CHAPTER Financial Reporting Issues Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 11

CHAPTER

Financial Reporting Issues

Fundamentals of Advanced Accounting 1st Edition

Fischer, Taylor, and Cheng

1111

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 11, Slide #2

Comprehensive Annual Financial Report

• Comprehensive annual financial (CAFR) report required by every governmental unit– Demonstrates compliance with legislative provisions

• CAFR includes (minimum) two sets of financial statements– General purpose financial statements (GPFS)– Combination statements for nonmajor funds by fund

type


Comprehensive Annual Financial Report

Comprehensive Annual Financial Report (CAFR) has three sections

• Introduction• Financial section• Statistical section


CAFR - Introduction

Includes• Table of contents• Letter of transmittal• Other information


CAFR – Financial Section

Includes• Auditor’s report• Combining and individual fund statements• Complete set of GPFS includes

– Management discussion and analysis– Separate statements for governmental, proprietary and

fiduciary funds– Government-wide financial statements– Notes to financial statements– Require supplementary information (RSI)


CAFR – Statistical Section

• Includes data about governmental unit and community– General government expenditures by function– Community demographic statistics


Reporting Entity

Reporting entity : primary government plus component units?

• Primary government (PG) legal entity– Separately elected governing body– Fiscally independent of other state/local gov’ts.

• Component units (CU) that either– Are financially accountable to the PG– Are majority-owned for-profits that directly facilitate

public service– Must be included to avoid being misleading


CU Reporting: Presence Of Financial Accountability

The PG has financial accountability for the CU if:• The CU is fiscally dependent on the PG or• The CU is one for which the 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– The PG has a financial benefit/burden relationship


CU Reporting: Blending

• Some CU’s so intertwined with PG that they are “blended”– CU established to serve PG– Two boards are essentially the same– Footnote disclosure identifies existence

• The PG legal entity and blended CUs reported as if single entity

• CU funds blended with same type funds of the PG– Exception: The CU general fund blended into the PG’s

special revenue fund


CU Reporting: Discrete

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

...continued...


The New Reporting Model

GASB Statement No. 34

Basic Financial Statements

– and Management’s Discussion and Analysis –

for State and Local Governments

June 1999


Statement 34 Major Innovations

• Introductory narrative section– Highlights and analyzes gov’t financial performance

• Refinement of current funds-based information• Overall view of the gov’t in new gov’t-wide

statements• Comprehensive information on cost of delivering

services to citizens• Information about infrastructure asses

– Bridges, roads, storm sewers…


Management’s Discussion and Analysis (MD&A)

Topics must be limited to the following• Brief description of basic statements• Condensed current & prior year financial

information from gov’t-wide financial statements• Analysis of financial position and results of

operations• Analysis of individual fund information• Analysis of significant budgetary variations

...continued...


MD&A, continuedMD&A (continued)

• Description of changes in capital asset and long-term debt activity

• Description of condition of infrastructure assets• Description of currently known facts, decisions,

or conditions that are expected to have a material effect on the entity


Fund-Based StatementsFund-Based Statements

• Focus: to provide detailed information about short-term spending and fiscal compliance by major funds

• Required: separate fund-based statements for– Governmental fund– Proprietary fund – Fiduciary funds

• Statements highlight major funds– Aggregate non-major funds into one column


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 gov’t considers major


Governmental Funds

Financial statements• Balance sheet• Statement of revenues, expenditures and

changes in fund balances• Separate columns for general fund and major

funds– Nonmajor funds combined into one column

• Final column presents total of all funds


Proprietary Funds

Proprietary funds include• Enterprise funds – business-type activities

– If meets major funds test presented individually– Nonmajor funds combined into one column– Final column presents total of all funds

• Internal service funds – governmental activities– Reported as separate column


Proprietary Fund Statements

• Balance sheet– Equity (net assets) of fund classified into three

components:• Invested in capital assets, net of related debt• Restricted• Unrestricted

• Statement of revenues, expenses, and changes in fund net assets

• Statement of cash flows (direct method)


Fiduciary Fund Statements

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


Basic Financial Statements by Fund Category

Fund Category

Measurement Focus and Basis of Accounting

Basic Financial Statements

Governmental Current financial

resources, modified accrual

Balance sheet Statement of revenues, expenditures and changes in fund balance

Proprietary Economic resources,

accrual Balance sheet/statement of net assets Statement of revenues, expenditures and changes in fund balance/fund equity Statement of cash flows

Fiduciary Economic resources,

accrual Statement of fiduciary net assets Statement of changes in fiduciary net assets


Government-wide Statements

Basic Financial Statements• Statement of net assets• Statement of activities

– Cost of services approach

• Statements have one column for governmental activities

• Statements have one column for proprietary activities


Statement Of Net Assets

• All assets (including infrastructure) and liabilities• Net assets (equity) divided into 3 categories

– Unrestricted– Restricted– Capital related


Statement Of Net Assets – Key Characteristics

• All capital assets listed• All capital assets must be depreciated• General LTD adjusted for effective interest method• Current and non-current liabilities distinguished

from one another• Interfund payables/receivables are eliminated• Net payables/receivables between government and

business type activities shown separately


Government-wide Statement of Activities

• Begins with reporting of expenses by programs– Not expenditures

• Program revenues reported by– Charges for services– Program specific operating and capital grants– Contributions

• Non-program revenues reported as general• Balance of any expenses in each program

(expenses less revenues) paid for by general government revenues


Government-wide Statement Of Activities- Internal Service Fund

• Internal service fund (ISF) treated as cost allocation mechanism– Included in governmental activities column in

government-wide statement

• ISF revenues and expense are eliminated• Any profit is eliminated by reducing expenses for

ISF services charged to various function in the statements.


Retroactive Infrastructure Reporting

Special provisions in GASB No. 34• Delayed effective date for retroactive reporting

by 4 years (after June 15, 2005)• Allows various approaches to estimating

infrastructure cost• Allows prospective-only application for small

governments• Limited to major infrastructure fixed assets• Permits modified approach to measure cost of

using infrastructure assets


Convert Funds-based Statements To Government-wide Statements

• Reconciliation from funds-based to gov’t-wide statements required

• Convert from modified accrual basis to accrual basis


Audits of State and Local Governments

Broader than audits of a business - includes• Financial audits

– Compliance with fiscal requirements– Render a report expressing an opinion

• Performance audits– Emphasize economy, efficiency, program results and

managerial effectiveness– Provide independent report on

• Extent which gov’t officials carry out responsibility• Whether programs are producing desired results

...continued...


Audits Of State And Local Governments(Continued)

• Government Auditing Standards– U.S. General Accounting Office “Yellow Book”

• AICPA Auditing Standards– Incorporates the Yellow Book standards

• 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


Government-wide Statements – The Statistical Section

Focus on primary government• Financial trends information• Revenue capacity information• Debt capacity information• Demographic and economic information• Operating information


Other Financial Reporting Issues

• GASB encourages governments to develop and report nonfinancial measures of efficiency and effectiveness through service efforts and accomplishments (SEA) projects.

Documents

CHAPTER Financial Reporting Issues Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 11