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’ opinion 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 gov ernment 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 or 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 other 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 of 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.