2010 Municipal Financial Statement and Budget Workshop

1. 2010 Municipal Financial Statement and Budget Workshop

2. Workshop Leaders • 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.

3. Workshop Leaders • 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.

4. Workshop Learning Objectives • 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.

5. Workshop Agenda 1. Financial Statement Introduction 2. Financial Statement Analytical Review 3. Municipal Budgeting discussion

6. Workshop Handouts • Handout #1 – Sample Municipal Financial Statements • Handout #2 – Municipal Budgeting Session

7. Financial Statement Presentation • Introduction • A review of the current financial statements • Basic analytical review of the statements • Issues going forward in 2010 and beyond

8. Understanding Financial Statements • 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.

9. PSAB History • 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.

10. Current Financial Statement • 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.

11. Current Financial Statement • 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.

12. Current Financial Statement • 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.

13. First Rule in Municipal Accounting • Page 5, Handout #1 Financial Assets - Financial Liabilities = Net financial assets + Non Financial Assets = Accumulated Surplus

14. Accumulated Surplus consists of: Total Accumulated Surplus: $11,165,820

15. Accumulated Surplus (Continued) • 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

16. Management’s Responsibility Report • 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

17. 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

18. Auditor’s Report • 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.

19. Auditors Report – Adverse opinion • 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.”

20. Statement 1 – Statement of Financial Position Statement 1 • Page 5 • Purpose of Statement: to present the financial position of the municipality on a specific date. • Presents the resources controlled by a municipality.

21. Statement 1 – Statement of Financial Position (continued) • 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

22. Statement of Financial Position – Financial Analysis • 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.

23. Statement of Financial Position – Financial Analysis • 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

24. Change in Net Financial Assets • 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.

25. Cash and Liquid Investments • 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.

26. Assets to Liabilities Ratio • 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.

27. Municipal Debt Limit • 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.

28. Long Term Debt per Capita • 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.

29. Statement 2 – Statement of Operations • 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.

30. Statement 2 – Statement of Operations • Page 7 • Areas of the statement are: • Section 1 – Municipal Operating Revenues • Section 2 – Operating Expenses (Incl. Amortization) • Section 3 – Municipal Capital Revenues

31. Statement of Operations – Financial Analysis • 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

32. Long Term Debt Flexibility • 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.

33. Long Term Debt Flexibility • 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?

34. Level of Capital Investment • Page 6, Point G • Calculation – tangible capital asset acquisitions divided by total revenues. • Purpose – shows what percentage of revenues have gone into municipal infrastructure.

35. Municipal Reserve Size • 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.

36. Municipal Administration Percentage • 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.

37. Third Party Transfers • 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.

38. Management Discussion and Analysis • 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.

39. Statement of Operations – Budget to Actual Comparison • 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.

40. Statement of Change in Net Financial Assets – Statement 3 • 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.

41. Statement of Change in Net Financial Assets – Statement 3 • 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.

42. Statement 3 – Budget to Actual Comparison • 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.

43. Statement 3 – Budget to Actual Comparison • 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)

44. Statement 3 – Further Discussion • 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)

45. Statement of Cash Flow – Statement 4 • 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

46. Notes to the Financial Statements • 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.

47. Municipal Reporting Entity • 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.

48. Municipal Reporting Entity • 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.

49. Government Transfers • 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.

50. Government Transfers • 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.