1 Municipal Budgeting in the New PSAB World
2 MFOA & AMCTO May 27, 2008 Kingston, ON Dan Cowin, MFOA, Facilitator Tammy Wolters, former Treasurer Lanark County Calvin Barrett, Financial Services Waterloo Region
3 PSAB Compliance Before we discuss changes to the 2008 budget, perhaps a brief review of the changes required for PSAB compliance
4 PSAB Compliance PSAB SECTION DESCRIPTION 1000 Financial Statement Concepts 1100 Financial Statement Objectives 1200 Financial Statement Presentation 3150 Tangible Capital Assets 3410 Government Transfers 2700 Segment Disclosures
5 Cash vs Accrual Basis Accounting Full Cash Accounting Revenues recorded when cash received and expenditures recorded when paid Modified Cash Cash basis during year with set up of unpaid accounts and/or receivables at year end Modified Accrual Record expenditures when resources received & revenues when measurable and available within accounting period Full Accrual Accounting Revenues recognized when earned expenses recognized when incurred (TCAs capitalized and amortized).
6 Cash vs Accrual Basis Accounting Cash Based Accounting Advantages Easily understood by staff Represents cash payments required in a period Budget authority for current full price of asset Disadvantages Fails to align costs with provision of programs and services Long term asset commitments are not transparent Potential bias against large purchases Short term view leads to budgets based upon affordability rather than need Financial results can be manipulated Fails to recognize future costs Accrual Based Accounting Advantages Improved internal controls, particularly related to assets Assets not seen as free after initial purchase Long Term focus on Asset Renewal Improved access and understanding of full costs Disadvantages Difficult to understand Requires greater amount of judgment and estimates Costs of assets are recognized over time of providing programs and services may provide false sense of delay?
7 PSAB TCA Accounting Principles Tangible Capital Assets Recorded at cost Amortized over the useful life Amortization accounted for as an expense on the Income Statement Write-downs apply for decline in asset values Net write-downs accounted for as expenses on the Income Statement and not reversed Gains and/or losses to be accounted for as a revenue or expense on disposal Assets under construction are reflected in Work in Progress Inventory Donated assets are reflected at fair market value Assets funded by Capital Leases recognized
8 PSAB Amortization Definition: Systematic recognition of cost of tangible capital asset The cost, less any residual value, of a tangible capital asset with a limited life should be amortized over its useful life in a rational and systematic manner appropriate to its nature and use by the government Methods Straight line constant charge Variable Methods reflects service as a function of usage declining balance, service usage Useful life Depends on use of asset
9 Statement of Financial Position PS 1200 Current New (2009) FINANCIAL ASSETS FINANCIAL ASSETS Cash and equivalents Cash and equivalents Accounts receivable Accounts receivable Portfolio investments Portfolio investments Inventories for resale Inventories for resale TOTAL FINANCIAL ASSETS TOTAL FINANCIAL ASSETS LIABILITIES LIABILITIES Accounts Payables Accounts Payables Short term loan Short term loan Deferred Revenue Deferred Revenue Employee Benfits Employee Benfits Accured Interest Accured Interest Landfill closure / post closure liabilities Landfill closure / post closure liabilities Net Long-term debt Net Long-term debt Mortgages payable Mortgages payable Capital lease obligations Capital lease obligations TOTAL LIABILITIES TOTAL LIABILITIES NET FINANCIAL ASSETS (LIABILITIES) NET DEBT NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS Inventory of supplies Inventory of supplies Prepaid Expenses Prepaid Expenses Tangible Capital Assets (net of accumulated amortization) TOTAL NON-FINANCIAL ASSETS TOTAL NON-FINANCIAL ASSETS MUNICIPAL POSITION Operating Fund Capital Fund Reserves and Reserve Fund Fund Balances Amounts to be recovered in future years TOTAL MUNICIPAL POSITION TOTAL LIABILITIES & MUNICIPAL POSITION ACCUMULATED SURPLUS (DEFICIT)
10 Statement of Operations PS 1200 Current New (2009) REVENUES REVENUES Taxation Taxation User Fees User Fees Government Grants Government Grants Investment Income Investment Income Net proceeds from sales of assets Gains on disposal of assets Other revenues Other revenues TOTAL REVENUES TOTAL REVENUES EXPENDITURES EXPENSES Compensation and benefits Compensation and benefits Materials and supplies Materials and supplies Contractual services Contractual services Other goods and services Other goods and services Interest expense Interest expense Write down of tangible capital assets Loss on disposal of assets Total Capital Expenditures Amortization TOTAL EXPENDITURES TOTAL EXPENSES NET EXPENDITURES FOR THE YEAR Annual surplus (deficit) Financing and Transfers Accumulated surplus (deficit) at the beginning of the year Proceeds from long term debt Debt principal repayments Capital lease Obligations to funded (recovered) in future years Increase in Financing Change in Fund Balances Fund Balance at Beginning of the year Accumulated surplus (deficit) at the Fund Balance at End of the year End of the year
11 Statement of Cash Flows (PS 1200 Direct Method) OPERATING TRANSACTIONS Cash received from: Taxes Transfers Fees Cash Paid for: Salaries and Wages Materials and Supplies Grants Financing Charges CAPITAL TRANSACTIONS Proceeds on sale of tangible capital assets Cash used to acquire tangible capital assets INVESTING TRANSACTIONS Investments Purchased Proceeds from Redemption of Investments FINANCING TRANSACTIONS Debt Issued Debt Retired Increase (Decrease) in Cash xxxxx Cash at beginning of year xxxx Cash at end of Year xxxxx
12 New Financial Statements Statement of Change in Net Debt ANNUAL SURPLUS (DEFICIT) - LESS: ACQUISITION OF TANGIBLE CAPITAL ASSETS + PLUS: AMORTIZATION OF TANGIBLE CAPITAL ASSETS (GAIN) LOSS ON SALE OF TANGIBLE CAPITAL ASSETS PROCEEDS ON SALE OF TANGIBLE CAPITAL ASSETS WRITE-DOWNS OF TANGIBLE CAPITAL ASSETS - LESS: ACQUISITION OF SUPPLIES INVENTORIES - LESS: ACQUISITION OF PREPAID EXPENSES + PLUS: CONSUMPTION OF SUPPLIES INVENTORIES + PLUS: USE OF PREPAID EXPENSES (INCREASE) DECREASE IN NET DEBT NET DEBT AT BEGINNING OF PERIOD NET DEBT AT END OF PERIOD
13 FIR 2009 MMAH advises that the Ministry will be testing the 2009 FIR template this summer and will post the final 2009 FIR by the end of 2008 No major changes to the draft FIR that was circulated and is available on the website: Link to new FIR now
14 TCA Accounting January 1, 2009 Accounting Policies Establish rules for how TCA accounting will be handled in your municipality (see CICA guide for example) Thresholds, etc. Draft your policies now have in place summer 2008 will be needed sooner than you think!
15 Policy Decisions Required by PSAB Inventory Classes Segmentation (Whole vs Component) Level of Asset Detail Threshold Valuation Estimated Useful Life Historical Cost Consistent Method for FMV, Historical cost Not Available Amortization Methods Straight line, Declining Balance, SYD, units of output Residual Values Managing Disposals, Write Downs Betterments Budget and Reporting
16 TCA Accounting January 1, 2009 Operating day to day in 2009 Acquisitions and dispositions Write downs and write offs Betterments and maintenance Capital projects to work in progress inventory Capital projects to TCA Amortization of assets
17 TCA Transition to 2009 Need amounts for 2008 comparative financial statements TCA book & accumulated amortization Jan 1/08 Additions and disposals for fiscal 2008 Amortization for fiscal 2008 TCA book and accumulated amortization Dec 31/08
18 TCA Transactions Acquisitions & Disposal Acquisitions are added to the inventory of TCA-at actual costs plus directly attributable costs Disposals reduce the inventory of TCA deduct cost of asset and accumulated amortization Loss on disposal is an expense on the Statement of Operations Accounting entries to follow
19 TCA Transactions- Write downs and Write offs Circumstances may indicate that an asset should be written down in value or written off (PS to.37) The amount of the net write-off or write-down is to be accounted for as an expense in the Statement of Operations (PS ) A write-down is an adjustment to the cost of an asset. A corresponding adjustment is made to the accumulated depreciation and the net adjustment is reported as an expense in the statement of operations. This new cost should be amortized over the remaining useful life of the asset. A write-down can not be reversed (PS ) ie. There are no writeups Accounting entries to follow
20 TCA Transactions Work in Progress Up to the date of capitalizations, all acquisition costs and directly attributable costs are charged to work-in-progress or assets under development All work-in-progress is reported as such under PSG 7.7(c) Upon capitalization, all assets and associated costs are moved to asset inventory and TCA
21 Betterment or Maintenance Expense Maintenance Work maintains its predetermined service potential of the asset and its given useful life Expensed in full in the accounting period in which the expense occurred Betterment Work increases an asset s service potential and/or its useful life Capitalized Cost added to the asset s historical cost and its revised net book value will be amortized over the remainder of its useful life or extended useful life
22 Budget Impacts
23 PSAB Changes- Budgetary Impacts Overview Municipal Act changes- not yet complete But we do know: Accounting does not drive financing Will not be required to finance: Amortization Post employment benefits Landfill closure and post closure costs Will not carry over surpluses Budgeting processes likely won t change in the short term but... may over time Budgeting and Financial reporting disconnects may exist
24 Your Budget and Budget Process WILL budgets change? Budgeting and Financial Reporting may be different PSAB will affect reporting in several ways: Inclusion of amortization expense on the income statement Non-cash transaction Utilization of Historical cost-amortization will generally be substantially less than replacement Exclude debt principal repayment The repayment of principal will be a charge against the liability Exclude debt proceeds Exclude transfers to reserves Exclude cash received for asset disposals Include gains/losses for asset disposals
25 Compare Cash Based vs Accrual Based Budgeting/Accounting Funding Example Assume: Road Section build for $1,800, year Useful Life Scenario 1: Municipality pays for rehabilitations as they go No Budget for future Scenario 2: Municipality levies amount equal to Amortization Expense Scenario 3: Municipality levies amount equal to replacement cost over useful life ($3.6 mill) Scenario 4: Municipality levies amount equal to replacement cost over useful life plus the historical cost
26 Compare Cash Based vs Accrual Based Budgeting/Accounting -Scenario 1 Scenario Statement of Operations Annual Impact Statement of Financial Position Statement of Cash Flow Impact over Useful Life (18 years) Statement of Financial Position Scenario 1 Tax Levy = $0 No increase in cash Municipality pays for rehabilitation as they go No budget for future Amortization Expense = $100,000 Operating Deficit = $100,000 Decrease in TCA (acc dep) = $100,000 Decrease in Municipal Equity = $100,000 (Accumulated Surplus/Deficit) No change No change No change in cash position Decrease in Municipal Equity (Accumulated Deficit) = $1,800,000
27 Compare Cash Based vs Accrual Based Budgeting/Accounting -Scenario 2 Annual Impact Impact over Useful Life (18 years) Scenario 2 Tax Levy = $100,000 Municipality Levies Amount Equal to Amortization Expense Amortization Expense = $100,000 Operating Surplus/Deficit = $0 Increase in Cash Position = $100,000 Decrease in TCA = $100,000 No Change in Municipal Equity (Accumulated Surplus/Deficit) Increase in Cash = $100,000 Net Increase in Cash = $100,000 Increase in Cash = $1,800,000 No Change in Municipal Equity (Accumulated Surplus/Deficit)
28 Compare Cash Based vs Accrual Based Budgeting/Accounting -Scenario 3 Annual Impact Impact over Useful Life (18 years) Scenario 3 Municipality Levies Amount Equal to Replacement Cost over Useful Life Tax Levy = $200,000 Amortization Expense = $100,000 Operating Surplus = $100,000 Increase in Cash Position = $200,000 Decrease in TCA = $100,000 Increase in Municipal Equity $100,000 (Accumulated Surplus/Deficit) Increase in Cash = $200,000 Net Increase in Cash = $200,000 Increase in Cash = $3,600,000 Increase in Municipal Equity (Accumulated Deficit) = $1,800,000
29 Compare Cash Based vs Accrual Based Budgeting/Accounting -Scenario 4 Annual Impact Impact over Useful Life (18 years) Scenario 4 Tax Levy = $300,000 Increase in Cash Position = $300,000 Increase in Cash = $300,000 Increase in Cash = $5,400,000 Municipality Levies Amount Equal to Replacement Cost over Useful Life plus the Historical Cost Amortization Expense = $100,000 Operating Surplus = $200,000 Decrease in TCA = $100,000 Increase in Municipal Equity $200,000 (Accumulated Surplus/Deficit) Net Increase in Cash = $300,000 Increase in Municipal Equity (Accumulated Deficit) = $3,600,000
30 Compare Cash Based vs Accrual Based Budgeting/Accounting CASH-SHOWS Reserve contributions not sufficient to support replacement of the asset (more transparent) ACCRUAL-SHOWS Amortization expense not necessarily covered by cash basis asis d to finance for future-likely replacement cost makes sense ense oach
31 Budget Transition Program Budget (Current) REVENUES User fees Government Grants Investment Income Gains on disposal of assets Other Revenues Transfers from Reserves/Funds Proceeds from Debt TOTAL REVENUES EXPENDITURES Compensation and benefits Materials and supplies Contractual services Other goods and services Interest expense Principal Repayments Transfers to Reserves/Funds Capital Expenditures TOTAL EXPENDITURES Net Levy Program Budget (New) REVENUES User fees Government Grants Investment Income Gains on disposal of assets Other Revenues TOTAL REVENUES EXPENSES Compensation and benefits Materials and supplies Contractual services Other goods and services Interest expense Amortization TOTAL EXPENSES Funding for Principal Repayments Funding for Service Enhancements Funding for System Growth Funding for Inflation in Asset Costs Funding for historic underinvestment TOTAL FUNDING NOT COVERED BY ACCRUAL BASED BUDGETING Net Levy
32 Budget Transition Challenges for 2009 Do we have enough information to budget amortization? Translate transfer to capital reserves into Amortization Debt Principal Repayment Funding for Replacement and System Growth Educate staff and council that budget probably does not equate to need
33 Budget Transition How to transition from Transfers to/from Reserves to Full Accrual Budgeting? Eg.- facilitate splitting the capital budget into amortizable and non-amortizable chunks Eg. use TCA information to set aside funds for future replacement of its infrastructure and have an estimate of when they will need to be replaced
34 Budget Transition Challenges for 2010 and beyond Educate staff Build budget from a need perspective with regards to TCA replacement and system growth Ongoing reporting Cash vs Accrual How do we do it? How can we do in-year reporting in both manners? How can systems help?
35 Budgeting Case Study Municipality of Hereware Case Study Solution
36 Other Business SORP Jennifer Barr Next Meeting September?