Financial Statement Preparation

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Financial Statement Preparation Analysis
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Overview of the Governmental Environment
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Unique Aspects of Governments

• Public organizations
• Government in the Sunshine
• Notice requirements
• Access requirements

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Unique Aspects of Governments

• Involuntary resource providers
• AKA taxpayers
• Public goods
• Accountability

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Unique Aspects of Governments

• Political environment
• Varies by type, size, nature
• Special interest groups
• Partisan politics
• No new taxes
• Tax reform in Florida

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Unique Aspects of Governments

• Lack of profit motive
• Relates to concept of public goods
• Cost recovery
• Disparities among governments

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Financial Reporting for Governmental Organizations
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Users of Financial Reports

• Citizens
• Legislative oversight bodies
• Investors creditors
• Internal management
• Decision making
• Planning
• Monitoring

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Needs of Users of Financial Reports

• Citizens and others (e.g., creditors and
  legislators) have a need for periodic reports on
  the sources of the governments resources and how
  the resources were used
• Interim financial reports are needed as well as
  annual reports
• GAAP does not apply to interim reporting by
  governmental organizations

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Financial Reporting Objectives

• GASB Concepts Statement No. 1
• Public accountability
• Information for decision making

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Financial Reporting Objectives

• Public accountability
• Sufficient current revenues for services
• Compliance
• Budget
• Finance-related legal/contractual requirements
• SEA other accomplishments

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Financial Reporting Objectives

• Public accountability
• Presumes taxpayers are entitled to know
• What government is doing how
• What government did how well
• What government plans to do why
• Intergenerational/interperiod equity
• Current year revenues sufficient for current year
  services OR
• Future taxpayers will be required to assume
  burden for services previously provided

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Financial Reporting Objectives

• Information for decision making
• Economic decisions
• Social decisions
• Political decisions

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Financial Reporting Objectives

• Information for decision making
• Financial reporting should be
• Understandable
• Reliable
• Relevant
• Timely
• Consistent
• Comparable

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Financial Reporting Objectives

• Information for decision making
• Uses
• Actual vs. budget
• Financial condition
• Operating results
• Compliance
• Efficiency
• Effectiveness

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Financial Reporting Objectives

• Information for decision making
• General purpose financial reporting
• BFS
• Popular
• CAFR
• Other

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Financial Reporting Objectives

• Information for decision making
• Special purpose reports
• Legal/contractual requirements
• OCBOA
• Prescribe format
• Specific elements, etc.
• Examples of special purpose financial reporting
• Bond offering statements
• Operating/capital budgets
• Grants
• Regulatory agencies

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The GovernmentalReporting Entity
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Reporting Entity

• A reporting entity consists of
• A primary government
• Including fiduciary funds
• Component units

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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
• Separate column for major CUs
• Blended presentation
• CUs financial information included with
  appropriate fund columns of the PG

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Reporting Entity

• A primary government is
• A state government
• General purpose local government
• City, town, county, etc.
• Special purpose government
• Separately elected governing body
• Legally separate
• Fiscally independent
• Of other state/local governments
• Examples
• School districts, special districts, etc.

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Reporting Entity

• Primary government is financially accountable for
  another organization if
• It appoints a voting majority of the
  organizations 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

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Reporting Entity

• If PG does not appoint majority of the governing
  board, it is financially accountable for another
  organization if the other organization
• Is fiscally dependent on PG
• OR
• Holds economic resources entirely/almost entirely
  for PG AND
• PG entitled to/has ability to access majority of
  economic resources being held by other
  organization AND
• Resources being held are significant to PG

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Examples of Component Units

• Governmental component units
• Dependent special districts
• Port authorities
• Universities
• Hospitals
• Not-for-profit component units
• Volunteer fire departments
• Libraries
• Museums
• Hospitals

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Accounting for Governmental Organizations
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Government GAAP

• GASB
• FASAB
• Hierarchy
• Statements interpretations
• Technical bulletins audit guides
• EITF AICPA Practice Bulletins
• Implementation guides, Q As
• Other

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Government GAAP

• GASBs External Financial Reporting
• Financial statements
• Financial reports
• Special purpose reports
• Debt offering documents
• Budgets
• External grant reports
• Other non-financial information

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Government GAAP

• How financial reporting objectives are met
• Measurement focus
• Basis of accounting
• Fund accounting
• Budgetary accounting reporting

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Measurement FocusWHAT is measured?

• Economic resources measurement focus
• Measure inflows outflows of economic resources
• Current (i.e. financial ) noncurrent (i.e.
  economic)
• Capital assets long-term debt
• Focuses on operational accountability
• Whether management efficiently uses resources in
  providing services

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Measurement FocusWHAT is measured?

• Current financial resources measurement focus
• Measure inflows outflows of current financial
  resources
• Cash other liquid assets
• Payables from cash other liquid assets
• Focuses on fiscal accountability
• Whether managers have met budgetary other legal
  financial requirements

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Basis of AccountingWHEN are elements recognized?

• Modified accrual basis of accounting
• Revenues recognized when measurable available
• Expenditures recognized when incurred
• Expected to be liquidated with current financial
  resources
• Accrual basis of accounting
• Revenues recognized when earned
• Expenses recognized when incurred

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Measurement Focus Basis of Accounting Summary
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Government GAAP

• Fund accounting
• Number of funds concept
• Categories of funds
• Governmental
• Proprietary
• Fiduciary

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Definition of Fund

• A separate fiscal accounting entity
• Self-balancing set of accounts
• Segregating financial resources, liabilities
  payable from fund resources, fund equities
  primarily to ascertain compliance
• Attain objectives specified by regulations,
  restrictions, or limitations
• An entity with its own set of books and
  statements
• Chart of accounts, general ledger, etc.

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Government GAAPCategories and Types of Funds

• Governmental funds
• General Fund
• Special revenue funds
• Capital projects funds
• Debt service funds
• Permanent funds

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Governmental Funds Common Characteristics

• Government type activities
• Current financial resources measurement focus
• Modified accrual basis of accounting used
• Account for expenditures of financial resources
  (not expenses)
• Capital assets long-term liabilities are not
  recorded in governmental funds
• Both recorded as expenditures

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Types of Governmental Funds

• General Fund (GF)
• Only one per government
• Most financial transactions related to general
  government operating activities are recorded in
  this fund

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Types of Governmental Funds

• Special Revenue Funds (SRF)
• Used when required by law/policy to account for
  financial resources earmarked for a specified
  operating purpose
• Gas tax
• Grants
• Impact fees
• Accounting and budgeting usually identical to
  general fund

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Types of Governmental Funds

• Debt Service Funds (DSF)
• Account for accumulation of financial resources
  segregated to pay principal or interest on LTD
• May include required reserves as well as current
  financial resources

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Types of Governmental Funds

• Capital Projects Funds (CPF)
• Account for financial resources segregated to pay
  for construction/acquisition of major long-lived
  capital assets

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Types of Governmental Funds

• Permanent Funds
• Account for resources provided by trust in which
  the earnings but not the principal must be used
  for public purposes

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Governmental GAAPCategories and Types of Funds

• Proprietary funds
• Enterprise funds
• Internal service funds
• Fiduciary funds
• Agency funds
• Investment trust funds
• Private-purpose trust funds
• Pension trust funds

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Proprietary Funds Common Characteristics

• Business type activities
• Full accrual basis of accounting reporting
• Similar to for-profit entities
• Economic resources measurement focus
• Capital assets long-term liabilities recorded
  in the funds
• Depreciation expense on capital assets recorded
• Expenses are recorded, not expenditures

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Types of Proprietary Funds

• Enterprise Funds
• Account for activities in which goods or services
  are provided to the general public for a charge
• Electric water utilities, airports, parking
  garages, transportation systems, liquor stores

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Types of Proprietary Funds

• Internal Service Funds (ISF)
• Account for activities in which goods or services
  are provided to other departments of the same
  government (or others) for a charge
• Central stores, central computing, motor pools,
  printing
• Reported as governmental or business type
  activities in GWS because based on customers
  served

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Fiduciary Funds Common Characteristics

• Full accrual accounting reporting
• Economic resources measurement focus
• Capital assets long-term liabilities recorded
• Additions (to net assets) deductions (from net
  assets) recorded instead of revenues expenses

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Types of Fiduciary Funds

• Agency Funds
• Account for financial resources in which the
  government is acting in an agency capacity
• Examples tax agency funds and pass-through
  agency funds
• Accounting is simple assets liabilities
• No revenue and expense accounts used since there
  are no net assets

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Types of Fiduciary Funds

• Investment Trust Funds
• Account for external investment pools where
  assets are held for other (external) governments,
  along with funds of the sponsoring government
• Assets, liabilities, net assets, changes in net
  assets related to the equity of the external
  participants are reported in this fiduciary fund

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Types of Fiduciary Funds

• Private-purpose Trust Funds
• To account for financial resources (expendable or
  nonexpendable) in which the government is acting
  in a trustee capacity for
• Private individuals
• Organizations
• Other governments

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Types of Fiduciary Funds

• Pension/OPEB Trust Funds (one or more)
• To account for financial resources where
  government (or other designated trustee) is
  acting in trustee capacity for its employees
• Retirement benefits
• Pensions
• Other post-employment benefits
• Insurance, etc.

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The Governmental Financial Reporting Model
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Implementation of the GASB No. 34 Reporting
Model

• Result of NCGA GASB standards that evolved
  since the 1930s
• Reflects changing needs of information users
• Highly summarized information
• Information for government as a whole
• Comparable to the private sector
• Issued in final form June 1999
• Implemented in phases based on size of government
• All governments have implemented at this point

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General Purpose External Financial Reports

• Managements discussion and analysis
• Government-wide Fund financial
• financial statements statements
• Notes to the financial statements
• Required supplementary information
• (other than MDA)

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Financial Reporting Model

• Government-wide financial statements
• Entity-wide perspective
• Long-term focus - operational accountability
• Economic resources
• All governmental business-type activities
  reported on the accrual basis
• Essentially the same as for-profit entities

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Basic Financial Statements

• Government-wide financial statements
• Statement of Net Assets
• Statement of Activities
• Fund financial statements
• Notes to the financial statements
• Required supplemental information

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Government Wide Statements

• Report primary governments financial information
  for
• Governmental activities
• Business-type activities
• Required statements
• Statement of Net Assets
• Statement of Activities
• Fiduciary activities excluded from GWS

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Fund Level Statements

• Fund level financial statements
• Short-term focus - financial accountability
• Reported based on type of fund
• Governmental funds - modified accrual
• Proprietary funds - essentially same as
  for-profit entities
• Information on fund level financial statements
  must be reconciled to information reported in GWS

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Fund Level Statements

• Fund financial statements
• Presented for major funds nonmajor funds in the
  aggregate
• Two governmental fund financial statements
• Three proprietary fund financial statements
• Two fiduciary fund financial statements

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Fund Level StatementsGovernmental Funds

• Balance sheet
• Statement of revenues, expenditures changes in
  fund balance
• Reconciliation of total fund balances of
  governmental funds to total net assets of
  governmental activities at the government-wide
  level

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Fund Level StatementsProprietary Funds

• Similar to those of for-profit entities
• Statement of net assets
• Statement of revenues, expenses, and changes in
  net assets
• Statement of cash flows
• Reconciliation of total net assets of proprietary
  funds to total net assets of business type
  activities at the government-wide level

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Fund Level StatementsFiduciary Funds

• Activities reported in fund financial statements
• Statement of fiduciary net assets
• Statement of changes in fiduciary net assets

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General Purpose External Financial Reporting
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Concepts Statement No. 1 Objectives of Financial
Reporting

• Issued May 1987
• Financial reporting should
• Assist in fulfilling governments duty to be
  publicly accountable
• Sufficiency of current year revenues for services
• Obtained used in accordance with legal budget
• Compliance with finance-related legal/contractual
  requirements

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Concepts Statement No. 1 Objectives of Financial
Reporting

• Financial reporting should
• Assist users in evaluating operating results for
  the year
• Info re
• Sources uses of financial resources
• How activities financed cash requirements met
• Whether financial condition has improved or
  deteriorated as a result of current year
  operations

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Concepts Statement No. 1 Objectives of Financial
Reporting

• Financial reporting should
• Assist users in assessing level of services that
  can be provided governments ability to meet
  obligations as they become due
• Info re financial position condition
• Info re physical other nonfinancial resources
  with useful lives beyond 1 year
• Including info to assess service potential
• Disclose legal/contractual restrictions on
  resources risk of potential loss of resources

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Financial ReportingComprehensive Annual
Financial Report

• NOT required by GAAP
• Many small medium size governments do not
  prepare this level of financial information
• Major sections
• Introductory section
• Financial section
• Includes BFS which are GAAP
• Statistical section
• If prepared, GASB No. 44 establishes GAAP re
  contents

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Comprehensive Annual Financial Report

• Introductory Section (NOT GAAP)
• Title page
• Contents page
• Letter of transmittal
• Other (as desired by management)

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Comprehensive Annual Financial Report

• Financial Section
• Auditors report
• Required by GAAP
• MDA
• Basic Financial Statements (BFS)
• Required Supplementary Information (RSI) other
  than MDA, including the budgetary comparison
  schedule
• Combining individual fund financial statements

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Comprehensive Annual Financial Report

• Statistical Section
• Required by GAAP if prepared
• Financial trends information
• Revenue capacity information
• Debt capacity information
• Demographic and economic information
• Operating information

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Comprehensive Annual Financial Report GFOA Award
Program

• Established Certificate of Achievement for
  Excellence in Financial Reporting Program in 1945
• Encourage assist governments to go beyond
  minimum GAAP requirements
• Spirit of transparency full disclosure
• Reports submitted are reviewed by
• Selected members of GFOA professional staff
• GFOA Special Review Committee (SRC)
• Individuals with expertise in public-sector
  financial reporting
• Includes FS preparers, independent auditors,
  academics, other finance professionals

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Comprehensive Annual Financial Report GFOA Award
Program

• Required to submit within 6 months of FYE
• Requirements
• Basically a clean audit opinion
• GAAS, GAGAS, GAAP
• CAFR prepared in accordance with guidelines
  GAAP
• Responses to prior year GFOA reviewer comments
• Items reviewed delineated in GFOA reviewer
  checklist
• Approximately 70 pages in length

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Current Financial Reporting Issues

• Concepts Statement No. 3, Communication
  Methodsprovides guidance on where information
  should be placed in financial reports
• Financial statements
• Notes to the financial statements
• Required supplementary information
• Supplementary information

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Current Financial Reporting Issues

• Concepts Statement No. 4, Elements of Financial
  Statements
• Defines elements of statements of financial
  position as
• Assets - resources with present service capacity
  the government presently controls
• Liabilities - present obligations to sacrifice
  resources the government has little/no discretion
  to avoid
• Deferred outflow of resources - a consumption of
  net assets by the government that is applicable
  to a future reporting period
• Deferred inflow of resources - an acquisition of
  net assets by the government that is applicable
  to a future reporting period
• Net position - residual of all other elements
  presented in a statement of financial position.

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Current Financial Reporting Issues

• Concepts Statement No. 4, Elements of Financial
  Statements
• Defines elements of resource flows statements as
• Outflow of resources - a consumption of net
  assets by the government that is applicable to
  the reporting period
• Offset deferred outflow of resources
• Inflow of resources - an acquisition of net
  assets by the government that is applicable to
  the reporting period
• Offset deferred inflow of resources

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Current Financial Reporting Issues

• Popular Reporting
• Developed because many accounting professionals,
  politicians, others believe current
  governmental financial statements are
• Excessively complex AND
• Not understandable except to those knowledgeable
  about governmental accounting
• Some governments issue popular reports
• Simplified, summary type reports
• Graphical presentation used to a greater extent
  than traditional financial statements