Critical Accounting Issues And Financial Statement Overview - - PDF document

Critical Accounting Issues And Financial Statement Overview

Presentation by: Gary Weinstock, Vice President/Comptroller

New York State Housing Finance Agency State of New York Mortgage Agency Affordable Housing Corporation Municipal Bond Bank Agency Tobacco Settlement Financing Corporation

April 11, 2019

Outline of Financial Statement Presentation One of the Committee Members requested a refresher on critical accounting

• issues. I will address that at this meeting by first focusing on the basic layout of the

financials, the authoritative pronouncements which are followed by the Agencies in preparing the financials. Next I will present a few of the most important issues that we face in preparing the books and records of the Agencies. Let me begin with a discussion of the contents of the Agency’s financial

• statements. I will be focusing on certain items in the most recent HFA report which

I have attached. Financial statements are prepared once a year at October 31 for HFA, SONYMA, MBBA and TSFC and approved by the Board each January after the recommendation of the Audit Committee. AHC's fiscal year end is March 31 and is approved by the Board in June. The Agencies financial statements are prepared under the guidance established and used for governmental accounting entities. First, let’s establish the standards which are followed. I. Statement Information: A. Explanation of terms 1. "GAAP" - Generally Accepted Accounting Principles. The primary guidance for accounting in the United States (US) is GAAP. These refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information. 2. "GAAS" - Generally Accepted Auditing Standards. These are the standards our auditors follow when conducting audits for the Agencies. Ernst & Young LLP conducts, and reports the results of their audit in

accordance with generally accepted auditing standards (GAAS). Auditing standards provide a measure of audit quality and the objectives to be achieved in an audit. Auditing procedures differ from auditing standards. 3. "FASB" Financial Accounting Standards Board. The Financial Accounting Standards Board (FASB) is the independent, private-sector, not-for-profit organization that establishes financial accounting and reporting standards for public and private companies and not-for- profit organizations that follow Generally Accepted Accounting Principles (GAAP). 4. "GASB" - Governmental Accounting Standards Board The Governmental Accounting Standards Board (GASB) is the independent, private-sector organization that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles. GASB standards are the primary standards and guidance for the Agencies’ financials. They were created to provide governments with standards that apply more to their needs than FASB, which I mentioned is for private industry. B. Responsibility for Financial Reporting - Corporate type letter acknowledging management's responsibility for the financial statements (signed by CEO and CFO). C. As of October 31, 2018 (March 31, 2018 for AHC), the auditors’

• pinion is "clean": there are no exceptions for all five Agencies.

D. Management's Discussion and Analysis (MD & A) - This is an assessment by management of the financial performance of the

• Agency. It contains an explanation of the material aspects of the

financial statements by comparing year to year over a three year period.

E. Statement of Net Position – the GASB term for the Balance Sheet-The GASB does not use the term balance sheet because this statement doesn’t “Balance” the way a standard Balance Sheet does. This Statement presents Assets, Liabilities, and Net Assets. Additionally, it reports deferred inflows of resources and deferred outflows of

• resources. A deferred outflow of resources is defined as “a

consumption of net assets by the government that is applicable to a future reporting period,” and a deferred inflow of resources is defined as “an acquisition of net assets by the government that is applicable to a future reporting period. Simply put, this concept is a way of deferring the recognition of revenues and expenses to a future

• period. Put another way, it is a way of recognizing calculated costs
• r income or changes in value during the year without effecting the

Agencies overall fund balance. Instead, these are put off until the cost is incurred by the Agency. Thus, these items are shown separately from Assets and Liabilities within the statement. I still use the term Balance Sheet since that is a lot clearer. F. Statement of Revenues, Expenses and Changes Net Position - the GASB term for the Income or P& L statement, for revenues and expenses over the last year. G. Statement of Cash Flows- is basically a cash statement. Shows receipts and disbursements. Like a check book statement with adjustments for non-cash items. H. Notes to Financial Statements - This is information essential to understanding the financial statements. It outlines accounting policy, delinquencies, contingencies, SWAPS, pensions, OPEB, and

• ther major events.

II. HFA Subsidy Loans One of the critical accounting issues for HFA is the recording Subsidy Loans. These loans are almost always Subordinated Debt and do not require regular payments of interest and certainly not principal on a current basis. A cash flow test is generally performed beginning at a period up to fifteen years after the loan closes to determine if any payment is due. Principal is usually not due until the loan maturity date, which could be up to 40 or 50 years after closing and interest may not be paid until then either.

Other Subordinate debt includes loans made with Housing Plan or other State Funds or the debt the Agency acquired from ESD when its Mitchell Lama portfolio was acquired by the Agency. These loans had outstanding balances and workout agreements which were not being repaid. When the Agency refinanced this debt those amounts became subordinate to the Agencies first mortgage loans. Since there is no regular cash stream, the Agencies policy is to record the disbursement of loan proceeds as an expense. An allowance is then established for the amount of the loan and any interest is deferred. Any payment received is recorded as income in the period collected. As of October 31, 2018, the Agency had allowances established for Subsidy Loans in the amount of $520 million and the Subordinate Debt relating to the Mitchel Lama portfolio acquired from ESD was approximately $280 million. These amounts are reported in footnote 4 of the HFA financials. Certain recently closed Subsidy Loans require hard payments of interest due regularly. While the policy for recording these loans has not been fully developed, I expect that we will continue to record an allowance for the amount advanced since mortgage principal payments continue to be

• deferred. However, interest income will be recorded annually in the amount due.

III. “GASB” Standards-Summary of important standards GASB STATEMENT NO. 34 BASIC FINANCIAL STATEMENTS—AND MANAGEMENT'S DISCUSSION AND ANALYSIS—FOR STATE AND LOCAL GOVERNMENTS This standard established financial reporting requirements for state and local governments throughout the United States. When implemented, it presented new information and restructured much

• f the information that governments had presented in years prior to

its implementation. The requirements were developed to make annual reports more comprehensive and easier to understand and

• use. The concept of the MD&A was introduced in GASB 34.

The next three GASB statements require an actuary to calculate the revenues, expenses and potential liabilities at any point in time. In each case we receive a detailed reported which lays out the financial statement amounts and the footnote disclosure.

GASB STATEMENT NO. 53 ACCOUNTING AND FINANCIAL REPORTING FOR DERIVATIVE INSTRUMENTS (The SWAPS entered into by HFA and SONYMA are accounted for under this standard.) This Statement continues to be the standard by which the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments is

• measured. It was issued to address the fact that Derivative

instruments are often complex financial arrangements used by governments to manage specific risks or to make investments. By entering into these arrangements, governments receive and make payments based on market prices. Derivative instruments associated with changing financial and commodity prices result in changing cash flows and fair values that can be used as effective risk management or investment tools. Derivative instruments, however, also can expose governments to significant risks and liabilities. In the case of SONYMA, the SWAPS have resulted in savings of $8.3 million as of first quarter 2019. This statement allows for recognition of the effectiveness of SWAPS and has been used in the HFA and the SONYMA financials since 2010. In accordance with GASB 53, the Agencies’ policy regarding SWAPS is as follows: “The Agency has entered into various interest rate swap contracts in

• rder to manage the risks associated with interest due on its State

Revenue Bond Program portfolio. The Agency recognizes the fair value of all derivative instruments as either an asset or liability on its statements of net position with the offsetting gains or losses recognized in earnings or as either deferred inflows or outflows if deemed an effective hedge.” In this case, if the hedge is calculated as ineffective, the deferred

• utflows or inflows are recognized as actual revenues or expenses.

While the SONYMA actuarial report is initiated by the Agency using actuaries engaged by the Agency, the only HFA SWAPS currently held are related to the State’s Personal Income Tax (“PIT”) bonds, or service contract revenue bond (“SCOR”) debt. In that case, the report is received from the State and those results are reported.

For 2018, the State’s HFA debt recognized an accumulated decrease in fair value of hedging derivatives of $10.5 million (see page 23 of the 2018 HFA financial statements). This is an unrealized loss because it won’t be realized unless the SWAP matures in a loss position. GASB STATEMENT NO. 68 ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS—AN AMENDMENT OF GASB STATEMENT NO. 27 This statement changed the way SONYMA and HFA account for pension expense. Previously, the Agencies simply recorded the amount paid to the State as pension expense. With the implementation of GASB 68, the Agency is required to record its share

• f the State’s pension expense and any related liability. The amounts

recorded as well as the extensive disclosure required in the notes to the financials are provided by the State. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by

• ther entities.

In a similar case to GASB 53, the State engages an actuary to report

• n the entire State pension system. In this report, the State lays out

each Agencies share of the liability which the Agency then reports. The detailed reporting for HFA can be found in Note 13 to the financial

• statements. As of October 31, 2018, the amount of the liability was

$858 thousand and the expense for the year was $1.3 million. For SONYMA the liability was $1.1 million and the expense for the year was $1.5 million. GASB STATEMENT NO. 75 ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS The most recent GASB pronouncement requiring a major change to the Agencies financials is GASB 75. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). So the emphasis

here is, other than pensions, what benefits does a government give to employees when they retire. The Agencies OPEB obligation is primarily related to the health care insurance of retirees for which the Agency contributes to the cost. The purpose of this disclosure is the show how much has been earned by employees but not yet paid out by the Agency as a liability on the Balance Sheet. The amount of expense recognized in any period is not the amount paid but is the amount earned by employees. GASB 75 requires the Agency to engage its’ own actuary. The actuary gathers all the information relating to the cost of health care such as the ages of current employees, retirees and current expenditures. Then, using a discount rate, a calculation of the cost to the Agency for the current year as well as the long-term liability position is

• calculated. The report is used for the recording of the cost and the

footnote disclosure. The Agencies’ auditors review the report and have their actuaries review the report and work with the Agencies actuaries to ensure that this is recorded accurately. The detailed footnote disclosure for HFA can be found in Note 12. The amount of the liability to be paid in future periods for HFA was approximately $40 Million as of October 31, 2018 and the expense recognized for the year was $3.4 million. For SONYMA the liability was $43.7 million and the expense was $2.9 million. To summarize, the overarching theme of these GASB Statements is to recognize the benefits earned by employees in the period earned rather than in the period

• paid. Going along with that concept, the amount of the accumulated expense

which has not yet been expended is shown as a liability. I hope this was helpful in explaining some of the critical accounting issues the Agency face other than the normal recording of mortgages, fees and other regularly recorded income and expense items.