The New Reporting Model

1. The New Reporting Model An Elected Official’s Guide

2. Introduction

3. What Is GASB Statement No. 34? • Issued in June 1999 • Establishes a new framework or “reporting model” for state and local government financial reports • Biggest change in the history of public-sector accounting

4. What Does the New Model Replace? • Traditional model originated early in the 20th century • Definitive form of traditional model set by NCGA Statement 1 (1979) • Widely adopted in the 1980s • Considered a major improvement • Still, consensus gradually emerges on need for improvement

5. How New is the New Model? • Retains the most popular features of the traditional model • Adds several significant new features • Goal: • Retain and better serve current users • Attract new users not served previously

6. What Are the Key New Features? • Government-wide financial reporting • Additional long-term focus for governmental (i.e. tax-supported) activities • Narrative introductory overview and analysis • Information on major individual funds • Expanded budgetary reporting

7. What about Infrastructure? • Most controversial feature of new model • GFOA position • Each government must make its own decision regarding the implementation of infrastructure reporting • Governments that elect to report infrastructure should take a least-cost approach to implementation

8. What Determines When to Implement? • Timing of implementation depends upon total revenues • Only revenues of governmental funds and enterprise funds of the primary government • Exclude other financing sources and extraordinary items • Measured as of the first fiscal year ended on or after 6/30/99

9. What is the Implementation Schedule?

10. Background and Overview Part 1

11. What is a Financial Reporting Model? • Three ways to provide needed information: • Display (i.e., financial statements) • Disclosure (i.e., notes) • Additional information (i.e., required supplementary information) • Reporting model defines minimum combination of these three elements • GASB defines for state/local governments

12. Scope of the Reporting Model

13. How Many Models Are There? • Two private-sector models • Business model • Not-for-profit model • One model for state and local governments • Unique • Still, many similarities to private-sector models

14. Summary of Reporting Models

15. Why Separate Models? • Two key reasons why government has always had a separate model • Special need to ensure and demonstrate compliance with legal requirements • External restrictions (e.g., grants and bond indentures) • Internal restrictions (e.g., operating budget) • Desire to focus on near-term financing requirements (like the operating budget)

16. What Are the Key Differences? • Use of fund accounting • Use of special accounting for tax-supported activities • Presentation of budgetary comparisons in connection with regular financial reporting

17. Why the Need for a New Model? • Financial reporting must demonstrate both • Fiscal accountability and • Operational accountability • Fiscal accountability already strong, but can be made even stronger • Operational accountability needs to be significantly enhanced

18. How To Improve Operational Accountability? • Introduction of government-wide financial statements • Expanded focus for governmental activities • Presentation of cost data • Narrative overview and analysis

19. How To Improve Fiscal Accountability? • Shift in focus to major individual funds • Shift in focus to individual fund budgets • Inclusion of data from the original budget

20. What is the Basic Structure of the New Model? • “Basic financial statements” • Government-wide financial statements • Fund financial statements • Governmental funds (tax-supported activities) • Proprietary funds (business-type activities) • Fiduciary funds (not available for programs) • Notes to the financial statements • Required supplementary information (RSI)

21. Basic Financial Statements • Government-wide statements (2) • Fund statements • Governmental fund statements (2 or 3) • Proprietary fund statements (3) • Fiduciary fund statements (2) • Notes to the financial statements

22. RSI • Management’s discussion and analysis (MD&A) • Other RSI (as needed) • Budgetary comparisons • Infrastructure data (modified approach) • Pension trend data • Claims development trend data

23. New Governmental Model

24. New Model Within the CAFR • Introductory Section of CAFR • Financial Section of CAFR • Basic financial statement and RSI (new reporting model) • Combining and individual fund presentations • Statistical section of CAFR

25. Key Components of the New Model Part 2

26. What is the Purpose of MD&A? • Narrative introduction and overview • Analysis of key data • Why significant increases or decreases? • Why is the original budget for the general fund different from the final amended budget? • Why has the fund balance of the general fund increased or decreased?

27. What Can Be Found in MD&A? • Relationship among financial statements • Condensed comparative statements • Overall analysis • Major fund analysis • Budget variances for general fund • Capital asset and long-term debt activity • Known facts, decisions or conditions expected to have a significant impact

28. Is MD&A Reliable? • RSI is reliable, but still has certain inherent limitations • Information is necessarily selective rather than comprehensive • Analysis is always subjective to some degree • MD&A not included within the scope of the independent audit • Still subject to limited auditor procedures

29. What are the Entity-Wide Statements? • Two Government-wide basic financial statements • Statement of net assets • Statement of activities

30. What is the Statement of Net Assets? • Reports all assets and liabilities • Both financial assets and capital assets (including infrastructure) • Both current and long-term liabilities • Presentation options • Order of relative liquidity • Current versus long-term (i.e., “classified”) • Difference = “net assets”

31. How are Net Assets Reported? • Presentation based on accessibility of underlying assets • Net investment in capital assets • Restricted • Unrestricted

32. Components of Net Assets

33. What is the Statement of Activities? • All changes in government-wide net assets • Focus on expenses rather than expenditures • Order of presentation • Service focus rather than revenue focus • Expenses (cost of services) precede revenues • Net cost format demonstrates degree to which an activity is self-financing

34. Structure of Statement of Activities • Start: Expenses by function • Less: Program revenues (directly related fees, charges and grants) • Result: Net expenses by function • Add: General revenues and other changes • Result: Increase/decrease in net assets

35. Why Entity-Wide Statements? • Focus on the “big picture” (a government is more than the sum of its parts) • Demonstrate the totalimpact of the short-term financing decisions reported in the governmental funds • Provide cost information (i.e. expenses), for activities reported in governmental funds

36. How Wide is “Government-wide”? • Primary government (government as legally defined) • Component units (legally separate entities for which the primary government is financially accountable) • NOTfiduciary funds or fiduciary-type component units

37. Why Two Types of Activities? • Governmental activities • Tax-supported • Program revenues not expected to cover expenses • Business-type activities • At last partially supported by fees and charges • Program revenues expected to cover all or a significant portion of program expenses • Division avoids inappropriate comparisons

38. Negative Unrestricted Net Assets? • Accounting versus financing • Accounting - focus on when liability incurred • Financing - focus on when liability paid • Governments typically focus on financing • Resources raised when needed for payments • Deficit unrestricted net assets = commitment of future taxing power

39. Why No Similar Deficit for Businesses? • Businesses categorize net assets based on source rather than accessibility • Invested net assets (e.g., capital stock, owner’s equity) • Retained earnings • Practical result: Capital assets offset long-term liabilities of businesses

40. Does Surplus = Money to Spend? • Capital assets reported net of related debt • Capital assets cannot actually be used to pay off debt • Debt service must be paid from restricted and unrestricted net assets • Therefore, positive balance of unrestricted net assets does not necessarily = money to spend • Look to governmental fund statements for information on spendable resources

41. How To Use Cost Information? • Distinguish direct costs from indirect costs • Distinguish avoidable costs from unavoidable costs • Depreciation is based upon historical cost rather than replacement cost • Care needed in making comparisons • “Funding” depreciation expense may not provide adequate resources for replacement • Rate setting must consider cash flows

42. Why Are Some Items Shown Separately? • Need to avoid artificial fluctuations in trend data • “Extraordinary items” • Unusual in nature and • Infrequent in occurrence • “Special items” • Unusual in nature or infrequent in occurrence • Subject to management control

43. What Are Govt. Fund Statements? • Governmental fund balance sheet • Governmental fund statement of revenues, expenditures and changes in fund balances • Budgetary comparison (optional as basic financial statement)

44. What is the GF Balance Sheet? • Financial assets • Liabilities to be be paid from available expendable resources • Difference = fund balance • Reserved fund balance = unavailable for appropriation • Designated unreserved fund balance = tentative management plans

45. Structure of Fund Balance

46. What Is the GF Operating Statement? • Statement of revenues, expenditures and changes in fund balances • Other financing sources and uses reported separately to avoid distorting trend data • Issuance of debt (including capital leases) • Sale of capital assets (if not “special item”) • Transfers • Refunding transactions

47. What is the Budgetary Comparison? • Compare • Original budget to final amended budget • Final amended budget to actual (presented on the budgetary basis) • Options • Basic financial statement (GFOA recommended practice consistent with current practice) • Required supplementary information

48. Why GF Financial Statements? • Most decisions in public sector made in context of operating budget • Focus on near-term inflows and outflows of spendable resources • Includes budgeted items not otherwise reported in operating statement (e.g., capital outlay) • Excludes from operating statement items not typically budgeted (e.g., the incurrence of liabilities payable in future years, depreciation)

49. Deficit Unreserved Fund Balance? • Deficit = claims on current financial resources exceed the balances of those resources • Always to be taken seriously • Situations that may justify deficit: • Encumbered long-term contracts • Long-term borrowings from other funds

50. Deficit of Revenues to Expenditures? • Deficit may indicate a fund is “living beyond its means” • Situations that may justify deficit: • “Budgeting” excess fund balance • Up-front contributions for capital projects • Debt-financed capital projects • Reimbursement grants • Planned operating subsidies