Linda Dufresne, CPA Dufresne & Associates, CPA, PA GNP Services, CPA, PA linda@dufresnecpas

1. Linda Dufresne, CPA • Dufresne & Associates, CPA, PA • GNP Services, CPA, PA • linda@dufresnecpas.com

2. Steps to Understanding SOCF • What entities must provide the SOCF? • What guidance is applicable? • Where to get information? • How to adjust from accrual to cash basis? • Which way do the signs go? • Where are items reported on the SOCF? • What additional information is required to be presented? • How to analyze the SOCF – what it reveals and what it does not

3. Things to keep in mind Ten laws of Accounting 1.Trial balances don’t 2.Working Capital does not 3.Liquidity tends to run out 4.Return on investments never will 5. Bottom line is only the tip of the iceberg. 6. If you need accounting to prove it, it was probably not true in the first place 7. There is nothing more permanent than a temporary account 8. An accountant is a man hired to explain that you did not make the money you did 9. Cash flow doesn’t 10. Obviously accounting pays, otherwise there would be no accountants.

4. GASB Statement 34, ¶ 105 says: Governments should present a statement of cash flows for proprietary funds based on the provisions of GASB Statement 9, as amended by this Statement. The direct method of presenting cash flows from operating activities (including a reconciliation of operating cash flows to operating income) should be used. Proprietary funds CANNOT use FAS-95 for guidance Statement of Cash Flows (SOCF)

5. Who must prepare the statement? Proprietary funds are required to present the statement What is our guidance? GASB 9 as amended by GASB 34 What is the form of presentation? Direct method should be used Statement of Cash Flows (SOCF)

6. The focus is on cash: Cash in and out easy for users to grasp; Removing effect of accruals also removes some of the harder to understand components; Similarly, removing effect of accruals does not present the financial position picture; so The intent of the SOCF is to provide an additional financial analysis tool as an alternative to the accrual basis financials Statement of Cash Flows (SOCF)

7. What is included as “cash”: Cash on hand; Cash on deposit; Cash in restricted accounts; and A position in a cash and investment pool that has the same characteristics as a demand deposit (resources can be deposited or withdrawn without notice or penalty) Statement of Cash Flows (SOCF)

8. Inclusion of cash equivalents is optional: Short-term, highly liquid investment that is readily convertible to known amounts of cash Matures within three months of the date it is acquired Note that instruments initially purchased having a maturity greater than three months DO NOT become a cash equivalent when entering the last three months The determination as to whether an asset is a cash equivalent is made only once, when the asset is acquired Statement of Cash Flows (SOCF)

9. Definition of cash equivalents may be determined by a government so long as the definition is more restrictive than the GAAP definition Cash definition enjoys no such flexibility For example, a government may define cash equivalents to exclude resources held in restricted accounts; however, cash in restricted accounts must be included as part of the balance on the cash flow statement Statement of Cash Flows (SOCF)

10. SOCF only reports transactions that affect an entity’s cash accounts Transactions that would not be reflected: Receipts of proceeds of refunding bonds if the refunded debt qualifies for defeasance and the cash is placed directly in escrow; Receipt of bond proceeds related to financing authorities if the proceeds are delivered directly to the intended recipients rather than to the financing authority Commodities and similar noncash items (for example, federal surplus food used in school lunch programs) even though they may be reported as revenues/expenses in the statement of revenues, expenses and changes in fund net assets/equity; and Rollovers of certificates of deposit Statement of Cash Flows (SOCF)

11. Exceptions to the basic rule that only cash (and cash equivalents) are reported on the SOCF: Checks and warrants are considered cash flows when issued rather than when presented for payment Cash balance cannot be less than zero A negative position in cash is tatamount to a borrowing and reported as a cash flow Changes in fair value of investments subject to fair value reporting and classified as cash equivalents should be recognized as cash flows from investing activities when they occur Statement of Cash Flows (SOCF)

12. Gross vs net presentation In most instances, gross presentation is required Exceptions Items whose turnover is quick, amounts are large and maturities are short provided the original maturity of the asset or liability is three months or less (Investments, loans receivable, debt) Governmental enterprises whose assets for the most part are highly liquid investments and that have little or no debt outstanding during the period Statement of Cash Flows (SOCF)

13. Comic relief? An accountant was walking along a beach and stumbled across an old lamp. He picked it up, rubbed it and out popped a genie. The genie said "You released me from the lamp, blah blah blah. This is the fourth time this month and I'm getting a little sick of these wishes so you can forget about three. You only get one wish!" The accountant sat and thought about it for a while and said, "I've always wanted to go to Hawaii but I'm scared to fly and I get very seasick. "Could you build me a bridge to Hawaii so I can drive over there to visit?" The genie laughed and said, "That's impossible! Think of the logistics of that! How would the supports ever reach the bottom of the Pacific? Think of how much concrete! How much steel! You're going to have to think of another wish." The Accountant agreed, and tried to think of a really good wish. Finally, he said, "I don't understand how banks have managed to package crap mortgages and sell them to other, supposedly astute, banks, can you explain it to me please." The genie paused for a while and said, "How many lanes do you want on that bridge?"

14. Cash flows from operating activities Cash flows from noncapital financing activities Cash flows from capital and related financing activities Cash flows from investing activities Reconciliation of net operating revenues (expenses) to net cash provided (used) by operating activities Supplemental schedule of noncash transactions SOCF Layout

15. GASB Statement 9, ¶ 16 Operating activities generally result from providing services and producing and delivering goods, and include all transactions and other events that are not defined as capital and related financing, noncapital financing, or investing activities Cash flows from operating activities generally are the cash effects of transactions and other events that enter into the determination of operating income. CASH FLOWS from Operating Activities

16. Generally include all cash flows related to transactions and events reported as components of operating income in the statement of revenues, expenses and changes in fund net assets/equity Also category is used for any cash inflow or outflow that cannot properly be classified in one of the other three categories Must be reported by major categories of receipts and payments At a minimum, receipts from customers, receipts from interfund services, payments to suppliers, payments to employees, payments related to interfund services CASH FLOWS from Operating Activities

17. Interest receipts Rarely qualify for inclusion as part of cash flows from operating activities Exception: Loans made to fulfill government social programs rather than for income or profit; and Directly benefit individual constituents of the government (low income housing and student loans) Program loans typically refer to loans that meet both of these criteria Making and collection of program loans also are classified as cash flows from operating activities CASH FLOWS from Operating Activities

18. Statement of Cash Flows Common Cash Flows from Operating Activities - Items to Consider

19. Statement of Cash Flows Common Cash Flows from Operating Activities - Items to Consider

20. Statement of Cash Flows Common Cash Flows from Operating Activities - Items to Consider

21. Statement of Cash Flows Common Cash Flows from Operating Activities - Items to Consider

22. GASB Statement 9, ¶ 20 Noncapital financing activities include borrowing money for purposes other than to acquire, construct, or improve capital assets and repaying those amounts borrowed, including interest This category includes proceeds from all borrowings (such as revenue anticipation notes) not clearly attributable to acquisition, construction, or improvement of capital assets, regardless of the form of the borrowing Also included are certain other interfund and intergovernmental receipts and payments. CASH FLOWS from Noncapital financing Activities

23. Borrowings to finance program loans would properly be reported in this category even though the loans themselves would be treated as part of cash flows from operating activities Grant proceeds not specifically restricted to capital purposes Grant payments to other entities Includes transfers to and from other funds (except when capital related) Tax receipts not attributable to capital purposes Interest paid on noncapital-related vendor payables CASH FLOWS from Noncapital financing Activities

24. Statement of Cash Flows Common Cash Flows from Noncapital Financing Activities - Items to Consider

25. GASB Statement 9, ¶ 23 Capital and related financing activities include acquiring and disposing of capital assets used in providing services or producing goods, borrowing money for acquiring, constructing, or improving capital assets and repaying the amounts borrowed, including interest, and paying for capital assets obtained from vendors on credit. CASH FLOWS from CAPITAL AND RELATED FINANCING Activities

26. Borrowing and repayment (principal and interest) of debt clearly attributable to capital purposes Proceeds of capital grants and contributions Transfers from other funds for capital purposes Payments related to acquisition, construction or improvement of capital assets Sale or involuntary conversion of capital assets such as insurance proceeds Capital type special assessments Taxes levied for capital purposes or related debt service Tap fees in excess of actual cost of connection Interest capitalization is reported as interest payments rather than capital acquisition even though the payments may be capitalized in the statement of position and not reported as interest expense in the statement of revenues, expenses and changes in fund net assets/equity CASH FLOWS from CAPITAL AND RELATED FINANCING Activities

27. Statement of Cash Flows Common Cash Flows from Capital and Related Activities - Items to Consider

28. GASB Statement 9, ¶ 26 Investing activities include making and collecting loans (except program loans, as discussed in paragraph 19) and acquiring and disposing of debt or equity instruments. CASH FLOWS from INVESTING Activities

29. Statement of Cash Flows (INVESTING Activities Section) • Interest receipts (except program loans) • Loan collections (except program loans) • Proceeds from sale of investments • Receipt of interest on customer deposits • Changes in the fair value of investments subject to fair value reporting and classified as cash equivalents • Loans made to others (except program loans) • Purchases of investments

30. Statement of Cash Flows Common Cash Flows from Investing Activities - Items to Consider

31. Reconciliation of Net Operating Revenues (Expenses) to Net Cash Provided (Used) by Operating Activities Begin with Operating Income (Loss) Add back noncash expenses included in the determination of operating income (loss) Plus or minus changes in assets and liabilities pertaining to operating activities (GASB 9, ¶ 33)

32. Reconciliation of Net Operating Revenues (Expenses) to Net Cash Provided (Used) by Operating Activities Purpose is to draw users’ attention to the important difference between cash from operations and operating income/loss Present either on the face of the SOCF or as a schedule accompanying the SOCF

33. Supplemental Schedule of Noncash Transactions GASB Statement 9 ¶ 37 states that a disclosure is required for all investing, capital and financing activities during the year that “affect recognized assets or liabilities but do not result in cash receipts or cash payments in the period”.

34. Supplemental Schedule of Noncash Transactions • Financial statement users need information on certain noncash activities that otherwise would fail to be reported • Two specific criteria • Transaction affects recognized assets or liabilities; and • Had it involved cash, the transaction would not properly have been classified as cash flows from operating activities • Presentation either narrative or tabular form on a separate schedule accompanying the SOCF • When a transaction involves both cash and noncash components (for example, initiation of a capital lease involving a down payment), clear description of cash and noncash aspects is required • Example of easily overlooked noncash transaction that would require disclosure on this schedule is net appreciation/depreciation in the value of investments reported at fair value but not classified as cash equivalents

35. Examples of noncash transactions include: Assets acquired by capital leasing Gifts in kind Capital contributions (including transfers of assets between the special districts and local governments)

36. All comedy has a grain of truth! Late one night in Washington, a mugger wearing a ski mask jumped into the path of a well-dressed man and stuck a gun in his ribs."Give me your money!" he demanded.Indignant, the well-dressed man bellowed, "Hrm! Do you realize that you are attempting to rob a United States Congressman!""In that case," replied the robber, "give me my money!"

37. Survival Tips for Preparing the Statement of Cash Flows • Analyze net asset line items by statement of cash flow categories during preparation of audit workpapers and lead schedules. • Prepare Statement of Net Asset (SONA) Variance worksheet. • Compile the Additional Cash Flow Data worksheet and Statement of Revenues, Expenses and Changes in Fund Net Assets (SRENA).

38. Survival Tips for Preparing the Statement of Cash Flows, continued • Using the “Cash Flow Stmt Worksheet” template, transfer/link amounts from, SNA Variance, SRENA and Additional Cash Flow Data Worksheet. • Prepare Operating Activities section first. Then prepare reconciliation section. It is important to keep these two sections in balance. • Most common pitfall is transposing the sign (+/-) on amounts.

39. Survival Tips for Preparing the Statement of Cash Flows Analyze net asset line items by statement of cash flow categories. See previous slides

40. Survival Tips for Preparing the Statement of Cash Flows Prepare Statement of Net Asset (SONA) Variance worksheet. See sample on following slides

41. Comparative SONA for Preparing the SOCF

42. Comparative SONA for Preparing the SOCF

43. Survival Tips for Preparing the Statement of Cash Flows Compile the Statement of Revenues, Expenses and Changes in Fund Net Assets (SRENA) and Additional Cash Flow Data worksheet.

44. Additional Cash Flow Data

45. Additional Cash Flow Data

46. SRENA

47. SRENA, continued

48. SRENA, concluded

49. Survival Tips for Preparing the Statement of Cash Flows, continued Using the “Cash Flow Stmt Worksheet” template, transfer/link amounts from SONA Variance, SRENA and Additional Cash Flow Data Worksheet.

50. Statement of Cash Flows (Operating Activities Section)