financial audit of the department of public safety_part6 ppt

Capital Assets The accounting treatment over capital assets depends on whether the assets are used in governmental fund or proprietary fund operations and whether they are reported in th

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other state agencies for services provided to those agencies for a fee The amounts reported as net receivables were established based on management’s estimate of amounts collectible

Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as internal balances

Inventories

Inventory of goods, materials, and supplies is valued at cost (first-in, first-out method) Inventory in the enterprise fund consists primarily of printing, construction, and sewing supplies to be used in the Correctional Industries Program

Capital Assets

The accounting treatment over capital assets depends on whether the assets are used in governmental fund or proprietary fund operations and whether they are reported in the government-wide or fund financial statements

Capital assets include land, improvements to land, buildings, building improvements, vehicles, machinery, equipment, and all other tangible or intangible assets that are used in operations and that have initial useful lives extending beyond a single reporting period

When capital assets are purchased, they are capitalized and depreciated

in the government-wide financial statements Capital assets are recorded

as expenditures of the current period in the governmental fund financial statements Capital assets used in proprietary fund operations are accounted for on the same basis as in the government-wide financial statements

Capital assets are valued at cost where historical cost records are available and at estimated historical cost where no records exist

Donated capital assets are valued at their estimated fair value on the date received

Improvements to capital assets that materially add to the value or extend the life of the assets are capitalized Other repairs and normal

maintenance are not capitalized Major outlays for capital assets and improvements are capitalized as projects are constructed

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The department has adopted the following capitalization policy:

Deferred Revenues

Deferred revenues reported in governmental activities on the statement of net assets and in other governmental funds on the balance sheet arise when the department receives resources before it has a legal claim to them, as when grant monies are received prior to the incurrence of qualifying expenditures In subsequent periods, when the department has

a legal claim to the resources, the liability for the deferred revenue is removed from the statement of net assets and balance sheet and revenue

is recognized

Due to Individuals

Due to individuals represents assets held by the department primarily in

an agency capacity for the inmate population

Accumulated Vacation

It is the department’s policy to permit employees to accumulate earned but unused vacation and sick leave benefits There is no liability for unpaid accumulated sick leave since sick leave is not convertible to pay upon termination of employment All vacation pay is accrued when incurred in the government-wide and proprietary fund financial statements A liability for these amounts is reported in the governmental funds only if they have matured, for example, as a result of employee resignations and retirements

Restricted Net Assets

Net assets are restricted when constraints placed on net assets are imposed by grantors, contributors, or laws and regulations of authorizing governments When both restricted and unrestricted net assets are available, the department generally applies unrestricted resources before restricted resources for expenses incurred

Minimum

Land improvements $ 100,000 15 years Not applicable

Buildings and improvements 100,000 30 years 40 years

Furniture and equipment 5,000 7 years 5 years

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Appropriations

Appropriations represent the authorizations granted by the State Legislature that permit a state agency, within established fiscal and budgetary controls, to incur obligations and to make expenditures Appropriations are allotted quarterly The allotted appropriations lapse if not expended by or encumbered at the end of the fiscal year State allotted appropriations reported in the accompanying statement of activities and statement of revenues, expenditures, and changes in fund balances are shown net of lapsed appropriations related to previous years

Program Revenues

Program revenues derive directly from the programs of the department or from parties outside of the department and are categorized as charges for services, operating grants and contributions, or capital grants and

contributions

Charges for services – Charges for services include revenues based on exchange or exchange-like transactions These revenues arise from charges to customers or applicants who purchase, use, or directly benefit from the goods, services, or privileges provided Revenues in this category include fees charged for specific services, such as controlled substance registration fees, security service fees, and state law and court imposed crime victim compensation fees Payments from other

governments that are exchange transactions are also reported as charges for services

Operating grants and contributions – Program-specific operating and capital grants and contributions include revenues arising from mandatory and voluntary nonexchange transactions with other governments,

organizations, or individuals that are restricted for use in a particular program Governmental grants and assistance awards made on the basis

of entitlement periods are recorded as intergovernmental receivables and revenues when entitlement occurs All other federal reimbursement-type grants are recorded as intergovernmental receivables and revenues when the related expenditures or expenses are incurred

Intrafund and Interfund Transactions

Significant transfers of financial resources between activities included within the same fund are offset within that fund Transfers of revenues from funds authorized to receive them to funds authorized to expend them have been recorded as transfers in the basic financial statements

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During the current year, the department discovered that certain capital assets were not recorded in its capital assets inventory system as of June 30, 2004 These capital assets had a carrying value of $4,354,152, net of accumulated depreciation of $1,611,489 at June 30, 2004 The recording of these assets resulted in the following adjustments to net assets for the governmental activities at June 30, 2004:

Revenue estimates are provided to the State Legislature at the time of budget consideration and are revised and updated periodically during the fiscal year Amounts reflected as budgeted revenues and budgeted expenditures in the statement of revenue and expenditures – budget and actual (budgetary basis) – general fund are derived primarily from acts of the State Legislature and from other authorizations contained in other specific appropriation acts in various Session Laws of Hawaiÿi To the extent not expended or encumbered, general fund appropriations generally lapse at the end of the fiscal year for which the appropriations were made The State Legislature specifies the lapse date and any other particular conditions relating to terminating the authorization for other appropriations such as those related to the special revenue funds

Encumbrances are recorded obligations in the form of purchase orders or contracts The department records encumbrances at the time purchase orders or contracts are awarded and executed Encumbrances

outstanding at fiscal year-end are reported as reservations of fund balances since they do not constitute expenditures or liabilities

For purposes of budgeting, the department’s budgetary fund structure and accounting principles differ from those utilized to present the governmental fund financial statements in conformity with U.S

generally accepted accounting principles (GAAP) The department’s annual budget is prepared on the modified accrual basis of accounting with several differences, principally related to: (1) the encumbrance of purchase order and contract obligations, (2) the recognition of certain receivables, and (3) special revenue fund operating grant accruals and deferrals These differences represent a departure from GAAP The following schedule reconciles the budgetary amounts to the amounts presented in accordance with GAAP for the general fund for the fiscal year ended June 30, 2005:

Note 3 – Restatement

Governmental Activities

Net assets as of June 30, 2004, as previously reported $ 82,456,696 Addition of capital assets, net of accumulated depreciation 4,354,152 Net assets as of June 30, 2004, as restated $ 86,810,848

Note 4 – Budgeting and

Budgetary Control

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Cash in State Treasury

The state director of finance is responsible for the safekeeping of all moneys paid into the state treasury The state director of finance pools and invests any monies of the State, which in the director’s judgment, are

in excess of amounts necessary for meeting the immediate requirements

of the State Legally authorized investments include obligations of, or guaranteed by, the U.S government, obligations of the State, federally-insured savings and checking accounts, time certificates of deposit, and repurchase agreements with federally-insured financial institutions The State established a policy whereby all unrestricted and certain restricted cash is invested in the State’s investment pool Cash accounts that participate in the investment pool accrue interest based on the average weighted cash balances of each account

For demand or checking accounts and time certificates of deposit, the State requires that the depository banks pledge collateral based on daily available bank balances The use of daily available bank balances to determine collateral requirements results in the available balances being under-collateralized at various times during the fiscal year All securities pledged as collateral are held either by the state treasury or by the State’s fiscal agents in the name of the State

For the purposes of the statement of cash flows, cash and cash equivalents includes cash in state treasury

Interest Rate Risk - As a means of limiting its exposure to fair value losses arising from rising interest rates, the State’s investment policy generally limits maturities on investments to not more than five years from the date of investment

Credit Risk - The State’s investment policy limits investments to state and U.S Treasury securities, time certificates of deposit, U.S

government or agency obligations, repurchase agreements, commercial paper, bankers’ acceptances, and money market funds and student loan resource securities maintaining a Triple-A rating

Excess of revenues over expenditures and other uses – actual on budgetary basis $ 971,923 Reserved for encumbrances at fiscal year-end 9,430,783 Expenditures for liquidation of prior fiscal year encumbrances (6,816,025) Lapsed appropriations related to prior years (1,421,954)

Net adjustment for commissary revenue accrual 5,078 Net change in fund balance - GAAP basis $ 2,358,936

Note 5 – Cash and

Cash Equivalents

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Custodial Risk - For an investment, custodial risk is the risk that, in the event of the failure of the counterparty, the State will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party The State’s investments are held at broker/dealer firms which are protected by the Securities Investor Protection Corporation (SIPC) up to a maximum amount Excess-SIPC coverage is provided by the firms’ insurance policies In addition, the State requires the institutions to set aside in safekeeping certain types of securities to collateralize repurchase agreements The State monitors the market value of these securities and obtains additional collateral when appropriate

Concentration of Credit Risk - The State’s policy provides guidelines for portfolio diversification by placing limits on the amount the State may invest in any one issuer, types of investment instruments, and position limits per issue of an investment instrument

The carrying value of the department’s cash in the state treasury at June 30, 2005 was $22,412,721 ($21,670,352 for the governmental and proprietary funds and $742,369 for the fiduciary fund) Information relating to the cash in state treasury is determined on a statewide basis and not for individual departments or divisions Information regarding the carrying amount and corresponding bank balances of the cash (which includes the department’s cash in state treasury) and collateralization of the cash balances is included in the comprehensive annual financial report of the State The department’s share of the cash in the state treasury, as summarized in the table below, is 0.6%:

Maturity (in years)

(Amounts expressed in thousands) State treasury:

Cash and cash equivalents $ 2,074,860 $ 2,074,860 $ — $ — Investments:

Certificates of deposit 68,299 53,299 15,000 — U.S government securities 1,374,711 — 1,374,700 11 Repurchase agreements 361,065 345,408 15,657 —

Total investments 1,804,075 398,707 1,405,357 11 Total state treasury $ 3,878,935 $ 2,473,567 $ 1,405,357 $ 11

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Governmental activities:

Total governmental activities depreciation $ 6,353,887 Business-type activities – correctional industries $ 204,953

Balance

Business-type activities:

Building and improvements $ 2,579,000 $ — $ — $ 2,579,000

Equipment under capital lease 649,758 25,826 — 675,584

Total capital assets 3,958,858 25,826 — 3,984,684 Less accumulated depreciation:

Building and improvements 773,700 64,475 — 838,175

Equipment under capital lease 520,764 47,489 — 568,253

Total accumulated depreciation 1,947,346 204,953 — 2,152,299 Governmental activities –

capital assets, net $ 2,011,512 $ (179,127) $ — $ 1,832,385

Depreciation expense was charged to functions as follows:

The only long-term liability for governmental activities is for accrued compensated absences Long-term liability activity during the fiscal year ended June 30, 2005 was as follows:

The amount of governmental activities compensated absences liability due within one year is $5,499,153 The compensated absences liability has been paid primarily by the general fund in the past

Long-term liability activity for business-type activities during the fiscal year ended June 30, 2005 was as follows:

Balance at July 1, 2004 $ 15,403,945

Balance at June 30, 2005 $ 14,086,233

Note 8 – Long-term

Liabilities

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Payroll fringe benefit costs of the department’s employees funded by state appropriations (general fund) are assumed by the State and are not charged to the department’s operating funds These costs, totaling

$32,224,817 for the fiscal year ended June 30, 2005, have been reported

as revenues and expenditures in the general fund of the department Payroll fringe benefit costs related to federally-funded salaries are not assumed by the State and are recorded as expenditures in the

department’s special revenue funds

Capital Leases

The department’s Correctional Industries Program has long-term equipment leases expiring through October 2006 that are accounted for

as capital leases in the enterprise fund The leased equipment is amortized using the straight-line method over the estimated useful lives

of the equipment The amortization is included in depreciation and amortization expense of the enterprise fund and amounted to approximately $47,500 for the fiscal year ended June 30, 2005

At June 30, 2005, the future minimum lease payments together with the present value of net minimum lease payments (obligations under capital leases) were as follows:

Operating Leases

The department leases office facilities from third-party lessors as well

as equipment on a long-term basis that are reported in the general and enterprise funds Future minimum lease rentals under noncancelable operating leases with terms of one year or more at June 30, 2005, were

as follows:

Amount

July 1, 2004 Additions Reductions June 30, 2005 one year

Capital lease obligations $ 30,617 $ 25,826 $ 38,912 $ 17,531 $ 14,277 Accrued compensated absences 225,968 71,728 126,038 171,658 67,013

Total $ 256,585 $ 97,554 $ 164,950 $ 189,189 $ 81,290

Note 9 – Nonimposed

Employee Fringe

Benefits

Note 10 – Lease

Commitments

Fiscal year ending June 30:

Total minimum lease payments 17,531 Lease amounts representing interest at 5.50% – 7.58% 684

Present value of minimum lease payments $ 16,847

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Total rent expense for the fiscal year ended June 30, 2005 was approximately $510,000

Employees’ Retirement System

Substantially all eligible employees of the department are required by Chapter 88, Hawaiÿi Revised Statutes (HRS), to become members of the Employees’ Retirement System of the State of Hawaiÿi (ERS), a

cost-sharing multiple-employer public employee retirement plan The ERS provides retirement benefits as well as death and disability benefits The ERS issues a publicly available financial report that includes

financial statements and required supplementary information The report may be obtained by writing to the ERS at City Financial Tower, 201 Merchant Street, Suite 1400, Honolulu, Hawaiÿi 96813

Members of the ERS belong to either a contributory or noncontributory option Only employees of the department hired on or before June 30,

1984 are eligible to participate in the contributory option The noncontributory option provides for reduced benefits and covers most eligible employees hired after June 30, 1984 Employees hired before that date were allowed to continue under the contributory option or to elect the new noncontributory option and receive a refund of employee contributions All benefits vest after five and ten years of credited service under the contributory and noncontributory options, respectively Both options provide a monthly retirement allowance based on the employee’s age, years of credited service, and average final compensation (AFC) The AFC is the average salary earned during the five highest paid years of service, including the vacation payment, if the employee became a member prior to January 1, 1971 The AFC for members hired on or after that date is based on the three highest paid years of service, excluding the vacation payment

Most covered employees of the contributory option are required to contribute 7.8% of their salary Police officers, firefighters, investigators

Fiscal year ending June 30:

$ 765,000

Note 11 – Retirement

Benefits

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