1. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 Financial Reporting of State and Local Governments

2. 9-2 ` Learning Objectives After studying Chapter 9, you should be able to:  Describe the concepts related to the financial reporting requirements of the GASB 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, when included, manner of reporting component units

3. 9-3 ` Learning Objectives (Cont’d)  Identify and describe the contents of a comprehensive annual financial report (CAFR)  Understand how to reconcile governmental fund financial statements to governmental activity in the government-wide financial statements  Identify and explain financial reporting issues and topics

4. 9-4 Concepts of Financial Reporting  Two primary objectives of government financial reports To provide information that can be used to assess accountability To assist users in making economic, social, and political decisions  Characteristics of useful information are understandability, reliability, relevance, timeliness, consistency, and comparability

5. 9-5 Concepts of Financial Reporting (Cont’d)  Effective communication improves the usefulness of government financial reports  The information appearing in government financial reports must meet the definition of one of the elements defined by GASB Assets Liabilities Deferred outflows of resources Outflows of resources Deferred inflows of resources Inflows of resources Net position

6. 9-6  The reporting entity consists of the primary government and all component units for which the primary government is financially accountable  Component units are reported by discrete (separate column) presentation, or by blending the component unit’s financial information with the appropriate fund columns of the primary government Reporting Entity

7. 9-7 Reporting Entity (Cont’d)  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

8. 9-8  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: The other organization is fiscally dependent on the PG, and The other organization can provide specific financial benefits or impose specific financial burdens on the PG Reporting Entity (Cont’d)

9. 9-9 Reporting Entity (Cont’d)  A financial benefit or financial burden exists if the PG: Is entitled to the organization’s resources Is legally obligated to finance the organization’s deficits, or provide financial support to the organization, or Is obligated in some other manner for the organization’s debt

10. 9-10  Citizens and others (e.g., creditors and legislators) have a need for periodic reports on the sources of the government’s resources and how the resources were used  Interim financial reports are needed as well as annual reports for sound internal management and legislative oversight Financial Reports

11. 9-11 The major sections of a comprehensive annual financial report (CAFR) are the  Introductory section  Financial section  Statistical section Financial Reporting— Comprehensive Annual Financial Report

12. 9-12 Introductory Section  Title page  Contents page  Letter of transmittal  Other (as desired by management) CAFR (Cont’d)

13. 9-13 Financial Section  Auditor’s report  MD&A  Basic financial statements  Required supplementary information (RSI) other than MD&A, including the budgetary comparison schedule  Combining and individual fund financial statements CAFR (Cont’d)

14. 9-14 Statistical Section  Financial trends information  Revenue capacity information  Debt capacity information  Demographic and economic information  Operating information CAFR (Cont’d)

15. 9-15 General Purpose External Financial Reports Management’s discussion and analysis Government-wideFund financial financial statementsstatements Notes to the financial statements Required supplementary information (other than MD&A)

16. 9-16  Government-wide financial statements Statement of net position (Ill. A2-1 and 9-3) Statement of activities (Ill. A2-2 and 9-4)  Fund financial statements (see next 3 slides)  Notes to the financial statements Basic Financial Statements

17. 9-17 Fund Financial Statements— Governmental Funds  Balance sheet—governmental funds (Ill. A2-3 and 9-5) with reconciliation (Ill. A2-4 and 9-7)  Statement of revenues, expenditures, and changes in fund balances—governmental funds (Ill. A2-5 and 9-6) with reconciliation (Ill. A2-6 and 9-8)

18. 9-18 Fund Financial Statements— Proprietary Funds  Statement of net position—proprietary funds (Ill. A2-7)  Statement of revenues, expenses, and changes in fund net position—proprietary funds (Ill. A2-8)  Statement of cash flows—proprietary funds (Ill. A2-9)

19. 9-19 Fund Financial Statements— Fiduciary Funds  Statement of fiduciary net position (Ill. A2-10)  Statement of changes in fiduciary net position (Ill. A2-11)

20. 9-20 Financial Reporting Model 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 the same as for-profit entities

21. 9-21 Financial Reporting Model (Cont’d)  Preparation of the government-wide financial statements at year-end requires : Adjusting entries to record items such as 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 Position— Unrestricted to Net Position—Restricted (various purposes) and Net Position—Net Investment in Capital Assets

22. 9-22 Financial Reporting Model (Cont’d) Fund financial statements:  Short-term focus on fiscal accountability  Most activities of the government are reported on the modified accrual basis; however, proprietary funds and fiduciary funds are reported essentially the same as for-profit entities

23. 9-23 Financial Reporting Model (Cont’d)  Preparation of the fund financial statements at year- end requires appropriate classification of fund balances as Nonspendable Spendable – restricted, committed, assigned or unassigned Q: How are the various fund balance classifications defined?

24. 9-24 Financial Reporting Model (Cont’d)  Preparation of the fund financial statements at year- end also requires that information on the governmental fund financial statements be reconciled to information reported in the Governmental Activities column on the government-wide statements

25. 9-25 Reporting Issues & Topics GASB’s Recognition and Measurement Attributes Project  Potentially a new concept statement  Examines changing from “modified accrual” measurement focus for governmental funds  The focus is on a “near term” measurement focus

26. 9-26 Reporting Issues & Topics (Cont’d) 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 provide simplified, summary reports called “popular reports”  Graphical presentation is used to a greater extent than traditional financial statements

27. 9-27 Reporting Issues & Topics (Cont’d) Other comprehensive basis of accounting (OCBOA)  Not all governments maintain internal records on a GAAP basis, many use OCBOA  Types of OCBOA most commonly used by governments include—cash basis, modified cash basis, and regulatory basis  Many reasons are provided for using OCBOA, including cost and ease of use  Use of OCBOA does not preclude the need to present information similar to that reported under GAAP

28. 9-28 Reporting Issues & Topics (Cont’d) International Accounting Standards  As with FASB, GASB has an international counterpart  International Public Sector Accounting Standards (IPSAS) are issued by the International Public Sector Accounting Standards Board (IPSASB)  IPSASB are used by many countries

29. 9-29 Concluding Comments  The financial reporting model requires each financial reporting entity to prepare at a minimum: MD&A; basic financial statements (government-wide and fund); notes to the financial statements; and required supplementary information, other than MD&A  It is recommended that each reporting entity prepare as its official financial record a comprehensive annual financial report (CAFR)  As the financial needs of users continue to change, so will financial reporting standards END