SWCD Financial Statements

Current Reporting Requirements

In accord with Minn. Statute 103C.325, Subd. 2, the Office of the State Auditor (OSA) and the MN Board of Soil and Water Resources (BWSR) require all soil and water conservation districts (SWCDs) to have an annual financial audit regardless of revenue, effective with the 2019 financial statements.

For the purposes of fulfilling the audit requirement, SWCDs may contract directly with a Certified Public Accountant (CPA) with experience in auditing governmental entities and in good standing with the State Board of Accountancy. Refer to the Audit Bid Letter for information needed to obtain bids for the annual audit and you may want to include the CPA Guide when sending the audit bid letter to CPA firms for a price quote. Both documents can be found at: https://bwsr.state.mn.us/swcd-financial-statements

Draft copies of the annual audited financial statements are due to OSA by October 31, following the year ended December 31. The OSA will review one-third of the draft SWCD audited financial statements each year. However, review of a district’s financials could occur more often if requested by BWSR (i.e. significant deficiencies identified by the CPA firm during the audit process). OSA’s review schedule for SWCD financial statements 2019 through 2021 can be found at: https://bwsr.state.mn.us/swcd-financial-statements.

Final copies of the annual audited financial statements are due to OSA, BWSR’s Chief Financial Officer, and other parties having an interest in the SWCD operations by December 31, following the year ended the previous December 31.

Breakdown of county revenue should be submitted to BWSR’s Chief Financial Officer no later than October 31, following the year ended December 31. A reporting form can be found at: https://bwsr.state.mn.us/swcd-financial-statements.

Items to note:

• Unaudited financial statements or summary Balance Sheet/Profit and Loss reports (Finance Report packages) no longer need to be submitted to BWSR by March 15.
• If the district contracts with a CPA firm for bookkeeping services and the firm has two or less partners, the annual audit is to be prepared by a separate independent CPA firm. A CPA firm providing consulting services could also prepare audited financial statements. (Recommendation by AICPA National Peer Review Committee)
• The Office of the State Auditor may have additional annual reporting requirements which are independent of the financial statement requirements to BWSR and OSA.

Accounting Adjustments from CPA Audit

Districts should carefully review accounting adjustments requested by the CPA firm preparing audited financial statements. These adjustments identify opportunities for improvement in the district’s accounting. If needed, ask the CPA for further clarification “Please help me understand why these adjusting entries are needed to prevent having to make them again next year.” Use a similar approach if the district’s equipment log does not match the CPA calculations for beginning balance, additions, deletions, and ending balance of equipment, accumulated depreciation, and net capital assets.

2019 SWCD Audit Work Group

In 2019, a SWCD Audit Work Group was formed to review various issues related to SWCD financial activities, reporting, and frequency of audits. The work group included representatives from SWCD supervisors and staff, MASWCD, OSA, and BWSR. The group identified a need for SWCD training in the areas of accounting, grants management, and internal controls.

Ongoing challenges identified were: 1) each year several SWCDs need assistance to prepare unaudited financial statements and BWSR doesn’t have the capacity to provide these services and 2) there has been considerable variance in some SWCD’s unaudited vs. audited financial statement data reported.

Because funding levels have increased significantly, the majority of SWCDs annually meet the revenue threshold requiring audited financial statements. A survey of SWCDs identified unaudited financial statements were time consuming to prepare while prepping for an audit by a CPA firm required less staff time. Since CPA firms must begin their process using the most recent audited financial statements, annual audits are more cost effective and the cost is an allowable expense as overhead in the BWSR billable rate calculations. Most importantly, audited financial statements are more accurate and provide insights into the financial management of SWCDs, as reviewed from a CPA perspective. Based on the recommendation from this work group, BWSR moved forward with updating its Memorandum of Understanding with OSA to require annual SWCD audited financial statements.

History

Minn. Statute 103C.325, Subd. 2, requires the state auditor to annually audit the books of the SWCDs or, at the request of the district board, the state auditor can allow for a certified public accountant (CPA) to perform the annual audit. Further, the state auditor may determine that an annual audit is not necessary.

In 1993, an understanding was reached between the OSA and BWSR to establish guidelines for the audits of SWCDs. The agreement allowed a SWCD to hire a private CPA to conduct the audit; it also set a threshold for the frequency of the audit. Based on the 1993 agreement, a SWCD was required to have an audit of its financial records when its accumulated revenues since the last audit reached $300,000, but not less frequently than once every four years. Over the years, at BWSR’s request, the accumulated revenues threshold was changed to $500,000 and no less frequently than once every three years.

A pilot process was used for the 2018 financial statements. The MOU between BWSR and OSA was updated in 2019 with the current annual financial statement requirements outlined above.

Overview

A financial statement is a formal record of the financial activities and position of the district. Annual financial statements are financial reports based on a 12-month consecutive time period. Financial statements demonstrate the district’s ability to manage public dollars and are a fiscal responsibility. Audited financial statements assess the district’s strengths and weaknesses. According to Generally Accepted Accounting Principles (GAAP), financial statements are presented using modified accrual accounting and follow a standardized format which enables comparability of district trends for revenues and expenses over several years and to its peers. Financial data is summarized to gauge the health of the district and can be used to calculate the district’s going concern. Understanding financial statements enable the district to take actions and make decisions which allow the district to grow and be successful.

Items to note:

• The End-of-Year Accounting Adjustments section contains the entries needed to close the year within the accounting system. End-of-year accounting adjustments are not part of the financial statement process.
• The Office of the State Auditor may have additional annual reporting requirements which are independent from the audited annual financial statements required.

Financial Statement Components

Management’s Discussion and Analysis

This section of the financial statements enables the district to highlight accomplishments from the past year, discuss significant developments, and note future plans. Detail is provided on the change in fund balance from the previous year, which is helpful to understand the effects to the fund balance. Further information on how to analyze financial data can be found in the Financial Statement Analysis section below.

Notes to the Financial Statements

Detailed notes for Capital Assets report the beginning balances, additions, deletions, and ending balances for equipment, accumulated depreciation, and net book value of capital assets. The net book value of capital assets is reported in the adjustment column of the Statement of Net Position and Governmental Fund Balance Sheet and the annual depreciation amount shown in the adjustment column of the Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance.

Detailed notes for Compensated Absences Payable report the liability for employees’ leave payout, according to the district’s personnel policies. The liability is shown in the adjustment column of the Statement of Net Position and Governmental Fund Balance Sheet and the increase or decrease from the prior year reported in the adjustment column of the Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance. Annual review of the liability is encouraged and when the total amount becomes significant to the district, consider recording as a liability within the accounting system (see End-of-Year Accounting Adjustments section).

Audited financial statements provide much detail related to defined benefit pension plans, in accordance with accounting rules issued by the Governmental Accounting Standards Board (GASB), effective in the 2015 reporting year. GASB Statement No. 68 changed the way a public pension plan discloses its pension information and how pension costs are accounted for in the financial statements. Net pension liability, deferred outflows of resources, and deferred inflows of resources are shown in the adjustment column of the Statement of Net Position and Governmental Fund Balance Sheet and the net pension expense reported in the adjustment column of the Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance. PERA has compiled an Understanding the New Pension Accounting and Financial Reporting Requirements brochure (sample brochure included in the Appendix) which details the new pension accounting and reporting requirements and is available on their website at: https://www.mnpera.org/employers/financial-resource-center/gasb-public-information/.

A Certified Public Accounting firm conducting an audit to provide audited financial statements may provide an assessment of the district’s strengths and weaknesses related to internal controls and segregation of duties.

Statement of Net Position and Governmental Fund Balance Sheet

The amounts reported in the General Fund column of the statement come directly from the Balance Sheet within the accounting system after the end-of-year accounting adjustments have been made and represent the district’s financial standing at a given point in time. All assets and liabilities are reported on a modified accrual basis. Assets minus liabilities equals fund balance/net position. Over time, increases or decreases in the district’s fund balance/net position are one indicator of the district’s financial health.

The Adjustments column of the statement reports the adjustments for financial statement purposes, such as capital assets, pension, compensated absences, and fund balance classifications. The Statement of Net Position column represents the combined amount of the other two columns.

A significant item on most district’s Statement of Net Position and Governmental Fund Balance Sheet is unearned revenue, which represents monies received by the district before the related goods and/or services have been provided. Formerly referred to as deferred revenue, these monies are advanced payments on grants with the funds deposited to the district financial account; however, the monies may need to be returned to the funding agency (i.e. state, etc.) should the grant be cancelled or funds unspent by the grant expiration date.

Statement of Activities and Governmental Fund Revenues, Expenditures and Changes in Fund Balance

The amounts reported in the General Fund column of the statement come directly from the Profit and Loss report within the accounting system after the end-of-year accounting adjustments have been made. All revenues and expenditures are reported on a modified accrual basis. Revenues minus expenditures equals excess of revenues over (under) expenditures (i.e. net income).

The Adjustments column of the statement reports the adjustments for financial statement purposes, such as depreciation on capital assets, net pension expense, and change in the compensated absences balance. The Statement of Activities column represents the combined amount of the other two columns.

Budgetary Comparison Statement

The amounts reported in the General Fund column of the statement come directly from the Profit and Loss report within the accounting system after the end-of-year accounting adjustments have been made. All revenues and expenditures are reported on a modified accrual basis. Revenues minus expenditures equals excess of revenues over (under) expenditures (i.e. net income).

This statement demonstrates the degree to which the direct expenses of a given program or project are offset by related revenues (i.e. district, county, local, federal, state). Direct expenses are those clearly identifiable with a specific program or project. Over time, increases or decreases in the district’s fund balance/net position are one indicator of the district’s financial health. Other non-financial factors are changes in state and local governmental funding. Diversification of funding sources is important to the long-term health of the district.

The statement reports the differences between budgeted and actual within the reporting categories. Significant differences should be reviewed and outlined in the Management’s Discussion and Analysis section of the financial statements.

Financial Statement Analysis

Since financial statements are presented in a standardized format, comparability of district trends can be facilitated with minimal effort by entering the annual financial statement data into a spreadsheet which compares five or more years. Use a format that best fits your needs and present the data in different ways (numerical, charts, graphs, etc.) to highlight important trends in ways that are easily understood. Use audited financial statement data if available. BWSR has developed a financial statement dashboard, which you can adjust to meet the needs of your district. The dashboard and Creating Charts in Excel (instructions for making changes to the dashboard) can be found on the BWSR website, Operational Resources - Soil and Water Conservation Districts - SWCD Financial Statements: https://bwsr.state.mn.us/swcd-financial-statements.

In the Expenditures section of the Profit and Loss Statement, capital outlay/depreciation can be entered as either capital asset purchases for the year, annual depreciation reported in the financial statements, or left blank, depending upon the fiscal management preference of the district board. If capital asset purchases are needed to help sustain or grow district operations, it would be advisable to include either capital asset purchases for the year (more variance) or the annual depreciation reported in the financial statements (less variance but would need to know this amount in a timely manner).

Review the data over several years to determine trends within specific line item categories in revenues and expenses. Strive to find ways to diversify district funding. Net revenue over (under) expenditures has a direct effect on the fund balance. Review changes to assets, liabilities, and fund balance for the years presented to determine if the district is operating in a sustainable manner.

Going Concern Calculation

The accounting term “Going Concern” refers to the district’s likelihood of continuing its normal course of business and its calculation is one way to gauge the health of the district. The financial statement dashboard mentioned above includes the calculation as outlined here:

• Total cost of district operations divided by 12 months to determine monthly cost of district operations
• Determine the unassigned fund balance (refer to Board Oversight – Annual Budgeting Process - Classifications of Fund Balance section)
• Unassigned fund balance divided by the monthly cost of district operations equals the number of months the fund balance would support district operations
  • If less than 3 months, the district should strive to grow the fund balance
  • 3-6 months of fund balance is building a safety net for leaner times or unforeseen circumstances
  • Greater than 6 months of fund balance represents a good fiscal position to consider hiring staff to expand district services, funding capital asset purchases, or addressing other needs identified in the budgeting process/strategic plan
  • Too many months of fund balance may not be a good use of public funds since public dollars are held in reserve and not used to support the community

It is recommended for districts to adopt a formal fund balance policy and maintain general operating fund reserves. Refer to the Board Oversight - Annual Budgeting Process – Establishing a Financial Target section of this chapter for an example of an Unassigned Fund Balance Policy.

Unaudited financial statements are no longer required. The End-of-Year Accounting Adjustments section contains the entries needed to close the year within the accounting system. End-of-year accounting adjustments are not part of the financial statement process.

The Office of the State Auditor may have additional annual reporting requirements which are independent of the annual audited financial statements required. Prior to 2019, SWCDs often prepared and submitted unaudited financial statements. For historical purposes, an overview of the process is provided.

Reports (prepared using Excel)

Include:

• Statement of Net Position and Governmental Fund Balance Sheet
• Budgetary Comparison Statement
• Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance

The SWCD_Fin_Stmts_20xx_Statement_Template would auto-populate some data thus the order of entries shown on the Instructions tab. Next, review of the green shaded areas on the Help Sheet tab would reflect if the data entered balanced. If not in balance, data entry would be rechecked.

Adjustments for Financial Statements Only

There are three adjustments required for governmental financial statements. Amounts entered in the template Help Sheet yellow highlighted areas would auto-populate to the adjustments column of the appropriate reports.

Capital Assets
At least on an annual basis, governmental organizations are required to report their capital assets according to accounting standards (GASB 34). The End-of-Year Accounting Adjustments - Prior to Year-End – Capital Assets section addresses the updates needed to the equipment log in order to accurately report asset purchases, depreciation, and deletion amounts for the year.

Pension
Governmental organizations are required, since 2015, to report their net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense on an annual basis as an adjustment for financial statement purposes only (GASB 68). Through 2018 reporting, unaudited financial statements could use a simplified version to calculate pension liability, inflows, outflows, and expense. Annual pension data can be found in the 20xx GASB Toolkit – Final GASB 68 Schedules and Audit Opinion for Fiscal Year 20xx on the Minnesota PERA website at: https://www.mnpera.org/employers/financial-resource-center/. To search the PERA audit report when open, right mouse “Find” then enter “xxx County SWCD” and click “Next” to move to each page where the organization’s name can be found. Since unaudited financial statements are no longer required, there is no need to gather pension numbers (liability, inflows, outflows) since this calculation is done by the CPA firm during the annual audit.

Compensated Absences
Compensated Absences represents the cost to the organization of benefits owed (vacation, sick, comp time, etc.) if all employees end employment as of December 31 (required per GASB 34). A list of employees and their current leave balances was created and then adjusted for the actual leave the employee would be paid according to district policies. Multiplying the adjusted hours by the employee’s rate of pay as of December 31 would provide the total amount due for all employees, which is the end-of-year compensated absences liability. FICA, Medicare, or PERA not included in the calculation since the adjustment is for financial statement purposes only.

Compensated Absences Chart

Reports (prepared using Word)

Include:

• Management’s Discussion and Analysis
• Notes to the Financial Statements

Templates for these documents had been provided with district data entered as appropriate, including any specifics provided by the district.