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HomeMy WebLinkAbout7 2002 Audit A tv►d . �T Memorandum To: Board of Directors From: Mary Chapman, Administrative Services Manager Date: June 13, 2003 SUBJECT: Audited Financial Statements Changes and Adjustments —2002 Audit 1. WHY THIS ITEM IS BEFORE THE BOARD On June 23, 2003, Tim McCann from KPMG will be here to present the 2002 audited financial statements. We do not yet have a draft report for you to look at. I will forward a copy to you as soon as I receive it. However, Peter asked that I highlight the major changes that Tim will be discussing with the Board so that you will have an opportunity to digest some of the changes you will be seeing. 2. HISTORY As you know, for the 2001 audit and many years before, we had Arthur Andersen perform audits for the District. Since Arthur Andersen was no longer in business, we went out and hired KPMG as our new auditors. With new auditors, comes a new set of eyes looking at our records and how financial activities have been recorded. Accounting firms don't all have the same interpretations of the accounting rules. Also, there are new accounting standards implemented by the Government Accounting Standards Board (GASB) such as GASB 33, 34, 37 and 38 which affect all state and local governments. For the District, GASB 33 was effective 1/1/01 and GASB 34, 37 & 38 were effective 1/1/03. 3. NEW INFORMATION The major areas for discussion are: A. Donner Lake Assessment District: Under the Arthur Andersen interpretation of how the assessment district should be recorded on our books, the total assessment district was set up as a receivable and the annual assessment was counted as revenue each year and would continue to be for the term of the assessment. KPMG's interpretation is that the receivable should be recorded as we did but that the offsetting revenue should be recorded as the District spends the money to rebuild the water system. The difference in these two interpretations is substantial. It results in a $6,247,485 entry that requires KPMG to restate the ending Net Asset (Retained Earnings) balance at 12/31/01. 1 have been told that because the balance has to be changed and Arthur Andersen is no longer in business to audit the change or issue a new opinion letter, we must treat 2001 as un-audited. The result of this change is that the revenue (principal portion only) is front ended and actually makes the District's income statement look better. The downside is that as the system is depreciated (a non-cash expense on the income statement) there will not be any offsetting revenue as the years go on. A possible solution would be to have 2001 re-audited. This is not a desirable choice in that it will cost the District a lot of money and it will be extremely time-consuming. Shane Philpot of KPMG and David Casnocha will be discussing this issue and how it will impact us going forward with any new debt. We will also be talking to David about the impact on our existing debt and debt covenants. B. Single Year Audit: KPMG will issue the 2002 audited financial statements as a single year. It will not show the numbers as compared to the previous year. This is partially because of the problem in A above. Also, because of GASB 34, 37 and 38, there are significant format and disclosure changes that have to be made and KPMG does not feel that it is appropriate to include the Arthur Andersen numbers because they did not perform the audit. C. Changes to language used in the audit report: I have been told all along by KPMG that they will have to change how some of the items are worded in the audited financial statements to meet efforts in the accounting industry to standardize the language. An example is where we call retained earnings "Consumer Funds Reinvested in the District", the new language is "Net Assets". Another example is where we call accounts receivable "Amounts due from consumers", the standard is "Accounts Receivable". D. GASB 34, 37, 38 changes: The major impact to the District is in how the audited financial statements are presented. For instance, "Restricted Funds" must now be broken down into two categories, "Board designated funds" which is considered unrestricted in the audited financial statements and "Restricted funds" which represents funds that are actually restricted by contract or law such as our COP reserve funds. There are several other presentation and disclosure requirements particularly in the notes to the financial statements. We will see additional changes when we do the 2003 audit. E. Contributed Capital: With the changes brought on by GASB 33, we started to record the fair market value of donated assets and assets that were paid for by developers and customers. For example, before GASB 33 we would accept a donated asset such as a pipeline from a developer and that was it. Since 1/1/2001, we have been recording donations at their fair market value. Thus for 2002, we recorded $259,036 in contributed capital on the electric side of the business mostly relating to facilities fees collected and new electric connection fees and $10,449,978 on the water side. The water contributions were mostly made up of the value of the Glenshire acquisition, the Donner Lake Assessment District revenue, facilities fees collected and new water connections that were paid for from connection fees. RECOMMENDATION: No action is required at this time.