Financial Reporting Pyramid

1
Chapter 17
Financial Reporting Issues
2
The New Reporting Model

• GASB Statement No. 34
• Basic Financial Statements
• and Managements Discussion and Analysis
• for State and Local Governments
• June 1999

3
The Comprehensive Annual Financial Report (CAFR)

• Introduction
• Financial section
• auditors report
• general purpose financial statements notes
• combining statements
• Statistical section

4
Statement 34 Primary Features

• Managements discussion and analysis
• Basic financial statements
• government-wide
• fund
• Required supplementary information

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GASBs Financial Reporting Pyramid

• Top highly aggregated, consolidated financial
  statements
• Bottom highly detailed, voluminous reports
• Dual reporting approach
• CAFR and GPFS
• combined and combining statements
• individual fund and account group statements

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Financial Reporting

• Comprehensive annual financial report
• simple entity context
• complex entity context
• defining the government reporting entity
• blending
• discrete presentation
• related organizations, joint ventures, and
  jointly governed organizations

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Complex Entities

• Reporting entity definition
• primary government (PG) legal entity plus
• component units (CU) that either
• are financially accountable to PG
• are majority-owned for-profits that directly
  facilitate public service
• must be included to avoid being misleading

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CU Reporting Presence of Financial
Accountability

• PG has financial accountability for CU if
• the CU is fiscally dependent on PG or
• the CU is one for which PG either appoints voting
  majority of governing board or majority of board
  is composed of primary government officials and
  the CU is one over which
• the PG has the ability to impose its will or
• with which PG has a financial benefit/burden
  relationship

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CU ReportingBlending

• Permitted only if CU meets one of three
  conditions
• substantively same governing body as PG
• provides service only to PG
• benefits only PG

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CU ReportingBlending, continued

• PG legal entity and blended CUs reported as if
  single entity
• CU funds blended with same type funds of PG
• exception CU general fund blended into the PGs
  special revenue fund

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CU ReportingDiscrete

• Default presentation
• Applies to CUs that do not meet blending criteria
• Required for most CUs

12
CU ReportingDiscrete, continued

• GPFS requirements
• one or more CU columns in the GPFS -- clearly
  distinguished from PG data
• condensed financial statement data for major CUs
  and combining discretely presented CU financial
  statements or separate column for each major
  discretely presented CU
• aggregate data for non-major CUs
• other CAFR requirements -- combining CU financial
  statements

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Component Unit Reporting Options

• Separate columns in the government-wide
• Separate statements after fund presentations
• Condensed information in the notes

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Managements Discussion and Analysis - MDA

• Brief description of basic statements
• Condensed comparative financial information
  derived from government-wide financial statements
• Analysis of financial position and results of
  operations (significant variances)
• Analysis of budgetary changes and results

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MDA, continued

• Description of changes in capital asset and
  long-term debt activity
• Description of currently known facts, decisions,
  or conditions that are expected to have a
  material effect on the entity.
• Governments are encouraged not to duplicate MDA
  information in the letter of transmittal

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Fund-Based Statements

• Basic Financial Statements, consisting of
• Governmental fund statements
• Proprietary fund statements
• Fiduciary funds and similar component unit
  financial statements

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Required Fund Presentations

• Major funds
• Nonmajor funds presented in a single column by
  category
• Concept does not apply to fiduciary activities or
  internal service funds

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Major Fund Definition

• General fund is always major
• Other major funds
• comprise at least 10 of assets, liabilities,
  revenues, or expenditures/expenses (excluding
  extraordinary items) of the relevant fund
  category or fund type and
• at least 5 of same elements of the total
  governmental and proprietary funds combined
• other funds that government considers major

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Governmental Funds

• Measurement focus and basis of accounting
• current financial resources
• modified accrual

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Governmental Fund Statements

• Balance sheet
• Statement of revenues, expenditures, and changes
  in fund balances
• Reconciliation to government-wide numbers
  required for both statements, either at bottom of
  each statement or in separate schedules
• Accounts groups no longer reported

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Required Reconciliations

• Reconciling items include
• addition of capital assets and noncurrent
  liability activities, deletion of other financing
  sources and uses
• reporting internal service funds as proprietary
  in fund statements and as governmental in
  government-wide statements
• revenue and expense recognition versus revenue
  and expenditures

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Proprietary Funds

• Measurement focus and basis of accounting
• economic resources
• accrual basis

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Proprietary Funds, continued

• When are enterprise funds required?
• debt\user charge-based
• debt secured solely by pledge of net revenues
  from fees or charges
• laws or regulations require recovery of cost
• pricing policy designed to recover cost
• Enterprise funds can also be used if management
  wants to capture net income information

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Proprietary Fund Statements

• Balance sheet
• Statement of revenues, expenses, and changes in
  fund net assets
• Statement of cash flows-direct method
• Reconciliation required for financial position
  and operating statements (if necessary)

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Proprietary Fund Balance Sheet

• Classified
• Restricted assets should be reported
• Equity (net assets) of fund classified into three
  components
• invested in capital assets, net of related debt
• restricted
• unrestricted

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Fiduciary Funds

• Redefined cannot be used to support the
  governments own programs
• expendable Special Revenue Funds
• non-expendable Private Purpose Trusts
• Measurement focus and basis of accounting
• economic resources
• accrual accounting

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Fiduciary Fund Statements

• Statement of fiduciary net assets
• Statement of changes in fiduciary net assets

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Government-wide Statements

• Basic Financial Statements
• Statement of net assets
• Statement of activities
• cost of services approach
• Measurement focus and basis of accounting
• Economic resources
• Accrual basis

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Government-Wide Statement of Net Assets

• All assets (including infrastructure) and
  liabilities
• Net assets or balance sheet format
• Net assets
• invested in capital assets, net of related debt
• restricted
• unrestricted

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Statement of Net Assets
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Infrastructure Assets

• Required to be reported for the first time
• Prospective reporting begins when GASB 34 is
  adopted
• Retroactive reporting begins after phased in
  period (requires last 25 years of data)
• Reporting alternatives
• historical cost-based depreciation
• modified approach

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Infrastructure Assets Modified Approach

• Permitted if the government demonstrates that it
  is maintaining qualifying infrastructure assets
  approximately at or above the condition level
  that it established
• No depreciation is required all costs to
  maintain assets are expensed
• Condition assessments should be performed at
  least every three years

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Government-Wide Statement of Activities

• Net cost format
• Expenses by functions/programs
• Revenues by
• charges for services
• operating grants and contributions
• capital grants and contributions
• general
• Special, extraordinary items, and transfers

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Statement of Activities
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Changes to Note Disclosures

• Summary of significant accounting policies
• Changes in capital assets and long-term
  liabilities
• Segment reporting

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Required Supplementary Information (RSI)

• RSI is not part of the financial statements and
  is not subject to high levels of audit scrutiny
• Budgetary comparisons for general and major
  special revenue funds
• original and final budget
• actual on budgetary basis
• Infrastructure-modified approach
• three most recent condition assessments
• estimated amount to maintain and preserve versus
  actual amount for last five years

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Special Purpose Governments

• Most are engaged in governmental activities,
  business-type activities, or both
• Single program governmental activity--government-w
  ide and fund statements may be combined

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Special Purpose Governments, continued

• All other governmental activities must present
  both government-wide and fund financial
  statements
• Business-type activities--government-wide
  statements not required

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Statement 34 Implementation

• Periods beginning after
• June 15, 2001 for governments with revenues of
  100 million or more (phase I)
• June 15, 2002 for governments with revenues of
  10 million or more, but less than 100 million
  (phase II)
• June 15, 2003 for governments with revenues of
  less than 10 million (phase III)
• Early application encouraged

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Retroactive Infrastructure Reporting
Phase I governments periods beginning after June
15, 2005 Phase II governments--periods beginning
after June 15, 2006 Phase III governments--encoura
ged, but not required
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Audits of State and Local Governments

• Financial audits
• Performance audits
• Government Auditing Standards
• U.S. General Accounting Office Yellow Book
• AICPA Auditing Standards
• incorporates the Yellow Book standards

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Audits of State and Local Governments, continued

• Single Audit Act (1984, revised 1996)
• U.S. Office of Management and Budgets OMB
  Circular A-133
• Audit of financial statements
• Audit of federal financial awards

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Other Financial Reporting Issues

• Service efforts and accomplishments
• Affiliated organizations
• Post employment benefits other than pensions