   The expectation is that this extra time required
    will be less than the additional time need to
    complete the 2009 audit
   Time will be needed to adapt and learn the new
    accounting standards, it won’t happen
    overnight.

   Financial analysis can be used to assist in
    managing municipal operations.

   Documents and support will be available on the
    Sasktca.ca website until March 2011.

				
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