CHAPTER Financial Reporting Issues Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 11

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #2 Comprehensive Annual Financial Report Comprehensive annual financial (CAFR) report required by every governmental unit –Demonstrates compliance with legislative provisions CAFR includes (minimum) two sets of financial statements –General purpose financial statements (GPFS) –Combination statements for nonmajor funds by fund type

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #3 Comprehensive Annual Financial Report Comprehensive Annual Financial Report (CAFR) has three sections Introduction Financial section Statistical section

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #4 CAFR - Introduction Includes Table of contents Letter of transmittal Other information

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #5 CAFR – Financial Section Includes Auditor’s report Combining and individual fund statements Complete set of GPFS includes –Management discussion and analysis –Separate statements for governmental, proprietary and fiduciary funds –Government-wide financial statements –Notes to financial statements –Require supplementary information (RSI)

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #6 CAFR – Statistical Section Includes data about governmental unit and community –General government expenditures by function –Community demographic statistics

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #7 Reporting Entity Reporting entity : primary government plus component units? Primary government (PG) legal entity –Separately elected governing body –Fiscally independent of other state/local gov’ts. Component units (CU) that either –Are financially accountable to the PG –Are majority-owned for-profits that directly facilitate public service –Must be included to avoid being misleading

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #8 CU Reporting: Presence Of Financial Accountability The PG has financial accountability for the CU if: The CU is fiscally dependent on the PG or The CU is one for which the 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 will or –The PG has a financial benefit/burden relationship

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #9 CU Reporting: Blending Some CU’s so intertwined with PG that they are “blended” –CU established to serve PG –Two boards are essentially the same –Footnote disclosure identifies existence The PG legal entity and blended CUs reported as if single entity CU funds blended with same type funds of the PG –Exception: The CU general fund blended into the PG’s special revenue fund

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #10 CU Reporting: Discrete Default presentation Applies to CUs that do not meet blending criteria Required for most CUs...continued...

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #11 The New Reporting Model GASB Statement No. 34 Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments June 1999

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #12 Statement 34 Major Innovations Introductory narrative section –Highlights and analyzes gov’t financial performance Refinement of current funds-based information Overall view of the gov’t in new gov’t-wide statements Comprehensive information on cost of delivering services to citizens Information about infrastructure asses –Bridges, roads, storm sewers…

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #13 Management’s Discussion and Analysis (MD&A) Topics must be limited to the following Brief description of basic statements Condensed current & prior year financial information from gov’t-wide financial statements Analysis of financial position and results of operations Analysis of individual fund information Analysis of significant budgetary variations...continued...

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #14 MD&A, continued MD&A (continued) Description of changes in capital asset and long- term debt activity Description of condition of infrastructure assets Description of currently known facts, decisions, or conditions that are expected to have a material effect on the entity

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #15 Fund-Based Statements Focus: to provide detailed information about short-term spending and fiscal compliance by major funds Required: separate fund-based statements for –Governmental fund –Proprietary fund –Fiduciary funds Statements highlight major funds –Aggregate non-major funds into one column

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #16 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 gov’t considers major

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #17 Governmental Funds Financial statements Balance sheet Statement of revenues, expenditures and changes in fund balances Separate columns for general fund and major funds –Nonmajor funds combined into one column Final column presents total of all funds

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #18 Proprietary Funds Proprietary funds include Enterprise funds – business-type activities –If meets major funds test presented individually –Nonmajor funds combined into one column –Final column presents total of all funds Internal service funds – governmental activities –Reported as separate column

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #19 Proprietary Fund Statements Balance sheet –Equity (net assets) of fund classified into three components: Invested in capital assets, net of related debt Restricted Unrestricted Statement of revenues, expenses, and changes in fund net assets Statement of cash flows (direct method)

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #20 Fiduciary Fund Statements Statement of fiduciary net assets Statement of changes in fiduciary net assets

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #21 Basic Financial Statements by Fund Category

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #22 Government-wide Statements Basic Financial Statements Statement of net assets Statement of activities –Cost of services approach Statements have one column for governmental activities Statements have one column for proprietary activities

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #23 Statement Of Net Assets All assets (including infrastructure) and liabilities Net assets (equity) divided into 3 categories –Unrestricted –Restricted –Capital related

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #24 Statement Of Net Assets – Key Characteristics All capital assets listed All capital assets must be depreciated General LTD adjusted for effective interest method Current and non-current liabilities distinguished from one another Interfund payables/receivables are eliminated Net payables/receivables between government and business type activities shown separately

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #25 Government-wide Statement of Activities Begins with reporting of expenses by programs –Not expenditures Program revenues reported by –Charges for services –Program specific operating and capital grants –Contributions Non-program revenues reported as general Balance of any expenses in each program (expenses less revenues) paid for by general government revenues

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #26 Government-wide Statement Of Activities - Internal Service Fund Internal service fund (ISF) treated as cost allocation mechanism –Included in governmental activities column in government-wide statement ISF revenues and expense are eliminated Any profit is eliminated by reducing expenses for ISF services charged to various function in the statements.

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #27 Retroactive Infrastructure Reporting Special provisions in GASB No. 34 Delayed effective date for retroactive reporting by 4 years (after June 15, 2005) Allows various approaches to estimating infrastructure cost Allows prospective-only application for small governments Limited to major infrastructure fixed assets Permits modified approach to measure cost of using infrastructure assets

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #28 Convert Funds-based Statements To Government-wide Statements Reconciliation from funds-based to gov’t-wide statements required Convert from modified accrual basis to accrual basis

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #29 Audits of State and Local Governments Broader than audits of a business - includes Financial audits –Compliance with fiscal requirements –Render a report expressing an opinion Performance audits –Emphasize economy, efficiency, program results and managerial effectiveness –Provide independent report on Extent which gov’t officials carry out responsibility Whether programs are producing desired results...continued...

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #30 Audits Of State And Local Governments (Continued) Government Auditing Standards –U.S. General Accounting Office “Yellow Book” AICPA Auditing Standards –Incorporates the Yellow Book standards 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

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #31 Government-wide Statements – The Statistical Section Focus on primary government Financial trends information Revenue capacity information Debt capacity information Demographic and economic information Operating information

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 11, Slide #32 Other Financial Reporting Issues GASB encourages governments to develop and report nonfinancial measures of efficiency and effectiveness through service efforts and accomplishments (SEA) projects.