City of Otsego - 2017 Communications Letter
City of Otsego
Wright County, Minnesota
Communications Letter
December 31, 2017
City of Otsego
Table of Contents
Report on Matters Identified as a Result of
the Audit of the Financial Statements 1
Significant Deficiency 3
Required Communication 4
Financial Analysis 8
Emerging Issues 19
1
BerganKDV, Ltd.
bergankdv.com
Report on Matters Identified as a Result of
the Audit of the Financial Statements
Honorable Mayor, Members of the
City Council and Management
City of Otsego
Otsego, Minnesota
In planning and performing our audit of the financial statements of the governmental
activities, business-type activities, each major fund, and the aggregate remaining fund
information of the City of Otsego, Minnesota, as of and for the year ended December 31,
2017, in accordance with auditing standards generally accepted in the United States of
America, we considered the City's internal control over financial reporting (internal control)
as a basis for designing audit procedures that are appropriate in the circumstances for the
purpose of expressing our opinions on the financial statements, but not for the purpose of
expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do
not express an opinion on the effectiveness of the City's internal control.
Our consideration of internal control was for the limited purpose described in the preceding
paragraph and was not designed to identify all deficiencies in internal control that might be
material weaknesses or significant deficiencies and, therefore, material weaknesses or
significant deficiencies may exist that were not identified. In addition, because of inherent
limitations in internal control, including the possibility of management override of controls,
misstatements due to error, or fraud may occur and not be detected by such controls.
However, as discussed below, we identified a certain deficiency in internal control that we
consider to be a significant deficiency.
A deficiency in internal control exists when the design or operation of a control does not
allow management or employees, in the normal course of performing their assigned
functions, to prevent, or detect and correct, misstatements on a timely basis. A material
weakness is a deficiency, or a combination of deficiencies in internal control, such that there
is a reasonable possibility that a material misstatement of the City's financial statements will
not be prevented or detected and corrected, on a timely basis. We did not identify any
deficiencies in internal control that we consider to be material weaknesses.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit attention by those
charged with governance. The significant deficiency identified is stated within this letter.
2
The accompanying memorandum also includes financial analysis provided as a basis for
discussion. The matters discussed herein were considered by us during our audit and they do
not modify the opinion expressed in our Independent Auditor's Report dated May 21, 2018,
on such statements
This communication is intended solely for the information and use of management, the City
Council, others within the City and state oversight agencies and is not intended to be, and
should not be, used by anyone other than these specified parties.
St. Cloud, Minnesota
May 21, 2018
3
City of Otsego
Significant Deficiency
LACK OF SEGREGATION OF ACCOUNTING DUTIES
The City had a lack of segregation of accounting duties due to a limited number of office employees.
Adequate segregation of accounting duties is in place when the following four areas of a transaction
have been separated: authorization, custody, recording, and reconciliation. Examples of functions
within the City that demonstrate this lack of segregation of accounting duties include, but are not limited
to, the following:
• Cash Receipts – The Utility Billing Clerk and Accountant have access to initiate and record
receipts. The Utility Billing Clerk is also responsible for depositing cash receipts. The
Accountant is also involved in the reconciliation process and has full access to the general
ledger.
• Utility Billing Process – The Utility Billing Clerk is responsible for handling customer payments,
depositing payments received, and recording adjustments to accounts.
• Disbursements – Due to small staff the City allows access to other employees to perform
disbursement related activities in order to fill in for normal roles and responsibilities in the
absences of other staff. In the absence of the Accountant, the Utility Billing Clerk has access to
record & cut checks and has access to blank checks.
• Financial Reporting and Journal Entry Process – The Finance Director and Accountant have full
access to the general ledger and can make adjustments without review during the monthly and
yearend financial closing process.
Management and the City Council must remain aware of this situation and management should
continually monitor internal control, including changes that occur.
4
City of Otsego
Required Communication
We have audited the financial statements of the governmental activities, business-type activities, each
major fund, and the aggregate remaining fund information of the City as of and for the year ended
December 31, 2017. Professional standards require that we provide you with the following information
related to our audit.
OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN
THE UNITED STATES OF AMERICA AND GOVERNMENT AUDITING STANDARD
As stated in our engagement letter, our responsibility, as described by professional standards, is to
express opinions about whether the financial statements prepared by management with your oversight
are fairly presented, in all material respects, in conformity with accounting principles generally accepted
in the United States of America. Our audit of the financial statements does not relieve you or
management of your responsibilities.
As part of our audit, we considered the internal control of the City. Such considerations were solely for
the purpose of determining our audit procedures and not to provide any assurance concerning such
internal control.
As part of obtaining reasonable assurance about whether the financial statements are free of material
misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations,
contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance
with such provisions.
Generally accepted accounting principles provide for certain required supplementary information (RSI)
to supplement the basic financial statements. Our responsibility with respect to the RSI, which
supplements the basic audit financial statements, is to apply certain limited procedures in accordance
with generally accepted auditing standards. However, the RSI was not audited and, because the limited
procedures do not provide us with sufficient evidence to express an opinion or provide any assurance,
we do not express an opinion or provide any assurance on the RSI.
Our responsibility for the supplementary information accompanying the financial statements, as
described by professional standards, is to evaluate the presentation of the supplementary information in
relation to the financial statements as a whole and to report on whether the supplementary information is
fairly stated, in all material respects, in relation to the financial statements taken as a whole.
PLANNED SCOPE AND TIMING OF THE AUDIT
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements; therefore, our audit involved judgment about the number of transactions to be
examined and the areas to be tested.
5
City of Otsego
Required Communication
PLANNED SCOPE AND TIMING OF THE AUDIT (CONTINUED)
Our audit included obtaining an understanding of the City and its environment, including internal
control, sufficient to assess the risks of material misstatement of the financial statements and to design
the nature, timing, and extent of further audit procedures. Material misstatements may result from
(1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or
governmental regulations that are attributable to the City or to acts by management or employees acting
on behalf of the City.
QUALITATIVE ASPECTS OF ACCOUNTING PRACTICES
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the City are described in the notes to financial statements. No new
accounting policies were adopted and the application of existing policies was not changed during the
year ended December 31, 2017. We noted no transactions entered into by the City during the year for
which there is a lack of authoritative guidance or consensus. All significant transactions have been
recognized in the proper period.
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's knowledge and experience about past and current events and assumptions about
future events. Certain accounting estimates are particularly sensitive because of their significance to the
financial statements and because of the possibility that future events affecting them may differ
significantly from those expected. The most sensitive estimates affecting the financial statements were:
Depreciation – The City is currently depreciating its capital assets over their estimated useful lives,
as determined by management, using the straight-line method.
Expense Allocation – Certain expenses are allocated to programs based on an estimate of the benefit
to that particular program. Examples are salaries, benefits, and supplies.
Net Pension Liability, Deferred Outflows of Resources Related to Pensions, and Deferred Inflows of
Resources Related to Pension Activity – These balances are based on allocation by the pension plans
using estimates based on contributions.
We evaluated the key factors and assumptions used to develop the accounting estimates in determining
that they are reasonable in relation to the financial statements taken as a whole.
The financial statement disclosures are neutral, consistent, and clear.
DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT
We encountered no significant difficulties in dealing with management in performing and completing
our audit.
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City of Otsego
Required Communication
CORRECTED AND UNCORRECTED MISSTATEMENTS
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are clearly trivial, and communicate them to the appropriate level of
management. Management did not identify, and we did not notify them of any, uncorrected financial
statement misstatements.
In addition, none of the misstatements detected as a result of audit procedures and corrected by
management were material, either individually or in the aggregate, to the financial statements taken as a
whole.
DISAGREEMENTS WITH MANAGEMENT
For purposes of this letter, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditor's report. We are pleased to report that no such disagreements arose during the
course of our audit.
MANAGEMENT REPRESENTATIONS
We requested certain representations from management that are included in the management
representation letter.
MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the City's financial statements or a determination of the type of
auditor's opinion that may be expressed on those statements, our professional standards require the
consulting accountant to check with us to determine that the consultant has all the relevant facts. To our
knowledge, there were no such consultations with other accountants.
OTHER AUDIT FINDINGS OR ISSUES
We generally discuss a variety of matters, including the application of accounting principles and
auditing standards, with management each year prior to retention as the City's auditors. However, these
discussions occurred in the normal course of our professional relationship and our responses were not a
condition to our retention.
7
City of Otsego
Required Communication
OTHER MATTERS
We applied certain limited procedures to the RSI that supplements the basic financial statements. Our
procedures consisted of inquiries of management regarding the methods of preparing the information
and comparing the information for consistency with management's responses to our inquiries, the basic
financial statements, and other knowledge we obtained during our audit of the basic financial statements.
We did not audit the RSI and do not express an opinion or provide any assurance on the RSI.
With respect to the supplementary information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplementary information to the underlying accounting records used to prepare the
financial statements or to the financial statements themselves.
8
City of Otsego
Financial Analysis
The following pages provide graphic representation of select data pertaining to the financial position and
operations of the City for the past five years. Our analysis of each graph is presented to provide a basis
for discussion of past performance and how implementing certain changes may enhance future
performance. We suggest you view each graph and document if our analysi s is consistent with yours. A
subsequent discussion of this information should be useful for planning purposes.
GENERAL FUND
The following graph summarizes the past five years of General Fund revenues, expenditures, and fund
balance. For the year ended December 31, 2017, revenues for the City's General Fund totaled
$5,895,990. This represents an increase of $104,494, or 1.8%, from 2016. General Fund expenditures
totaled $4,732,327 in 2017, which is an increase of $19,967, or 0.4%, from 2016. Revenue and
expenditure activity, combined with other financing sources and uses resulted in an increase in fund
balance of $244,443 in 2017.
The ending General Fund balance of $3,890,645 is further broken down into spending categories;
$114,997 of the fund balance has already been spent on prepaid items and $202,200 has been spent on
assets held for resale. In addition, $185,066 is assigned for insurance funding and $20,191 is assigned
for educational programs. This leaves $3,368,191 available for spending on any purpose, which is
considered unassigned fund balance. The City's policy is to maintain a minimum fund balance in the
General Fund of 45.0% of the subsequent years' expenditures. The fund balance at December 31, 2017,
represents 72.3% of 2018 budgeted expenditures of $5,378,034.
2013 2014 2015 2016 2017
Total Revenues $3,779,808 $5,307,292 $5,089,342 $5,791,496 $5,895,990
Total Expenditures 3,654,491 4,165,186 4,424,819 4,712,360 4,732,327
Fund Balance 1,912,075 3,393,638 2,890,523 3,646,202 3,890,645
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
General Fund
9
City of Otsego
Financial Analysis
GENERAL FUND REVENUES
Trends for each of the City's major revenue classifications over the past five years are graphically
portrayed in the bar chart below.
As stated earlier, General Fund revenues increased $104,494, or 1.8%, from 2016. Taxes increased
$266,134 due to an increased tax levy of approximately $230,000 and an increased collection of
delinquent taxes. Other revenue increased by $132,792 due to the City receiving a developer
contribution of land in 2017. This was offset by a decrease in licenses and permits which decreased
$298,181 from 2016 to 2017, due to decreased building and development in 2017.
2013 2014 2015 2016 2017
Taxes $3,449,691 $3,442,280 $3,444,175 3,625,893 3,892,027
Intergovernmental 217,630 337,779 195,363 69,567 74,080
Licenses and Permits 36,455 1,238,823 1,179,136 1,661,565 1,363,384
Charges for Services 38,321 192,168 174,878 286,614 275,740
Investment Income (5,403)37,427 15,015 21,233 31,343
Other 43,114 58,815 80,775 126,624 259,416
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
General Fund Revenues
10
City of Otsego
Financial Analysis
GENERAL FUND REVENUES (CONTINUED)
The allocation of revenues by source within each major classification is presented below for 2017 and
2016. The City continues to rely on tax revenue as the majority of its General Fund revenue, accounting
for 66.0% of its total revenue in 2017. Sources of revenue were fairly consistent with the prior year, with
the exception of licenses and permits making up a smaller proportion of total revenues in 2017 due to
decreased building and development.
Taxes
66.0%
Intergovernmental
1.3%
Licenses and Permits
23.1%
Charges for Services
4.7%
Investment Income
0.5%Other
4.4%
2017 General Fund Revenues
Taxes
62.6%
Intergovernmental
1.2%
Licenses and
Permits
28.7%
Charges for
Services
4.9%
Investment Income
0.4%
Other
2.2%
2016 General Fund Revenues
11
City of Otsego
Financial Analysis
GENERAL FUND REVENUES (CONTINUED)
The graph below outlines the budget and actual results for General Fund revenues.
Taxes Intergovernmental Licenses and Permits Charges for Services Investment Income Other
Budget $3,895,273 $56,800 $788,900 $105,550 $33,000 $6,000
Actual 3,892,027 74,080 1,363,384 275,740 31,343 259,416
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
$2,200,000
$2,400,000
$2,600,000
$2,800,000
$3,000,000
$3,200,000
$3,400,000
$3,600,000
$3,800,000
$4,000,000
2017 General Fund Revenues
Budget and Actual
Overall, actual revenue exceeded budgeted revenue by $1,010,467, or 20.7%. The largest variance was
for licenses and permits which was $574,484 over budget. This was the result of budgeting
conservatively for building and commercial construction permits for 2017. The second largest variance
was in the other category which was $253,416 over budget due to the developer contribution of land that
was not budgeted for. In addition, charges for services was $170,190 over budget due to budgeting
conservatively for commercial development and building activity in 2017. The remaining revenues
sources were close to the amounts budgeted.
12
City of Otsego
Financial Analysis
GENERAL FUND EXPENDITURES
As discussed previously, total General Fund expenditures increased $19,967, or 0.4%, from 2016.
General government expenditures decreased $160,428 due to the combination of the City Administrator
and Finance Director positions. Public safety expenditures increased $66,179, which was across several
departments. The increase was also across all expenditure types, (personal services, supplies, and other
services and charges) but largely due to the fire contracts increasing which are based on the City's tax
capacity. Public works expenditures increased $45,345, which was also across several departments. The
increase was again across all expenditure types, (personal services, supplies, and other services and
charges) but largely due to wage and step increases. Parks and Recreation expenditures increased
$53,617, which was across several departments. The increase was also across all expenditure types
(personal services, supplies, and other services and charges) but largely due to wage and step increases.
2013 2014 2015 2016 2017
General Government $973,051 $1,188,802 $1,150,130 $1,240,005 $1,079,577
Public Safety 1,263,881 1,496,112 1,666,509 1,829,288 1,895,467
Public Works 1,109,949 1,014,937 1,034,524 1,010,620 1,055,965
Parks and Recreation 304,324 461,240 477,445 534,122 587,739
Economic Development 3,286 4,095 96,211 98,325 113,579
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
$4,500,000
$5,000,000
General Fund Expenditures
13
City of Otsego
Financial Analysis
GENERAL FUND EXPENDITURES (CONTINUED)
The following charts illustrate the allocation of General Fund expenditures by program/function. The
allocation of total expenditures by program has fluctuated slightly between the past two years as a result
of the changes in expenditures as discussed on the previous page.
General
Government
22.8%
Public Safety
40.1%
Public Works
22.3%
Parks and
Recreation
12.4%
Economic
Development
2.4%
2017 General Fund Expenditures
General
Government
26.3%
Public Safety
38.8%
Public Works
21.5%
Parks and
Recreation
11.3%Economic
Development
2.1%
2016 General Fund Expenditures
14
City of Otsego
Financial Analysis
GENERAL FUND EXPENDITURES (CONTINUED)
The graph below outlines the budget and actual results for General Fund expenditures.
General Government Public Safety Public Works Parks and Recreation Economic
Development
Budget $1,334,349 $1,875,138 $1,136,728 $584,490 $109,860
Actual $1,079,577 1,895,467 1,055,965 587,739 113,579
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
2017 General Fund Expeditures
Budget and Actual
Overall, actual expenditures were under budgeted amounts by $308,238, or 6.1%. The general
government program had the largest variance, coming in $254,772 under budget. This variance is
primarily due to budgeting for a full staff in 2017. The City combined the City Administrator and
Finance Director positions in 2017. In addition, public works was $80,763 under budget due to fewer
supplies being purchased than anticipated in 2017.
15
City of Otsego
Financial Analysis
ANALYSIS OF TAX LEVY INFORMATION
The chart below graphs the tax capacity, certified tax levy, and City tax rate for 2013 through 2017.
Comparing 2013 through 2017, the City's tax capacity has increased $5,902,241, or 62.3%, to
$15,372,529. The City's certified levy increased $1,251,724, or 28.6%, over the same time frame. As a
result, the City's tax capacity rate has decreased from 46.23% in 2013 to 37.85% in 2017. When
comparing 2016 to 2017 the chart indicates that even with a levy increase of $609,602 the tax rate
decreased from 37.92% to 37.85% due to a $2,134,105 increase in the total tax capacity.
$4,378,021 $4,500,188 $4,679,976 $5,020,143
$5,629,745
$9,470,288
$10,095,765
$11,358,615
$13,238,424
$15,372,529
46.23%
44.58%
41.20%
37.92%
37.85%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
$16,000,000
$18,000,000
2013 2014 2015 2016 2017
Tax Capacity, Levy, and Rates
Tax Levy Total Tax Capacity Tax Capacity Rate
16
City of Otsego
Financial Analysis
WATER FUND
2013 2014 2015 2016 2017
Operating Revenues $1,195,892 $1,114,528 $1,163,963 $1,266,379 $1,459,868
Operating Expenses 907,185 853,551 911,243 943,066 1,059,863
Operating Income with Depreciation 288,707 260,977 252,720 323,313 400,005
Operating Income without Depreciation 763,931 733,738 726,399 805,049 906,196
$(200,000)
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Water Fund
The Water Fund experienced operating income of $400,005 in 2017. This is the fifth consecutive year
with an operating income. We have also illustrated the operating income for the past five years with
depreciation, a non-cash expense, factored out of operating expenses. In 2017, the City experienced
operating income of $906,196 with depreciation expense factored out of operating expenses.
Depreciation expense amortizes the original cost of fund capital assets over their estimated useful lives.
In 2017, operating revenues increased $193,489, or 15.3%, while operating expenses increased
$116,797, or 12.4%. The increase in operating revenues was due to an increase in rates and an increase
in users. Operating expenses increased primarily as a result of increased professional services and
supplies.
After factoring in non-operating items and capital contributions, in the form of connection fees and
developer contributions, and transfers the net position in this fund increased by $2,148,204.
17
City of Otsego
Financial Analysis
SEWER FUND
2013 2014 2015 2016 2017
Operating Revenues $1,186,523 $1,325,181 $1,477,603 $1,590,795 $1,737,618
Operating Expenses 1,529,321 1,458,714 1,612,830 1,888,280 1,913,520
Operating Loss with Depreciation (342,798)(133,533)(135,227)(297,485)(175,902)
Operating Income without Depreciation 481,694 689,589 689,210 542,132 736,786
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
Sewer Fund
In 2017, the Sewer Fund continued to generate an operating loss. In 2017, the Sewer Fund experienced
an operating loss of $175,902 with depreciation. Operating revenues increased $146,823 or 9.2% over
the prior year, while operating expenses increased $25,240, or 1.3%. The increase in operating revenues
is due to an increase in rates, as well as an increase in users. The increase in operating expenses was due
to increased depreciation costs.
The operating loss in 2017 decreased significantly which is an indication that the City has responded to
the significant operation losses by increasing rates to assist in covering operating expenses and an
increase in users. Without depreciation, operating income totaled $736,783. We recommend the City
continue to monitor operations and fee structures of this fund to ensure positive operating results.
After factoring in non-operating items, capital contributions, in the form of connection fees and
developer contributions, and transfers, the net position in this fund increased $2,311,542.
18
City of Otsego
Financial Analysis
STORM WATER FUND
2013 2014 2015 2016 2017
Operating Revenues $41,831 $45,570 $45,066 $46,811 $61,540
Operating Expenses 72,944 57,977 95,533 42,342 62,172
Operating Income (Loss) with Depreciation (31,113)(12,407)(50,467)4,469 (632)
Operating Income (Loss) without Depreciation (13,355)5,376 (29,051)28,520 34,502
$(70,000)
$(50,000)
$(30,000)
$(10,000)
$10,000
$30,000
$50,000
$70,000
$90,000
$110,000
Storm Water Fund
The Storm Water Fund experienced an increase in operating revenues of $14,729 or 31.5% from 2016
due to an increase in rates and more users. Operating expenses increased, $19,830 or 46.8% from 2016
to 2017 due to increases in professional services and personal services. The fund experienced an
operating loss of $632 in 2017. Without depreciation included in operating expenses, the fund
experienced operating income of $34,502.
After factoring in non-operating items (developer contributions), this fund's net position increased by
$586,273.
19
City of Otsego
Emerging Issues
Executive Summary
The following is an executive summary of financial and business related updates to assist you in staying
current on emerging issues in accounting and finance. This summary will give you a preview of the new
standards that have been recently issued and what is on the horizon for the near future. The most recent
and significant updates includes:
• Accounting Standard Update – GASB Statement No. 84 – Fiduciary Activities – GASB has
issued GASB Statement No. 84 relating to accounting and financial reporting for fiduciary
activities. This new statement establishes clarity to determines when a government has fiduciary
responsibility for a certain activity.
• Accounting Standard Update – GASB Statement No. 87 – Leases – GASB has issued GASB
Statement No. 87 relating to accounting and financial reporting for leases. This new statement
establishes a single model for lease accounting based on the principle that leases are financing of
the right to use an underlying asset.
The following is an extensive summary of the current updates. As your continued business partner, we
are committed to keeping you informed of new and emerging issues. We are happy to discuss these
issues with you further and their applicability to your City.
ACCOUNTING STANDARD UPDATE – GASB STATEMENT NO. 84 – FIDUCIARY
ACTIVITIES
The objective of this Statement is to improve guidance regarding the identification of fiduciary activities
for accounting and financial reporting purposes and how those activities should be reported.
This Statement establishes criteria for identifying fiduciary activities of all state and local governments.
The focus of the criteria generally is on (1) whether a government is controlling the assets of the
fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria
are included to identify fiduciary component units and postemployment benefit arrangements that are
fiduciary activities. An activity meeting the criteria should be reported in a fiduciary fund in the basic
financial statements. Governments with activities meeting the criteria should present a statement of
fiduciary net position and a statement of changes in fiduciary net position. An exception to that
requirement is provided for a business-type activity that normally expects to hold custodial assets for
three months or less.
GASB Statement No. 84 describes four fiduciary funds that should be reported, if applicable: (1)
pension (and other employee benefit) trust funds, (2) investment trust funds, (3) private-purpose trust
funds, and (4) custodial funds. Custodial funds generally should report fiduciary activities that are not
held in a trust or equivalent arrangement that meets specific criteria.
20
City of Otsego
Emerging Issues
ACCOUNTING STANDARD UPDATE – GASB STATEMENT NO. 84 – FIDUCIARY
ACTIVITIES (CONTINUED)
This Statement also provides for recognition of a liability to the beneficiaries in a fiduciary fund when
an event has occurred that compels the government to disburse fiduciary resources. Events that compel a
government to disburse fiduciary resources occur when a demand for the resources has been made or
when no further action, approval, or condition is required to be taken or met by the beneficiary to release
the assets.
GASB Statement No. 84 is effective for reporting periods beginning after December 15, 2018. Earlier
application is encouraged.
Information provided above was obtained from www.gasb.org.
ACCOUNTING STANDARD UPDATE – GASB STATEMENT NO. 87 – LEASES
The objective of this Statement is to better meet the information needs of financial statement users by
improving accounting and financial reporting for leases by governments. This Statement increases the
usefulness of governments' financial statements by requiring recognition of certain lease assets and
liabilities for leases that previously were classified as operating leases and recognized as inflows of
resources or outflows of resources based on the payment provisions of the contract. It establishes a
single model for lease accounting based on the foundational principle that leases are financings of the
right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability
and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a
deferred inflow of resources, thereby enhancing the relevance and consistency of information about
governments' leasing activities.
A lease is defined as a contract that conveys control of the right to use another entity's nonfinancial asset
(the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like
transaction. Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any
contract that meets this definition should be accounted for under the leases guidance, unless specifically
excluded in this Statement.
A short-term lease is defined as a lease that, at the commencement of the lease term, has a maximum
possible term under the lease contract of 12 months (or less), including any options to extend, regardless
of their probability of being exercised. Lessees and lessors should recognize short-term lease payments
as outflows of resources or inflows of resources, respectively, based on the payment provisions of the
lease contract.
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City of Otsego
Emerging Issues
ACCOUNTING STANDARD UPDATE – GASB STATEMENT NO. 87 – LEASES
(CONTINUED)
A lessee should recognize a lease liability and a lease asset at the commencement of the lease term,
unless the lease is a short-term lease or it transfers ownership of the underlying asset. The lease liability
should be measured at the present value of payments expected to be made during the lease term (less any
lease incentives). The lease asset should be measured at the amount of the initial measurement of the
lease liability, plus any payments made to the lessor at or before the commencement of the lease term
and certain direct costs. A lessee should reduce the lease liability as payments are made and recognize
an outflow of resources (for example, expense) for interest on the liability. The lessee should amortize
the lease asset in a systematic and rational manner over the shorter of the lease term or the useful life of
the underlying asset. The notes to financial statements should include a description of leasing
arrangements, the amount of lease assets recognized, and a schedule of future lease payments to be
made.
A lessor should recognize a lease receivable and a deferred inflow of resources at the commencement of
the lease term, with certain exceptions for leases of assets held as investments, certain regulated leases,
short-term leases, and leases that transfer ownership of the underlying asset. A lessor should not
derecognize the asset underlying the lease. The lease receivable should be measured at the present value
of lease payments expected to be received during the lease term. The deferred inflow of resources
should be measured at the value of the lease receivable plus any payments received at or before the
commencement of the lease term that relate to future periods. A lessor should recognize interest revenue
on the lease receivable and an inflow of resources (for example, revenue) from the deferred inflows of
resources in a systematic and rational manner over the term of the lease. The notes to financial
statements should include a description of leasing arrangements and the total amount of inflows of
resources recognized from leases.
GASB Statement No. 87 is effective for reporting periods beginning after December 15, 2019. Earlier
application is encouraged.
Information provided above was obtained from www.gasb.org.