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HomeMy WebLinkAboutOther Auditor Reports 12/31/2007CITY OF LINO LAKES, MINNESOTA OTHER AUDITOR REPORTS YEAR ENDED DECEMBER 31, 2007 WNW CITY OF LINO LAKES, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2007 Page Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an — Audit of Financial Statements Performed in Accordance with Govemmental Auditing Standards 1-4 Report on Minnesota Legal Compliance 5 Other Required Auditor Communications 6 -8 — New Accounting and Reporting Standards 9 New Auditing Standards 13 MIM LarssnAllen CPAs, Consultants & Advisors www.larsonallen.com REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota We have audited the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2007, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 16, 2008. We conducted our audit in accordance with U.S. generally accepted auditing standards and the standards applicable to financial audits contained in Govemment Auditing Standards, issued by the Comptroller General of the United - States. Internal Control Over Financial Reporting - In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements and not to provide an opinion on the internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City's ability to initiate, authorize, record, process, or report financial data reliably in accordance with U.S. generally accepted accounting principles such that - there is more than a remote likelihood that a misstatement of the City's financial statements that is more than inconsequential will not be prevented or detected by the City's internal control. We did not detect any items which we would consider to be significant deficiencies in internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be - prevented or detected by the entity's internal control. Our consideration of the internal control was for the limited purpose described in the first paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control that we consider to be material weaknesses, as defined above. (, = LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms. INTERNATIONAL Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of material misstatement, we performed tests of its 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, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. During the course of our audit, several items came to our attention that we feel could be addressed by the City of Lino Lakes to more efficiently run the City's operations or improve its internal controls. We herein submit the following suggestions to the City of Lino Lakes for their consideration. Auditor Comments: Capital Project Deficits The financial statements for the capital project funds are presented in Statements 3, 5, 12 and 13 of the 2007 Annual Financial Report. As of December 31, 2007, three capital project funds have deficit fund balances equaling a combined deficit of $863,954. While this is an on -going comment, we would like to recognize the significant improvements made related to fund balance deficits over the past four years. The following describes the status of each of these funds: - One of the deficits is very typical for any city operating a TIF fund (TIF 1 -11). This fund showed positive operating results with revenues in excess of expenditures of $5,470 for 2007. The second deficit is simply a timing difference between expenditures and the related MSA funding source (CSAG 14/8 Reconstruction Project). As anticipated, this fund will continue to run a deficit until the project nears completion and the MSA revenue is recognized. - The third has specifically been addressed by the Council and a plan is being implemented to reduce the deficit over the near future (Dedicated Parks). This fund showed positive operating results with revenues in excess of expenditures of $6,536 for 2007. Area and Unit Charge Fund On January 11, 1988, the City Council approved Resolution 1 -88, which established the Area and Unit Charge Fund for the City. The purpose of this fund is to collect various area and unit charges to be used to meet debt payments. Before October 1 of each year, the City estimates the required transfer needed to meet debt payments for the subsequent year. In December, these estimated amounts are transferred to the various debt funds. We recommend that the City continue to closely monitor actual versus projected area and unit assessment collections to assure that debt payment requirements will be met. Designations of balances required for debt service is necessary to define discretionary construction balances available to the City. The financing plan for the following bond issues have pledged area and unit charges for the repayment of debt service: • Improvement and Utility Bonds of 2004A • Water Revenue Bonds of 1999B • Water Revenue Bonds of 1996B The Improvement and Utility Bonds of 2004A have future debt service requirements (principal and interest) totaling $1,513,969. During 2007, transfers of $480,899 and $410,000 were made to the Improvement Bonds of 2005B and Improvement Refunding Bonds of 2003A debt service funds. (2) The Water Revenue Bonds of 1999B has future debt service requirements totaling $117,817 (principal and interest). The City annually transfers amounts from the Area and Unit Charge Fund to the Water Fund sufficient to help cover the debt services of these bonds. During 2007, a transfer of $141,199 was made to the Water Fund. It is the City's intention to repay the Water Revenue Bonds of 1999B and 1996B with revenues of the Water Fund. If revenues are not sufficient to meet the debt requirements, funds will be transferred from the Area and Unit Charge Fund. In addition to the transfers above, the Area and Unit Charge Fund transferred $8,550 to the General Fund and $82,000 to the Legacy Woods Edge Improvement Capital Projects Fund. DEBT SERVICE FUNDS Debt service funds are a type of governmental fund used to account for the accumulation of resources for the payment of principal and interest on general obligation debt (other than enterprise fund debt). Debt service funds may have one or a combination of revenue sources pledged to retire debt including property taxes, tax increments, special assessments and area and unit charges. The diverse nature of the type of debt included in the same fund type requires careful analysis to determine the adequacy of the fund balance and projected fund balance. The following schedule extracts information from Exhibits 2 and 3 of the 2007 Annual Financial Report to assist in this analysis. The following schedule compares outstanding debt with assets pledged for debt retirement. This - comparison provides a means to judge (at least on a preliminary basis) the financial position of each individual debt service fund. December 31, 2007 Deferred Total Remaining Over Fund Deferred Tax Resources Debt Service (Under) Fund Description Balance Revenue Total Levies Available Scheduled Funded General Debt: - Certificates of Indebtedness $ 109,336 $ 6,667 $ 116,003 $ 473,991 $ 589,994 $ 451,420 $ 138,574 Lease Revenue Bonds of 1998A 476,121 5,800 481,921 318,001 799,922 691,125 108,797 Public Project Revenue Bonds 1999C 353,389 2,947 356,336 214,127 570,463 306,049 264,414 Tax Abatement Bonds 2006C 55,223 1,222 56,445 3,739,781 3,796,226 3,613,412 182,814 - Utility Revenue Bonds 2006D 70,808 160,640 231,448 - 231,448 694,063 (462,615) CIP Refunding Bonds 2006E 60,741 1,771 62,512 3,968,790 4,031,302 3,839,600 191,702 TIF Bonds 2007A 22,438 22,438 6,067,427 6,089,865 5,778,494 311,371 $ 1,148,056 $ 179,047 $ 1,327,103 $14,782,117 $ 16,109,220 $ 15,374,163 $ 735,057 Special Assessment Debt: Improvement Bonds of 2002A Improvement Bonds of 2002B Improvement Bonds of 2003A Improvement Bonds of 2003B Improvement Bonds of 2004A Improvement Bonds of 2005A Refunding Imp. Bonds of 2005B $ 354,399 $ 94,060 $ 448,459 $ 37,439 $ 485,898 $ 266,451 $ 219,447 1,061,963 467,729 1,529,692 - 1,529,692 1,624,748 (95,056) 21,049 203,471 224,520 224,520 965,384 (740,864) 92,939 44,511 137,450 151,589 289,039 239,493 49,546 301,641 314,871 616,512 1,638,394 2,254,906 1,513,969 740,937 510,276 5,087,578 5,597,854 7,416,836 13,014,690 7,472,832 5,541,858 435,079 352,331 787,410 3,668,504 4,455,914 3,979,939 475,975 $ 2,777,346 $ 6,564,551 $ 9,341,897 $12,912,762 $ 22,254,659 $ 16,062,816 $ 6,191,843 Note: Deferred revenue in the above table does not include the future scheduled "interest portion" of the adopted assessment rolls. The 2O04A Improvement Bonds also include a pledge from the Area and Unit Fund that has not been included above. The above table provides a means for the monitoring the status of the debt service funds. For the General Debt funded solely by property taxes, it appears that there are adequate planned levies to retire ▪ the debt when the future lease revenues scheduled to be received from the school district are included. (3) While in total the City has a surplus of total resources available over remaining scheduled debt service based on the calculation above, certain individual funds are operating at a deficit. These deficits will need to be funded by future adopted assessment rolls, special assessment levies, investment earnings, transfers from other funds, property taxes or other available means. Factors to consider when analyzing debt service funds: • Are all the anticipated assessment rolls being adopted as soon as appropriate? • Have all the planned financing sources been identified, such as pledged amounts from the area and unit fund or future MSA funds? • Are there significant "prepayments" received from property owners? In the current investment environment, will the earnings the City will receive on these prepayments be lower than the interest rate that was being charged on the adopted assessment roll? The Area & Unit Fund is committed to the debt service of some special assessment bonds as well as toward the water revenue bonds. The City's five -year operating plan addresses the above issues and therefore, this comment is simply a reminder of the extent that repayment of certain debt is based on pledged sources from the Area and Unit fund. Developer Escrow Accounts The City maintains an Agency Fund to account for the activity related to developer escrows. It is our understanding that developers deposit an escrow prior to a project beginning and that certain costs may be applied against this escrow. A total net deposit held in the agency fund at December 31, 2007 was $1,028,002. Within this balance we noted that there are several escrow accounts that carry a "negative" balance (which represents an additional receivable balance from the developer) or have remained idle from the prior year. Efforts were made during 2007 by the City to reconcile negative and idle accounts with the related developers. For instance, total "negative" accounts were reduced from $268,660 at December 31, 2006 to $198,024 at December 31, 2007. We recommend that the City continue this process. Conclusion We welcome the opportunity to discuss the points mentioned in this letter or any other accounting and procedural issues in order to coordinate our efforts with you, the mutual objective being the development of more effective accounting procedures for the City. We understand that some of the aforementioned points are in the process of implementation or may already have been implemented; however, these points are noted so that effective follow -up can be accomplished. We sincerely appreciate all the courtesies and cooperation extended to us by you and the staff of the City, and thank you for the opportunity to be of service to you. We look forward to working with you in the future. This report is intended solely for the information and use of the City Council, finance committee, management, the Office of the State Auditor, and federal awarding agencies and pass- through entities and is not intended to be and should not be used by anyone other than these specified parties. Minneapolis, Minnesota May 16, 2008 (4) Z:t d z L P LarsonAllen LLP Immo NEMER LarsonAlleri LLP CPAs, Consultants & Advisors www.larsonallen.com REPORT ON MINNESOTA LEGAL COMPLIANCE — Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota MMI We have audited the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota as of and for the year ended December 31, 2007, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 16, 2008. We conducted our audit in accordance with U.S. generally accepted auditing standards, the standards — applicable to financial audits contained in Governmental Auditing standards, issued by the Comptroller General of the United States, and the provisions of the Minnesota Legal Compliance Audit Guide for Local Govemment, promulgated by the State Auditor pursuant to Minnesota Statute 6.65. Accordingly, — the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. - The Minnesota Legal Compliance Audit Guide for Local Govemment covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that, with respect to the items tested, the City of Lino Lakes, Minnesota complied with the material terms and conditions of applicable legal provisions. Wow This report is intended solely for the use of the City of Lino Lakes, Minnesota, the Office of the State Auditor, and other state agencies, and is not intended to be and should not be used by anyone other — than these specified parties. ..‘t.I.a,•2_,,dez, LLp LarsonAllen LLP — Minneapolis, Minnesota May 16, 2008 (5) LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms. INTERNATIONAL Lars•nAllen CPAs, Consultants & Advisors www.larsonallen.com OTHER REQUIRED AUDITOR COMMUNICATIONS Honorable Mayor and Members of the City Council City of Lino Lakes, Minnesota - We have audited the financial statements of the governmental activities, the business -type activities, each major fund, and the aggregate remaining fund information of the City of Lino Lakes, Minnesota for the year ended December 31, 2007, which collectively comprise the City's basic financial statements - and have issued our report thereon dated May 16, 2008. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter date December 5, 2007, our responsibility, as described by - professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City of Lino Lakes. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material - misstatement, we performed tests of the City of Lino Lake's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. IMmr Other Information in Documents Containing Audited Financial Statements Our audit opinion, the audited financial statements, and the notes to financial statements should only be - used in their entirety. Inclusion of the audited financial statements in a client prepared document, such as an annual report, should be done only with our prior approval and review of the document. Our responsibility for other information in documents containing the entity's financial statements and report does not extend beyond the financial information identified in the report. We do not have an obligation to perform any procedures to corroborate other information contained in such documents. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing previously communicated to you in our meeting about planning matters on March 28, 2008. (6) �, LarsonAllen LLP is a member of Nexia International, a worldwide network of independent accounting and consulting firms. INTERNATIONAL Significant Audit Findings Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Lino Lakes are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during 2007. We noted no transactions entered into by the Governmental Unit during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's 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 significantly from those expected. The most sensitive estimates affecting the financial statements were: Estimated useful lives of depreciable capital assets - Management's estimate of useful lives for depreciable assets is based on guidance recommended by authoritative accounting literature and past experiences. The useful life of a depreciable asset determines the amount of depreciation that will be recorded in any given reporting period as well as the amount of accumulated depreciation that is reported at the end of a reporting period. Estimated year -end valuation of investments at fair value — Management's estimate of the fair value of investments is based on published market values at December 31, 2007. Estimated current portion of compensated absences payable — Management's estimate of the amount of the year -end compensated absences payable balance to be taken by employees within one year of December 31, 2007 is based on historical trends and anticipated leave time activity. We evaluated the key factors and assumptions used to develop the above estimates in determining that it is reasonable in relation to the financial statements taken as a whole. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. No such misstatements material, either individually or in the aggregate, to the financial statements taken as a whole were noted. 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 that could be significant to the financial statements or the auditors' report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated May 16, 2008. (7) Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the City's financial statements or a determination of the type of auditors' opinion that may be expressed on those statements, our professional standards require ▪ the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. — Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City's auditors. However, these — discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. — This report is intended solely for the use of the City Council, finance committee, and management of the City of Lino Lakes and is not intended to be, and should not be used by anyone other than these specified parties. NIMm Minneapolis, Minnesota May 16, 2008 (8) ,.-:1.-1.:1-.s..dehi__ Z.L.P LarsonAllen LLP New Accounting and Reporting Standards Other Post - Employment Benefits (GASB Statements No. 45) In the past, most governmental employers offering post employment benefits accounted for them on a pay -as- you -go basis. However, the Governmental Accounting Standards Board (GASB), in July 2004, issued Statement No. 45, Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions, which will make the pay -as- you -go accounting for these benefits a "thing of the past ". Why the change in position by the GASB, you ask? The answer is Tess than nebulous— frequency of occurrence, significance, and disparity. Post employment benefits have become more prevalent in the governmental arena as a means of attracting and retaining talented employees, as a result of legislation, or a combination of the two. Post employment benefits may also comprise a significant cost to the employer, especially if the benefits involve providing healthcare coverage after separation from active employment. Further, these benefits represent a form of compensation, the cost of which should be recognized over the period of time that an employee earns the benefit. Disparity in practice developed as some governmental employers simply followed the pay -as- you -go accounting whereas others opted to report an accrual -basis liability on their financial statements by following the provision of Financial Accounting Standards Board Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, which applies to the private sector. Several bridges must be crossed on the path to adopting GASB Statement No. 45. First, the other post employment benefits or "OPEB" benefits must be identified. Simply speaking, OPEB benefits under the context of the new GASB standard are in essence any type of benefit provided to an employee over a period of time after their separation from service, not necessarily retirement, and obviously not limited to healthcare benefits. Another important aspect is determining the "substantive plan ". The substantive plan is the employers' and the employees' mutual understanding of the OPEB benefit, not necessarily what is written down. In fact, the OPEB plan may not have been previously written down at all! Then one must determine whether the substantive plan is a defined contribution plan or a defined benefit plan: • a defined contribution OPEB plan, under GASB Statement No. 45, is "....plan having terms that (a) provide an individual account for each plan member and (b) specify how contributions to an active plan member's account are to be determined, rather than the income or other benefits the member or his or her beneficiaries are to receive at or after separation from employment." This is similar to a 401(k) plan or a 403(b) plan. • conversely, a defined benefit OPEB plan is one "...having terms that specify the benefits to be provided at or after separation from employment. These benefits may be specified in dollars (for example, a flat dollar payment or an amount based on one or more factors such as age, years of service and compensation), or as a type or level of coverage (for example, prescription drugs or a percentage of healthcare insurance premiums)." The third step is determining the OPEB liability. The OPEB liability for a defined contribution is simply the unpaid contractually required payment, similar to an unpaid invoice. On the other hand, the OPEB liability for a defined benefit pension plan is the cumulative unpaid or unfunded annual required contribution or "ARC ", which will require an actuarial analysis. (9) Other Post - Employment Benefits (GASB Statements No. 45) (Continued) For a defined benefit OPEB plan, the manner of funding the OPEB liability is an important consideration. - Under the new GASB standard, an OPEB liability will only be considered as funded to the extent that assets are transferred to an irrevocable trust for the specific benefit of plan members (i.e. covered employees) and their beneficiaries. Assets held in an irrevocable trust can be reported in fiduciary - financial statements and thus excluded from the employers' government -wide financial statements. Employer assets that are simply "earmarked" to provide for OPEB benefits but that could otherwise be re- directed to other uses are not considered by the GASB as funding of the OPEB liability. Therefore, these earmarked assets continue to be reported in the government -wide financial statements. Said another way, if the intended assets are not held in an irrevocable trust, the OPEB plan is considered unfunded. Recognizing the complexity of the new requirement, the GASB allowed for a phased -in implementation depending on the employers' size. For instance, the effective date for implementing the OPEB standard is for the first fiscal year beginning after December 15, 2006, 2007 or 2008 depending on whether an employer was a phase 1, 2, or 3 implementer of GASB Statement No. 34, respectively. Based on this schedule, implementation for the City would be required for the year ending December 31, 2008. - Given the time allowed before the required implementation dates, there are some important actions and considerations that employers should initiate. First, the employer will need to understand the substantive plan, and would be far the wiser to get it in writing as a formal plan agreement. Qualified and reputable attorneys may need to be engaged for this task. Second, if the OPEB benefit is structured as a defined benefit plan, as opposed to a defined contribution plan, the employer in all likelihood will need to engage an independent actuary to measure the liability. Once the attorneys and the actuaries are engaged, the employer would be wise to study several ad -hoc scenarios —for example, changing assumptions for contribution rates, discount rates, demographics of the covered employee group, duration of coverage, prospective vs. retroactive implementation, etc. —and evaluate the effects on their financial statements. While Statement No. 34 was the most significant accounting standard to be issued by the GASB in the last 20 years, Statement No. 45 is a close second. However, the GASB has allowed a generous amount of time before the required implementation date. Use it wisely! Accounting for Termination Benefits (GASB Statements No. 47) The Governmental Accounting Standards Board (GASB) has issued Statement No. 47, Accounting for Termination Benefits, to provide accounting guidance for state and local governmental employers regarding benefits (such as early- retirement incentives and severance benefits) provided to employees that are terminated. Statement No. 47 requires recognition of the cost of involuntary termination benefits in the period in which a government becomes obligated to provide benefits to terminated employees, which is not necessarily the same period as when the benefits are actually provided. The Statement requires recognition of the cost of voluntary termination benefits when the termination offer is accepted. The Statement provides an exception to the general recognition requirements for termination benefits that affect defined benefit post employment benefits, such as pensions or retiree healthcare. Those termination benefits should be accounted for in the same manner as defined benefit pensions or other post employment benefits, although any increase in an actuarial accrued liability associated with a termination benefit is required to be separately disclosed. (10) Accounting for Termination Benefits (GASB Statements No. 47) (Continued) The Statement also elaborates on how to measure the cost of termination benefits and requires disclosure of information about termination benefit arrangements, including a description of the plan and the cost of the benefits. Statement No. 47 is effective for financial statements for periods beginning after June 15, 2005. However, for termination benefits that affect defined benefit post employment benefits other than pensions, governments should implement Statement No. 47 simultaneously with Statement No. 45, Accounting and Financial Reporting by Employers for Post employment Benefits Other Than Pensions. Sales and Pledges of Receivables and Future Revenues and Intra- Entity Transfers of Assets and Future Revenues (GASB Statements No. 48) This statement is effective for periods beginning after December 15, 2006 and therefore, is applicable to the City for the year ended December 31, 2007. This statement clarifies accounting treatment for transactions involving the exchange of an interest in expected receivable or future revenue collections for immediate cash payments. Accounting and Financial Reporting for Pollution Remediation Obligations (GASB Statements No. 49) This statement is effective for periods beginning after December 15, 2007 and therefore, is applicable to the City for the year ended December 31, 2008. GASB Statement No. 49 requires governments to measure and report liabilities and expenditures resulting from pollution remediation obligations. The new standard is applicable to all pollution remediation except as associated with the following: Environmental obligations associated with landfills which are already covered under GASB Statement No. 18: Accounting for Municipal Solid Waste Landfill Closure and Post - closure Care Costs. Future pollution remediation activities that are required when an asset is retired except for newly retired assets where no liability has previously been recognized. Asset impairments which are already covered under GASB Statement No. 42: Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. Any pollution prevention costs, fines, penalties, or any other non - remediation expenditures. Accounting for any environmental non - exchange transactions. Expenditure recognition or asset capitalization occurs when one of the following five obligating events takes place: The government is compelled to take pollution remediation action because of an imminent endangerment. The government violates a pollution prevention related permit or license. The government is named, or evidence indicates that it will be named, by a regulator as a responsible party or potentially responsible party for remediation, or as a government responsible for sharing costs. The government is named, or evidence indicates that it will be named, in a lawsuit to compel participation in pollution remediation. The government commences or legally obligates itself to commence pollution remediation. Accounting and Financial Reporting for Pollution Remediation Obligations (GASB Statements No. 49) (Continued) Costs of remediation should be accrued for all components (legal fees, site investigation costs, etc.) of - the obligation that are reasonably estimable. The standard outlines a method for recording a liability based on estimated future remediation payments (expected cash flow technique = sum of all probability weighted amounts in a range of possible estimated amounts). The liability should be reduced by any — estimated insurance or other recoveries that are not yet realized or realizable. An asset should be reported separately for any known insurance or other recoveries that are already realized or realizable. If liability recognition is necessary, it is required to be recorded at current value versus estimated future inflating factors for such criteria as unknown technologies, laws or regulations. This liability amount is carried forward unchanged until one of the five benchmarks occurs, there is a change in the remediation plan, or there is a change in operating conditions. IIIIM MMIIII law Additional footnote disclosures accompanying recognition of a liability include explaining the nature and source of the remediation obligation as well as the methods and assumptions used to estimate the liability. (12) NEW AUDITING STANDARDS The Auditing Standards Board of the American Institute of CPA's has issued eight new auditing standards that significantly impact the required level of audit documentation, risk assessment and manner of reporting audit findings to audit committees, or their equivalents, by financial auditors. These audit standards, 104 through 111, will impact the audit process, including the approach, predictability of audit steps, and the overall scope of work to be performed. These standards are effective for the audits of financial statements for periods beginning on or after December 15, 2006. We bring this to your attention as a matter of information to consider in planning and executing your plans for future audits. • SAS No. 104, Amendment to Statement on Auditing Standards No. 1, Codification of Auditing Standards and Procedures ( "Due Professional Care in the Performance of Work ") • SAS No. 105, Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards • SAS No. 106, Audit Evidence • SAS No. 107, Audit Risk and Materiality in Conducting an Audit • SAS No. 108, Planning and Supervision • SAS No. 109, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement • SAS No. 110, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained • SAS No. 111, Amendment to Statement on Auditing Standards No. 39, Audit Sampling These Statements establish standards and provide guidance concerning the auditor's assessment of the risks of material misstatement (whether caused by error or fraud) in a financial statement audit, and the design and performance of audit procedures whose nature, timing, and extent are responsive to the assessed risks. Additionally, the Statements establish standards and provide guidance on planning and supervision, the nature of audit evidence, and evaluating whether the audit evidence obtained affords a reasonable basis for an opinion regarding the financial statements under audit. The primary objective of these Statements is to enhance auditors' application of the audit risk model in practice by specifying, among other things: • More in -depth understanding of the entity and its environment, including its internal control, to identify the risks of material misstatement in the financial statements and what the entity is doing to mitigate them • More rigorous assessment of the risks of material misstatement of the financial statements based on that understanding • Improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks (13)