J A N U A R Y / F E B R U A R Y 2 0 2 2 20 nebraska cpas Paul H. Koehler, CPA, is a sole practitioner in Lincoln, Neb. He has more than 45 years experience in auditing, training, and consulting, specializing in nonprofit organization and state and local governments. You may contact him at (402) 488-1578. This article was originally published by the Center for Plain English Accounting (CPEA), which provides non-authoritative guidance on accounting, auditing, attestation, and SSARS standards. Learn more at aicpa.org/CPEA. © 2021 Association of International Certified Professional Accountants. All rights reserved. Reprinted with permission. Paragraph 139 of SFAC No. 6 indicates that accrual accounting attempts to record transactions, events, and circumstances when they occur. revenues are recognized when earned, and expenses when a liability has been incurred.” Paragraph 139 of SFAC No. 6 indicates that accrual accounting attempts to record transactions, events, and circumstances when they occur. Thus, it’s the occurrence concept that triggers accrual accounting recognition, not the “earning” concept, which applies essentially to exchange or reciprocal transactions (per paragraph 150 of SFAC No. 6). Most SLGs and NFPs have significant nonreciprocal transactions like various tax and contribution revenues that seldom involve a matching of revenues and expenses simultaneously from the same transaction and, thus, don’t result in “earnings” (or loss). Additionally, upon adoption of FASB ASC 606, Revenue From Contracts With Customers, the word “earning” is no longer used. Finally, expenses only would result in a liability if not simultaneously paid when incurred. Issue 2: Misunderstanding Accruals and Deferrals Paragraph 141 of SFAC No. 6 indicates that accrual accounting involves not only accruals but also deferrals, including allocations and amortizations. Accrual is concerned with expected future cash receipts and payments (transaction occurrence precedes cash f low). Deferral is concerned with past cash receipts and payments (cash f low precedes transaction occurrence). Common deferrals include prepaid insurance and unearned subscriptions. Entity management should use these terms in accordance with relevant U.S. GAAP. This is especially true for SLGs, for which GASB 65, Items Previously Reported as Assets and Liabilities, indicates the use of the term “deferred” should be limited to items reported as deferred outf lows of resources or deferred inf lows of resources. Issue 3: Misuse of U.S. GAAP Resource Outflow Terminology Some entities fail to understand the differences between types of resource outf lows and misuse the terminology in the financial statement notes. “Expenses” are an accrual basis concept. They are expired costs. “Expenditures” are modified accrual basis, used by general funds of governments. They are decreases in current financial resources. “Disbursements” are cash basis. Don’t intermix these fundamental terms. Anecdotally, I recall a memorable financial statement note that was seven words long and intermixed three bases of accounting: “Expenses are reported as expenditures when paid.” Misunderstanding of the Terms “Transactions” and “Events” • Numerous SLG and NFP financial statement notes present paragraph headings labeled “Internal Transactions” or “Interfund Transactions.” • Both SLG and NFP financial statement notes sometimes refer to “transactions and events.” Paragraph 137 of SFAC No. 6 indicates that a transaction is a particular kind of external event. Paragraph 138 suggests the term “internal transaction” is essentially contradictory. Paragraph 135 of SFAC No. 6 defines an event as a happening of consequence to an entity. It may be an internal event, or it may be an external event such as a transaction with another entity. Thus, a transaction is a type (subset) of an event. A note like the one cited above is not appropriate and clear (it’s like writing the words “cars and vehicles”). Appropriate terminology to use in notes could be “transactions and other events” or just “events.” Specific SLG Financial Statement Note Reminders The Center for Plain English Accounting (CPEA) report, State and Local Government Financial Statements: Common Auditing & Financial Reporting Deficiencies, provides reminders related to frequent disclosure misstatements including: • Omission of disclosure/inclusion of government foundations in the reporting entity. • Reporting entity notes still referring to “oversight authority” and other outdated terms. • Omitting special items or extraordinary items. • Still referring to “fixed assets,” not capital assets (a two-decade outdated term). • Omitted related party disclosures. • Omitted presentations of corrections of errors. t
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