GASB STANDARD ON FUND BALANCE REPORTING EFFECTIVE FOR 2011

As we previously reported the Governmental Accounting Standards Board (GASB) has issued GASB Statement No. 54 "Fund Balance Reporting for Governmental Fund Type Definitions". This standard must be implemented by 2011 for calender year governments.

This Statement will replace the current reporting of fund balance shown below:

- Reserved

- Unreserved, Designated

- Unreserved, Undesignated

With the following classifications:

- Nonspendable (items that aren't spendable like inventory, or dollars that per contract must be set aside)

- Restricted (restricted by law, or by credit agreement, grant agreement, etc...)

- Committed (subject to constraints imposed by formal action of the council)

- Assigned (constrained by the government's intent - includes all fund balances remaining in funds other than the general fund)

- Unassigned - (general fund balance not included in one of the categories above)

In addition GASB 54 will impact the reporting of Special Revenue Funds for some Cities. Under GASB 54, Special Revenue funds are funds with "restricted or committed revenue sources expected to continue to comprise a substantial portion of inflows". Municipalities that have Special Revenue Funds without substantial restricted or committed revenue sources will need to eliminate these funds in 2011 and report this activity in the General Fund.

IRS Considers Fire Relief Organization's to be Tax Exempt Entities

According to the Pension Division of the Minnesota State Auditors Office, a representative of the IRS has indicated that fire relief associations, as tax-exempt organizations, are required to file Form 990 with the IRS. In addition, the IRS has stated that tax-exempt organizations that fail to satisfy annual filing requirements for three consecutive years automatically lose their tax-exempt status.

In 2010, the IRS offered a one-time relief program, for fire-relief associations at risk of losing their tax-exempt status, allowing them to file the required Forms for 2007, 2008, and 2009. Fire relief associations, which had not filed the required Forms for 2007, 2008, and 2009 could preserve their tax-exempt status under the relief program by filing the Forms by October 15, 2010.

The IRS represenatatives have stated that fire relief association's that did not file the required Forms by October 15 are at risk of losing their tax-exempt status.

CITIES WILL NEED TO ACCOUNT FOR INTANGIBLE ASSETS IN 2010

GASB Statement 51 "Accounting and Financial Reporting for Intangible Assets" is effective for 2010 City financial statements.

For the governmental fund basis financial statements the cost of intangible assets will continue to be reported as a current year expenditure, however for proprietary fund and government wide financial statements intangible assets will need to be capitalized and amortized over their estimated useful lives.

The GASB defines intangible assets as having the following characteristics:

1) a lack of physical substance

2) non-financial in nature

3) a useful life extending beyond one reporting period

The most common types of intangible assets for Minnesota Cities are easements, right-of-ways and computer software. Less common examples of intangible assets for Cities include trademarks, patents, copyrights, water rights or mineral rights.

Legislature Makes Changes to Qualified Safekeepers Requirements

The rules for "Qualified Safekeepers" have been changed as a result of laws enacted by the 2010 State Legislature. The changes eliminate the requirement for a broker to have a principal executive office in the State of Minnesota. In addition, a broker is now required to carry sufficient SIPC or excess SIPC coverage to protect all securities in the possession of the broker.

STATE AUDITOR ISSUES GUIDANCE ON ACCOUNTING PROCEDURES DOCUMENTATION

In 2010, the Office of the State Auditor issued the following guidance on the documenation of accounting policies and procedures.

Cities should document their accounting policies and procedures in a written policy statement or manual which spells out the accounting policies and procedures that make up the entity’s internal control system. The detail and complexity of the documentation will depend on the size of the entity.

The documentation should:

• Describe the procedures as they are intended to be performed;

• Indicate which employees are to perform which procedures; and

• Explain the design and purpose of control-related procedures to increase employee understanding and support for controls.

The written accounting policies and procedures will:

• Enhance employees’ understanding of their role and function in the internal control system;

• Establish responsibilities;

• Provide guidance for employees;

• Improve efficiency and consistency of transaction processing;

• Improve compliance with established policies;

• Help prevent deterioration of key elements in the entity’s internal control system;

• Maintain consistency in procedures from year to year and during employee transitions; and

• Help decrease circumvention of the entity’s policies.

The written documentation of accounting policies and procedures should be prepared by appropriate levels of management and approved by the entity’s governing body to emphasize its importance and authority. To be effective, the written documentation should be shared with all employees. Entities may want to ask employees to sign a form acknowledging receipt of the policy or manual and agreeing to adhere to the policies contained in the policy or manual.

Social Security Tax Temporarily Cut for 2011

The Tax Relief Act passed in December 2010 includes a two percentage-point payroll tax holiday for employees. As a result, employees will pay 4.2% Social Security tax (instead of 6.2%) on 2011 wages up to the $106,800 maximum threshold.

FOR MORE INFORMATION...

For more information on these topics, please contact our audit team at the Smith Schafer office nearest you at one of the phone numbers listed below.

To access the Smith, Schafer and Associates, Ltd. website click here www.smithschafer.com