Chapter9Financial Reportingof State and Local

Governments

McGraw-Hill © 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives

After reading this chapter, you should be able to:

Describe the financial reporting requirements of the GASBS 34 reporting model.

Explain the key concepts and terms used in describing the governmental reporting entity.

Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity, and the manner of reporting component units.

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Learning Objectives (Cont’d)

Identify and describe the contents of a Comprehensive Annual Financial Report (CAFR).

Identify and explain contemporary financial reporting issues.

Key Terms

Blended presentationBlending (blended)Component unitsDiscrete presentation Efficiency measuresFinancial accountabilityFinancial reporting entityInput measureJoint venture

Jointly governed organizationsLegally separate organizationsOther stand-alone governmentOutcome measureOutput measurePopular report (reporting)Primary governmentService efforts and

accomplishments (SEA)

The reporting entity consists of the primary government and all component units for which the primary government is financially accountable

Most component units are reported by discrete (separate column) presentation, rather than “blending” the component unit’s financial information in the same fund columns of the primary government

Reporting Entity

A primary government is financially accountable for another organization if it appoints a voting majority of the organization’s governing board and it can either impose its will on that organization or potentially provide specific financial benefits to or

impose a financial burden on the other organization.

Reporting Entity (Cont’d)

Even if it does not appoint a majority of an organization’s governing board, the primary government (PG) is financially accountable for another organization if either: The other organization is fiscally dependent on the

PG, or It holds economic resources entirely or almost

entirely for the PG, the PG is entitled to or has the ability to access a majority of the economic resources being held by the other organization, and the resources being held are significant to the PG

Reporting Entity (Cont’d)

Citizens and others (e.g., creditors and legislators) have a need for periodic reports on where the government got its money and how it was spent.

Interim financial reports are needed as well as annual reports.

Financial Reports

Recommended, but not mandatory

Introductory section

Financial section

Statistical section

Financial ReportingComprehensive Annual Financial Report

Introductory Section Title page Contents page Letter of transmittal Other (as desired by management)

CAFR (Cont’d)

Financial Section Auditor’s report MD&A Basic Financial Statements Required Supplementary Information (RSI)

other than MD&A Combining and individual fund financial

statements

CAFR (Cont’d)

Statistical Section Tables and charts showing multiple-year

trends in financial and socioeconomic information

CAFR (cont’d)

General Purpose External Financial Reports

Management’s discussion and analysis

Government-wide Fund financial

financial statements statements

Notes to the financial statements

Required supplementary information

(other than MD&A)

Government-wide Financial Statements

Statement of Net Assets (Illustrations 1-4 and 9-4)

Statement of Activities (Illustrations 1-5 and 9-5)

Fund Financial Statements (see next slide)

Notes to the Financial Statements

Basic Financial StatementsGASBS 34

Fund Financial StatementsGASBS 34

Balance Sheet - Governmental Funds (Illustrations 1-6 and 9-6) Statement of Revenues, Expenditures, and Changes in Fund

Balances - Governmental Funds (Illustrations 1-7 and 9-6) with reconciliation (Ill. 1-8)

Statement of Net Assets - Proprietary Funds (Ill.1-9) Statement of Revenues, Expenses, and Changes in Fund Net

Assets - Proprietary Funds (Ill. 1-10) Statement of Cash Flows - Proprietary Funds (Ill. 1-11) Statement of Fiduciary Net Assets (Ill. 1-12) Statement of Changes in Fiduciary Net Assets (Ill. 1-13)

GASBS 34 Reporting Model (Cont’d)

Government-wide financial statements:

Entity-wide perspective

Long-term focus on operational accountability

All governmental and business-type activities of the government as a whole are reported on the accrual basis—essentially same as for-profit entities

GASBS 34 Reporting Model (Cont’d)

Fund financial statements:

Short-term focus on fiscal accountability

Most activities of the government reported on the modified accrual basis; business-type activities essentially the same as for-profit entities

GASBS 34 Reporting Model (Cont’d)

Preparation of the government-wide financial statements at year-end requires:

Adjusting entries to record annual depreciation and accrual of interest receivable and payable.

Entries to close all program and general revenues and expenses.

Entries to reclassify, as necessary, Net Assets-Unrestricted to Net Assets-Restricted (various purposes) and Net Assets-Invested in Capital Assets, Net of Related Debt

Current Issues - Service Efforts and Accomplishments (SEA)

Focused on measuring and reporting on the efficient and effective uses of government resources

Three categories of measures:Measures of service efforts (input measures)

Measures of service accomplishments (output and outcome measures)

Measures that relate efforts to accomplishments (efficiency and effectiveness measures)

Current Issues - Popular Reporting

Many accounting professionals, politicians, and others believe current governmental financial statements are excessively complex and not understandable except to those knowledgeable about governmental accounting

Some governments have begun to experiment with simplified, summary reports called “popular reports”

Graphical presentation is used to a greater extent than traditional financial statements

Implementation of the GASBS 34 Reporting Model

The GASBS 34 reporting model is a result of NCGA and GASB Standards that have evolved since the 1930s and reflects the changing needs of information users.

Until software vendors modify their software to meet the financial reporting requirements of the GASBS 34 model, most governments are expected to continue to use their current fund accounting software systems, then prepare reclassification spread sheets at year-end in order to prepare the full accrual government-wide financial statements.

Concluding Comments

The GASBS 34 reporting model requires each financial reporting entity to prepare as a minimum: MD&A; Basic financial statements (government-wide and fund); Notes to the financial statements; Required supplementary information, other than MD&A.

In addition, each reporting entity is recommended to prepare as its official financial record a comprehensive annual financial report (CAFR).

As the financial needs of users continues to change, so will financial reporting standards.

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