GENERAL OVERVIEW OF THE NEW GASB 34 REQUIREMENTS

A working group that included school business administrators, department staff, and public school accountants, met several times over the summer and fall of 2000 to address the key issues related to implementation of GASB 34 in New Jersey’s school districts.

The department will adhere to the three year phase-in schedule stated in GASB 34 and shown below.

This schedule requires districts with total annual revenue (governmental and enterprise funds) of $100 million or more (for the fiscal year (FY) ending June 30, 1999) to implement GASB 34 for the fiscal year beginning July 1, 2001. The department issued a memorandum on August 2, 2000 to 17 districts that were identified based on transmitted audit summary (audsum) information, with total revenues of $100 million or more and subject to GASB 34 implementation beginning July 1, 2001. Annual revenue as defined in GASB 34 has been further clarified in the GASB Implementation Guide and should be computed using the modified accrual (GAAP) basis rather than budgetary. Since audsum data is on a budgetary basis, the department recommends that every district consult with its auditor to determine in which year the district should implement GASB 34.

Under the new financial reporting model of GASB 34, the following information will be required in a school district’s CAFR:

· Management’s Discussion and Analysis (MD&A)
· Basic Financial Statements
· Required Supplementary Information

Management’s Discussion and Analysis: This is a narrative to be prepared by the school district management and should provide an overview of, and its perspective on, the district’s financial performance for the year. This section is similar to corporate annual reports.

Basic Financial Statements: These statements include the new district-wide financial statements, the fund financial statements, and notes to the financial statements. For New Jersey school districts, the Combining Statements and Individual Fund Schedules, (B through I in the Outline of CAFR on page v of The Audit Program 1999-2000) will continue as presented prior to GASB 34.

District-wide Statements: Two new district-wide statements will need to be developed - a statement of net assets and a statement of activities. The new statements provide additional financial information and a more informed picture of the district’s overall financial position. These new statements will present the governmental and business-type (enterprise) funds using the full accrual basis of accounting. The district’s capital assets and long-term liabilities will no longer be reported in the account groups, but will be included in the statement of net assets. The statement of activities will present the district’s activities in the governmental or the business-type fund column as applicable. On this statement, the district’s operations are reported in a format that shows net (expense) revenue of each function and identifies the net cost of providing school district services. These statements are similar to commercial accounting and are expected to be more familiar and meaningful to the public.

Fund Statements: Most of the requirements remain the same for the fund-based statements. Governmental funds will continue to be reported on a modified accrual basis and will have a balance sheet and statement of revenues, expenditures and changes in fund balance. The major modification to these statements is the inclusion of a new summary reconciliation to the district-wide financial statements that must be included in a separate schedule.

Notes to the Financial Statements: Information on the district-wide statements will need to be included, in addition to the current note disclosures.

Required Supplementary Information (other than MD&A): The information currently reported by New Jersey districts will continue. Districts will now need to include a schedule that compares the final budget and original budget with actual expenditures for the general fund and special revenue funds.

Full Accrual Accounting: To prepare the district-wide statements, districts will need to convert their financial activities from the modified accrual to the full accrual basis of accounting. This does not mean districts must keep two sets of books. During the year, districts will still do their accounting and budgeting on the same basis as they do now. At the end of the year, they will close the books and prepare fund statements as they do currently. After closing the books, the district should then prepare the new set of district-wide statements on the full accrual basis. Districts should be aware that documentation for beginning and end-of-the-year accrual balances and the preparation of the reconciliation should be available for audit.

Capitalization of Assets: There are two major implications of full accrual accounting related to the presentation of capital assets in the district-wide funds:

1. Inclusion of capital assets in the statement of net assets: Districts should begin planning to have their fixed assets inventoried and valued so that the information is available for inclusion in the statement of net assets. If capital assets are not included on the statement, the balance for "Net assets invested in capital assets, net of related debt" will be understated or could be negative if the district has significant long-term liabilities. This would have a negative impact on the "bottom line" total net assets. All outstanding debt will need to be evaluated to determine the amount that relates to capital assets.

2. Inclusion of depreciation expense for capital assets in the statement of activities: Districts will now be required to calculate and report depreciation on their capital assets such as buildings and equipment. The new statement of activities requires that depreciation expense for capital assets that can be specifically identified with a function be included in direct expenses of governmental funds. Districts should review their inventory records and procedures now to ensure that the historical or estimated historical cost basis and estimated useful life are recorded for all capitalized assets. This will facilitate the calculation of depreciation expense and the related accumulated depreciation at year end of the implementation year.

It is for the above reasons that the working group considered in great detail the proposal to increase New Jersey’s capitalization threshold from $500 to $2000. The consensus of the working group members was that an increase in the threshold level was warranted. Please refer to the department’s January 11, 2001 memo announcing the threshold change to $2000 effective July 1, 2001 for further information on the revised criteria.

Budget Comparison: GASB 34 requires districts to include the original budget certified for taxes in the financial reports comparing the final budget to actual revenues and expenditures. This will highlight the budgetary changes made throughout the year. If the changes are significant, the reasons for these changes must be included in the district’s MD&A.

Changes to internal services fund: Internal service funds are used to report the activities that provide goods or services to other funds or to other districts on a cost reimbursement basis. The internal service fund is used only if the reporting district is the predominant participant in the activity. If the district is not the predominant participant, the activity should be reported in an enterprise fund.

Creation of permanent funds: The permanent fund replaces nonexpendable trust funds and is used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used to support the district’s programs. Districts will need to review the trust instruments or other documentation for each trust to determine if the trust is a permanent fund as defined in GASB 34.

Changes to fiduciary funds: Fiduciary funds are used to report assets held in trust or agency capacity for others, not to support district programs. Districts should review the expendable trusts to determine if, under GASB 34, they should be presented as special revenue funds. Pensions and other employee benefit trust funds are an example of fiduciary funds. Agency funds should be used to report resources held by the district in a purely custodial capacity. The activity of fiduciary funds is not included in the district-wide statements but is included in the fund statements. Although the basic accounting for a specific trust is not likely to change, the district will need to distinguish between the permanent funds referred to in the preceding paragraph and the fiduciary funds.

The elimination of account groups: Districts should continue to record capital assets in the fixed (capital) asset account group and debt in the long-term debt account group. Year-end adjustments will be necessary to bring these balances to the district-wide statement of net assets.

The department intends to put future information, including sample statements and a section of Frequently Asked Questions (FAQ) on GASB 34 implementation issues, on the department’s web page at www.state.nj.us/njded. District staff should review the GASB Statement 34 and related publications and guides, which may be obtained directly from GASB through the web site www.gasb.org. Greater understanding may be gained by utilizing training opportunities available such as those offered by the professional accounting societies such as American Institute of Certified Public Accountants (AICPA), New Jersey Society of Certified Public Accountants (NJSCPA), the New Jersey Association of School Business Officers (NJASBO) or Government Finance Officers Association (GFOA). The web sites of those organizations may also be a resource.

Since the focus of the GASB Statement 34 is on financial reporting requirements, the department anticipates that the effects on daily business operations in school districts will be minimal. However, the format of the financial reports included in the Comprehensive Annual Financial Reports (CAFR) will change. The department plans to distribute and put on the web site a sample updated CAFR outline in the spring of 2001.

The preparation of the Management Discussion and Analysis and the financial statements are the responsibility of district management. However, district auditors who have an understanding of the changes required by GASB Statement No. 34 may advise you, to the extent permitted by audit standards, on your district’s implementation efforts.

Districts may also want to consult with their software vendors and obtain updates for GASB 34 implementation from them. As stated above, the accounting records of governmental funds will continue to be maintained on the same basis as established by the fund.

If you have any questions regarding this information, please contact the Office of Fiscal Policy and Planning by telephone at (609) 292-8441 or by E-mail at pscott@doe.state.nj.us.