City of Otsego ComLtr
City of Otsego
Wright County, Minnesota
Communications Letter
December 31, 2019
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 Issue 19
1
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, 2019, 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
have not been 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.
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 over financial reporting, 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. A reasonable possibility exists when the likelihood of an event
occurring is either reasonably possible or probable as defined as follows:
Reasonably possible. The chance of the future event or events occurring is more than remote but
less than likely.
Probable. The future event or events are likely to occur.
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 20, 2020, on such statements.
This communication is intended solely for the information and use of management, Members of 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 20, 2020
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.
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 and 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
year-end financial closing process.
We recommend that the City review the internal control process over the year-end closing process to
ensure there are no adjustments needed.
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, 2019. Professional standards require that we advise you of the following matters related
to our audit.
Our Responsibility in Relation to the Financial Statement Audit
As communicated in our engagement letter, our responsibility, as described by professional standards, is
to form and express opinions about whether the financial statements prepared by management with your
oversight are presented fairly, in all material respects, in accordance with accounting principles
generally accepted in the United States of America. Our audit of the financial statements does not
relieve you or management of its respective responsibilities.
Our responsibility, as prescribed by professional standards, is to plan and perform our audit to obtain
reasonable, rather than absolute, assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the City's internal control over financial
reporting. Accordingly, as part of our audit, we considered the internal control of the City solely for the
purpose of determining our audit procedures and not to provide any assurance concerning such internal
control.
We are also responsible for communicating significant matters related to the audit that are, in our
professional judgement, relevant to your responsibilities in overseeing the financial reporting process.
However, we are not required to design procedures for the purpose of identifying other matters to
communicate to you.
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.
Our Responsibility in Relation to Government Auditing Standards
As communicated in our engagement letter, 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 grant agreements, noncompliance with which
could have a direct and material effect on the determination of financial statement amounts. However,
the objective of our tests was not to provide an opinion on compliance with such provisions.
5
City of Otsego
Required Communication
Planned Scope and Timing of the Audit
We conducted our audit consistent with the planned scope and timing we previously communicated to
you.
Compliance with All Ethics Requirements Regarding Independence
The engagement team, others in our firm, as appropriate, our firm, and our network firms have complied
with all relevant ethical requirements regarding independence.
Qualitative Aspects of Significant Accounting Practices
Significant Accounting Policies
Management has the responsibility to select and use appropriate accounting policies. A summary of the
significant accounting policies adopted by the City is included in the notes to financial statements. There
have been no initial selection of accounting policies and no changes to significant accounting policies or
their application during 2019. No matters have come to our attention that would require us, under
professional standards, to inform you about (1) the methods used to account for significant unusual
transactions and (2) the effect of significant accounting policies in controversial or emerging areas for
which there is a lack of authoritative guidance or consensus.
Significant Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's current judgements. Those judgements are normally based on 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 markedly from management's current
judgements. 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 Pensions – These balances are based on an 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.
Financial Statement Disclosures
Certain financial statement disclosures involve significant judgment and are particularly sensitive
because of their significance to financial statement users. The financial stat ement disclosures are neutral,
consistent, and clear.
6
City of Otsego
Required Communication
Significant Difficulties Encountered during the Audit
We encountered no significant difficulties in dealing with management relating to the performance of
the audit.
Uncorrected and Corrected Misstatements
For the purposes of this communication, professional standards require us to accumulate all known
and likely misstatements identified during the audit, other than those that we believe are trivial, and
communicate them to the appropriate level of management. Further, professional standards require
us to also communicate the effects of uncorrected misstatements related to prior periods on the
relevant classes of transactions, account balances or disclosures, and the financial statements as a
whole.
Management did not identify and we did not notify them of any uncorrected financial statement
misstatements.
In addition, professional standards require us to communicate to you all material, corrected
misstatements that were brought to the attention of management as a result of our audit procedures.
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, professional standards define a disagreement with management as a
matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or
auditing matter, which could be significant to the City's financial statements or the auditor's report.
No such disagreements arose during the course of our audit.
Representations Requested from Management
We have requested certain written representations from management, which are included in the
management representation letter.
Management's Consultations with Other Accountants
In some cases, management may decide to consult with other accountants about auditing and
accounting matters. Management has informed us that, and to our knowledge, there were no
consultations with other accountants regarding auditing and accounting matters.
Other Significant Matters, Findings, or Issues
In the normal course of our professional association with the City, we generally discuss a variety of
matters, including the application of accounting principles and auditing standards, operating conditions
affecting the City, and operating plans and strategies that may affect the risks of material misstatement.
None of the matters discussed resulted in a condition to our retention as the City's auditor.
Other Information in Documents Containing Audited Financial Statements
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.
7
City of Otsego
Required Communication
Other Information in Documents Containing Audited Financial Statements (Continued)
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.
We were not engaged to report on the other information accompanying the financial statements but
are not RSI. Such information has not been subjected to the auditing procedures applied in the audit
of the basic financial statements, and accordingly, we do not express an opinion or provide any
assurance on it.
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 analysis 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, 2019, revenues for the City's General Fund totaled
$6,692,859. This represents an increase of $387,069, or 6.1%, from 2018. General Fund expenditures
totaled $5,686,890 in 2019, which is an increase of $391,923, or 7.4%, from 2018. Revenue and
expenditure activity, combined with net transfers out of $799,826, resulted in an increase in fund
balance of $206,143 in 2019.
The ending General Fund balance of $4,319,810 is further broken down into spending categories;
$323,124 is for nonspendable fund balances which is made up of $120,924 of prepaid items and
$202,200 of assets held for resale. In addition, $195,708 is assigned for insurance deductibles and
$28,032 is assigned for educational programs. This leaves $3,772,946 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, 2019, represents 68.4% of 2019 budgeted expenditures of $6,312,672.
2015 2016 2017 2018 2019
Total Revenues $5,089,342 $5,791,496 $5,895,990 $6,305,790 $6,692,859
Total Expenditures 4,424,819 4,712,360 4,732,327 5,294,967 5,686,890
Fund Balance 2,890,523 3,646,202 3,890,645 4,113,667 4,319,810
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
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 $387,069, or 6.1%, from 2018. Taxes increased
$197,798 due to an increased tax levy. Investment income increased $106,948 from 2019 due to better
market conditions. Other sources of revenue stayed consistent with the prior year.
2015 2016 2017 2018 2019
Taxes $3,444,175 $3,625,893 $3,892,027 $4,131,910 $4,329,708
Intergovernmental 195,363 69,567 74,080 78,437 88,328
Licenses and Permits 1,179,136 1,661,565 1,363,384 1,672,906 1,699,879
Charges for Services 174,878 286,614 275,740 315,699 310,871
Investment Income 15,015 21,233 31,343 48,761 155,709
Other 80,775 126,624 259,416 58,077 108,364
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
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 2019 and
2018. The City continues to rely on tax revenue as the majority of its General Fund revenue, accounting
for 64.7% of its total revenue in 2019. Sources of revenue were fairly consistent with the prior year.
Taxes
64.7%Intergovernmental
1.3%
Licenses and
Permits
25.4%Charges for
Services
4.6%Investment Income
2.3%
Other
1.7%
2019 General Fund Revenues
Taxes
65.5%
Intergovernmental
1.2%
Licenses and
Permits
26.5%
Charges for
Services
5.0%
Investment Income
0.8%
Other
1.0%
2018 General Fund Revenues
11
City of Otsego
Financial Analysis
GENERAL FUND REVENUES BUDGET AND ACTUAL
The graph below outlines the budget and actual results for General Fund revenues.
Taxes Intergovernmenta
l
Licenses and
Permits
Charges for
Services
Investment
Income Other
Budget $4,330,235 $70,800 $982,401 $162,820 $65,000 $29,300
Actual $4,329,708 88,328 1,699,879 310,871 155,709 108,364
$-
$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
2019 General Fund Revenues
Budget and Actual
Overall, actual revenue exceeded budgeted revenue by $1,052,303, or 18.7%. The largest variance was
for licenses and permits which was $717,478 over budget. This was the result of budgeting
conservatively for building and commercial construction permits for 2019. The second largest variance
was in charges for services which was $148,051 over budget also due to budgeting conservatively for
commercial development and building activity in 2019. Investment income was over budget $90,709
overbudget due to budgeting conservatively. The remaining revenues sources were consistent with
budgeted amounts.
12
City of Otsego
Financial Analysis
GENERAL FUND EXPENDITURES
As discussed previously, total General Fund expenditures increased $391,923, or 7.4%, from 2018.
Public safety expenditures increased $211,253 due to an increase in the public safety contract with
Wright County. Public works expenditures increased $80,254, which was across several departments.
The increase was also across all expenditure types, including personal services, supplies, utilities, and
other services and charges. All other functions were consistent with the amounts expended in the prior
year.
2015 2016 2017 2018 2019
General Government $1,150,130 $1,240,005 $1,079,577 $1,188,219 $1,227,565
Public Safety 1,666,509 1,829,288 1,895,467 2,168,187 2,379,440
Public Works 1,034,524 1,010,620 1,055,965 1,170,464 1,250,718
Parks and Recreation 477,445 534,122 587,739 654,786 715,026
Economic Development 96,211 98,325 113,579 113,311 114,141
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
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 very slightly between the past two years as a
result of the changes in expenditures as discussed on the previous page.
General
Government
21.6%
Public Safety
41.8%Public Works
22.0%
Parks and
Recreation
12.6%
Economic
Development
2.0%
2019 General Fund Expenditures
General Government
22.5%
Public Safety
40.9%Public Works
22.1%
Parks and Recreation
12.4%
Economic
Development
2.1%
2018 General Fund Expenditures
14
City of Otsego
Financial Analysis
GENERAL FUND EXPENDITURES BUDGET AND ACTUAL
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 $1,318,961 $2,374,426 $1,297,889 $706,920 $114,260
Actual $1,227,565 2,379,440 1,250,718 715,026 114,141
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
2019 General Fund Expeditures
Budget and Actual
Overall, actual expenditures were under budgeted amounts by $125,566, or 2.2%. The general
government program had the largest variance, coming in $91,396 under budget. This variance is
primarily due to budgeting for contingencies that did not happen in 2019. All other functions were
consistent with the budgeted amounts.
15
City of Otsego
Financial Analysis
TAX CAPACITY, LEVY, AND RATES
The chart below graphs the tax capacity, certified tax levy, and City tax rate for 2015 through 2019.
Comparing 2015 through 2019, the City's tax capacity has increased $7,249,925, or 63.8%, to
$18,608,540. The City's certified levy increased $2,030,133, or 43.4%, over the same time frame. As a
result, the City's tax capacity rate has decreased from 41.2% in 2015 to 36.1% in 2019. When comparing
2018 to 2019 the chart indicates that even with a levy increase of $606,807 the tax rate decreased from
36.56% to 36.06% due to a $1,912,532 increase in the total tax capacity.
$4,679,976 $5,020,143 $5,629,771
$6,103,302
$6,710,109
$11,358,615
$13,238,424
$15,372,529
$16,696,008
$18,608,540
41.20%
37.92%37.85%
36.56%36.06%
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
$20,000,000
2015 2016 2017 2018 2019
Tax Capacity, Levy, and Rates
Tax Levy Total Tax Capacity Tax Capacity Rate
16
City of Otsego
Financial Analysis
WATER FUND
2015 2016 2017 2018 2019
Operating Revenues $1,163,963 $1,266,379 $1,459,868 $1,666,629 $1,626,076
Operating Expenses 911,243 943,066 1,059,863 1,180,414 1,447,050
Operating Income with Depreciation 252,720 323,313 400,005 486,215 179,026
Operating Income without Depreciation 726,399 805,049 906,196 1,031,364 771,993
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
Water Fund
The Water Fund experienced operating income of $179,026 in 2019. 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 2019, the City experienced
operating income of $771,993 with depreciation expense factored out of operating expenses.
Depreciation expense amortizes the original cost of fund capital assets over their estimated useful lives.
In 2019, operating revenues decreased $40,553, or 2.4%, while operating expenses increased $266,636,
or 22.6%. The decrease in operating revenues was due to a decrease in usage. Operating expenses
increased primarily as a result of increases in water meters purchased and maintenance expenses.
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 $1,929,599.
17
City of Otsego
Financial Analysis
SEWER FUND
2015 2016 2017 2018 2019
Operating Revenues $1,477,603 $1,590,795 $1,737,618 $1,921,402 $2,246,688
Operating Expenses 1,612,830 1,888,280 1,913,520 2,049,079 2,097,663
Operating Loss with Depreciation (135,227)(297,485)(175,902)(127,677)149,025
Operating Income without Depreciation 689,210 542,132 736,786 833,442 1,137,333
$(500,000)
$(250,000)
$-
$250,000
$500,000
$750,000
$1,000,000
$1,250,000
$1,500,000
$1,750,000
$2,000,000
$2,250,000
$2,500,000
Sewer Fund
In 2019, the Sewer Fund generated an operating income for the first time in the five years presented. In
2019, the Sewer Fund experienced an operating income of $149,025 with depreciation. Operating
revenues increased $325,286 or 16.9% over the prior year, while operating expenses increased $48,584,
or 2.4%. The increase in operating revenues is due to an increase in rates. The increase in operating
expenses was due to increased depreciation costs.
The operating income in 2019 was a result of increasing rates to assist in covering operating expenses
and has experienced an increase in users. Without depreciation, operating income totaled $1,137,333.
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 $4,329,877.
18
City of Otsego
Financial Analysis
STORM WATER FUND
2015 2016 2017 2018 2019
Operating Revenues $45,066 $46,811 $61,540 $70,010 $109,372
Operating Expenses 95,533 42,342 62,172 71,040 123,163
Operating Income (Loss) with
Depreciation (50,467)4,469 (632)(1,030)(13,791)
Operating Income (Loss) without
Depreciation (29,051)28,520 34,502 46,414 44,177
$(70,000)
$(50,000)
$(30,000)
$(10,000)
$10,000
$30,000
$50,000
$70,000
$90,000
$110,000
$130,000
Storm Water Fund
The Storm Water Fund experienced an increase in operating revenues of $39,362 or 56.2% from 2018
due to including special assessment revenue in charges for services for the first time in 2019. Operating
expenses increased, $52,123 or 73.4% from 2018 to 2019 due to a culvert purchased in 2019 as well as
increases in depreciation. The fund experienced an operating loss of $13,791 in 2019. Without
depreciation included in operating expenses, the fund experienced operating income of $44,177.
After factoring in non-operating items, and capital contributions from developers and governmental
funds, this fund's net position increased by $1,015,187.
19
City of Otsego
Emerging Issue
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 update includes:
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 update. 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. 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.
20
City of Otsego
Emerging Issue
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 fiscal years beginning after June 15, 2021.
Information provided above was obtained from www.gasb.org.