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Chapter 17. Financial Reporting Issues. The New Reporting Model. GASB Statement No. 34 Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments June 1999. The Comprehensive Annual Financial Report (CAFR). Introduction Financial section

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Chapter 17

Financial Reporting Issues

the new reporting model
The New Reporting Model

GASB Statement No. 34

Basic Financial Statements

– and Management’s Discussion and Analysis –

for State and Local Governments

June 1999

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the comprehensive annual financial report cafr
The Comprehensive Annual Financial Report (CAFR)
  • Introduction
  • Financial section
    • auditor’s report
    • general purpose financial statements & notes
    • combining statements
  • Statistical section

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Statement 34 Primary Features

  • Management’s discussion and analysis
  • Basic financial statements
    • government-wide
    • fund
  • Required supplementary information

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gasb s financial reporting pyramid
GASB’s Financial Reporting Pyramid
  • Top: highly aggregated, consolidated financial statements
  • Bottom: highly detailed, voluminous reports
  • Dual reporting approach
    • CAFR and GPFS
    • combined and combining statements
    • individual fund and account group statements

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financial reporting
Financial Reporting
  • Comprehensive annual financial report
    • simple entity context
    • complex entity context
      • defining the government reporting entity
      • blending
      • discrete presentation
      • related organizations, joint ventures, and jointly governed organizations

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complex entities
Complex Entities
  • Reporting entity definition
    • primary government (PG) legal entity plus
    • component units (CU) that either
      • are financially accountableto PG
      • are majority-owned for-profits that directly facilitate public service
      • must be included to avoid being misleading

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cu reporting presence of financial accountability
CU Reporting: Presence of Financial Accountability
  • PG has financial accountability for CU if:
    • the CU is fiscally dependent on PG or
    • the CU is one for which 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 willor
      • with which PG has a financial benefit/burden relationship

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cu reporting blending
CU Reporting:Blending
  • Permitted only if CU meets one of three conditions:
    • substantively same governing body as PG
    • provides service only to PG
    • benefits only PG

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cu reporting blending continued
CU Reporting:Blending, continued
  • PG legal entity and blended CUs reported as if single entity
  • CU funds blended with same type funds of PG
    • exception: CU general fund blended into the PG’s special revenue fund

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cu reporting discrete
CU Reporting:Discrete
  • Default presentation
  • Applies to CUs that do not meet blending criteria
  • Required for most CUs

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cu reporting discrete continued
CU Reporting:Discrete, continued
  • GPFS requirements:
    • one or more CU columns in the GPFS -- clearly distinguished from PG data
    • condensed financial statement data for major CUs and combining discretely presented CU financial statements or separate column for each major discretely presented CU
    • aggregate data for non-major CUs
    • other CAFR requirements -- combining CU financial statements

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Component Unit Reporting Options

  • Separate columns in the government-wide
  • Separate statements after fund presentations
  • Condensed information in the notes

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Management’s Discussion and Analysis - MD&A

  • Brief description of basic statements
  • Condensed comparative financial information derived from government-wide financial statements
  • Analysis of financial position and results of operations (significant variances)
  • Analysis of budgetary changes and results

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MD&A, continued

  • Description of changes in capital asset and long-term debt activity
  • Description of currently known facts, decisions, or conditions that are expected to have a material effect on the entity.
  • Governments are encouraged not to duplicate MD&A information in the letter of transmittal

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Fund-Based Statements

  • Basic Financial Statements, consisting of
  • Governmental fund statements
  • Proprietary fund statements
  • Fiduciary funds and similar component unit financial statements

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Required Fund Presentations

  • Major funds
  • Nonmajor funds presented in a single column by category
  • Concept does not apply to fiduciary activities or internal service funds

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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 government considers major

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Governmental Funds

  • Measurement focus and basis of accounting
    • current financial resources
    • modified accrual

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Governmental Fund Statements

  • Balance sheet
  • Statement of revenues, expenditures, and changes in fund balances
  • Reconciliation to government-wide numbers required for both statements, either at bottom of each statement or in separate schedules
  • Accounts groups no longer reported

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required reconciliations
Required Reconciliations
  • Reconciling items include:
    • addition of capital assets and noncurrent liability activities, deletion of other financing sources and uses
    • reporting internal service funds as proprietary in fund statements and as governmental in government-wide statements
    • revenue and expense recognition versus revenue and expenditures

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Proprietary Funds

  • Measurement focus and basis of accounting
    • economic resources
    • accrual basis

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proprietary funds continued
Proprietary Funds, continued
  • When are enterprise funds required?
    • debt\user charge-based
    • debt secured solely by pledge of net revenues from fees or charges
    • laws or regulations require recovery of cost
    • pricing policy designed to recover cost
  • Enterprise funds can also be used if management wants to capture net income information

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Proprietary Fund Statements

  • Balance sheet
  • Statement of revenues, expenses, and changes in fund net assets
  • Statement of cash flows-direct method
  • Reconciliation required for financial position and operating statements (if necessary)

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Proprietary Fund Balance Sheet

  • Classified
  • Restricted assets should be reported
  • Equity (net assets) of fund classified into three components:
    • invested in capital assets, net of related debt
    • restricted
    • unrestricted

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Fiduciary Funds

  • Redefined: cannot be used to support the government’s own programs
    • expendable: Special Revenue Funds
    • non-expendable: Private Purpose Trusts
  • Measurement focus and basis of accounting
    • economic resources
    • accrual accounting

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Fiduciary Fund Statements

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

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Government-wide Statements

  • Basic Financial Statements
  • Statement of net assets
  • Statement of activities
    • cost of services approach
  • Measurement focus and basis of accounting
  • Economic resources
  • Accrual basis

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slide29

Government-Wide

Statement of Net Assets

  • All assets (including infrastructure) and liabilities
  • Net assets or balance sheet format
  • Net assets
    • invested in capital assets, net of related debt
    • restricted
    • unrestricted

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Infrastructure Assets

  • Required to be reported for the first time
    • Prospective reporting begins when GASB 34 is adopted
    • Retroactive reporting begins after phased in period (requires last 25 years of data)
  • Reporting alternatives
    • historical cost-based depreciation
    • modified approach

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Infrastructure Assets

Modified Approach

  • Permitted if the government demonstrates that it is maintaining qualifying infrastructure assets approximately at or above the condition level that it established
  • No depreciation is required; all costs to maintain assets are expensed
  • Condition assessments should be performed at least every three years

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Government-Wide

Statement of Activities

  • Net cost format
  • Expenses by functions/programs
  • Revenues by
    • charges for services
    • operating grants and contributions
    • capital grants and contributions
    • general
  • Special, extraordinary items, and transfers

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Changes to Note Disclosures

  • Summary of significant accounting policies
  • Changes in capital assets and long-term liabilities
  • Segment reporting

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Required Supplementary Information

(RSI)

  • RSI is not part of the financial statements and is not subject to high levels of audit scrutiny
  • Budgetary comparisons for general and major special revenue funds
    • original and final budget
    • actual on budgetary basis
  • Infrastructure-modified approach
    • three most recent condition assessments
    • estimated amount to maintain and preserve versus actual amount for last five years

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Special Purpose Governments

  • Most are engaged in governmental activities, business-type activities, or both
  • Single program governmental activity--government-wide and fund statements may be combined

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Special Purpose Governments, continued

  • All other governmental activities must present both government-wide and fund financial statements
  • Business-type activities--government-wide statements not required

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slide39

Statement 34 Implementation

  • Periods beginning after
    • June 15, 2001 for governments with revenues of $100 million or more (phase I)
    • June 15, 2002 for governments with revenues of $10 million or more, but less than $100 million (phase II)
    • June 15, 2003 for governments with revenues of less than $10 million (phase III)
  • Early application encouraged

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Retroactive Infrastructure Reporting

Phase Igovernments periods beginning after June 15, 2005

Phase IIgovernments--periods beginning after June 15, 2006

Phase IIIgovernments--encouraged, but not required

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audits of state and local governments
Audits of State and Local Governments
  • Financial audits
  • Performance audits
  • Government Auditing Standards
    • U.S. General Accounting Office “Yellow Book”
  • AICPA Auditing Standards
    • incorporates the Yellow Book standards

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audits of state and local governments continued
Audits of State and Local Governments, continued
  • 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

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other financial reporting issues
Other Financial Reporting Issues
  • Service efforts and accomplishments
  • Affiliated organizations
  • Post employment benefits other than pensions

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