HUD PHA GAAP CONVERSION GUIDE

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Issuance of the Public Housing Assessment System (PHAS) Amendments; Final Rule (24 CFR Part 902) The following represents changes to this document that have been made in accordance with amendments to the Final Rule (24 CFR Part 902), published on January 11, 2000, as well as changes for clarification: " The journal entries for Loss Contingency Liabilities have been changed. Because Loss Contingency Liabilities are recorded as current liabilities, any journal entries for long term liabilities resulting from a loss contingency were eliminated. (page 41) " The title of account 1295 from changed from cAmount due to/from d to cInter-program (due from). d (pages 40, 43, and 44) " A chart has been added to summarize the financial scoring process in the year 2000 and beyond. (page 47) " A one-month extension has been granted for PHAs with fiscal years ending September 30, 1999, December 31, 1999, March 31, 2000, and June 30, 2000. For fiscal years ending after June 30, 2000, the final rule provides PHAs with a 15-day "grace" period beyond the submission due date. (page 47 and 49) " A footnote has been added to clarify that the submission timetable does not include automatic extensions that may be offered by HUD. (page 48) " The name of FDS Line 1101 changed from "Capital Outlays - Enterprise Funds" to "Capital Contributions." (page 61) " The name of FDS Line 1104 changed from "Prior Period Adjustments" to "Prior Period Adjustments and Equity Transfers." (page 61) 2 EXECUTIVE SUMMARY This guide was prepared by the U.S. Department of Housing and Urban Development's (HUD's) Real Estate Assessment Center (REAC) with assistance from Arthur Andersen, LLP. The purpose of this guide is to assist the Public Housing Authorities (PHAs) in converting their annual financial statements from HUD 9s basis of accounting to Generally Accepted Accounting Principles (GAAP) as required by the Uniform Financial Reporting Standards. This guide will be updated periodically as needed. The use of GAAP is effective for all PHAs with fiscal years beginning on or after October 1, 1998. The purpose of this guide is to: " explain the PHAs' responsibilities in the conversion process " provide general information and guidance on governmental accounting in accordance with GAAP " explain the GAAP conversion strategy and HUD preferred accounting options under GAAP " provide conversion entries for key financial statements items " describe the technical submission requirements " explain the required supplemental financial data schedule " document the due dates " provide answers to common questions 3 Section I. Introduction Basis for Development REAC developed this guide to help PHAs convert their annual financial statements from the HUD 9s basis of accounting to GAAP. In compiling the information and examples in this guide, REAC and Arthur Andersen, LLP utilized data, interpretations and examples contained in the referenced authoritative literature as well as in Governmental Accounting, Auditing and Financial Reporting (GAAFR) published by the Government Finance Officers Association and the 1998, Miller Governmental GAAP Guide. To assess the financial condition of each PHA using uniform standards and protocols, REAC requires GAAP based financial statements. The goal is to analyze the operating results and financial position and to compare each to industry benchmarks. Scope The requirement that PHAs report their annual financial statement information to conform to GAAP applies to all PHAs that administer subsidized programs under the terms of an Annual Contribution Contract (ACC). PHAs are required to report all business activities so that REAC may assess the overall financial condition of the PHA. This guide does not attempt to advise PHAs on setting up and maintaining an accounting system. Each PHA should consult with an independent public accounting firm for advice and guidance as necessary. 4 PHA Responsibilities Each PHA will be required to: " provide an effective system of internal controls to safeguard cash and other assets; " provide budgetary control over their programs; " provide timely, accurate, and complete financial information for management decision making; " provide the financial data needed to prepare the financial statements and various HUD reports; and, " permit a timely and effective audit. Each PHA has the responsibility to set up systems that meet the minimum standards required by 24 CFR Part 85 including: " Financial Reporting 3 Disclose accurate, current and complete financial results of HUD assisted programs. " Accounting Records 3 Identify the source and application of funds provided for HUD assisted activities. " Internal Controls 3 Maintain effective controls and accountability for all assets, including Accounting Controls and Management Activities. " Budget Controls 3 Prepare a separate budget for each HUD assisted program, based on HUD prescribed categories, and assure that expenditures do not exceed the approved budget. " Allowable Cost 3 Ensure that funds are expended in accordance with program requirements, based on OMB Circular A-87 or as amended. " Source Documentation 3 Maintain source documents and files that support the financial transactions recorded in the books, providing an adequate audit trail. 5 Governmental Accounting Jurisdiction over Accounting and Reporting Standards Accounting and financial reporting can be divided into three categories: " commercial " not-for-profit " governmental The Financial Accounting Standards (FASB) has jurisdiction over commercial and not-for-profit accounting and reporting. The Governmental Accounting Standards Board (GASB) has jurisdiction over state and local governmental accounting and reporting. In 1989, the Financial Accounting Foundation reaffirmed that the GASB 9s jurisdiction encompasses all state and local governmental institutions, not only when they are included as part of a government 9s financial report, but also when they issue their own separate financial statements. Governmental Accounting System A governmental accounting system must make it possible to: " present fairly and with full disclosure the financial position and results of financial operations of the funds and account groups of the governmental unit, conforming with Generally Accepted Accounting Principles (GAAP); and, " determine and demonstrate compliance with finance-related legal and contractual provisions. A governmental accounting system should be organized and operated on a fund basis. A fund is defined as: a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives under special regulations, restrictions or limitations . A fund 9s cbasis of accounting d determines when a transaction or event is recognized in the fund 9s operating statement. Governmental GAAP allows the use of both governmental and enterprise fund methods for financial accounting and reporting. The difference between the two methods is their measurement focus: 6 " Governmental funds use cmodified accrual d accounting. It is not enough that an economic transaction or event has occurred for it to affect the operating statement. Rather, the related cash flow must occur within a short-enough period to have an effect on current expendable resources. Therefore, the modified accrual or accrual basis of accounting, as appropriate, should be used to measure financial position and operating results. " Enterprise funds use cfull accrual d accounting. Transactions and events are recognized as revenues/gains or expenses/losses when they occur, regardless of the timing of related cash flows. Governmental Fund Accounting Most government services are financed through taxes and intergovernmental revenues. Although beneficiaries of tax-financed services are typically taxpayers themselves, there normally is no direct relationship between what an individual taxpayer is asked to pay and the cost of the services received by that same taxpayer. Other government services are financed through user charges. In this case, the cost to an individual is proportionate, at least in some degree, to the benefit received by an individual. If a service is largely funded through non-exchange revenues (taxes, for example), it is called a c governmental- type activity . d Accountants have taken a certain approach to governmental-type activities, focusing on: " available, expendable resources " near-term demands on them, rather than on long-term recovery Enterprise Fund Accounting If a service receives a significant portion of its funding through user charges, it is called a cbusiness- type activity d 3 an activity similar to that found in the private sector. Interest in a government 9s business-type/ enterprise activities has centered on: " the cost of providing services " the degree to which the cost is recovered through user charges Private-sector accountants involved with profit-making enterprises share this interest in cost and cost recovery. The GASB 9s Codification , Section 1300.104, states that the enterprise fund type may be used: To account for operations (a) that are financed and operated in a manner similar to private business enterprises 3 where the intent of the governing body is that the costs (expenses, including depreciation of providing goods or services to the general public on a continuing basis be financed or recovered through user charges; or (b) where the governing body has decided that periodic income determination or revenues earned, 7 expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability or other purposes. While HUD strongly prefers the use of full accrual accounting, the determination of whether the governmental or enterprise method should be used is left to the discretion of each PHA in consultation with its IPA. The type of activities covered by a fund drives which method most accurately provides users of the financial statements with a clear understanding of the PHA 9s operations and financial results. For example, it is likely that PHAs will use enterprise fund accounting for operations principally funded through tenant rentals and federal housing assistance programs. These funds may include low rent housing, Section 8 and most, if not all grant programs. 8 Sources of GAAP and the GAAP Hierarchy The GASB is the highest, but not the sole, source of GAAP for PHA governmental entities. The AICPA, in Statement of Auditing Standards No. 69, The Meaning of cPresent Fairly in Conformity with Generally Accepted Accounting Principles d in the Independent Auditor 9s Report , established a hierarchy of sources of GAAP for state and local governments and government-related entities. By definition, a higher level of this hierarchy automatically preempts any inconsistent guidance that may be found at some lower level. The five levels of the GAAP hierarchy are described as follows: GAAP Hierarchy GASB AICPA Other Level 1 Statements and Interpretations FASB pronouncements made applicable by a Statement or GASB Interpretations Level 2 Technical Bulletins Audit and Accounting Guides/ SOPs (Specific to Government and cleared by GASB) Level 3 Issues Task Force Consensus AcSEC Practice Bulletins (Specific to Government and cleared by GASB) Positions and AICPA Practice Bulletins made applicable by AICPA and Cleared by GASB Level 4 Implementation Guides Audit and Accounting Guides/ SOPs/AcSEC Practice Bulletins (Specific to Government but Not cleared by GASB Widely Recognized and Prevalent Practice (e.g.,Governmental Accounting, Auditing, and Financial Reporting 3 GAAFR). Level 5 Concepts Statements GAAFR Review Textbooks/ Articles/ FASB Pronouncements Other sources identified in levels 1 through 4 in the private sector accounting hierarchy that have not been made applicable by the action of the GASB, AICPA Technical Practice Aids, Handbooks and Pronouncements of other professional associations or regulatory agencies 9 The following information summarizes HUD 9s accounting preferences and includes a comparison of the governmental and enterprise fund methods of accounting: GAAP Accounting Topic Governmental Fund Enterprise Fund Financial Statements 3 - Classified Balance Sheet - Statement of Revenue, Expenditures and Changes in Fund Balance - Statement of Cash Flows - Budget vs. Actual Supplemental Schedules - - Combining Balance Sheet - Combining Statement of Revenue, Expenditures and Changes in Fund Balance - Financial Data Schedule Multiple Column Multiple Column Enterprise Fund Only Governmental Fund Only X X X Single Column Single Column Single Column X X X Full accrual Modified accrual Economic basis Current resources measurement focus Optional X X X X HUD prefers: " A classified, comparative Balance Sheet 2 Current = one year or less 2 Non current = more than one year from the balance sheet date " Comparative Memorandum Totals (First year waiver) " The full accrual method 10 Section II. Implementation Guide Introduction To report financial information, governmental GAAP requires governmental entities to use either the governmental fund method or the enterprise fund method. The selected option depends on the type of activity performed and the intent of the activity. HUD will not require a prescribed accounting and reporting method to be used, as this decision is to be made by the PHA. For guidance on selecting an accounting and reporting method and on applying governmental GAAP, the following authoritative sources should be referred to: " GASB Statements and Interpretations " The AICPA Government Auditing Guide " Governmental Accounting, Auditing and Financial Reporting Guide (GAAFR) HUD-preferred Options under GAAP GAAP permits choices among acceptable options for certain accounting transactions. Since the purpose of converting to GAAP is to achieve uniform and consistent financial data from all PHAs, HUD has selected preferred options for some of those transactions where GAAP allows a PHA to choose from more than one method. " Classified Balance Sheet HUD prefers a classified balance sheet . A classified balance sheet lists: " current assets together, followed by non-current assets " current liabilities together, followed by non-current liabilities Current assets are generally defined as cash and other assets reasonably expected to be realized in cash or those assets sold or consumed in the normal operating cycle of the business (i.e. one-year). Current liabilities are generally defined as obligations whose liquidation is reasonably expected to require using current resources properly classified as current assets or through creating other current liabilities. In a classified balance sheet: " classify the portion of long-term debt expected (required) to be repaid within one year as a current liability " classify all other assets and liabilities that do not meet the above definition of current as a non- current asset or liability Accrual Method of Accounting 11 HUD has selected the full accrual method of accounting as the preferred method for both governmental and enterprise fund methods. While required for the enterprise fund model, governmental GAAP also allows the full accrual method of accounting in the governmental fund type for entities like PHAs. Revenue Recognition Criteria of Grants and Shared Revenue Under GAAP, the measurement focus for a governmental fund is the flow of current financial resources. Revenues are recognized when they are susceptible to accrual, which means they are both measurable and available . Revenues are measurable when the amount of revenue is subject to reasonable estimation. Revenues are available when the revenue is subject to collection within the current period, or after the end of the period but in time to pay liabilities outstanding at the end of the current period. Definitions Grant - A contribution or gift of cash or other assets from a government entity, to be used or expended for a specified purpose, activity or facility. Shared Revenue - A revenue levied by one government but shared on a predetermined basis, often in proportion to the amount collected at the local level, with another government or class of government. Grants and shared revenues are recognized as revenue based on the method of accounting used by the particular fund that receives the resources. Governmental fund receipts are recorded on the modified accrual basis. Enterprise fund receipts are recorded on the full accrual basis. Governmental funds Grants, entitlements and shared revenues should be recorded as revenue when they meet the measurable and available criteria. In general, governmental units receiving grants are entitled to the resources when appropriate expenditures under the grant program are made. Thus, the critical event is the point at which an expenditure is incurred. At that point, grant revenue should be simultaneously recognized along with the expenditure. The receipt of a grant and subsequent expenditure of the grant may be recorded in the following manner: 12 Entitlements and shared revenue generally are subject to forfeiture only if the governmental unit does not observe the prescribed regulations. Thus, entitlements and shared revenues may be recognized before they are actually received if they (1) can be reasonably estimated and (2) are available to finance expenditures of the current period. When grants, entitlements and shared revenue have not met the measurable and available criteria and no resources have been received from the disbursing governmental unit, the recipient governmental unit may disclose the nature and amount of the item in a note to the financial statements, but receivable and deferred revenue accounts should not be established. On the other hand, when the revenue criteria are not met but the grant, entitlement or shared revenue has been received the amount should be recorded as deferred revenue. Enterprise Funds Enterprise funds must use the full accrual basis of accounting to determine when grants, entitlements, and shared revenue should be recorded. In determining whether (1) the earnings process is complete or virtually complete and (2) an exchange has taken place, due consideration should be given to the qualifying restrictions that may be imposed by the terms of the grant, entitlement or shared revenue. 1) (1111.1) Cash XXX (2200) Deferred Revenue XXX Grant is received from a governmental unit. 2) (4590) Expenditures - General XXX (2111) Accounts Payable 3 Venders and Contractors XXX (2200) Deferred Revenue XXX (3401) Revenue 3 HUD PHA Grants XXX Expenditures that qualify under the grant program are incurred. 13 GAAP Conversion Strategy Currently, HUD does not require PHAs to follow GAAP standards: PHAs may follow either GAAP or HUD financial reporting standards. Under the new rule, PHAs will determine the reporting model based on governmental GAAP, which is driven by the PHAs determination of what type of government entity it is. When GAAP permits options for the accounting of certain transactions, HUD has selected the preferred option. Below is a decision tree that shows options related to the reporting model. A supplemental financial data sheet must be presented with all financial statements. PH A GASB Enterprise Fu nd s Com m ercial Accou nting, as allow ed by GASB Fu ll Accru al H UD Preferences Accru e all exp enses Expense inventory as consu m ed Dep reciate fixed assets Transfer H UD d ebt to equ ity Com p ensated absences Fu ll or M od ified Accru al Governm ental Accou nting Governm ental Fu nd s 14 Content This guide lists financial statement items that will be accounted for differently under GAAP as compared to the former HUD method. PHAs should refer to the present literature on governmental accounting as a source of detailed information on how to account for these items under GAAP. " Accounts Receivable " Inventory " Investments " Fixed Assets " Depreciation " Bonds and Notes Payable " Compensated Absences " HUD-guaranteed or Direct Debt " Interest Subsidy (related to HUD-guaranteed or Direct Debt) " Loss Contingencies " Unfunded Pension Liability The financial statement items are discussed in these sections: " Former HUD Accounting " GAAP Methodology " HUD-preferred Accounting (if GAAP provides more than one acceptable method) " Conversion Entries " Guidelines for Conversion Included in Appendix B is a sample chart of accounts which PHA's may adopt (but are not required to adopt). The sample GAAP and conversion journal entries included in this guide use the account number on that sample chart of accounts for illustrative purposes only. The account numbers to debit and credit will depend on the PHA 9s actual chart of accounts. 15 Accounts Receivable GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record receivables for tenant rental income and HUD contributions due. Establish an Allowance for uncollectible (or doubtful) Accounts. Required Required Required Required None None Former HUD Accounting For tenant accounts receivable (A/R), HUD required the modified or full accrual method of accounting. The full amount to be collected as rental income was recorded as Tenants A/R at the beginning of each month and the A/R was then reduced as rent was collected from the tenants. HUD allowed for the write-off of uncollected tenant receivables only when the tenant vacated the premises. No accrual was required for HUD contributions due. HUD did not require a reserve for uncollectible accounts. These are the journal entries for the former HUD Accounting method: 1) To recognize rental income at the beginning of each month: (1122) Tenants Accounts Receivable XXX (3110) Dwelling Rental XXX 2) To write-off A/R of vacated tenants: (4570) Collection Losses XXX (1122) Tenants Accounts Receivable XXX 3) To record the collection of an account previously written off: (1111.1) Cash XXX (4570) Collection Losses XXX 16 GAAP Methodology Both governmental and enterprise funds must account for uncollectible accounts receivable. " For governmental funds, NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles, requires that an allowance for uncollectible accounts be established for potentially uncollectible amounts. " For enterprise funds, SFAS No. 5 , Accounting for Contingencies, guides the establishment of the allowance for uncollectible accounts for potentially uncollectible amounts. Under GAAP, these are the entries for accounts receivable: For Governmental Funds: 1) As revenues are billed or accrued, the total amount of the billings including the accrual is debited to accounts receivable. The portion of the accounts receivable expected to be collected is credited to revenues, and the portion of the accounts receivable not expected to be collected is credited to the allowance for doubtful accounts. The net revenue approach is necessary because governmental funds account for expenditures, not expenses; and the amounts of receivables that are uncollectible do not constitute an expenditure. Therefore, they are treated as a deduction from revenue. Here are the entries to establish the allowance account: (1122) Tenants Accounts Receivable XXX (3110) Dwelling Rental XXX (3110) Dwelling Rental XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX 2) To write-off receivables (done on an interim basis): (1122.1) Allowance for Doubtful Accounts- tenants XXX (1122) Tenants Accounts Receivable XXX 3) To record collection of accounts receivable previously written-off (done as necessary): (1111.1) Cash XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX 17 HUD-preferred Accounting HUD prefers full accrual of accounts receivable, with an appropriate allowance for uncollectible (or doubtful) accounts . Conversion Entries From HUD to Governmental: 1) To establish an allowance for doubtful accounts: (2806) Undesignated Fund Balance (To establish the prior year's reserve) XXX (3110) Dwelling Rental (To record the current year's addition to the reserve) XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX From HUD to Enterprise: 1) To establish an allowance for doubtful accounts: (2806) Undesignated Fund Balance / Retained Earnings (To establish the prior year's reserve) XXX (4570) Collection Losses (To record the current year's addition to the reserve) XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX For Enterprise Funds: 1) To record bad debt expense (to establish and adjust the allowance account): (4570) Collection Losses XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX 2) To write-off receivables (done on an interim basis): (1122.1) Allowance for Doubtful Accounts - tenants XXX (1122) Tenants Accounts Receivable XXX 3) To record collection of accounts receivable previously written-off (done as necessary): (1111.1) Cash XXX (1122.1) Allowance for Doubtful Accounts - tenants XXX 18 Guidelines for Conversion To provide for all reasonably anticipated losses inherent in the receivable balances that will not be collected, establish an allowance for uncollectible (or doubtful). When calculating the appropriate balance for the allowance account, consider such factors as the current accounts receivable aging and the historical collection experience. An example calculation methodology is: 1. Group the receivables as: " Current receivables " Receivables less than 90 days outstanding, but not current. " Receivables 90 - 180 days outstanding. " Receivables over 180 days outstanding. 2. Identify all receivables that are known to be uncollectible or that have a low probability of collection. 3. Establish the reserve for the estimated amount that will not be collected. 4. Establish a reasonable estimate of the remaining receivables which may not be collectible or collected and increase the reserve by this amount. The method used by each PHA could change based on its specific circumstances. Note: This methodology may also be applied to all other classifications of accounts receivable. 19 Inventory GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Capitalize Inventory Optional Required Capitalize inventory and expense it when used. Former HUD Accounting Some PHAs expensed inventory when the items were purchased (purchase method) while others expensed inventory when it was consumed (consumption method). GAAP Methodology According to NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles, Par. 73: inventory of a governmental fund c . . . may be considered expenditures either when purchased (purchases method) or when used (consumption method), but significant amounts of inventory should be reported in the balance sheet. d An enterprise fund must account for its inventory just as a business enterprise would. ARB No. 43, Statement 2, Restatement and Revision of Accounting Research Bulletins, states that: &in accounting for the goods in the inventory at any point in time, the major objective is the matching of appropriate costs against revenues in order that there may be a proper determination of the realized income. Thus, the inventory at any given date is the balance of costs applicable to goods on hand remaining after the matching of absorbed costs with concurrent revenues. To achieve this matching of costs with revenues, an enterprise fund must use the consumption method for inventory--report inventory as a current asset and expense it as it is consumed. Inventories should be valued at cost using a flow assumption (e.g. cweighted average d, cfirst-in-first- out d, clast-in-first-out d) acceptable under GAAP. However, if the value of the inventory falls below cost due to damage, deterioration, obsolescence or other causes, then a loss should be recognized. This loss should be recorded in the allowance for obsolete inventory account. 20 HUD-preferred Accounting HUD prefers the consumption method because it matches expenditures and expenses to the period in which it is used. Conversion Entries Under GAAP, when a governmental fund uses the purchase method of accounting for inventory, these are the entries: 1) To record the purchase of inventory (4420) Expenditures 3 Materials and Other XXX (1111.1/2111) Cash (or Accounts Payable) XXX There will only be a conversion entry if the entity accounted for inventory on the purchase method. and converts to the consumption method: (1260/1270) Inventories 3 Material/Equipment (Record inventory on hand at year-end) XXX (4420) Expenditures 3 Materials and Inventory (Record the change in inventory balance for the year) XXX (2806) Undesignated Fund Balance/Retained Earnings (Amount of inventory on hand at prior year-end) XXX Under GAAP, when an enterprise fund uses the consumption method of accounting for inventory, these are the entries: 1) To record the purchase of inventory (1260/1270) Inventories - Materials/Equipment XXX (1111.1/2111) Cash (or Accounts Payable) XXX 2) To record the use of inventory (4420) Expenditures-Materials and Other XXX (1260/1270) Inventories-Materials/Equipment XXX 3) To record the allowance for obsolete inventory (4420) Expenditures-Materials and Other XXX (1275) Allowance for Obsolete Inventory XXX 21 Guidelines for Conversion Take a physical valuation of inventory on hand at or near year-end. Price the inventory on hand at year-end and establish an allowance for obsolete inventory. 22 Investments GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record Investments Record at Fair Market Value Record at Fair Market Value None Former HUD Accounting HUD recorded investments either at amortized cost or fair market value; however, most PHAs record investments at amortized cost. These are the journal entries to record the transactions related to investments: GAAP Methodology GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools , states that "governmental entities should report investments at fair value in the balance sheet (or other statement of financial position). Fair value is the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale." GASB Statement No. 31, also states that "all investment income, including changes in the fair value of investments, should be recognized as revenue in the operating statement (or other statement of activities). 1) To record the purchase of an investment: (1162*) Investments 3 General Fund & Security Deposit Fund XXX (1111.1) Cash XXX 2) To accrue interest on General Fund investments: (1145) Accrued Interest Receivable XXX (3610*) Interest on General Fund Investments XXX * This account could be any investment account based on the source of the investment funds. The associated interest would also be posted to the associated interest account. 1) To record investments at market (1162*) Investments 3 General Fund & Security Deposit Fund XXX (3620) Gain or Loss on Investments XXX * This account could be any investment account based on the source of the investment funds. The associated interest would also be posted to the associated interest account. 23 HUD-preferred Accounting HUD prefers that each PHA follow GAAP as stated in GASB Statement No. 31. Conversion Entries Guidelines for Conversion None The following entry is required to record the investments at market value. 1) To record investments at market value if market value exceeds cost: (1162) Investments XXX (2806) Undesignated Fund Balance/Retained Earnings (amount of difference between cost and market at prior year-end) XXX (3620) Gain or Loss on Investments XXX (current year portion of market appreciation) 24 Fixed Assets GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Expense Soft Modernization Costs Required Required None Former HUD Accounting The basis of HUD's accounting for fixed assets was cost. HUD required the capitalization of all development, modernization, and relocation costs without distinguishing between soft modernization costs and hard modernization costs. Soft modernization costs are used to finance activities incurred in connection with HUD capital projects that do not meet the GAAP capitalization rule (see GAAP Methodology section below), because they do not extend the useful life of the asset. An example of soft modernization costs is the money spent to relocate tenants prior to the modernization of a unit or building. Hard modernization costs are incurred for projects associated with: " the purchase of capital assets " major construction or improvements (i.e., addition to a building or installation of a new boiler). Routine repair and maintenance are not hard modernization costs; expense them as the costs are incurred. GAAP Methodology NCGA Statement No. 1, Governmental Accounting and Financial Reporting Principles, addresses the treatment of fixed assets for governmental and enterprise funds: Fund fixed assets are fixed assets utilized in proprietary fund activities, which are accounted for in the appropriate (proprietary) fund. Fixed assets other than those accounted for in proprietary funds (or Trust funds) are general fixed assets. General fixed assets are accounted for in the General Fixed Assets Account Group rather than in the governmental funds. Fixed assets should be accounted for at cost or, if the cost is not practicably determinable, at estimated cost. Donated fixed assets should be recorded at their estimated fair value at the time received. 25 All normal expenditures of preparing an asset for use should be capitalized. However, unnecessary expenditures that do not add to the utility of the asset should be charged to expense (i.e., repairing a piece of equipment damaged during shipment would be charged to expense). Development costs would be capitalized under GAAP, and relocation costs would be expensed under GAAP. Also "hard modernization costs" must be capitalized while "soft modernization costs" are expensed when incurred. 26 Under GAAP, these entries are used for fixed assets: For Governmental Funds: 1) To record the receipt of HUD modernization/development grant funds: (1111.1) Cash XXX (3401) Revenue-HUD PHA Grant XXX 2) To record the purchase of fixed assets (GFAAG): (1400.6) Land XXX (1400.7) Buildings XXX (1400.8/1400.9) Equipment 3 Furniture, Equipment and machinery XXX (2801) Investment in General Fixed Assets XXX (7540**) Property Betterments and Additions XXX (1111.1/2111) Cash (or Accounts Payable) XXX 3) To record "soft modernization costs" : (4190*) Other administrative expense XXX (1111.1/2111) Cash (or Accounts Payable) XXX ** This item may be any capital outlay expenditure account. For Enterprise Funds: 1) To record receipt of HUD modernization/development grants: (1111.1) Cash XXX (3401) Revenue-HUD PHA Grants (soft costs) XXX (2802) HUD PHA Contribution (hard costs) XXX 2) To record the purchase of fixed assets: (1400.6) Land XXX (1400.7) Buildings XXX (1400.8/1400.9) Equipment XXX (1111.1/2111) Cash (or Accounts Payable) XXX 3) To record "soft modernization costs" : (4190*) Sundry - Other administrative expense XXX (1111.1/2111) Cash (or Accounts Payable) XXX * This item could be any expense category in which expended modernization dollars were classified (e.g. 4110 Administrative salaries, 4150, etc .). 27 HUD-preferred Accounting Record the purchase of property, plant and equipment in accordance with the capitalization standards promulgated under GAAP. According to those standards, development and hard modernization costs should be capitalized and depreciated. However, certain costs funded through HUD capital grants do not meet the definition of a capitalized cost and, therefore, should be expensed as incurred. For example, relocation costs and management improvements would not meet the GAAP capitalization rule and as a result would be expensed as the costs are incurred. Conversion Entries To write off the soft modernization costs previously capitalized, the following entry will be made: (2802/2801) HUD PHA Contribution / Investment in Fixed Assets XXX (1400.7) Buildings XXX 28 Depreciation GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Depreciate Fixed Assets over Estimated Useful Life Optional Required Capitalize fixed assets and depreciate these assets over their estimated useful lives. Former HUD Accounting HUD required the capitalization of assets and the write-off of these assets at the time of their disposal. HUD did not require depreciation of these assets. GAAP Methodology NCGA Statement No.1, Governmental Accounting and Financial Reporting Principles, states that while depreciation expense cannot be recorded in a governmental fund , accumulated depreciation may be reported in the General Fixed Assets Account Group. Reporting accumulated depreciation in the account group is not mandatory. If the governmental unit decides to report accumulated depreciation, observe the conventional accounting standards with respect to acceptable depreciation methods, economic life, and estimated salvage value. When the accumulated depreciation entry is made in the General Fixed Assets Account Group, depreciation expense is not recorded. Instead, the "Investment in General Fixed Assets" account is reduced and "Accumulated Depreciation" is increased: Under NCGA Statement No.1, all depreciable property of an enterprise fund must be depreciated in accordance with GAAP as applied by a commercial enterprise. Depreciation on fixed assets of a enterprise fund must be shown as an expense on its operating statements, with appropriate disclosures in the financial statements. For Governmental Funds: (2801) Investment in General Fixed Assets XXX (1400.5) Accumulated Depreciation XXX For Enterprise Funds: (4800) Depreciation Expense XXX (1400.5) Accumulated Depreciation XXX 29 GASB Codification , Section G60.116, allows, but does not require enterprise funds to close out depreciation expense on contributed assets to ccontributed capital d rather than to cretained earnings. d This provision applies only to assets contributed by governments outside the financial reporting entity. If the cadd back d option is adopted, the full amount of depreciation is still reported in the enterprise fund 9s operating statement, where it reduces the amount of net income reported. This treatment allows users of the operating statement to see the full cost of providing services, including depreciation on contributed assets. The amount of depreciation on contributed assets is then cadded back, d effectively decreasing contributed capital rather than retained earnings. HUD recommends use of the cadd back d option to properly reflect cretained earnings d. For practical purposes, property items frequently are grouped and an average life applied to determine depreciation. Groupings may be by year of acquisition, by type (all cars), by classification (all equipment), by location, or by a combination of these ways. Depreciation based on groups that include items with varying lives is referred to as composite depreciation . No gains/losses should be recognized on normal dispositions when this technique is used. The following definitions relate to depreciation: " Tangible assets are assets held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and expected to be used for more than one period. " Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. " Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value. " Useful life is either: a) the period of time over which an asset is expected to be used by the enterprise; or, b) the number of production or similar units expected to be obtained from the asset by the enterprise. Addback entry for Enterprise Funds: (2802) HUD PHA Contributions XXX (2806) Undesignated Fund Balance/Retained Earnings XXX 30 " Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction. " Residual value is the net amount, which the enterprise expects to obtain for an asset at the end of its useful life after deducting the expected costs of disposal. d When depreciating fixed assets, the PHA should establish useful lives for these assets that reflect reasonable estimates of the assets' lives. HUD-preferred Accounting HUD prefers that both governmental and enterprise funds: " Depreciate all fixed assets over their useful lives. " Remove from the balance sheet all fixed assets that have been disposed of. Conversion Entries From HUD to Governmental: 1) To record accumulated depreciation: (2801) Investment in General Fixed Assets XXX (1400.5) Accumulated Depreciation XXX From HUD to Enterprise: 1) To record accumulated depreciation and depreciation expense: (2802) HUD PHA Contributions XXX (4800) Depreciation Expense (current year) XXX (1400.5) Accumulated Depreciation XXX 31 Bonds and Notes Payable GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record Bonds and Notes Payable by Separating Current and Non-Current Portions. Required Required None Former HUD Accounting PHAs recorded debt that was guaranteed and serviced by HUD as well as debt that is not guaranteed and serviced by HUD. In addition, the related interest expense was also recorded. These are the journal entries for the former HUD accounting: GAAP Methodology The notes & bonds issued by the PHA continue to use the same methodology as was required by HUD. The entries are the same as above except for entry three which would require a credit to cash rather than HUD Annual Contributions Receivable. 1) To record accrued interest on bonds and notes payable: (5610) Interest on Notes and Bonds Payable XXX (2132) Interest Payable-Notes XXX (2133) Interest Payable-Bonds XXX 2) To record debt service payment due from HUD: (1176) HUD Annual Contributions Receivable XXX (2840) Cumulative HUD Contributions XXX 3) To record debt service payments paid to bond/note holders: (2132) Interest Payable - Notes XXX (2133) Interest Payable 3 Bonds XXX (2342) New Housing Authority Bonds - Retired XXX (1176) HUD Annual Contributions Receivable XXX 32 Conversion Entries No conversion is necessary for bonds and notes payable which are not related to HUD-guaranteed debt because the HUD method is in compliance with GAAP. However, if the bond or note payable is related to HUD-guaranteed Debt, conversion is necessary. (See the section on HUD-guaranteed debt.) Guidelines for Conversion None 33 Compensated Absences GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record liability for Compensated Absences (sick leave, vacation time) Required Required None Former HUD Accounting For HUD reporting, PHAs were required to disclose the liability related to compensated absences-- such as sick leave and vacation pay. For recording these compensated absences, HUD required a cash basis approach. Therefore, the expense was recorded when the payment was made to the employees. GAAP Methodology GAAP requires the accruing of a liability for the estimated amount of future benefits for services rendered. According to GASB Statement No. 16, Accounting for Compensated Absences : cA liability for compensated absences that are attributable to services already rendered and that are not contingent on a specific event that is outside the control of the employer and employee (i.e. an employee gets sick) should be accrued as employees earn the rights to the benefits. Compensated absences that relate to future services or that are contingent on a specific event that is outside the control of the employer and employee should be accounted for in the period those services are rendered or those events take place." Vacation Leave and Other Compensated Absences with Similar Characteristics Accrue these types of compensated absences as a liability because employees earn these benefits by meeting both of these conditions: 1. The employees 9 rights to receive compensation are attributable to services already rendered; and, 2. It is probable that the employer will compensate employees for the benefits through paid time off or some other means, such as cash payments at termination or retirements. 34 Sick Leave and Other Compensated Absences with Similar Characteristics If paid time off is contingent on a specific event outside the control of the employer and employee (jury duty, for example), other compensated absences have characteristics similar to sick leave. If it is probable that the employer will compensate employees for the benefits through cash payments conditioned on the employees 9 termination or retirement, accrue a liability as the benefits are earned by the employees Under GAAP, these are the entries for compensated absences for both Governmental and Enterprise Funds: For governmental funds--because HUD is currently funding the entire liability for compensated absences through the operating subsidy, Section 8 administrative fees, and grants, the entire liability should be accrued in the general fund, and not in the general long-term debt account group (GLTDAG). HUD-preferred Accounting Account for sick and vacation time in accordance with GAAP and record the liability in the fund (for both the governmental fund and enterprise fund models) as HUD has provided funding for these liabilities. 1) To record the liability for compensated absences: (4120*) Administrative Salaries XXX (2135.1) Accrued Compensated Absences XXX * This item could be any expense category in which compensated absences apply (e.g. 4110 Administrative Salaries, 4410 Ordinary Maintenance and Operations - Labor, etc.). 35 Conversion Entries Guidelines for Conversion To convert from the cash method to the accrual method of accounting for compensated absences, PHAs should consider the following steps: " Develop a database for entering leave balances and download all relevant employee payroll information. " Enter information into the database from the leave balance report from the end of the previous leave period. " Use the database to run a report to calculate the leave time accrual based on current leave regulations. Liability Calculation Calculate the compensated absences liability based on the pay or salary rates in effect at the balance sheet date. However, if the employer pays employees for compensated absences at other than their pay or salary rates--for example, at a lower amount as established by contract, regulation, or policy-- use that other rate as of the balance sheet date to calculate the liability. Accrue an additional amount as a liability for salary-related payments associated with the payment of compensated absences, using the rates in effect at the balance sheet date. The salary-related payments subject to this accrual are those items for which an employer is liable to make a payment directly and incrementally associated with payments made for compensated absences on termination. Such salary-related payments include the employer's share of social security, Medicare taxes, and payroll taxes and also may include the employer's contributions to pension plans, for example. 1) To record the liability for compensated absences: (4120*) Administrative Salaries (Current year-end changes in accrual) XXX (2806) Undesignated Fund Balance (Amount for the prior year-end accrual) XXX (2135.1) Accrued Compensated Absences XXX * This item could be any expense category in which compensated absences apply (e.g. 4110 Administrative Salaries, 4410 Ordinary Maintenance and Operations - Labor, etc.). 36 Base the accrual on the entire liability for each type of compensated absence to which the salary- related payments apply. Therefore, accrue: " payments that are directly and incrementally associated with the payment of sick leave termination payments for the entire sick leave liability " salary-related payments associated with termination payments of vacation leave for the entire vacation leave liability, including leave that might be taken as paid time off rather than paid as termination payments 37 HUD-guaranteed or Direct Debt GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record HUD- guaranteed Debt as capital contribution Not required Not required HUD-guaranteed Debt should be classified as a capital contribution on the PHA 9s books. Former HUD Accounting If PHAs had bonds and notes outstanding that HUD guaranteed (called HUD-guaranteed Debt) and for which HUD made all payments of the principal and interest, the PHAs were not liable for this debt. The debt, accrued interest liability, and expense were presented on the PHA's financial statements. However, HUD made the actual cash payment to the bond and note holders instead of passing the money through to the PHA who would in turn send it to the bond and note holders. This treatment resulted in a non-cash transaction between HUD and the PHA. Also, some PHAs carried debt owed to HUD, even though the terms of the debt stated that the debt would be forgiven after a period not exceeding 40 years. GAAP Methodology GASB Interpretation No. 2, Disclosure of Conduit Debt Obligations, provides guidance as to the proper GAAP treatment of this HUD-guaranteed Debt. The debt transactions between the PHAs and HUD are similar to conduit debt obligations, which are: "Certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer's financial reporting entity." GAAP requires PHAs to disclose some details of the debt transaction and may require the PHA to record the liability on the issuer's (PHA's) books. 38 Because the transaction between the PHA and HUD is similar to HUD giving money to the PHA to operate, record the money as a capital contribution. HUD has essentially made an investment in the PHA. Furthermore, Section 7 and 8 of the Consolidated Annual Contributions Contract limits the use of PHA units for housing eligible families and requires PHAs to include language to this effect in the Declaration of Trust or similar document. Therefore, reclassify the liability as a capital contribution, and disclose the transaction in the financial statement footnotes. Conversion Entries Guidelines for Conversion To properly convert the accounts related to the HUD-guaranteed Debt, PHAs should consider these steps: " Review the debt documents to ensure that HUD does indeed owe the debt " Determine the amount of debt outstanding " Reclassify the principal " Reverse any accrual for interest expense payable. To reclassify debt that is guaranteed by HUD to a capital contribution from HUD: (2130.4*) HUD-guaranteed Debt XXX (2802) HUD-PHA Contributions XXX * Including all other liability accounts, related fiscal agent accounts, and HUD ACC receivable amounts for HUD guaranteed debt. 39 Interest Subsidy (related to HUD-guaranteed or Direct Debt) GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Eliminate accrual for interest related to HUD- guaranteed Debt. Required (assuming debt is treated as a capital contribution) Required (assuming debt is treated as a capital contribution) None Former HUD Accounting HUD required PHAs to accrue the subsequent-year interest subsidy by recording the related accounts receivable, annual contribution, interest expense, and interest payable at year-end. Then at the beginning of the following fiscal year, HUD made the debt service payment, eliminating the accounts receivable and interest payable. GAAP Methodology Because the interest subsidy is related to HUD-guaranteed Debt and the debt will be reclassified as a capital contribution, PHAs do not need to record the debt on their financial statements. HUD-preferred Accounting HUD prefers that the PHA eliminates the accrual for subsequent-year interest subsidy and all entries related to HUD-guaranteed Debt. Conversion Entries None Guidelines for Conversion Same as HUD-guaranteed Debt 40 Loss Contingencies GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Record liability for loss contingencies Required Required None Former HUD Accounting HUD did not require accrual of loss contingencies, except for PHAs, which were self-insured. PHAs are required to obtain a waiver of the Annual Contributions Contract and specific authorization from to HUD to be self-insured. GAAP Methodology Under SFAS No. 5, Accounting for Contingencies, all PHAs must accrue contingent losses if the loss is probable and a reasonable estimate may be established. Recording a loss will affect the fund balance for governmental funds and retained earnings for enterprise funds. If neither of the conditions above is present, then the loss should only be disclosed. Under GAAP, these are the entries for loss contingencies: HUD-preferred Accounting For Governmental Funds: 1) To record the short-term portion of the contingent liabilities: (4190*) Administrative Expense-Other XXX (2130.2) Current Portion of Long-Term Debt 3 Operating Borrowings XXX 2) To record the long-term portion of the contingent liabilities: (1295) Inter-program (due from) XXX (2130.3) Long-Term Debt 3 Operating Borrowings XXX For Enterprise Funds: 1) To record recognition of a contingent liability: (4190*) Administrative Expense-Other XXX (2130.2) Current Portion of Long-Term Debt 3 Operating Borrowings XXX * This item could be any expense category in which contingent losses apply (e.g. 4190 Administrative Expense 3 Other, 4590 Other General Expense, etc.) 41 Accrue contingent liabilities if the loss is probable and can be reasonably estimated whether the PHA is self-insured or has obtained insurance from an outside insurance company. Conversion Entries Guidelines for Conversion Discuss with legal counsel contingent liabilities that meet the definition of SFAS No.5. For Governmental Funds: 1) To record recognition of the current portion of contingent liabilities: (4190*) Administrative Expense-Other XXX (2120.3) Accrued Contingent Liability XXX For Enterprise Funds: 1) To record recognition of a contingent liability: (4190*) Administrative Expense-Other XXX (2806) Retained Earnings (Amount of the prior year-end accrual) XXX (2130.2) Accrued Contingent Liability XXX * This item could be any expense category in which contingent losses apply (e.g. 4190 Administrative Expense 3 Other, 4590 Other General Expense, etc.) 42 Unfunded Pension Liability GAAP Accounting Topic Governmental Fund Enterprise Fund HUD-preferred Accounting Recognition of liability for unfunded pension amounts currently due. Required Required Recognize current liability for the difference between pension amount due and actual amount funded and expended. Former HUD Accounting HUD did not require the PHA to recognize a liability for pension amounts which were due but unfunded. GAAP Methodology GASB-27, Accounting for Pensions by State and Local Governmental Employers , addresses accounting and reporting issues related to pension information presented in the financial statements of state and local governmental employers. GASB-27 requires that a governmental employer determine the amount of the annual required contributions (ARC) for each year. The ARC is based on (1) the employer 9s normal costs and (2) a provision that amortizes the unfunded actuarial accrued liability. Normal cost is defined as that portion of the actuarial present value of pension plan benefits and expenses which is allocated to a valuation year by the actuarial cost method. Amortization of unfunded actuarial liability is the other portion of the ARC. Governmental Funds : Using modified accrual basis of accounting, the amount of expenditure recorded on the governmental entity 9s activity statement is that portion of the annual pension cost that uses current expendable resources. If, at the end of the year, the net pension obligation represents a liability (underfunded), the amount is reported as part of the General Long-Term Debt Account Group. If the net pension obligation is overcontributed, the amount is not reported on the financial statements, but must be disclosed. 43 Enterprise Funds: Using full accrual accounting, the expense is based on the computation of the annual pension cost. Any difference between the amount of the accrual and the amount funded should be subtracted or added to the net pension obligation. If the pension plan is underfunded, the amount of liability should be reported on the balance sheet. If the pension plan is overfunded, the amount should be reported as an asset on the balance sheet. HUD-preferred Accounting Recognize the unfunded pension liability using the full accrual method. Likewise, recognize the expense for the full ARC. Conversion Entries 1. To record the pension expense: (4540*) Employee Benefit Contribution XXX (1111.1) Cash XXX 2. To record the liability for unfunded pension amounts: (1295) Inter-program (due from) XXX (2138) Unfunded Pension Liability. (GLTDAG) XXX * This item could be any expense category in which pension expense applies (e.g. REAC suggested account 4182 3 Employee benefit contribution administrative, 4222 3 Employee benefit contributions 3 tenant services, etc.) To record the pension expense and unfunded pension liability: (4540*) Employee Benefit Contribution XXX (1111.1) Cash XXX (2138) Unfunded Pension Liability XXX * This item could be any expense category in which pension expense applies (e.g. REAC suggested account 4182 3 Employee benefit contribution administrative, 4222 3 Employee benefit contributions 3 tenant services, etc.) 44 Guidelines for Conversion None For Governmental Funds: To recognize a liability for pension amounts which were due but unfunded at the date of conversion: (1295) Inter-program (due from) XXX (2138) Unfunded Pension Liability XXX For Enterprise Funds: To recognize a liability for pension amounts which were due but unfunded at the date of conversion: (2806) Retained Earnings (Amount of the prior year-end accrual) XXX (2138) Unfunded Pension Liability XXX 45 Section III. Technical Submission Requirements Submission Methodology This is a preliminary listing of the requirements for electronic submission of PHA GAAP based financial data to the Financial Assessment Subsystem (FASS) of REAC. As of the date

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