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The Annual Financial Report for 2017


February 12, 2018 by Toni Nelson
Category: Financial Reporting

The Annual Financial Report for 2017

It is that time of year where I review the changes made by the State Auditor’s Office (SAO) in its annual update to BARS with a focus on the new annual financial reporting requirements.

Admittedly, over the years that I have been working with local government my focus has been ‘cash basis’ rather than GAAP reporting. This has been driven by my experience in working with small to medium size local government jurisdictions and the fact that the majority (77%) of the entities in Washington State use cash basis as their method of accounting and reporting. This method of accounting and reporting is prescribed by the State Auditor’s Office (SAO) through its publication known as BARS (Budgeting, Accounting and Reporting System).

In the spirit of trying to inform all annual financial report filers of the changes incorporated into the BARS manuals, there are some common denominators between the Cash and GAAP forms of accounting and reporting. Those common areas are: the Chart of Accounts, some sections in the Notes to Financials, and the Supplementary and SAO Report Schedules. This blog post will address changes to these areas as well as addressing new areas for cash-basis accounting and reporting entities.

Those of you who prepare financial reports according to GAAP know that this complex process requires a more comprehensive reporting format and a considerable amount of time devoted to its completion. Lacking the required expertise for GAAP reporting and the fact that SAO, WFOA, and others provide support on this more complex reporting method, I will only discuss those areas where both Cash and GAAP crossover.

The SAO BARS manuals for both cash-and GAAP-reporting entities has an Overview of Significant Changes (Cash / GAAP), which is released each year to highlight the changes that have been incorporated into the manuals and will be required for the financial report that you are preparing for the past fiscal period (2017). I would encourage you to review and address those changes applicable to your entity before you begin preparing your report.

Changes to: BARS Account Structure

Speaking of the BARS manual there has been a lot of transformation and evolution over the past 10+ years. BARS has evolved from a hard copy publication updated annually each January (and I might add, took considerable time to review and replace individual pages) to an online manual that has been condensed and several components eliminated. Where there were once five total manuals, now there are now only two: A Cash BARS manual and a GAAP BARS manual.

This year’s changes continue the ongoing evolution of BARS. One of the more significant changes has to do with the terminology and code structure of the “BARS” account code system. The pages and terminology associated with BARS code construction has been eliminated. The previous use of Prime, BASUB, and Element codes has been replaced by a numerical reference associated with its location in a 7-digit, account code system. The previous element codes (digits 4 and 5) will be assigned by local government for its own unique use unless the SAO/Chart of Accounts prescribes otherwise.

​An example of this is the assigned use of fourth and fifth digits for codes 591-594, 596, and 599 (See Chart of Accounts, Revenue and Expenditure Overview, Page 6). Additionally, the sixth digit will continue to use the guidance provided by SAO under the title of “object codes,” with the seventh digit being assigned by local government to provide additional clarity to expenditures.

Changes to: Chart of Accounts

Changes to the BARS codes (Chart of Accounts) can have significant impacts on your annual report preparation. These codes are used to record the financial transactions of your entity and will subsequently flow to Schedule 01-Revenues/Expenditures, which is the heart of SAO’s online filing system. Accuracy here is critical and BARS manual section #4.8.1.20 — reporting for Schedule 01 — requires that local government update the incorrect financial data.

There were several changes to the definitions contained within the chart of accounts in addition to new account codes added. It will be important to refer to the Overview of Significant Changes for your entity type (Cash or GAAP). Below are some of the most significant.

3360642, Marijuana Excise Tax Distribution: This additional BARS classification differentiates between funds distributed under section 1603 of 2E2SHB 2136, which is ratably based on retail sales within your jurisdiction, and the state shared portion of sales in excess of $25 million distributed on a per capita basis as authorized in RCW 69.50.540(2)(g).

3670000, Contributions and Donations from Nongovernmental Sources: While this is not a new BARS code, they have clarified the definition of connection fee (see note below under 3790000).

3790000, Capital Contributions: The update does not change the use but clarifies the definition of connection fees. This BARS code was previously used by proprietary entities and local government entities with proprietary activities, such as water and sewer, to record system development fees. It has been eliminated for cash-basis entities and BARS now requires that you use code 367, Contributions and Donations (see above).

398xxxx, Insurance Recoveries: This BARS code has been split into two codes:

  • 3981xxx, Insurance Recoveries for cash-basis governments: This code was implemented to replace the loss of use of the 370 series for cash-reporting entities; and
  • 3980xxx, Insurance Recoveries for GAAP-basis governments.

51530xx, Legal Services: This section has been expanded to segregate the costs between internal (5153x) and external (5154x) legal services. This BARS code change will be required for 2018 reporting.

Here’s a tip: Upload your draft Schedule 01 to the SAO online reporting portal to see what, if any, BARS codes are being red-flagged and address these items prior to continuing with your financial report.

Changes to: Financial Statements for Cash Basis

Financial Statement (C5) format has changed: The fiduciary funds are now required to be reported by type rather than by individual fund. Counties must take particular note, as they are now required to include special purpose districts on the C5.

Type of Fiduciary Fund Associated Digit(s)
Investment trust fund 600-609
Pension (and other employee benefit) trust funds 610-619
Pension (and other employee benefit) trust funds Private-purpose trust fund 620-629
Agency funds 630-699

Per BARS the fiduciary funds require a second digit for all fund numbers. (60=Investment; 61=Pension & Other Employee Benefit Trust funds; 62 = Private-Purpose Trust funds; and 63 – 69 = Agency funds). It will be important to review your fund number system to assure that all of your fiduciary funds have been appropriately classified.

Changes to: Notes to Financial Statements

There are very few changes to the Notes to Financial Statements this year for cash-basis entities: however, the financial condition and/or circumstances in your jurisdiction may have changed that would now require a note disclosure.

It’s important for all cash-basis-reporting entities to review the Other Disclosures section in the BARS manual to assure themselves whether a note disclosure is appropriate. Examples may include:

  • Correction of material errors in previous years
  • Significant transactions with related parties
  • Subsequent events
  • Component units or joint ventures:  For example, Transportation Benefit Districts are a component unit of the city and/or county that may have formed them
  • Significant commitments obligations: For example, a commitment to pay for post-employment benefits for LEOFF 1 retirees or construction commitments.

The 2017 changes are as follows. 

Note X, Cash and GAAP — Pension Plans: The matrix provided within the note for cash-basis entities has been updated to include an additional column for employers’ contributions. The Department of Retirement Systems (DRS) provides the Participating Employer Financial Information (PEFI) for report year 2017 and is the source materials for calculating your share of the pension liability and completing this reporting requirement. The SAO has provided Pension Liability worksheets for both cash-basis- and GAAP-reporting entities on the BARS Reporting Templates page. This information must additionally be included on Schedule 09.

Note X, Cash Only — Added special items, contingencies, litigations, and government combinations

  • Special items: These vary from the guidance provided under extraordinary events in that they meet one but not both of the criteria for extraordinary. These criteria are:
    • Unusual in nature, and/or 
    • Infrequent in occurrence.
  • Disclosing contingencies and litigations: This means that there is at least a reasonable possibility of an unfavorable outcome resulting in a financial loss or is of such significance that it would be misleading not to disclose. Disclosure is not required if covered by insurance unless it’s material and would be considered misleading if it was omitted.
  • Government combinations:  Here, disclosure is required when your entity underwent any changes related to operations due to a merger, acquisition, or transfer and/or disposal of operations.  

Note X, Debt — Loans with a forgiveness clause: Terms of these transactions need to be presented in the notes to the financial statements. The disclosures should include the assets acquired with the resources, conditions to be met for the transaction to become a grant, what circumstances require repayment, and the amount to be repaid (e.g., interest, appreciated value, etc.).

Note X, GAAP Only — Long Term Debt: The revision provides additional instructions for GASB 86, Certain Debt Extinguishment Issues. This is applicable when the debt is refunded with the government’s own resources.

Note X, GAAP Only — Tax Abatement: The revision added a matrix to summarize the disclosure requirements for governments own abatements and the abatements of others.

Additions, Deletions and Changes to: Supplemental Schedules

Schedule 06, Schedule Summary of Bank Reconciliation — Cash Cities and Counties only: This schedule is being introduced for the first time for report year 2017 and it is intended to replace Schedules 07 and 11 (Disbursements and Cash Activity). The purpose of Schedule 06 is to summarize the bank reconciliation process of all bank account balances with the Schedule 01 (Schedule of financial transactions), including those accounts holding funds in a fiduciary capacity. The schedule is considered optional for the report year 2017 but will become required for all subsequent fiscal years.

Here is a snapshot of the new report document.

sch-06_toni-blog_delete_618

Schedule 07 and 11, Disbursement and Cash Activity Schedules: These two schedules are being eliminated and replaced by the new Schedule 06. The SAO provides an option for report year 2017 that allows the continued use of both Schedule 07 and 11, but starting with report year 2018, Schedules 07 and 11 will be permanently replaced by Schedule 06.

Schedule 09, Liabilities: While the overview of significant changes provided within the BARS manual for 2017 does not reflect this change, the schedule no longer requires the BARS codes used for debt redemption. In light of this change it will be very important to accurately record the ID numbers for debt and liabilities.

Here is a snapshot of this document. 

sch-09_618

There is a new requirement for disclosing loans with a “forgiveness clause” (also see Notes to Financial Statements above). Loans with forgiveness clauses should be accounted for as debt proceeds when received. When a government has satisfied the criteria for the loan to be forgiven, grant revenue can be recognized (Schedule 16) along with a loan repayment (Schedule 09).

The SAO is additionally continuing with the pilot project for capturing the data to meet the reporting requirements of the WSDOT Street/Road report. This component of the online filing is optional.

Schedule 21, Risk Management: This is not a new requirement for 2017, but it is one worth repeating. This schedule is required for all local governments (GAAP or Cash) that have a self-insurance or assumption of risk exposure. The online filing system asks five questions and how these are answered will lead to a conclusion that the schedule is or is not not required. One example: the question asking if your entity has “reimbursable” agreements with the Employment Security Department (ESD). If you are one of many local government entities that are on a “reimbursable” basis with ESD then you will need to complete this schedule.

Schedule 22, Assessment Questionnaire: The expanded scope of completing this schedule was implemented last year. With so many special purpose districts (SPD) in Washington State, we thought it would be important to highlight this area. If you are one of the SPD’s listed below or your combined revenues are “usually less than $300,000,” you are required to complete and file Schedule 22.

  • Fire district
  • Conservation district
  • Transportation benefit (TBD) district
  • Economic and industrial development corporation
  • Cemetery district
  • Diking/drainage district
  • Mosquito/pest/weed district
  • TV reception district
  • Local/regional EMS and trauma care councils
  • Water conservancy board

Schedule 22 is an extensive audit schedule that provides information about the internal control procedures and practices within your district. It can only be accessed using the SAO online filing tool.

Filing the Annual Financial Report

Per the reporting deadline, RCW 43.09.230 states:

Such reports shall be prepared, certified, and filed with the state auditor within one hundred fifty days after the close of each fiscal year...

The filing deadline for the 2017 fiscal year is May 30 and there are “no” exceptions for this filing deadline. Whether you file online or file by mail, be sure that it’s completed by May 30.

The State Auditor’s Office: File Online provides excellent materials on the filing of your annual report using their online filing system, with links to their filing support group.

The MRSC website provides financial report checklists to assist with the report completion as well as a checklist for an internal review of your completed financial report to meet the internal control requirements of SAS 115.

Last but not least, start now! When it comes to the annual financial report you should start working on the preparation of the annual report as soon as you have your yearend financial transactions recorded and bank reconciliations completed. Now is the time to start drafting this important financial document.

Questions? Comments?

If you have questions about the annual financial report, please feel free to contact Toni Nelson, MRSC Financial Consultant via email or phone at 206-625-0916 x 109.

If you have questions about other local government issues, please use our Ask MRSC form or call us at (206) 625-1300 or (800) 933-6772.

About Toni Nelson

Toni has over 24 years of experience with Local Government finance and budgeting. Toni's area of expertise include "Cash Basis" accounting and reporting, budgeting, audit prep and the financial issues impacting small local government.

VIEW ALL POSTS BY Toni Nelson

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