Preparing a Top-Notch MD&A

1. Preparing a Top-Notch MD&A Tom Duensing, Deputy Financial Services Manager City of Tempe January 11, 2008

2. 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

3. CAFR vs. Basic Financial Statements Introductory section Mandatory reporting(GAAP) Financial section CAFR Statistical section

4. Basic Financial Statements & RSI RSI Audited basic financial statements Mandatoryreporting RSI

5. Reasons Behind the MD&A

6. 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)

7. 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

8. 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

9. 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

10. 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

11. 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? • Ensure MD&A is Presented • Ensure Auditors Apply Limited Procedures on MD&A

12. Components of the MD&A

13. Components of the MD&A • There are 8 Sections to an MD&A • Brief Discussion of the Basic Financial Statements • Condensed Comparative Financial Information • Analysis of Overall Financial Position and Results of Operations • Individual Fund Analysis

14. Components of the MD&A (con’t) • B to A Analysis for the General Fund • Capital Asset & Long-Term Debt Activity • Capital Asset Modified Approach Discussion (if applicable) - Infrastructure • Facts, Decisions or Conditions that Will have a Significant Financial Impact.

15. 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

16. 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

17. 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

18. 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

19. e. B to A Analysis General Fund • Should Discuss Differences Between • Original Budget & Final Amended Budget • Final Amended Budget & Actuals • Causes of Budget Variances – Use a “Reasonable Level of Specificity” (i.e. explain it in enough detail)

20. 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

21. 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

22. 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

23. 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 Facts, Decisions or Conditions that Will have a Significant Financial Impact (con’t)

24. Challenges of the MD&A

25. 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.

26. 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

27. 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

28. Questions? Thank You!