Preparing a Top-Notch MD&A

Tom Duensing, Deputy Financial Services ManagerCity of TempeJanuary 11, 2008

Overview

• Relationship of the MD&A to the CAFR• Reasons Behind the MD&A

– What is its purpose?– How did the MD&A evolve?– Why is the MD&A Required Supplementary

Information (RSI)?

• Components of the MD&A• Challenges of the MD&A• Summary/Questions

CAFR vs. Basic Financial Statements

General information on the government’s structure, services, and environment

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Management’s Discussion and AnalysisGovernment-wide Financial Statements

Government Fund Financial Statements

Proprietary Fund Financial Statements

Fiduciary Fund Financial Statements

Notes to the Financial Statements

Additional Required Supplementary Information

Information on individual funds and discretely presented component units and other supplementary information not required by GAAP

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Trend data and non-financial data

Introductory section

Financial section

CAFR

Statistical section

Mandatory reporting(GAAP)

Basic Financial Statements & RSI

Management’s discussion and analysis

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Government-wide financial statements

Fund financial statements

Governmental funds Proprietary funds

Fiduciary funds

Notes to the financial statements

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Other requiredsupplementary information (4 Types)

RSI

Audited basic financial statements

RSI

Mandatoryreporting

Reasons Behind the MD&A

Overall MD&A

• Introduces the Basic Financial Statements• Provides and Analytical Overview of Basic

Financial Statements• The MD&A Should…

– Be Objective,– Be Easily Readable, and– Provide and Assess the Year-Over-Year

Financial Position (Better Off or Worse Off)

Why an MD&A?

• MD&A part of GASB Statement No. 34 Established New Financial Reporting Requirements– Retained Short-Term/Fund Information– Incorporated a Long-Term Focus

• There is an Assumption That Management Understands– Transactions, Events & Conditions Reflected in

the Financial Report– Discuss Fiscal Policies that Govern Operations

What is GASB Trying to Accomplish?

• Improved Financial Reporting– Greater Government Accountability (Principal

Objective)– Providing More Useful Information– To a Wider Range of Users

• Objectives in Concept Statement 1 (Established Financial Reporting Objectives) are the Foundation of GASB 34/MD&A

• GASB 37 – “Confine” Topics to Those Listed in GASB 34

What is GASB Trying to Accomplish? (Con’t)

• Wanted Financial Information to be Relevant to Users and Reliable

• Information Should be Understandable to Knowledgeable Users

• User Needs Vary – Legal Compliance, Financing, Gov’t Effectiveness – That’s why both short-term & long-term focus is presented in the Basic Financial Statements

Background

• Reporting Model Project Began in 1984• Common Theme of the Project –

“Government-as-a-Whole” Financial Reporting (e.g. Entity Wide Perspective)

• The Long-Term Effects of Current-Period Transactions & Events

• ED Issued in January 1997• Statement Issued in June 1999

Background (con’t)

• The MD&A Requirement was Highly Supported by ED Respondents

• Generally, Preparers & Attestors Raised Concerns– RSI Status & Lack of Objectivity

• Why RSI?1. Ensure MD&A is Presented

2. Ensure Auditors Apply Limited Procedures on MD&A

Components of the MD&A

Components of the MD&A

There are 8 Sections to an MD&A

a. Brief Discussion of the Basic Financial Statements

b. Condensed Comparative Financial Information

c. Analysis of Overall Financial Position and Results of Operations

d. Individual Fund Analysis

Components of the MD&A (con’t)

e. B to A Analysis for the General Fund

f. Capital Asset & Long-Term Debt Activity

g. Capital Asset Modified Approach Discussion (if applicable) - Infrastructure

h. Facts, Decisions or Conditions that Will have a Significant Financial Impact.

a. Brief Discussion of the BFS

• Gov’t Financial Reporting is Unique• Discuss both Government-Wide and Fund

Financial Statements– Describe the two types and discuss the

differences between the two– Discuss how the Fund Financial Statements

either 1) reinforce or 2) provide add’l information about the Gov’t-Wide Financials

b. Condensed Comparative Financial Information

• Government-Wide Data• Current & Prior Fiscal Year• Both Governmental and Business-type

Activities• A Minimum Level of Detail is Required

c. Analysis of Overall Financial Position and Results of Operations

• Reasons for the change should be discussed (not just the size)

• Governmental & Business-Type Activities Discussed Separately

• Economic Factors Should be Discussed• Current Fiscal Period Should be

Emphasized

d. Individual Fund Analysis

• Major Gov’t and Proprietary Funds Discussed

• Discuss Significant Balances and Operations – Focus on the “why” significant changes occurred.

• Fund Balance/Net Assets – Discuss Restrictions, Commitments or Other Restrictions

• “Can” Discuss Non-Major Funds

e. B to A Analysis General Fund

• Should Discuss Differences Between1. Original Budget & Final Amended Budget

2. Final Amended Budget & Actuals

• Causes of Budget Variances – Use a “Reasonable Level of Specificity” (i.e. explain it in enough detail)

f. Capital Asset & Long-Term Debt Activity

• CA & LTD Information Should be Summarized – Refer readers to the notes and don’t repeat as much as possible

• Significant Changes Should be Described• Debt Items Discussed

– Future Commitments for Capital Exp’s– Credit rating changes– Debt limitations that affect future financings

• Special Assessment Debt - If Governmental Commitment, then Discuss

g. Capital Asset Modified Approach Discussion (if applicable)

• Modified Approach = If Gov’t Preserves the Infrastructure, Assets Should Not be Depreciated – Items to Discuss…..– Change in the Condition Levels– Discuss How Current Levels Compare with

Target Condition Levels– Amount Necessary to Preserve Condition

Level vs. Actual Expense Incurred

h. Facts, Decisions or Conditions that Will have a Significant Financial Impact

• What is “currently known”? – Date of the Independent Auditor’s Report

• Event Actually Happened vs. It “Might” Happen

Facts, Decisions or Conditions that Will have a Significant Financial Impact (con’t)• Major Grant Award• Lawsuit Adjudicated• Taxable Property

Reassessed• Major Development

Agreement

• Change in Tax Rate• Change in Fee

Structure• Significant Impairment

of Assets• Renegotiated Labor

Contract

Challenges of the MD&A

Challenges of the MD&A

• Financial Information is Highly Aggregated in the MD&A – Can cause difficulty in providing an adequate explanation.

• How can the preparer provide brief, yet effective information that is written in “Plain English”?

• Highly Aggregated vs. Sufficiently Descr.

MD&A Resources

• www.gasb.org– GASB 34– GASB 37– GASB Comprehensive Implementation Guide

• www.gfoaz.org – Membership Information Exchange

• www.gfoa.org – Governmental Accounting, Auditing, and

Financial Reporting (GAAFR)

• Other Governments’ CAFR’s

In Summary…..

• Designed to Introduce the Basic Financial Statements

• Although MD&A is a Written Analytical, It is Fairly Structured

• Should be 1) Objective, 2) Easily Readable & 3) Assess Year-Over-Year

• Excellent Chance for Preparers to Provide a FULL UNDERSTANDING of the Basic Financial Statements

Questions?

Thank You!