RD285 - Virginia Small Business Financing Authority (A Component Unit of the Commonwealth of Virginia) Management’s Discussion and Analysis and Basic Unaudited Financial Statements and Supplementary Information for the Fiscal Years ending June 30, 2017 and 2018 and Trial Bond Balance through June 30, 2018
Management’s Responsibility for the Financial Statements
The financial statements, management discussion and notes which follow herein have not been prepared or audited by a certified public accountant. The management of the Virginia Small Business Financing Authority (the “VSBFA" or the “Authority") is responsible for the preparation and presentation of these financial statements, management discussion and notes which follow and for the implementation and maintenance of internal controls relating to the preparation and fair presentation of financial statements which are free from material misstatement, whether due to fraud or error.
In management’s opinion, the financial statements, management discussion and notes presented herein present fairly, in all material respects, the financial position of the Virginia Small Business Financing Authority as of June 30, 2018 and June 30, 2017, and the changes in net position from the 2017 fiscal year-end to the 2018 fiscal year-end.
Non-GASB Compliant Financial Statements
While these statements have been prepared with generally accepted accounting principles in mind, these statements do not meet all U.S. Governmental Accounting Standards Board (GASB) requirements and therefore cannot be considered to be fully compliant with GASB.
GASB 70 and Prior Changes in Reporting Methodology
During fiscal years 2015 and 2016, the Authority made significant changes in reporting methodology relating to funds utilized in its SSBCI Cash Collateral Program (offered initially in 2013) and the State Cash Collateral Program (collectively referred to here as “CCP.")
• The Authority’s CCP programs utilize reserve accounts owned by the Authority and established at participating banks. These reserve accounts are funded with CCP deposits which VSBFA commits for the support of a specific loan for a specified period of time and up to a specified maximum amount. In the event of a loss on a defaulted CCP enrolled loan, the participating bank may – after liquidation of its primary collateral and completion of its collection efforts - file a claim with the Authority to request that the related CCP deposit be utilized to offset the bank’s deficiency loss (or a portion thereof.)
• In the 2013 and 2014 Fiscal Year financial statements, CCP reserve funds owned by the Authority and held in CCP Reserve Accounts at participating banks were reported as Cash Not Held with Treasurer. This reporting methodology implied these CCP reserve funds were liquid and available immediately for future use when in fact these funds had been committed by VSBFA for the participating bank’s potential use, in the event that bank should incur a future loss on an enrolled CCP loan.
• In order to more accurately reflect the Authority’s liquidity position and provide a more accurate representation of VSBFA’s obligations under the Cash Collateral Program, VSBFA made a change in reporting methodology during Fiscal 2015: funds held in CCP Reserve Accounts were reclassified as Restricted Assets and an equivalent, offsetting Restricted Liability was also recorded to reflect the Authority’s obligation of these CCP reserve account. During 2015, the Authority also classified Cash Collateral Program distributions made to participating banks as an expense and recorded a prior period adjustment to reflect the net adjustments to the Authority’s Fiscal 2015 beginning net position had this reporting methodology been utilized in Fiscal 2013 and Fiscal 2014.
• During Fiscal 2016, the Virginia Department of Accounts subsequently determined that the CCP reserves provided under the Cash Collateral Program constituted a non-exchange financial guarantee under the Governmental Accounting Standards Board (GASB) Statement No. 70. The Virginia Auditor of Public Accounts provided similar guidance in early Fiscal 2017. As defined by GASB 70, a non-exchange financial guaranty is typically provided by a government for the obligations of a private entity, not-for-profit organization or an individual, and the government providing the guarantee or support has not directly received equal or approximately equal value in exchange for that guarantee or support. Except for a nominal application fee, the CCP support provided by the Authority to participating banks under the Cash Collateral Program was extended without financial remuneration from the inception of the program until late in Fiscal 2017 when VSBFA began charging a nominal one-time fee for CCP support in excess of $150,000. Consequently, transactions between the Authority and participating CCP banks clearly meet the criteria for GASB 70 given that the Authority’s fees are not equivalent in value to the amount of CCP support being provided.
• Consistent with GASB 70, the funds held in CCP Reserve Accounts are now recognized as Restricted Assets. Also consistent with GASB 70, the Authority will not record a liability and related expense against these CCP Reserve Accounts (Restricted Assets) unless there is a greater than 50% chance that the Authority will be required to make a future payment related to support provided under the Cash Collateral Program. In accordance with GASB 70, the Authority’s Fiscal 2017 and Fiscal 2018 financial statements do not reflect an offsetting liability against the funds held in the CCP Reserve Accounts as of June 30, 2017 and as of June 30, 2018 given that as of those dates there were no Cash Collateral Program support obligations where the Authority had concluded that there was more than a 50% chance of a future claim payment would be necessary.