An Elected Officials Guide

1
The New Reporting Model

• An Elected Officials 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

• Managements discussion and analysis (MDA)
• 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 MDA?

• 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 MDA?

• 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 MDA Reliable?

• RSI is reliable, but still has certain inherent
  limitations
  
• Information is necessarily selective rather than
  comprehensive
  
• Analysis is always subjective to some degree
• MDA 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 total impact 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)
  
• NOT fiduciary 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, owners
  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

51
Why Are the Numbers Different?

• Difference between governmental funds and
  governmental activities in the government-wide
  financial statements
  
• Financial assets versus total assets
• Liabilities that are due and payable versus total
  liabilities
  
• Capital outlay versus depreciation
• Debt issuance and principal repayment

52
Why Are the Numbers Different? (cont.)

• Immediate recognition versus deferral and
  amortization
  
• Revenue when available versus revenue when
  earned
  
• Internal service fund activities and balances

53
Summary of Differences
54
Summary of Differences (cont.)
55
What are Proprietary Statements?

• Statement of net assets
• Statement of revenues, expenses and changes in
  fund net assets
  
• Statement of cash flows

56
What is the PF Statement of Net Assets?

• Essentially the same format as government-wide
  statement of net assets
  
• Current assets and liabilities separated from
  long-term assets and liabilities
  
• Net assets classified based upon accessibility
  rather than source (unlike businesses)

57
What is the PF Statement of Changes?

• Operating items distinguished from nonoperating
  items
  
• Demonstrates the degree to which a fund recovers
  the costs of the services it provides
  
• Nonoperating items
• Capital grants
• Operating subsidies
• Other

58
What is the PF Statement of Cash Flows?

• Positive or negative cash flow? Not evident from
  operating statement (unlike governmental funds)
  
• What are the sources and uses of cash?
• Operating activities
• Noncapital financing activities
• Capital and related financing activities
• Investing activities

59
Operating Income v. Operating Cash
60
Operating Income v. Operating Cash (cont.)
61
Operating Income v. Operating Cash (cont.)
62
Operating Income v. Operating Cash (cont.)
63
Should An EF Always Support Itself?

• Some enterprise funds designed to recover full
  cost
  
• Other enterprise funds designed to recover only a
  portion of their cost (subsidy reflects
  perceived indirect benefit to general public)
  
• Must distinguish between the two situations

64
Surplus/Deficit in Internal Service Fund?

• Role of internal service fund allocation of
  cost
  
• Ideally break even basis
• Exception for working capital needs
• Exception for replacement of capital assets
• Substantial ongoing surplus/deficit may mean that
  charges are excessive or insufficient

65
What are Fiduciary Funds?

• Resources not available to support government
  programs
  
• Pension funds
• Investment pools
• Private-purpose trusts
• Agency funds (e.g., tax collections for other
  governments)

66
What are Fiduciary Fund Statements?

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

67
Does Pension Surplus Full Funding?

• Accounting liabilities versus actuarial
  liabilities
  
• Present value of pension benefits earned
  (actuarial accrued liability) is not an
  accounting liability and so is not reported
  
• Therefore, positive net assets does not mean full
  funding

68
RSI

• Part 3

69
What is the Budgetary Comparison?

• Contents
• Original budget
• Final amended budget
• Actual (reported using budgetary basis of
  accounting)
  
• Variance column (optional)
• Option to report as basic financial statement or
  RSI (general fund and major special revenue funds)

70
Are Budget Amendments Bad?

• Budgeting based on estimates
• Amendments are frequent
• Meaning of significant differences between
  original and final amended budget
  
• Usually, an appropriate response to unforeseen
  changes
  
• May indicate weakness in budget process
• Consult MDA for analysis of difference

71
What Do Variances Mean?

• Governments focus on service rather than profit
• Excess revenue not necessarily favorable
• Savings achieved by a reduction in planned
  services not necessarily favorable
  
• Neutral terminology recommended (e.g., over and
  under) to avoid misunderstandings

72
What is the Schedule of Funding Progress?

• Comparison over time of actuarial assets and
  liabilities related to pension plans
  
• Ratio assets/liabilities funded ratio
• Use covered payroll as point of comparison
• Not presented when aggregate method used to
  determine annual required contribution

73
Unfunded Actuarial Accrued Liability
74
What is the Schedule of Employer Contributions?

• All acceptable actuarial funding methods lead to
  same point
  
• Need to compare annual required contribution
  (ARC) and actual contributions over time
  
• Full funding pattern of 100 funding of ARC

75
What is the Modified Approach?

• Infrastructure normally depreciated like other
  capital assets
  
• Option not to depreciate infrastructure if
  certain conditions met
  
• Up-to-date inventory of infrastructure
• Regular condition assessments
• Annual estimate of cost to maintain at level
  determined and disclosed by government
  
• Document maintenance level

76
What Needs to Be Reported for Modified Approach?

• Results of 3 most recent condition assessments
• Annual amount estimated to maintain at
  predetermined condition level (past 5 years)
  
• Actual expense to maintain at predetermined
  condition level (past 5 years)

77
Summary of Changes
78
Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)
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Summary of Changes (cont.)